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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Amicus Curiae Brief
- **Published:** January 1, 1998
- **Citation:** 523 U.S. 135

## Text

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,
v.
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 —

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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
COPYRIGHT OWNER’S EXCLUSIVE RIGHT TO
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
ii

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

iv

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
vi

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
Copyright Act of 1790, ch. 15, 1 Stat. 124.......... 16

Copyright Act of March 4, 1909, ch. 320,
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
Register of Copyrights on the General
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 &

Copyright J. (BNA) No. 755, at 36 (Nov. 14, 1985) ..

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

U.C.C. § 2-312(3)

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

an

10

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
copyright owners the power to block importation and distribution of
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
Copyright Act does not negate section 602(a)’s right to block
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.

5

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
copyright owner’s rights abroad are determined by the laws of each
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
copyright. In 1939, Congress amended the 1909 Copyright Act
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
COPYRIGHT § 2.08[G}[3]} (1996).

“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 &
Copyright J. (BNA) No. 755, at 36 (Nov. 14, 1985) (reporting position of
International Trade Commission that gray market exists because of “free
ride” and not due to price discrimination between markets).

7

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”).

10

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.
COPYRIGHT FROM DIMINISHMENT BY GRAY
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
copyright owner to receive the full benefit of its distribution right
under section 106(3).

11

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
copyright even when the goods in question were made with the
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
copyright owner), and unauthorized importation of copies
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

12

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.,
COPYRIGHT LAW REVISION (PART 1): REPORT OF THE REGISTER OF
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.
COPYRIGHT LAW 149-50 (Comm. Print 1965).

13

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
copyright owner, anywhere in the world, extinguishes any right later
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. ..)

14

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).

15

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
copyright owner to bring an action for infringement “even before
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

16

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...)

17

virtually all gray market imports. However, Costco concludes,
section 602(a) retains some meaning because it still allows a
copyright owner to bring an action against importers of works made
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.

18

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).

19

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
abroad.” 2 P. Goldstein, COPYRIGHT § 5.6.1 at 5.115-16 (1996);
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
copyright owner exclusive distribution rights only in the United
States. See supra pp. 5-6. The statute does not purport to grant the
copyright owner any right to distribute overseas. This is consistent
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. ..)

21

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).

22

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

‘© A contrast to section 602(a)’s focus on the place of acquisition can be
found in section 601, which expressly restricts importation of certain
material based on its place of manufacture. See 17 U.S.C. § 601.

23

(“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
copyright owner from realizing the full value of each copy released
into the United States market with his authorization”).

The test of whether certain actions diminish the value of a
copyright has long been applied by this Court in determining
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
copyright owner must undergo the more cumbersome and expensive
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...)

24

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
copyright bear no relationship to each other. See Sony Corp. v. Universal
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.

25

Furthermore, the position urged by Costco is inconsistent with
copyright law generally. “Courts have long held that in patent,
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.
26

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
Copyright Act urged by Costco would encourage willful blindness
in determining whether a good has been imported without a
copyright owner’s authorization. A retailer unsure of a copyrighted
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. . .”

27

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385014_0058%3A18. Public record. Not legal advice.