Amicus Curiae Brief — Quality King Distributors, Inc. v. L'Anza Research Int'l, Inc.

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ah Supreme Court U.S

\o FILED

No. 96-1470

SEP 22 1997

IN THE SUPREME COURT OF THE UNITED BTATES CLERK

OCTOBER TERM, 1997

Ouem -- -- *

QUALITY KING DISTRIBUTORS, INC.,

/ Petitioner,

L’ ANZA RESEARCH INTERNATIONAL, INC.,

Respondent.

On Writ of Certiorari

to the United States Court of Appeals

for the Ninth Circuit

BRIEF FOR THE NATIONAL CONSUMERS LEAGUE,

THE NATIONAL ASSOCIATION OF MANUFACTURERS,

THE COSMETIC, TOILETRY, AND FRAGRANCE

ASSOCIATION, THE NONPRESCRIPTION DRUG

MANUFACTURERS ASSOCIATION,

AND THE COALITION TO PRESERVE

THE INTEGRITY OF AMERICAN TRADEMARKS

CHARLES E. BUFFON

Counsel of Record

CAROLINE M. BROWN

RONALD G. DOVE, JR.

Covington & Burling

1201 Pennsylvania Ave., N.W.

Post Office Box 7566

Washington, D.C. 20044

(202) 662-6000

Counsel for the National

Consumers League and the

Coalition to Preserve the

Integrity of American Trademarks

- Additional Counsel Listed on Inside Cover -

Of Counsel:

JAN S. AMUNDSON

General Counsel

QUENTIN RIEGEL

Deputy General Counsel

National Association of

Manufacturers

1331 Pennsylvania Ave., N.W.

Washington, D.C. 20004

(202) 637-3000

Counsel for the National

Association of Manufacturers

THOMAS J. DONEGAN, JR.

Vice President-Legal & General Counsel

The Cosmetic, Toiletry,

and Fragrance Association

1101 17th Street, N.W.

Suite 300

Washington, D.C. 20036

(202) 331-1770

Counsel for The Cosmetic, Toiletry,

and Fragrance Association

DANIEL F. O’KEEFE, JR.

Senior Vice President and

General Counsel

Eve E. BACHRACH

Vice President, Deputy General Counsel

and Secretary

Nonprescription Drug Manufacturers Association

1150 Connecticut Avenue, N.W.

Washington, D.C. 20036

(202) 429-9260

Counsel for the Nonprescription Drug

Manufacturers Association

ee —

IBEST AVAILABLE C

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TABLE OF CONTENTS

Page

INTEREST OF THE AMICI CURIAE ............

SUMMARY OF ARGUMENT .................. 3

News 4

I. THE GRAY MARKET DIMINISHES THE VALUE

OF THE COPYRIGHT BY UNDERMINING A

DISTRIBUTE THE COPYRIGHTED WORK IN THE

ET = < Selb ois 3 bg o.ble o'0c bce 0 4

Il. THE COPYRIGHT ACT PROTECTS A

U.S. COPYRIGHT FROM reel BY

GRAY MARKET IMPORTS ............... 1]

A. Section 602(a) Grants a Copyright

Owner the Right to Control Imports ........ ll

B. The First Sale Doctrine of Section 109(a)

Does Not Negate the Right to Block

Unauthorized Imports of Goods Not

Previously Distributed in the United States .... 14

C. The Copyright Act Enables a Right

Holder to Bring an Action Against a

Distributor of Unauthorized Imports ........ 24

ee Oa ee a 28

TABLE OF AUTHORITIES

FEDERAL CASES

American International Pictures, Inc. v.

Foreman, 576 F.2d 661 (Sth Cir. 1978) ........... 26

Andrus v. Glover Construction Co.,

Gp Ss SE POM wack Un oedskevcctheoansex 20

BMG Music v. Perez, 952 F.2d 318 (9th Cir.

1991), cert. denied, 505 U.S. 1206 (1992) ...... 15, 16

Beechwood Music Corp. v. Vee Jay Records,

Inc., 328 F.2d 728 (26 Cis. 1964)... eee ees 22

Boesch v. Graff, 133 U.S. 697 (1890) ...........-. 19

CBS, Inc. v. Casino Record Distributors,

Inc., 654 F. Supp. 677 (S.D. Fla. 1987) ........... 15

CBS v. Scorpio Music Distributors, 569 F. Supp.

47 (E.D. Pa. 1983), aff'd, 738 F.2d 424

OC Bee a vache xb ba dees ee-dab ea 15, 16, 22, 26

In re Certain Alkaline Batteries, 225 U.S.P.Q.

823 (I.T.C. 1984), rev'd, 225 U.S.P.Q. 862

SE 5's S60 eb aedis hsb ere er Oe eed og ns 2 8

Continental T.V., Inc. v. GTE Sylvania Inc.,

GP. Use 05 as BGs 4 eee es eth wees 10

Cosmair v. Dynamite Enterprises, 226 U.S.P.Q.

Fee ha paw hws O64 6 edb eens 14

Costello Publishing Co. v. Rotelle, 670 F.2d

ee es WN I ds LE WE awe bbc batsccle 26

D.C. Comics, Inc. v. Mini Gift Shop, 912 F.2d

a ee RS ae 26

Daimler Manufacturing Co. v. Conklin,

170 F. 70 (2d Cir. 1909), cert. denied,

es GE eee eu or 19

DeBardossy v. Puski, 763 F. Supp. 1239

Rs RES Ge Ts ee a 21

Deepsouth Packing Co. v. Laitram Corp.,

Ey EEE S, Paks FEW wie Ves « whee eS hue % 19

Denbicare U.S.A. Inc. v. Toys "R" Us, Inc.,

84 F.3d 1143 (9th Cir.), cert. denied,

eS ee 17

Disenos Artisticos e Industriales, S.A. v.

Costco Wholesale Corp., 97 F.3d 377

Bev DS EL ee 27

RT Pie Vater ord oo ow so so bos 20

Ferrero U.S.A., Inc. v. Ozak Trading, Inc.,

753 F. Supp. 1240 (D.N.J.), aff'd,

| ee 9

Ford Motor Co. v. B&H Supply, Inc., 646 F.

UI so ee 26

Goldstein v. California, 412 U.S. 546 (1973) ........ 24

Griffin v. Keystone Mushroom Farm, Inc.,

453 F. Supp. 1283 (E.D. Pa. 1978) .............. 19

Grupo Gamesa, S.A. de C.V. v. Dulceria el

Molino, Inc., 39 U.S.P.Q. 2d 1531

ce Bo | ree Peer eee ee eee 9

Harper & Row v. Nation Enterprises, 471 U.S.

oS Se ee ee ee ee 5, 24

Hearst Corp. v. Stark, 639 F. Supp.

J.) ': fe &. sar rr sree 15

Helene Curtis v. National Wholesale

Liquidators, Inc., 890 F. Supp. 152

1) 5 | Pe ree eee ween. oo

Holiday v. Mattheson, 24 F. 185

lh ree ee 19

ISC-Bunker Ramo Corp. v. Altech, Inc.,

765 F. Supp. 1310 (N.D. Ill. 1990) .............. 27

John Paul Mitchell Systems v.

Pete-n-Larry's, Inc., 862 F. Supp. 1020

CUR BRIL YG. FOOD ccc bc escctcescccccceces 9, 27

Johnson & Johnson Products v. DAL

International Trading, 798 F.2d 100

ft. 3 Be re eer eee e ee eeenees 27

K Mart Corp. v. Cartier, Inc., 486 U.S. 281

CE. po waweddececcvedsbeesdbeter eas 4, 24

L’anza Research Int'l, Inc. v. Quality King

Distribs., Inc., 98 F.3d 1109 (9th Cir. 1996) .... 15, 23

Lever Brothers Co. v. United States,

ee eee ee Gs GD ds cdc Ue cd cee. 9

Lever Brothers Co. v. United States, 981 F.2d

I I a s

Microsoft Corp. v. Harmony Computers &

Electronics, Inc., 846 F. Supp. 208

ER Gd vie nu ale «eae EOS ie ues és 27

Neutrogena Corp. v. United States, 7 U.S.P.Q.

I cna ar is oc re ee 14

Nintendo of America, Inc. v. Elcon

Industries, Inc., 564 F. Supp. 937

ED all, Sh eb dele ee) 2 cee 15

Original Appalachian Artworks, Inc.

v. Granada Electronics, Inc., 816 F.2d 68

ee ~

Original Appalachian Artworks, Inc. v. JF.

Reichert, Inc., 658 F. Supp. 458 (E.D. Pa.

UE we dab hd Bo ok abe a 6 Ms Weed ae 00 d's 15

Osawa & Co. v. B&H Photo, 589 F. Supp.

Se ME ae tinle wd des 006 oss sows 8

Parfums Givenchy, Inc. v. C&C Beauty

Sales, Inc., 832 F. Supp. 1378

Es PE cls -ds eg be b> cae. 7, 13, 15, 20, 21, 24

Parfums Givenchy, Inc. v. Dr&&Emporium, Inc.,

38 F.3d 477 (9th Cir. 1994), cert. denied,

es ee ED ose cd ded ao 62a’ 15, 17, 18, 26

Red Baron-Franklin Park, Inc. v. Taito Corp.,

9 U.S.P.Q. 2d 1901 (E.D. Va. 1988),

rev'd, 883 F.2d 275, (4th Cir. 1989),

cert. denied, 493 U.S. 1058 (1990) ............4.. 14

Sanofi, S.A. v. Med-Tech Veterinarian

Products, Inc., 222 U.S.P.Q. 143

Oh: Tae, BED 5b BRT es Ve octet woe 19

Sebastian International, Inc. v. Consumer

Contacts, Ltd., 664 F. Supp. 909

GOPEE BIGFD Siv a ccc ven ccetsdivvredsscives 21

Sebastian International, Inc. v. Consumer

Contacts, Ltd., 847 F.2d 1093

CPG UE 6 sb ccccaesevecusvees 14, 15, 16, 10

Selchow & Righter Co. v. Goldex Corp., 612

F. Supp. 19 (S.D. Fla. 1985) ..........-52000- 15

Simpson v. United States, 435 U.S. 6 (1978) ........ 13

Societe des Produits Nestle, S.A. v. Casa

Helvetia, Inc., 982 F.2d 633 (ist Cir. 1992) ...... 8, 9

Sony Corp. of America v. Universal City

Studios, Inc., 464 U.S. 417 (1984) ......... 5, 24, 25

Stabilisierungsfonds Fur Wein v. Kaiser Stuhl

Wine Distribs. Pty. Ltd., 647 F.2d 200

Se Ms SEED 0 occ veeceeb ones vincdcbcoss 26

Subafilms, Ltd. v. MGM-Pathe Communications.

Co., 24 F.3d 1088 (9th Cir. 1994) (en banc) ....... 20

Teleprompter Corp. v. CBS, 415 U.S. 394 (1974) ..... 24

Twentieth Century Music Corp. v. Aiken,

I is Ella Boe a oo oc bow cb oe oes 5

United Dictionary Co. v. G. & C. Merriam Co.,

Fae A SPC SS Gb oo s Deda dake Vocs 5, 22

United Drug Co. v. Theodore Rectanus Co.,

Rr 25

United States v. Arnold, Schwinn & Co., 388 U.S.

PP ee Tee ee eae ae 10

United States v. Eighty-Three Rolex Watches, 992

eo i Te eee eee 9

Update Art, Inc. v. Modiin Publishing, Ltd,

Se ne I PD es bic a Giie belse vc cecdie 21

Yamaha Corp. of America v. United States, 745

F. Supp. 730 (D.D.C. 1990), aff'd, 961

F.2d 245 (D.C. Cir. 1992), cert. denied,

oe EN 9

STATUTES AND REGULATIONS

CF ae Os CURE SM irs ca passim

Ce ee a ET tao oo OE sa tei SO Sh 24

SP ee PE Os Ue coe Serde kd Dek cweede passim

EE GN wk dvb bad w dade owe horse nat 12

oe ee PEL Gas ss a abba ee keeles sb ei 26

OE MS as oo a oy soe S we ne a 12

SF ULB. CON son io ok 8h SS FOI Ce DS 23

Meg og k REERS UT PILRSRRG 5 ok aapseatataner aie Gi passim

ce A oc. sss fC eS 20

Ue: CO ses So os es 24

i owns ca dneesueuees 24

ORR EN 8 oo kk Li a Oe 25

COR Weck K seo disc rse en 24

Act of July 31, 1939, ch. 396, §§ 2, 3,

Oe Rie FON ee au gach Dh we 15 Seek othe b

Act of March 3, 1891, ch. 565, § 7, 26 Stat.

eee IEE NS Se ES he 16

5 50, 96 Gan 0008, SOUR: 105. PAE i .....- 16

Omnibus Trade and Competitiveness Act of 1988,

Pub. L. No. 100-418, § 9003, 102 Stat.

1564 (1988), codified at 35 U.S.C. § 271(g) ......-. 18

LEGISLATIVE HISTORY

H.R. Rep. No. 1476, 94th Cong., 2d Sess.

(1976), reprinted in 1976 U.S. Code Cong.

Be AG, TR TE gh hoc a ee debe awewss 6, 12, 16

Vili

S. Rep. No. 473, 94th Cong., Ist Sess. (1975) .... 12, 16

Staff of House Comm. on the Judiciary,

87th Cong. Ist Sess., Copyright Law

Revision (Part 1): Report of the

Revision of the U.S. Copyright Law 126

(Comm. Print 1961)

Staff of House Comm. on the Judiciary,

88th Cong., Ist Sess., Copyright Law

Revision (Part 2): Discussion and

Comments on Report of the Register of

Copyrights on the General Revision of

the U.S. Copyright Law 212-14, 232,

Pe ee DB ies cc een eee ee 13

Staff of House Comm. on the Judiciary,

89th Cong., Ist Sess., Copyright Law

Revision (Part 6): Supplementary Report of

the Register of Copyrights on the General

Revision of the U.S. Copyright Law 149-50

(Comm. Print 1965)

Legislation to Amend the Lanham Trademark

Act Regarding Gray Market Goods:

Hearing on S.616 Before the Subcomm.

on Patents, Copyrights, and Trademarks

of the Senate Comm. on the Judiciary,

100th Cong., 2d Sess., at 520-25 (1990)

ARTICLES AND TREATISES

Curtis A. Bradley, Territorial Intellectual

Property Rights in an Age of Globalism,

37 Va. J. Int’! L. (forthcoming 1997) .........

Donald S. Chisum, Chisum on Patents (1997)... ..

Brian D. Coggio and Adriane M. Antler,

The Utilization of United States

Patents to Prevent the Importation and

Sale of Gray Goods, 83 Trademark Rep. 481 (1993) .. 19

Jan Corbet, The Law of EEC and Intellectual

Property, 13 J.L. & Com. 327, 333 (1994) .....

P. Goldstein, Copyright (1996) .............--

Hillary A. Kremen, Note, Caveat Venditor:

International Application of the First

Sale Doctrine, 23 Syracuse J. Int’! L. &

eM Rt a ye eee rere

Melville B. Nimmer & David Nimmer, Nimmer

on Copyright (1996) ..........--- eee eens

Richard A. Posner, Antitrust Policy and the

Supreme Court: An Analysis of the

Restricted Distribution, Horizontal Merger

and Potential Competition Decisions,

75 Colum. L. Rev. 282 (1975) ............-..

Peter D. Rosenberg, Patent Law

Fundamentals (3d ed. 1997) ................

Allen M. Shinn, Liabilities Under Article 42

of the U.N. Convention on the In:¢-national

Sale of Goods, 2 Minn. J. Global Trade 115 (1993)

MISCELLANEOUS

Antitrust Guidelines for the Licensing cf

Intellectual Property, 68 Antitrust & Trade

Reg. Rep. (BNA) No. 1708 (Special Supp.) .......

Berne Convention for the Protection of

Literary and Artistic Works, art. V(1)

(Paris 1971), Sen. Treaty Doc. No. 27,

99th Cong. 2d Sess., 40 (1986)

CIT Judicial Conference Examines Grey

Goods Issue, 31 Pat. Trademark &

Polydor v. Harlequin Record Shops, [1982] ECR 329 ..

U.C.C. § 2-312(3)

Universal Copyright Convention, 25 UST 1341,

art. II (1971)

INTEREST OF THE AMICI CURIAE

This amicus curiae brief is submitted on behalf of the National

Consumers League (“NCL”), the National Association of

Manufacturers (“NAM”), The Cosmetic, Toiletry, and Fragrance

Association (“CTFA”), the Nonprescription Drug Manufacturers

Association (“NDMA”), and the Coalition to Preserve the Integrity

of American Trademarks (“COPIAT”) in support of respondent

L’anza Research International, Inc.'

The NCL is America’s pioneer consumer organization. For

close to a century, NCL has advocated economic and social justice

for consumers and workers in both the marketplace and the

workplace. As part of its activities, NCL has examined the effect

of the gray market on consumers and consumer well-being in a

variety of product areas. NCL has also determined that the

consumer harms created by the gray market can be averted through

proper enforcement of U.S. intellectual property laws.

The NAM is the nation’s oldest and largest broad-based

industrial trade association. Its more than 14,000 member

companies and subsidiaries, including 10,000 small manufacturers,

employ approximately eighty-five percent of all manufacturing

workers and produce over eighty percent of the nation’s

manufactured goods. More than 158,000 additional businesses are

affiliated with the NAM through its Associations Council and

National Industrial Council.

The CTFA is the leading national trade association representing

the interests of the personal care products industry. Founded in

1894, CTFA has an active membership of approximately 300

companies that manufacture or distribute the vast majority of

finished personal care products marketed in the United States.

CTFA also represents approximately 300 associate member

companies including manufacturers of raw materials and packaging.

' Letters from both parties indicating consent to file this amicus curiae

brief are on file with the Clerk. Pursuant to Rule 37.6, amici state that no

counsel for either of the parties authored this brief in whole or in part. No

person or entity, other than amici curiae and their members, made a

monetary contribution to the preparation or submission of this brief.

CTFA membership includes companies large and small. More than

60 percent of CTFA members have yearly sales of $1 million or

less. The personal care product industry is an important factor in

the nation’s economy, employing directly or indirectly more than

two million people who are involved in the manufacture,

distribution, marketing or sale of $22 billion worth of personal care

products in the United States in 1996.

NDMA is the 116-year old national trade association

representing manufacturers and distributors of nonprescription or

over-the-counter (OTC) drugs. NDMA members account for over

90 percent of the retail sales of OTC drugs in the United States,

including such well-known brands as Tylenol®, Bayer®, and Advil®.

Members of NAM, CTFA, and NDMA frequently use

copyrighted works in the labels and package design of their products

and have been injured as a result of gray market imports that

display those works.

COPIAT is a trade association representing a total of

approximately 12,000 businesses. COPIAT is dedicated to

protecting the value of trademarks and copyrights in American

industries by combatting all types of intellectual property fraud. In

particular, COPIAT has worked for legislative, judicial, and

regulatory changes designed to prevent the business injury to its

members resulting from the importation and sale of gray market

goods.

SUMMARY OF ARGUMENT

The decision below should be affirmed as a correct

interpretation of section 602(a) of the Copyright Act, 17 U.S.C.

§ 602(a).

The gray market prevents a copyright owner from fully

enjoying one of the exclusive rights granted by the Copyright

Act—the right of domestic distribution—and thus diminishes the

value of the copyright. This is equally true whether the work is

‘tself copyrighted, such as a book or audio recording, or whether

the copyright is in an original work created to package and market

a commercial product, such as the hair care product. at issue here.

In both cases, the copyright is devalued because the gray market

“free rides” off the integrity, quality, and investment associated

with the sale of works authorized for distribution in this country.

In addition, with respect to commercial products in particular, the

value of the copyright is diminished if the consumer is deceived.

injured, or otherwise dissatisfied with the purchase of an item not

intended for the domestic market. Finally, the value of a copyright

is further decreased when the market is oversaturated with copies of

the work not intended for sale in this country or when copies are

sold in inappropriate distribution channels.

In section 602(a) of the Copyright Act, Congress gave

gray market goods. Section 602(a) ensures that a copyright owner

gets the full benefit of its exclusive domestic distribution rights

under section 106(3), which would otherwise be undermined by

gray market imports. The language and legislative history of

section 602(a) clearly covers the importation of gray market goods

as well as pirated ones.

The first sale doctrine codified in section 109%(a) of the

unauthorized imports. If the first sale doctrine were to apply,

section 602(a)'s provisions would effectively be limited to pirated

copies only, contrary to Congress’s clear intent to have section

602(a) cover gray goods as well. Petitioner’s attempts to construct

a handful of examples that would give “meaning” to section 602(a)

with respect to importation of non-piratical goods must be rejected

as inconsistent with the language and intent of the statute.

Moreover, construing section 109(a) to apply to sales first made

overseas is inconsistent with the territorial scope of the Copyright

Act and would make section 109(a)’s “limitation” to section 106(3)

broader than the section 106(3) right itself.

The Copyright Act allows a copyright owner to sue the

holder is not limited to bringing suit only against the actual

importer. In order to give copyright owners effective redress

against all manner of infringement, the Copyright Act allows suit

against anyone in the chain of distribution. The argurment of amici

Costco Companies, Inc., et al., that these general principles of

federal copyright law do not apply to section 602(a) must be

rejected.

ARGUMENT

I. THE GRAY MARKET DIMINISHES THE VALUE OF

THE COPYRIGHT BY UNDERMINING A COPYRIGHT

OWNER’S EXCLUSIVE RIGHT TO DISTRIBUTE THE

COPYRIGHTED WORK IN THE UNITED STATES.

In the decision under review, the Ninth Circuit correctly

recognized that the gray market diminishes the value of a

copyrighted work by interfering with the copyright owner's

exclusive right to domestic distribution.’

2 “Gray market” goods are defined as goods that are intended for sale

in a foreign market but are diverted for sale in this country through

unauthorized channels of distribution.

This is a more comprehensive definition of “gray market” than that

set forth by this Court in K Mart Corp. v. Cartier, Inc. 486 U.S. 281

(1988), which defined a gray market good as a “foreign-manufactured

good, bearing a valid U.S. trademark, that is imported without the consent

of the U.S. trademark holder.” Jd. at 285. Although many gray market

goods are manufactured abroad for sale abroad, some (including the ones

(continued...)

Section 106 of the Copyright Act confers a bundle of exclusive

rights to the owner of the copyright. These rights are “intended to

motivate the creative activity of authors and inventors by the

provision of a special reward, and to allow the public access to the

products of their genius after the limited period of exclusive control

has expired.” Somy Corp. of America v. Universal City Studios,

Inc., 464 U.S. 417, 429 (1984); accord Harper & Row v. Nation

Enterprises, 471 U.S. 539, 546 (1985) (quoting Sony).

Among the exclusive rights granted to a copyright owner is the

right to “distribute copies . . . of the copyrighted work to the public

by sale or other transfer of ownership, or by rental, lease, or

lending.” 17 U.S.C. § 106(3). This right encourages artistic

creativity that ultimately redounds to the public benefit by ensuring

that the author of a copyrighted work can distribute the work to the

public and thus “secure a fair return” for his or her labors. See

Twentieth Century Music Corp. v. Aiken, 422 U.S. 151, 156 (1975).

By making this right exclusive, the statute recognizes that an author

cannot secure a fair return if he or she cannot control the scope and

manner of distribution.

Section 106(3)’s grant of exclusive distribution rights extends

spasadilaaanendmmamnamon ies

the U.S. copyright laws do not operate outside the territorial

confines of the United States. See United Dictionary Co. v. G. &

C. Merriam Co., 208 U.S. 260 (1908); see generally Curtis A.

Bradley, Territorial Intellectual Property Rights in an Age of

*(.. continued)

at issue here) are manufactured domestically and then exported. Similarly,

although many gray market goods are trademarked, others (including the

ones at issue here) are subject to copyright or patent protection, or some

combination of the three.

Gray market goods are sometimes inaccurately referred to as “parallel

imports.” While all gray market goods are intended for sale abroad and

distribution are frequently manufactured in this country. In such

circumstances, it cannot duly be said that there is any “parallel

importation” because the authorized goods are not imported at all.

Globalism, 37 Va. J. INT'L L. (forthcoming 1997). Because the

United States has acceded to the Berne Convention, a work

published in the U.S. will be protected by copyright in other

signatory countries, as well as domestically. However, the

Protection of Literary and Artistic Works, art. V(1) (Paris 1971),

Sen. Treaty Doc. No. 27, 99th Cong. 2d Sess., 40 (1986); see also

Universal Copyright Convention, 25 UST 1341, art. II (1971). In

other words, a copyright owner's right to distribute his or her work

in countries other than the United States is governed by the law of

each country and not by the U.S. Code.

_As we explain below, a copyright owner’s exclusive right under

section 106(3) to control distribution of copies of the copyrighted

woth indie onann padeutdineuenienbiy Ghampantae.

This is equally true whether the good is itself copyrighted, such as

a book or audio recording, or whether the copyright is in an original

work created to package and market a commercial product, such as

the hair care products at issue here.’

The principal way in which the gray market can diminish the

value of an intellectual property right is by the gray marketer's

> Contrary to the suggestion of petitioner, Pet. Br. at 33, Congress has

long recognized that a label or design on an article of merchandise, if

original and sufficiently creative, is appropriately protected through

specifically to include “prints or labels used for articles of merchandise”

as copyrightable subject matter. See Act of July 31, 1939, ch. 396, §§ 2,

3, 53 Stat. 1142. When the copyright law was overhauled in 1976,

Congress made clear that in amending the definition of copyrightable

“pictorial, graphic, and sculptural” works it had “no intention whatever to

narrow the scope of the subject matter now characterized . . . as ‘prints or

labels used for articles of merchandise."” H.R. REP. NO. 1476, 94th

Cong., 2d Sess. 54 (1976), reprinted in 1976 U.S.C.C.A.N. 5659, 5667.

To be copyrightable, labels require a higher degree of originality than other

writings See 1 Melville B. Nimmer & David Nimmer, NIMMER ON

“free ride” off the investment of the U.S. right holder.‘ It is

frequently the product’s copyrighted packaging that makes it

recognizable or appealing to consumers. Without the copyrighted

label or design, there would be no “market” for gray goods because

gray marketers do not themselves engage in design, advertising,

marketing, or promotion for these goods and instead make their

profits by relying wholly on the efforts made by others.

In other words, a gray market for a product can develop

regardless of whether U.S. prices are higher, lower, or equal to

foreign prices. It is not a function of a “discriminatory pricing

regime,” as repeatedly alleged by petitioner. Pet. Br. at 2-3, 11,

31. All that is necessary for a gray market to flourish is that the

value added to the product by the U.S. copyright or trademark

owner—through quality control, advertising, and marketing—be

greater than the shipping costs to the United States.

Needless to say, copyright owners and other intellectual

property right holders lose money when gray marketers “free ride”

off their investment. In order to establish brand recognition and to

develop consumer markets, U.S. businesses must make significant

investments in product innovation, services, and marketing,

including the creation of original art works to serve as labels or

packaging. See, e.g., Parfums Givenchy, Inc. v. C&C Beauty

Sales, Inc., 832 F. Supp. 1378, 1381 (C.D. Cal. 1993) (finding

copyrighted package design to be “an important part” of product's

overall marketing scheme). A copyright owner does not get the

benefit of this investment if a gray market can use the product

* See Richard A. Posner, Antitrust Policy and the Supreme Court: An

Analysis of the Restricted Distribution, Horizontal Merger and Potential

Competition Decisions, 75 COLUM. L. REV. 282, 285 (1975); see also CIT

Judicial Conference Examines Grey Goods Issue, 31 Pat. Trademark &

International Trade Commission that gray market exists because of “free

ride” and not due to price discrimination between markets).

recognition and appeal that has been created in the work to take

sales away from authorized distributors.’

The second way in which the gray market devalues a

copyrighted work associated with a commercial product is by way

of its deleterious effect on U.S. consumers due to the differences in

goods. A copyright owner who creates an appealing and original

package design, and then invests in marketing and

efforts that feature the copyrighted work, has wasted its efforts if

consumers are ultimately harmed or disappointed due to their

purchase of a gray market product.°

are designed to conform to the laws, standards, and consumer

preferences of the foreign countries in which they are intended to be

sold. For example, gray market electronic products may operate

* Contrary to popular belief, gray market importers do not always pass

along their “free-riding” profits to U.S. consumers. Like other economic

actors, gray market importers charge what the market will bear, and it is

not unusual to find gray market goods priced at or above the prices

charged for authorized products. See In re Certain Alkaline Batteries, 225

U.S.P.Q. 823, 826 (1.T.C. 1984), rev'd, 225 U.S.P.Q. 862 (1985); see

also Gray Market Is Giving Hair-Product Makers Gray Hair, N.Y . TIMES,

July 13, 1997, § 1, at 28 (price survey revealed that gray market products

are frequently more expensive than their authorized counterparts).

* — This scenario will most commonly occur when the copyrighted work

is operating in conjunction with or as a trademark, i.e., when consumers

use the creative work to identify the product as coming from a particular

source. The Lanham Act protects against importation of trademarked gray

market goods that materially differ from their U.S. domestic counterparts,

even if the foreign and domestic trademark owners are affiliated. See,

e.g., Lever Bros. Co. v. United States, 981 F.2d 1330 (D.C. Cir. 1993);

Societe des Produits Nestle, S.A. v. Casa Helvetia, Inc., 982 F.2d 633 (ist

Cir. 1992); Original Appalachian Artworks, Inc. v. Granada Elecs., Inc.,

816 F.2d 68 (2d Cir. 1987). The fact that these gray market harms may

be averted through proper application of trademark law, however, does not

mean that they are not also relevant in the copyright context.

only with foreign voltage requirements

America v. United States, 745

F. |

1990), aff'd, 961 F.2d 245 (D.C. Cir. 1992), 506

U.S. 1078 (1993); detergents may be made for different water

conditions, see Lever Bros. Co. v. United States, 877 F.2d 101, 103

(D.C. Cir. 1989); toothpaste may have

dangerously high for the U.S., where the water is already

;

—

Subcomm. on Patents, Copyrights, and Trademarks of the Senate

Comm. on the Judiciary, 100th Cong., 2d Sess., at 520-25 (1990)

(statement of the Nat’! Council of Senior Citizens); soaps and

beauty products may have a different chemical composition or

fragrance, see Helene Curtis v. National Wholesale Liquidators,

Inc., 890 F. Supp. 152, 155 (E.D.N.Y. 1995); food-stuffs may

contain traces of pesticide not approved for use in the United States

or may have a different nutritional or caloric content, see Ferrero

U.S.A., Inc. v. Ozak Trading, Inc., 753 F. Supp. 1240, 1243

(D.N.J.), aff'd, 935 F.2d 1281 (3d Cir. 1991); and operating

instructions may be in a foreign language, see Osawa & Co. v.

B&H Photo, 589 F. Supp. 1163, 1168-69 (S.D.N.Y. 1984).

Even if the gray market good is physically identical to its

authorized counterpart at the time of manufacture, it can be

damaged or altered at the point of sale because of poor shipment

and handling or because of deterioration en route. See, ¢.g.,

Societe des Produits Nestle, S.A. v. Casa Helvetia, Inc., 982 F.2d

633, 642 (ist Cir. 1992); Grupo Gamesa, S.A. de C.V. v. Dulceria

el Molino, Inc., 39 U.S.P.Q.2d 1531, 1532-33 (C.D. Cal. 1996).

Furthermore, gray market merchandise is virtually never eligible for

factory-authorized repairs or covered by U.S. warranties for

domestic goods. See, e.g., United States v. Eighty-Three Rolex

Watches, 992 F.2d 508, 509 (Sth Cir. 1993); John Paul Mitchell

Sys. v. Pete-n-Larry’s, Inc., 862 F. Supp. 1020, 1926 (W.D.N.Y.

1994). Finally, because gray market goods are, by definition, sold

outside of authorized distribution channels, it can be very difficult

for a manufacturer or government agency to determine where or

how to implement recall or other safety notices.

Despite the significant differences that can exist between

authorized and gray market goods, consumers are almost never

advised that they are purchasing goods not intended for sale in this

country. As amici Costco Companies ef al. points out, it is not

unusual that these goods appear side-by-side on a shelf with

authorized goods. Costco Br. at 25. Therefore, a consumer

deceived, injured or dissatisfied with a gray market purchase is not

likely to “try again” and buy an authorized product. The end result

is that a copyright owner who has invested substantial time and

money in creating an original package design that appeals to

consumers will not be getting the repeat sales that the investment

may otherwise have generated.

The final way in which the gray market devalues a copyright

associated with an unauthorized import is by depriving a copyright

owner of the opportunity to control the scope and manner of

distribution of the copyrighted work. An author of a work may

well determine that the best way to profit from his or her creative

endeavor is to make it available only through select distributors or

in a limited quantity. Section 106(3) makes this decision the

prerogative of the copyright owner. Although the copyright law is

intended to allow public enjoyment of these works over time, there

is no requirement that distribution be widespread during the author’s

limited period of exclusive control.’

’ Nor does any other area of the law prevent a copyright owner from

limiting distribution to certain retailers. In Continental T.V., Inc. v. GTE

Sylvania Inc., 433 U.S. 36 (1977), this Court reversed United States v.

Ammold, Schwinn & Co., 388 U.S. 365 (1967), and held that it is not

presumptively anticompetitive or unlawful for a manufacturer to limit the

distributors permitted to sell its products. Applying the rationale of GTE

Sylvania in the copyright context, federal antitrust guidelines conclude that

territorial and other restrictions can be procompetitive because they give

“an incentive to invest in the commercialization and distribution of

products” by “protecting . . . against free-riding”. Antitrust Guidelines for

the Licensing of Intellectual Property, 68 Antitrust & Trade Reg. Rep.

(BNA) No. 1708 (Special Supp.) at S-4 (April 13, 1995) (emphasis added).

Accord GTE Sylvania, 433 U.S. at 55 (referring to “free riders” as a

“market imperfection”).

Gray market operators undermine this exclusive control by

importing copies of works not intended for domestic distribution

and, most commonly, by selling the unauthorized imports in mass-

merchandise “discount” stores. As supply increases, the price

which the copyright owner can obtain for the copyrighted work will

decrease. Most likely, demand also will be affected by a drop in

the work’s quality, integrity, safety level, or prestige as a result of

availability through channels of distribution that have lower

standards of quality and supervision or may otherwise be

undesirable. This will further drive down the price of the works

intended for domestic distribution, and is just one more example of

how the gray market prevents a copyright owner from fully

enjoying the rights granted under section 106(3).

Il. THE COPYRIGHT ACT PROTECTS A _ USS.

MARKET IMPORTS.

A. Section 602(a) Grants a Copyright Owner the Right to

Control Imports.

Given the potentially devastating impact of the gray market on

right holders, it is not surprising that the law gives copyright

owners some protection against it. Section 602(a) of the Copyright

Act makes actionable the “[iJmportation into the United States,

without the authority of the owner of copyright under this title, of

copies or phonorecords of a work that have been acquired outside

the United States.” 17 U.S.C. § 602(a).

Section 602(a) states that unauthorized importation is “an

infringement of the exclusive right to distribute copies or

phonorecords under section 106.” Jd. This does not mean, as

petitioner argues, that the rights conferred by section 602(a) are

merely a subset of the exclusive distribution rights conferred by

section 106(3). To the contrary, the statute clearly establishes

section 106(3) and section 602(a) as complementary rights,

providing a ban on unauthorized importation in order to allow a

under section 106(3).

That the importation ban in section 602(a) is not subsumed by

the distribution right in section 106(3) is evident by section 501(a),

which lists the two as separate and distinct bases for infringement:

“Anyone who violates any of the exclusive rights of the copyright

owner as provided by sections 106 through 118 . . . or who imports

copies or phonorecords into the United States in violation of section

602, is an infringer of the copyright.” 17 U.S.C. § 501(a); see also

17 U.S.C. § 511(a).

There is no question but that section 602(a) was intended to

include a ban on importation of gray market goods. The language

of the statute is straightforward: Except for a few enumerated

exceptions, such as the one for personal use, unauthorized

importation of copyrighted works into the United States is an

infringement of the copyright. The statute makes no distinction

between pirated copies and goods made with the copyright owner’s

consent but not authorized for sale in this country.

The legislative history of section 602(a) confirms that Congress

intended to make unauthorized importation an infringement of

consent of the copyright owner for sale outside of the United States.

For example, both the House and Senate reports accompanying the

final bill that became section 602(a) state:

“Section 602 . . . deals with two separate situations:

importation of ‘piratical’ articles (that is, copies or

phonorecords made without any authorization of the

or phonorecords that were lawfully made. The general

approach of section 602 is to make unauthorized

importation an act of infringement in both cases, but to

permit the United States Customs Service to prohibit

importation only of ‘piratical’ articles.” H.R. REP. No.

1476, 94th Cong., 2d Sess. 169 (1976), reprinted in 1976

U.S. CODE CONG. & AD. NEws 5659, 5785 (emphasis

added); see also S. REP. NO. 473, 94th Cong., ist Sess.

151 (1975).*

Contrary to petitioner’s suggestion, see Pet. Br. at 3, 11, 31,

the legislative history also leaves no doubt that section 602(a) was

intended to provide a mechanism whereby a copyright owner could

enforse its territorial restrictions on distribution without resort to a

breach of a contract suit against its overseas distributor. See

Parfums Givenchy, Inc. v. C&C Beauty Sales, Inc., 832 F. Supp.

1378, 1389-90 (C.D. Cal. 1993). In the long deliberations leading

up to the Copyright Act of 1976, of which section 602(a) is a part,

the Copyright Office initially opposed a ban on unauthorized but

lawfully made imports, stating that it was reluctant to “impose the

territorial restriction in a private contract upon third persons with no

knowledge of the agreement.”* Various industry officials and

scholars, however, took issue with the Copyright Office’s position

and argued vigorously for a statute that would protect territorial

distribution rights." The Copyright Office thereafter changed its

position, supporting a draft provision that eventually became section

602(a)."

* Although this joint statement by both houses of Congress is the most

“reliable” guide to congressional intent, see Simpson v. United States, 435

U.S. 6, 17-18 (1978) (Rehnquist, J., dissenting), it is all but ignored in the

% STAFF OF HOUSE COMM. ON THE JUDICIARY, 87TH CONG. IST SESS.,

COPYRIGHTS ON THE GENERAL REVISION OF THE U.S. COPYRIGHT LAW

126 (Comm. Print 1961).

0 See STAFF OF HOUSE COMM. ON THE JUDICIARY, 88TH CONG., 1ST

SESS., COPYRIGHT LAW REVISION (PART 2): DISCUSSION AND COMMENTS

ON REPORT OF THE REGISTER OF COPYRIGHTS ON THE GENERAL REVISION

OF THE U.S. COPYRIGHT LAW 212-14, 232, 275, 327 (Comm. Print 1963).

‘| See STAFF OF HOUSE COMM. ON THE JUDICIARY, 89TH CONG., 1ST

SESS., COPYRIGHT LAW REVISION (PART 6): SUPPLEMENTARY REPORT OF

THE REGISTER OF COPYRIGHTS ON THE GENERAL REVISION OF THE U.S.

Petitioner claims that section 602(a)’s ban on unauthorized

imports is negated in this case by section 109(a) of the Copyright

Act. That section provides:

“Notwithstanding the provisions of section 106(3), the

owner of a particular copy or phonorecord lawfully made

under this title, or any person authorized by such owner,

is entitled, without the authority of the copyright owner,

to sell or otherwise dispose of the possession of that copy

or phonorecord.” 17 U.S.C. § 109(a).

Petitioner and its supporting amici argue that this so-called “first

sale” doctrine operates to limit section 602(a) in all but a handful of

circumstances.

The courts that have addressed the interaction among the

distribution right of section 106(3), the first sale doctrine of section

109, and the ban on unauthorized imports in section 602(a) have

reached three different conclusions.

On one extreme is the decision of the Third Circuit in

Sebastian Int'l, Inc. v. Consumer Contacts, Ltd., 847 F.2d 1093 (3d

Cir. 1988). In that case, the court held that a first sale by the

to prevent importation of those copies. See 847 F.2d at 1098. In

other words, if the copyright owner distributes the material abroad,

it cannot complain if that material is later diverted back into the

United States for distribution and sale. Jd.; see also Neutrogena

Corp. v. United States, 7 U.S.P.Q.2d 1900 (D.S.C. 1988); Cosmair

v. Dynamite Enters., 226 U.S.P.Q. 344 (S.D. Fla. 1985).”

2 The Sebastian case involved goods first manufactured in the United

States and then exported for sale, 847 F.2d at 1098, but the court’s

reasoning suggests that the same result would obtain even if the goods had

been manufactured and first sold overseas. See id. at 1098 & n.1; see also

Red Baron-Franklin Park, Inc. v. Taito Corp., 9 U.S.P.Q.2d 1901, 1903

(continued. ..)

The great majority of courts that have considered the issue have

rejected the reasoning in Sebastian, at least with respect to goods

that were first manufactured and sold overseas. Most of these have

followed the decision of the district court in CBS v. Scorpio Music

Distribs., 569 F. Supp. 47, 49 (E.D. Pa. 1983), aff'd without op.,

738 F.2d 424 (3d Cir. 1984). The court in Scorpio reasoned that

an item manufactured overseas is not “lawfully made under this

title” within the meaning of section 109(a) and therefore is not

subject to that section’s first sale defense. See 569 F. Supp. at 49;

see also Parfums Givenchy, Inc. v. Drug Emporium, Inc., 38 F.3d

477 (9th Cir. 1994), cert. denied, 115 S. Ct. 1315 (1995); BMG

Music v. Perez, 952 F.2d 318, 319 (9th Cir. 1991), cert. denied,

505 U.S. 1206 (1992); Original Appalachian Artworks, Inc. v. J.F.

Reichert, Inc., 658 F. Supp. 458, 463 (E.D. Pa. 1987); CBS, Inc.

v. Casino Record Distribs., Inc., 654 F. Supp. 677 (S.D. Fila.

1987); Hearst Corp. v. Stark, 639 F. Supp. 970 (N.D. Cal. 1986);

Selchow & Righter Co. v. Goldex Corp. , 612 F. Supp. 19, 25 (S.D.

Fla. 1985); Nintendo of America, Inc. v. Elcon Indus., Inc. , 564 F.

Supp. 937, 943-44 (E.D. Mich. 1982).

In the decision below, the Ninth Circuit followed a third

approach. It did not rely on Scorpio’s interpretation of the words

“lawfully made under this title” in section 109(a), but instead held

that section 602(a) would be rendered meaningless if a first sale

abroad could be a defense to unauthorized importation. L’anza

Research Int’l, Inc. v. Quality King Distributors, Inc., 98 F.3d

1109, 1114 (9th Cir. 1996); see also Parfums Givenchy, Inc. v.

C&C Beauty Sales, Inc., 832 F. Supp. 1378, 1386 (C.D. Cal.

1993) (rejecting approach of Scorpio). Thus, the court held that

section 109(a) did not supersede section 602(a)’s ban on

unauthorized imports, even when the goods are manufactured

domestically and then exported.

2. continued)

(E.D. Va. 1988) (holding that a “logical and important” extension of

Sebastian decision would apply to goods manufactured overseas), rev'd on

other grounds, 883 F.2d 275 (4th Cir. 1989), cert. denied, 493 U.S. 1058

(1990).

Of the three approaches exemplified by Sebastian, Scorpio, and

L’anza, the broad reasoning in Sebastian—which is echoed in the

briefs of petitioner and its supporting amici—finds the least support

in the language of the Copyright Act and its legislative history.

First, and most important, the reading of section 109(a) that

was adopted by the Third Circuit and is urged by petitioner

completely undercuts the efficacy of the import bar expressly

provided by Congress in section 602, because virtually all gray

market goods have been the subject of a first sale abroad. If section

109(a) were to govern foreign sales, it would render section 602(a)

“virtually meaningless” except as to pirated copies. BMG Music,

952 F.2d at 319 (quoting Scorpio, 569 F. Supp. at 49). The statute

clearly was intended to have a broader effect. See supra pp. 12-13.

In order to give section 602(a) some “meaning” under their

expansive reading of the first sale doctrine, petitioner and its

supporting amici strive mightily to contrive examples of where the

statute might still be applicable. None of these examples finds

support in the legislative history or the case law. Petitioner

surmises, for example, that section 602(a) was intended to provide

an additional remedy that otherwise would not exist because it

allows a copyright owner to block importation of infringing copies

before they have actually been distributed in this country. Pet. Br.

at 24-25. This innovative argument must be rejected in light of the

fact that U.S. copyright law for over 200 years has expressly

prohibited the mere act of “importation” of infringing copies into

this country and has distinguished that act from dissemination to the

public. See Copyright Act of 1790, ch. 15, 1 Stat. 124; Act of

March 3, 1891, ch. 565, § 7, 26 Stat. 1104, 1109; Copyright Act

of March 4, 1909, ch. 320, § 30, 35 Stat. 1075, 1082. Congress’

statement that section 602(a) of the 1978 Act would allow a

any public distribution in this country has taken place” did not

signal a change in policy, but was simply a restatement of the law.

H.R. REP. No. 1476, at 170; S. REP. No. 473, at 152.

Petitioner also argues that section 602(a) has “meaning” with

respect to non-piratical copies because section 109(a) would not

prevent the copyright owner from blocking unauthorized importation

of copyrighted works by a thief, bailee, renegade licensee, or

unrelated owner of the foreign copyright—on the ground that none

of these would be “owner[s]” of the particular work within the

meaning of section 109(a). Pet. Br. at 26-28.

According to this reading of the statute, Congress intentionally

made importation rights turn on the precise legal relationships

among manufacturers, middlemen and distributors. Such a result

would not only be “unfortunate,” but is also unsupported by any

congressional indication that the statute was intended to address only

these few types of wrongs. NIMMER ON COPYRIGHT, § 8.12{B}[6],

at 8-159 n.102 (1996). The result urged by petitioner is even more

complicated, and less defensible, when it further circumscribes the

“meaningful” interpretation of section 602(a) by suggesting that one

who purchases an infringing work from an unlawful source

(including, presumably, a thief) would nonetheless be protected by

“the plain language” of section 109(a), regardless of the work’s

illegitimate provenance. Pet. Br. at 27 n.11.

The meaning attributed to section 602(a) by amici Costco

Companies ef al. is even more curious. Like the petitioner, Costco

attempts to give content to section 602(a) by looking not to the

language of that section but rather to section 109(a). While

petitioner focuses on narrow permutations of the word “owner,”

Costco focuses on whether the owner is in possession of a copy

“lawfully made under this title.” According to Costco, a copy

made by the copyright owner in the United States is “lawfully made

under this title,” as is a copy made by an assignee or licensee of the

U.S. copyright, or a copy made by or for the copyright owner

overseas."» This would make section 602(a) ineffective against

In support of this last proposition, Costco cites Denbicare U.S.A. Inc.

v. Toys "R” Us, Inc., 84 F.3d 1143 (9th Cir.), cert. denied, 117 S. Ct.

190 (1996), and Parfums Givenchy, Inc. v. Drug Emporium, Inc. , 38 F.3d

477 (9th Cir. 1994), cert. denied, 115 S. Ct. 1315 (1995). The Denbicare

case was not concerned with where the goods had been made but whether

they had been sold in the United States by the copyright owner or with its

authority. See 84 F.3d at 1150. In the Drug Emporium case, the court

(continued...)

virtually all gray market imports. However, Costco concludes,

section 602(a) retains some meaning because it still allows a

pursuant to assignments or licenses of foreign copyrights because

these works, while “lawfully made,” are not made “under this

title.” Costco Br. at 9-12.

Costco cannot point to any relevant authority supporting its

unnatural parsing of the phrase “lawfully made under this title” into

condition, U.S. copyright holders, although they have no other

protection from the gray market, could assign license the

The only cases cited by Costco in support of its “ 1” and

“Case 2” breakdown of section 109(a) are patent cases. Costco Br.

at 15-18. This reliance on patent law is misplaced for a number of

reasons. First, until January 1, 1988, patent law had no

“importation” restriction analogous to section 602(a). See Omnibus

Trade and Competitiveness Act of 1988, Pub. L. No. 100-418,

§ 9003, 102 Stat. 1564 (1988), codified at 35 U.S.C. § 271(g); see

generally Peter D. Rosenberg, 3 PATENT LAW FUNDAMENTALS

§ 17.02 (3d ed. 1997). Prior to this express limitation, the gray

market issue arose only “rarely” and was far from settled. See 5

Donald S$. Chisum, CHISUM ON PATENTS § 16.03{2]{a}[iv] (1997).

In the few patent cases that have addressed the issue, the

defining principle is not, as Costco asserts, whether the U.S. and

continued)

questioned whether the “lawfully made under this title” language of Section

109%(a) was of any relevance at all to the section 602(a) inquiry. See 38

F.3d at 482. Neither case supports Costco’s position.

abroad can be presumed by the foreign sale to have conveyed the

right to sell in the United States. See Boesch v. Graff, 133 U.S.

697, 702-03 (1890); Daimler Mfg. Co. v. Conklin, 170 F. 70, 72

(2d Cir. 1909), cert. denied, 216 U.S. 621 (1910); Sanofi, S.A. v.

Med-Tech Veterinarian Products, Inc., 222 U.S.P.Q. 143, 148-49

(D. Kan. 1983); Griffin v. Keystone Mushroom Farm, Inc., 453 F.

Supp. 1283, 1285-86 (E.D. Pa. 1978); see also Holiday v.

Mattheson, 24 F. 185 (S.D.N.Y. 1885) (no infringement where

U.S. patentee sold patented article in a foreign country without any

restrictions on resale).'*

Central to the decision in these cases is that patent exhaustion

is limited by nationwide boundaries and that “[tJhe sale of articles

in the United States under a United States patent cannot be

controlled by foreign laws.” Boesch v. Graff, 133 U.S. at 703; see

also Deepsouth Packing Co. v. Laitram Corp., 406 U.S. 518, 531

(1972) (patent law “makes no claim to extraterritorial effect”);

Griffin, 453 F Supp at 1285 (cc -.truing Boesch and Deepsouth to

hold that Italian and American ; atents do not have to be owned by

different persons in order for patentee to sue for infringement due

to unauthorized importation from Italy).

The pinched “meanings” given to section 602(a) by petitioner

and its supporting amici have no basis in the language of the statute

or im the case law. Indeed, one is forced to wonder why industry

representatives, officials from the Copyright Office, and successive

Congresses would debate the scope and wording of the statute for

nearly two decades to address such a limited handful of cases.

Petitioner asks the Court to believe that Congress ultimately

resolved this debate sub silentio by granting copyright owners

extensive protections in section 602(a), only to have 99% of its

protection eroded by application of section 109(a), even though

neither statutory provision refers to the other.

“ See generally Brian D. Coggio and Adriane M. Antler, The

Utilization of United States Patents to Prevent the Importation and Sale of

Gray Goods, 83 TRADEMARK REP. 481 (1993); Hillary A. Kremen, Note,

Caveat Vena.tor: International Application of the First Sale Doctrine, 23

SYRACUSE J. INT’L L. & Com. 161, 179-81 (1997).

If, as petitioner and its amici argue, Congress intended section

109(a) to carve such a gaping hole in section 602(a), then the first

sale doctrine would have been one of the enumerated exceptions in

section 602(a). That section expressly exempts importation of a

work intended for governmental use, personal use, or use by an

eleemosynary organization. “Where [as here] Congress explicitly

enumerates certain exceptions to a general prohibition, additional

exceptions are not to be implied, in the absence of evidence of a

contrary legislative intent.” Amdrus v. Glover Construction Co..,

446 U.S. 608, 616-17 (1980). In this case, not only is section

109(a) not referenced, but introducing a first sale defense into

section 602(a) would “obviate” the need for the exemptions that

Congress did list, “since these copies will often be lawfully made

gray market goods purchased through normal market channels

see also C&C Beauty Sales, 832 F. Supp. at 1388. For example,

one of section 602(a)’s exceptions is for a “single” item imported

for private use “and not for distribution.” 17 U.S.C. § 602(a)(2).

Yet, under petitioner’s reading of section 109(a), a gray marketer

would be entitled to distribute on a large scale what the individual

importer cannot do for the single copy whose importation is

specifically authorized by statute.

In addition to rendering section 602(a) and its enumerated

exceptions “virtually meaningless,” the position urged by petitioner,

and the Sebastian case on which it is predicated, creates an

inconsistency between section 106(3)’s grant of exclusive

distribution rights and the express exception to that statutory grant

in section 109%(a). As discussed above, section 106(3) grants a

States. See supra pp. 5-6. The statute does not purport to grant the

with the “longstanding principle of American law ‘that legislation

of Congress, unless a contrary intent appears, is meant to apply only

within the territorial jurisdiction of the United States.’” EEOC v.

Arabian American Oil Co., 499 U.S. 244, 248 (1991); see also

Subafilms, Lid. v. MGM-Pathe Communications. Co., 24 F.3d

1088, 1091, 1095-96 (9th Cir. 1994) (en banc) (applying this

principle to copyright laws); Update Art, Inc. v. Modiin Publ’g,

Lid., 843 F.2d 67, 73 (2d Cir. 1988) (same).

By virtue of the Berne Convention and other international

treaties, a U.S. copyright owner may automatically acquire foreign

copyrights in the work, but distribution of the work overseas is

governed by the copyright law of the foreign country not by U.S.

law. See DeBardossy v. Puski, 763 F.Supp. 1239, 1245 (S.D.N.Y.

1991) (international copyright conventions provide for

nondiscrimination against works of foreign origin but do “not

expand a member state’s copyright laws extraterritorially”).

Section 109(a), which is entitled a “limitation[ ] on exclusive

rights”, makes an express exception to the exclusive distribution

rights of section 106(3) when the copyright owner has already made

a “first sale” under that section. Petitioner’s reading of section

109(a) is that it also prevents a copyright owner from bringing suit

under section 602(a) for the unauthorized importation of goods over

which the copyright owner has never exercised its section 106(3)

domestic distribution rights, because the works were not intended

for sale in the United States. There is no indication in the statute

or the legislative history, however, that Congress intended section

109(a) to sweep more broadly than the section 106(3) domestic

distribution right it was intended to limit. Section 109(a) by its

terms does not purport to confer any right to import copyrighted

works into the United States. It merely confers a right to “sell or

otherwise dispose of the possession” of works already in this

country by lawful means. See C&C Beauty Sales, 832 F. Supp. at

1389; Sebastian Int’l, Inc. v. Consumer Contacts, Lid., 664 F.

Supp. 909, 918-20 (D.N.J. 1987)."°

'S Based on similar principles recognizing that a limitation of a right

cannot exceed the right’s territorial scope, the law in Europe prior to

formation of the European Community (EC) was generally that a copyright

owner’s national distribution rights were not extinguished (“exhausted”) by

a first sale in another country. See Jan Corbet, The Law of EEC and

Intellectual Property, 13 J.L. & COM. 327, 333 (1994). Since formation

of the EC and its recognition of EC-wide intellectual property rights, the

(continued. ..)

Contrary to the argument of amici Costco Companies ef ali.,

statutory limitations on the rights of U.S. copyright owners are not

presumed to be triggered by “operative acts” occurring outside the

United States. The “operative acts” identified by Costco all create

or transfer rights based on actions overseas. Costco Br. at 18-21.

However, the Copyright Act does not expressly or implicitly

recognize any extraterritorial “operative” actions that might serve

to limit or prevent the exercise of domestic rights. See United

Dictionary, 208 U.S. at 264-66 (failure to publish copyright notice

on foreign editions does not defeat copyright in U.S.); see also

Beechwood Music Corp. v. Vee Jay Records, Inc., 328 F.2d 728,

729 (2d Cir. 1964) (Friendly, J.) (licensing of reproductions of

sound records abroad does not trigger the compulsory license

provisions in the U.S.).

This failure to recognize the territoriality of the section 106(3)

distribution right mars not only the reasoning in Sebastian, but also

that underlying the Scorpio line of cases, which hold that the first

sale defense applies only to goods manufactured in this country.

See supra p. 15. Although Scorpio rightly recognized that

application of the first sale doctrine to section 602(a) renders it

“virtually meaningless” with respect to non-piratical goods, it also

held that section 109(a)’s limitation for goods “lawfully made under

this title” means that section 602(a) does not apply to goods

manufactured in this country and then exported for sale. Scorpio,

569 F. Supp. at 49. As we have shown, this reading of the statute

(continued)

Court of Justice of the European Communities has taken the position that

once an owner of an intellectual property right consents to market his or

her product in one EC Member State, under Community law that right is

exhausted and the owner cannot thereafter use it to restrain unauthorized

importation of that product into another EC Member State. See id. at 335-

36. However, the marketing of a product outside the EC by the copyright

owner or a licensee does not exhaust the right to bar unauthorized

importation into the EC. See, e.g., Polydor v. Harlequin Record Shops,

[1982] ECR 329; see generally Allen M. Shinn, Liabilities Under Article

42 of the U.N. Convention on the International Sale of Goods, 2 MINN. J.

GLOBAL TRADE 115, 138-39 (1993).

is in conflict with the principles governing the territoriality of

copyrights and must be rejected in favor of the approach taken in

the ¢2cision below—that section 109(a) is simply not applicable to

section 602(a) to the extent that it involves goods for which the

section 106(3) right has never been exercised.

In disregarding the place of manufacture, the approach taken by

the Ninth Circuit in the decision under review accurately reflects not

only the territorial scope of the section 106(3) distribution right but

also the actual language of section 602(a), which focuses uniquely

on where a copy was acquired, not where it was made."* Section

602(a) is directed to the unauthorized importation of copies

“acquired outside the United States.” This focus on copies acquired

abroad dovetails perfectly with a territorial reading of section

109(a), which limits application of the first sale doctrine to copies

first distributed in the United States under the domestic distribution

right of section 106(3). The court below correctly reconciled

sections 106, 109, and 602 by determining that copies first

distributed in the United States pursuant to section 106(3)’s domestic

distribution right could be subject to the “first sale” defense to

efforts to control their later disposition, while copies distributed and

acquired abroad could not.

In reaching this conclusion, it was proper for the court to look

to whether the actions complained of would frustrate the copyright

owner in enjoying the “full value” of the copyrighted works

intended for domestic distribution. As demonstrated in Part I of this

brief, the gray market severely devalues a copyright by undermining

the copyright owner’s exclusive right to domestic distribution. See

‘apra pp. 6-11. The court did not focus, as petitioner suggests, on

whether the copyright owner realized “full value” for the goods

intended for foreign distribution before they were diverted for sale

in the United States. Pet. Br. at 11-12, 32-32. Instead, the court

focused, properly, on the impact of the gray market on the goods

authorized for sale in this country. See L'anza, 98 F.3d at 1117

found in section 601, which expressly restricts importation of certain

material based on its place of manufacture. See 17 U.S.C. § 601.

(“the unauthorized importation of these goods undercuts L’anza’s

ability to receive the full value for L’anza products sold in the

United States through authorized channels”); see also C&C Beauty,

832 F. Supp. at 1386 (gray market “prevents the United States

into the United States market with his authorization”).

The test of whether certain actions diminish the value of a

whether there has been an infringement of a copyright owner’s

exclusive rights. See, e.g., Harper & Row, 471 U.S. at 544-46

(1985); Sony, 464 U.S. at 421, 425, 451 (1984); Teleprompter

Corp. v. CBS, 415 U.S. 394, 413 (1974); Goldstein v. California,

412 U.S. 546, 564 (1973); see also 17 U.S.C. § 107(4). The Ninth

Circuit correctly applied the same test here.

C. The Copyright Act Enables a Right Holder to Bring an

Action Against a Distributor of Unauthorized Imports.

It is important to note that the protection afforded by section

602(a) with respect to gray market goods is quite limited. While

Congress gave the Customs Service the power to prevent entry to

pirated copies, it did not grant it the same authority for non-piratical

goods. See 17 U.S.C. § 602(b); 19 C.F.R. 133.42(6). Instead, the

process of seeking to stop unauthorized importation on a case-by-

case basis by means of a civil suit under section 602(a)."’

‘7 Petitioner suggests that L’anza and other combatants of the gray

market are trying to accomplish through copyright law what they have not

been able to accomplish through application of trademark law, citing this

Court’s decision in K Mart Corp. v. Cartier, Inc., 486 U.S. 281 (1988).

See Pet. Br. at 7-9. The K Mart case involved section 526 of the Tariff

Act of 1930, which allows any U.S. entity to record its U.S. trademark

with the Customs Service in order to prevent unauthorized importation of

goods bearing that trademark, including genuine goods. See 19 U.S.C.

§ 1526(a). The protection provided by section 526, however, is only

available to U.S. entities and only against “merchandise of foreign

manufacture.” Jd. The Customs Service has interpreted this requirement

(continued...)

Amici Costco Companies et al. argue that this protection is

even further limited because suit may only be brought against the

actual importer and not the distributors who are selling the

unauthorized imports. See Costco Br. at 21-26. This argument is

supported neither by the language of section 602(a) nor by copyright

practice generally.

Although section 602(a) refers to unauthorized “importation,”

the harm at which it is expressly directed is “an infringement of the

exclusive right to distribute copies.” 17 U.S.C. § 602(a) (emphasis

added). Thus, the statute contains various exceptions for

importation that will not lead to distribution. Subsection (a)(2), for

example, exempts from liability “importation, for the private use of

the importer and not for distribution” of single copies of

copyrighted works; and subsection (a)(3) exempts from liability

importation by eleemosynary organizations for various specified

uses “unless the importation of such copies or phonorecords is part

of an activity consisting of systematic reproduction or distribution.”

Moreover, a copyright owner simultaneously can bring suit under

section 106(3) for infringement of its domestic distribution rights in

addition to asserting a violation of section 602(a) importation rights.

"(.. continued)

to mean that it need not prevent entry of gray market goods when the U.S.

and foreign trademark holder are the same person or are subject to

common ownership or control. See 19 C.F.R. 133.21(c). In K Mart,a

divided Court upheld Customs’ regulation as a reasonable interpretation of

ambiguous statutory language. See 486 U.S. at 293 (opinion of Kennedy,

J.); id. at 309-12 (opinion of Brennan, J.)

The Customs regulation at issue in the K Mart case has no bearing on

the question presented in this case. First, the Customs Service has no

responsibility or authority over section 602(a) cases. Second, and more

important, the purpose, scope, and statutory scheme for trademark and

City Studios, Inc., 464 U.S. 417, 439 n. 19 (1984); United Drug Co. v.

Theodore Rectanus Co., 248 U.S. 90, 97 (1918). Many trademarks are

not sufficiently original or creative to meet the copyright standard.

Furthermore, the position urged by Costco is inconsistent with

trademark, literary property, and copyright infringement cases, any

member of the distribution chain can be sued as an alleged joint

tortfeasor.” See Stabilisierungsfonds Fur Wein v. Kaiser Stuhl Wine

Distribs. Pty. Ltd., 647 F.2d 200, 207 (D.C. Cir. 1981) (Ginsburg,

J.) (citing cases). The copyright owner “may sue as many or as

few of the alleged wrongdoers as he chooses; those left out of the

lawsuit, commentary underscores, are not indispensable parties.”

Id.; see also Costello Publishing Co. v. Rotelle, 670 F.2d 1035,

1043 (D.C. Cir. 1981); see generally 2 P. Goldstein, COPYRIGHT

§ 13.6.1 (1996).

In copyright cases generally, distributors of infringing goods,

even innocent ones, are liable for infringement regardless of lack of

intent. See, e.g., D.C. Comics, Inc. v. Mini Gift Shop, 912 F.2d

29, 35 (2d Cir. 1990); Costello Publishing, 670 F.2d at 1044 n.13;

American Int'l Pictures, Inc. v. Foreman, 576 F.2d 661, 664 (Sth

Cir. 1978). While intent is not an element of copyright

infringement, it can be relevant in the consideration of appropriate

remedies. Costello Publishing, 670 F.2d at 1044 n. 13; Ford Motor

Co. v. B&H Supply, Inc., 646 F.Supp. 975, 989 (D.Minn. 1986).

A court confronted with a bona fide “innocent” infringer who “was

not aware and had no reason to believe that his or her acts

constituted an infringement” may reduce an award of statutory

damages accordingly. See 17 U.S.C. § 504.

Whether or not the Ninth Circuit was correct that Quality King

is an “importer” of gray market L’anza products,"* its decision

holding Quality King liable under section 602(a) is consistent with

these general copyright principle of joint and several liability,

regardless of intent. The decision is also consistent with others

allowing section 602(a) suits to proceed against a distributor. See

Drug Emporium, 38 F.3d at 481; Scorpio, 569 F.Supp. at 48-49.

On the other hand, there is nothing in the case law, the

statutory language, or the legislative history to support Costco’s

'8 Review of this factual issue is not part of the question presented.

theory that the “good-faith purchaser for value” provisions of the

Uniform Commercial Code (U.C.C.) should apply. Because intent

is not an element of infringement, see supra, “there is no such thing

as a bona fide purchaser for value in copyright law.” JSC-Bunker

Ramo Corp. v. Altech, Inc., 765 F.Supp. 1310, 1331 (N.D. Ill.

1990); see also Microsoft Corp. v. Harmony Computers &

Electronics, Inc., 846 F. Supp. 208,211 (E.D.N.Y. 1994). There

is no reason that this U.C.C. provision, which is otherwise not

applicable to copyright, springs to life in section 602(a) and exempts

a distributor from joint and several liability for its sale of goods

imported without the copyright owner’s authorization.

Finally, in a substantial number of cases, the position urged by

Costco would leave a right holder without any remedy at all against

unauthorized imports. Because the Customs Service exerts no

control over non-piratical imports, a copyright owner most likely

will not learn that copies of the work have been imported without

authorization until they appear on the distributor’s shelves. Even

assuming that the copyright owner could engage in discovery against

the distributor to try to determine who imported the works, this can

prove a futile inquiry due to the gray market practice of using shell

companies and obliterating product codes used to trace products.

See Disenos Artisticos e Industriales, S.A. v. Costco Wholesale

Corp., 97 F.3d 377, 379 (9th Cir. 1996); Johnson & Johnson

Prods. v. DAL Int’l Trading, 798 F.2d 100, 103 (3d Cir. 1986);

John Paul Mitchell Sys., 862 F.Supp. at 1025. Far from protecting

bona fide purchasers in good faith, the limited reading of the

in determining whether a good has been imported without a

work’s provenance is entitled to seek indemnification from its

suppliers, see U.C.C. § 2-312(3),"* but not an exemption from the

plain language of the statute.

‘8 This section provides; “Unless otherwise agreed a seller who is a

merchant regularly dealing in goods of the kind warrants that the goods

shall be delivered free of the rightful claim of any third person by way of

infringement or the like. . .”

CONCLUSION

For the foregoing reasons, and the reasons set forth in the brief

for respondent, this Court should affirm the decision below.

Respectfully submitted,

Of Counsel: CHARLES E. BUFFON

JAN S. AMUNDSON Counsel of Record

General Counsel CAROLINE M. BROWN

QUENTIN RIEGEL RONALD G. DOVE, JR.

Deputy General Counsel Covington & Burling

National Association of 1201 Pennsylvania Ave., NW

Manufacturers Post Office Box 7566

1331 Pennsylvania Ave., NW Washington, D.C. 20044

Washington, D.C. 20004 (202) 662-6000

(202) 637-3000

Counsel for the National

Counsel for the National Consumers League and the

Association of Manufacturers Coalition to Preserve the

Integrity of American a

Trademarks

THOMAS J. DONEGAN, JR. DANIEL F. O’KEEFE, JR.

Vice President - Legal & Senior Vice President and

General Counsel General Counsel

The Cosmetic, Toiletry, EVE E. BACHRACH

and Fragrance Association Vice President and

1101 17th Street, NW Deputy General Counsel

Suite 300 Nonprescription Drug

Washington, D.C. 20036 Manufacturers Association

(202) 331-1770 1150 Connecticut Ave., NW

Washington, D.C. 20036

Counsel for The Cosmetic, (202) 429-9260

Toiletry, and Fragrance

Association Counsel for the

Nonprescription Drug

Manufacturers Association

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.