The importation of gray market products into the United States has been an increasingly important issue for owners of United States trademarks. While companies have traditionally relied on trademark law to attempt to prevent the importation and sale of these products, the Supreme Court has let stand a Ninth Circuit decision that makes it easier for manufacturers to use copyright law to prevent the importation and sale of gray market products.

Gray Market Products and Trademark Law
"Gray market" products are products that are approved for sale by a manufacturer in a foreign country, but are imported and sold in the United States without the manufacturer's authorization. The importers and resellers are often able to sell gray market products at prices substantially lower than the manufacturer's authorized U.S. retailers, since the products are often sold at much lower prices overseas.

Historically, manufacturers have typically attempted to prevent the importation and sale of gray market products through trademark law. However, in order to succeed on a gray market infringement claim under trademark law, a manufacturer must be able to show that the imported gray market products are "materially different" than those sold by the manufacturer in the United States. Although the standard for materiality is low, this requirement makes it difficult for a manufacturer to prevent the sale of imported "gray market" goods when the products it sells overseas are identical to those sold within the U.S.

The Costco/Omega Case
In order to prevent the importation and sale of identical or near-identical gray market products, some manufacturers have turned to copyright law. This was the case with Omega in its dispute with Costco, which involved the sale of Omega watches at Costco's discount stores. These watches were typically sold for $2,000 in the United States. However, by buying the watches from an importer who purchased them for a much lower price in South America, Costco was able to sell the watches in its stores for only $1,299.

Omega was able to sue Costco for copyright infringement because the watches had a tiny copyrighted emblem on the back. Costco argued that it was immune from infringement under the "first-sale doctrine," which holds that once a manufacturer has made the first sale of a product, the new owner can re-sell the product for any price it wishes. However, under the Copyright Act, the first-sale doctrine applies only to a product "lawfully made under this title".

The interpretation of this phrase was at the heart of the case. Omega argued that the phrase "lawfully made under this title" applied only to goods manufactured in the United States (which would not include Omega's watches, which are made in Switzerland). Costco argued that the first-sale doctrine should apply to all lawful goods, regardless of the place of manufacture. The district court agreed with Omega and the Ninth Circuit affirmed, finding that the "first-sale" doctrine did not apply if the goods at issue were manufactured outside of the United States. Therefore, Costco's unauthorized sale of the watches violated Omega's copyright in its logo.

Costco subsequently appealed to the United States Supreme Court, which granted certiorari and heard arguments in November 2010. However, the Court deadlocked 4-4 — newly appointed Justice Kagan was forced to recuse herself due to her prior involvement in the case.

Consequences of the Supreme Court Deadlock
As there was no decision in either party's favor, the Supreme Court did not issue a written opinion and the Ninth Circuit's decision stands. However, the decision will not be binding on other circuits, meaning that a court outside the Ninth Circuit (such as in New York or Florida) would not be bound by the decision and could rule that even products manufactured outside the U.S. are subject to the first-sale doctrine of copyright law.

Some commentators have predicted that the Supreme Court may eventually be forced to reconsider this issue, especially if U.S. companies begin moving even more manufacturing overseas in an effort to avoid the first-sale doctrine and gain more control over the distribution channels of their products. Others have predicted that Congress may eventually address this issue.

The Costco decision gives brand owners another weapon to prevent the importation and sale of gray market products, even when those products may be identical to those authorized for sale within the United States. Companies should consider obtaining copyright protection for their products in order to provide another avenue for relief against gray market products in cases where relief under the trademark laws may not be available, particularly since copyright protection is fairly inexpensive and long-lasting.

Although product design is often not copyrightable (where it is not separable from the utilitarian aspects of the product), logos, emblems and other artistic features found on the product are usually copyrightable. In the Omega case, Omega freely admitted that it added the tiny emblem to the back of its watches solely so that it would be able to avail itself of protection against gray market imports through the copyright laws.

Finally, as noted above, since the Supreme Court did not issue a final order, the Omega case is only binding in the Ninth Circuit. Therefore, companies wishing to use the copyright laws to prevent the importation of gray market imports should file suit in the Ninth Circuit, at least until the holding of the Omega case has been adopted by courts in other jurisdictions.