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

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Supreme Court, U.S.

FILED

(1) SEP 22 1997

Si eee

No. 96-1470 f

IN THE #

; SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1996

QUALITY KING DISTRIBUTORS, INC.,

Petitioner,

Vv.

L’ANZA RESEARCH INTERNATIONAL, INC.,

Respondent.

On Writ of Certiorari to the United States

Court of Appeals for the Ninth Circuit

BRIEF OF AMICUS CURIAE

SWAROVSKI AMERICA LIMITED

IN SUPPORT OF RESPONDENT

WERNER KRONSTEIN

Counsel of Record

ROBERTA L. HORTON

DAVID E. KORN

RANJIT S. DHINDSA

ARNOLD & PORTER

555 12th Street, N.W.

Washington, D.C. 20004

(202) 942-5000

Counsel for Amicus Curiae

SWAROVSKI AMERICA LIMITED

BEST AVAILABLE COPY

TABLE OF CONTENTS

INTEREST OF AMICUS CURIAE ................. |

SREP CE ADMSUGENE once cee ccce eevee. 3

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I. APPLICATION OF THE FIRST SALE DOCTRINE

WOULD RENDER SECTION 602(a) VIRTUALLY

A Pee ee oe ee ee 5

ll. AFFIRMANCE WOULD NOT PLACE AN UNFAIR

OR IMPROPER BURDEN ON RETAILERS AND

SERS SUPERP TEED ov ow i cisoysccccees 8

A. Distributors Should Not Escape Liability

For Disseminating Unauthorized Imports . . . . 9

B. Retailers May Avail Themselves of Common

Sense Measures to Reduce the Risk of

BD. we Uo anh Rc sees hee es oe we Gee 8 13

lll. A BROAD REVERSAL BY THE COURT COULD

HAVE DEVASTATING EFFECTS ON

COPYRIGHTS IN INTRINSIC WORKS, NOT

PES eS Oa n N55 CRN SE ese cees 15

ET So eae binge btn bese avenue bes eos 19

TABLE OF AUTHORITIES

Cases:

Andrus v. Glover Const. Co., 446 U.S. 608 (1980) ...... 7

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

cert. denied, 505 U.S. 1206 (1992) .......-.-50055 12

Cash Currency Exchange, Inc. v. Shine, (In re Cash

Currency Exchange, Inc.), 762 F.2d 542 (7th Cir.),

cert. denied, sub. nom. Fryzel v. Cash Currency,

i See Cn can capadnebevelessacves 7-8

Columbia Broad. Sys. v. Scorpio Music Distribs.,

569 F. Supp. 47 (E.D. Pa. 1983), aff'd, 738 F.2d 421

EP ae rer es er ee 5, 14

Disenos Artisticos E Industriales, S.A. v. Costco

Wholesale Corp., 97 F.3d 377 (9th Cir. 1996) ..... 8-9, 12

Harper & Row, Publishers, Inc. v. Nation Enterprises,

SPORE click Scam nebevdiseecsevsecs 10

Hearst Corp. v. Stark, 639 F. Supp. 970

, SUL, Fin aug @b.b-¢ 5 'e'e 4 och ee aveecoces 5, 11

L'Anza Research Int'l, Inc. v. Quality King Distribs., Inc.,

98 F.3d 1109 (9th Cir. 1996) ......... cece ee eeee 5

Martin's Herend Imports, Inc. v. Diamond & Gem Trading

USA, Co., 112 F.3d 1296 (Sth Cif. 1997) ........... mi

Oser v. Wal-Mart Stores, Inc., 951 F. Supp. 115

a ee re Pe 13, 14

Parfums Givenchy, Inc. v. C & C Beauty Sales, Inc..

832 F. Supp. 1378 (C.D. Cal. 1993)............ 1, 5,7

Parfums Givenchy, Inc. v. Drug Emporium, Inc.,

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

514 U.S. 1004 (1995)

Selchow & Righter Co. v. Goldex Corp., 612 F. Supp. 19

PM oe hi bus civabe@uaceécve'e'secece 11

Swarovski America Lid. v. Costco Wholesale Corp.,

Case No. CV 93-6365 SVW (SHx) (Dec. 21, 1994)... 15

Swarovski America Ltd. v. Price/Costco Inc. and The

Price Co., Case No. CV 93-7403 SVW (SHx)

NIE 0 oi wG bso vie occ weedccdccccece. 15

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

982 F.2d 633 (Ist Cir. 1992) .................... 6

T.B. Harms Co. v. JEM Records, Inc., 655 F. Supp 1575

Wns WPCC Eee hive bi cccicccececccecee 8

Twentieth Century Music Corp. y. Aiken,

422 U.S. 181 (1975) ............. cc eee eee 18

Wildlife Express Corp. v. Carol Wright Sales, Inc..

18 F.3d 502 (7th Cir. 1994) ... 0.0.0 16

Statutes:

17 U.S.C. § 101 (1997)

17 U.S.C. § 106 (1997)

17 U.S.C. § 106(3) (1997)... ee ee eee 9

17 U.S.C. § 109%(a) (1997) 2. 2 ee ee eee passim

17 U.S.C. § 602(a) (1997)... 2 ee ee eee passim

islativ

H.R. Rep. No. 94-1476 (1976)... . 6-66 eee eee ee 8, 11

Miscellaneous:

Paul Goldstein, Copyright § 5.6.1.2 (2d ed. 1997) ....... 7

Restatement (Second) of Torts § 402A (1965) .......-.-. 13

Uniform Commercial Code § 2-403 ..........-5565- 13

INTEREST OF AMICUS CURIAE'

Swarovski America Limited ("SAL") is a member of the

Swarovski family of companies that are world-renowned for the

full lead crystal figurines, jewelry, jewelry stones, and other

decorative objects that they design, manufacture and sell. SAL

markets the Swarovski companies’ high quality copyrighted

crystal figurines and decorative objects, which SAL sells in the

United States under trademarks including SWAROVSKI SILVER

CRYSTAL, SWAROVSKI COLLECTORS SOCIETY, and

CRYSTAL MEMORIES. Through agreements with a European

affiliate, SAL has an exclusive U.S. license to distribute and

otherwise exploit rights in the crystal works that SAL sells.

As a copyright owner in crystal figurines and objects,

SAL’s interests in this case are two-fold. First, SAL’s exclusive

rights to distribute and otherwise exploit the copyrights in

Swarovski’s highly artistic works in the United States have

already been impaired by the influx of gray market copies of its

copyrighted works.’ The appeal of Swarovski’s crystal works,

which SAL sells through a network of authorized, upscale retail

dealers, depends in integral and essential part on the manner in

which they are handled, displayed and marketed as premium

products -- activities that are carefully prescribed and monitored

by SAL. That appeal is significantly undermined by gray market

sales of Swarovski’s works through unauthorized channels such

as discount establishments. A broad ruling that the first sale

doctrine applies to Petitioner's gray market sales may be

' The parties’ written consents to the filing of this brief are simultaneously

being submitted to the Clerk of the Court. Counsel for amicus curiae

Swarovski America Limited authored this brief, and no entity other than

Swarovski America Limited contributed financially to its drafting or submission.

* "Gray market goods” refers to goods “intended to be sold outside the

United States but which are imported into this country without the consent of

the owner of the United States trademark or copyright associated with the

good.” Parfums Givenchy, Inc. v.C & C Beauty Sales, Inc., 832 F. Supp. 1378,

1382 n.1. (C.D. Cal. 1993).

‘

interpreted to extend to gray market sales of SAL’s works, as

well. If so, that would open the floodgates for gray market

imports, thereby dissuading SAL’s authorized retailers from

carrying SAL’s figurines, and Swarovski from creating these

artistic works in the first place.

Second, SAL is party to several consent judgments and

settlements against gray market importers and distributors. These

include a recent consent judgment against the operator of a major

discount chain, Price/Costco, Inc., a successor to which joined in

an amicus brief submitted in Petitioner's favor. That judgment

enjoins Price/Costco from distributing any unauthorized imports

of copyrighted SWAROVSKI SILVER CRYSTAL figurines

except under very limited circumstances. The continued viability

of this injunction will likely turn on the Court's resolution of the

perceived tension between the import prohibition in Section

602(a) of the Copyright Act of 1976 (the "Copyright Act"), 17

U.S.C. § 602(a) (1997), and the first sale doctrine, 17 U.S.C.

§ 109%a) (1997). More generally, the viability of SAL’s entire

marketing efforts -- and those of other U.S. distributors in the

collectibles field, whose products are often sold on the gray

market -- may well turn on the Court’s decision.

As an exclusive U.S. distributor of copyrighted works,

SAL’s particular interests in this suit are not repvesented by

Respondent or by any of the other amici curiae filing briefs in

support of Respondent. None of these other briefs were

submitted by, or cover certain issues specific to, an individual

U.S. distributor of copyrighted goods manufactured abroad that

are sold on the gray market.

. S

SUMMARY OF ARGUMENT

Under the Copyright Act, copyright owners enjoy not

only the right to control the initial distribution of their works in

“the United States but also, through Section 602(a), the ability to

prevent unauthorized importation of those works. As SAL has

witnessed firsthand, the protection afforded by Section 602(a) is

vital to preserving the goodwill and high quality reputation in its

copyrighted works and to encouraging the creation of future

works -- a fundamental goal of the copyright laws. Applying the

first sale doctrine beyond its intended reach to limit Section

602(a) would contravene this goal and deny copyright owners the

protection they need to prevent tarnishment and devaluation of

their works.

These general principles are supported by a host of

arguments, many of which will be articulated by Respondent and

other amici. SAL submits this brief to emphasize a few specific,

discrete points as follows:’

|. Application of the first sale doctrine to foreign sales

would render Section 602(a) virtually meaningless because most

gray market imports have already been the subject of a first sale

abroad. Moreover, there are already explicit exceptions to the

importation ban built into Section 602(a), and applying the first

sale doctrine would render these exceptions superfluous.

* Although the specific question presented in Quality King is rather narrow,

both Petitioner and supporting amici have taken the occasion to urge a more

general application of the first sale doctrine in Section 109(a) to the importation

ban in Section 602(a). SAL thus feels a need to respond to this more general

2. Liability for the sale of unauthorized imports must

attach to retailers and other distributors as well as importers, and

the first sale defense should not be available to either. Any

contrary result would completely strip copyright owners of their

exclusive right to control the initial distribution of their

copyrighted products in the United States. Moreover, retailers’

claims that they would suffer unduly if not afforded the

opportunity to shield their gray market sales behind the first sale

doctrine are greatly exaggerated. Such retailers and other

distributors may employ contractual measures and other basic

means to guard against liability for selling gray market imports.

Certainly, in other contexts the law has imposed liability on

remote purchasers of goods and services, and it makes sense to

do so in the context of Section 602(a) as well.

3. Curbing any perceived “copyright misuse” in which

owners of copyrighted labels engage is no justification for a

sweeping decision that the first sale doctrine limits Section

602(a). Such a decision may adversely affect not only copyrights

in labels, but also copyrights in intrinsic works that embody a

high degree of creativity, such as SAL’s crystal figurines. SAL’s

concerns are emblematic of a much greater problem: A ruling

that the first sale defense is available to gray market importers

and distributors would impact on the many businesses whose

livelihood depends on having the exclusive rights to distribute

their copyrighted goods in the United States.

ARGUMENT

I. APPLICATION OF THE FIRST SALE DOCTRINE

WOULD RENDER SECTION 602(a) VIRTUALLY

MEANINGLESS

The Ninth Circuit Court of Appeals correctly found that

Section 602(a) "would be rendered meaningless if § 109(a) were

found to supersede the prohibition on importation.” ‘Anza

Research Int'l, Inc. v. Quality King Distribs., Inc., 98 F.3d 1109,

1114 (9th Cir. 1996). As other courts have observed, were the

first sale defense available to importers, they could easily

circumvent the Section 602(a) importation ban by buying

copyrighted goods indirectly, rather than from the copyright

owner. See Parfums Givenchy, Inc. v. C & C Beauty Sales, Inc.,

832 F. Supp. 1378, 1387 (C.D. Cal. 1993); Columbia Broad. Sys.

v. Scorpio Music Distribs., 569 F. Supp. 47, 49 (E.D. Pa. 1983),

aff'd, 738 F.2d 421 (3d Cir. 1984). Indeed, the case law is rife

with examples in which importers did just that. See, e.g.,

C & C Beauty Sales, 832 F. Supp. at 1381-82 (defendant

imported, as well as purchased from other gray market importers,

perfume with copyrighted box design without copyright owner’s

consent); Hearst Corp. v. Stark, 639 F. Supp. 970, 972-73 (N.D.

Cal. 1986) (defendants imported copyrighted books without

In fact, were the first sale doctrine to apply, most gray

marketers would automatically be shielded from Section 602(a)

liability, for virtually all gray market imports have a/ready been

the subject of a first sale by the time they find their way into the

United States. As the Fifth Circuit Court of Appeals observed in

rejecting application of the first sale doctrine of trademark law to

gray market goods:

[A]pplying the first sale rule to an unauthorized

importer such as [defendant] would mean that

the gray-market importer would always escape

liability. Unauthorized importers are never the

first seller. They always purchase the goods

from the manufacturer . . . or an intermediary,

and resell the goods in violation of an agreement

the manufacturer has with the exclusive

distributor... .

Martin's Herend Imports, Inc. v. Diamond & Gem Trading USA,

Co., 112 F.3d 1296, 1303 (Sth Cir. 1997). The first sale

doctrine would thus eliminate a broad class of importers from

Section 602(a) liability, rendering the provision virtually

meaningless.

Petitioner has argued that, even were the first sale

doctrine available, Section 602(a) would still have "meaning"

because it would allow a copyright owner to prevent the

While Herend’s observation about the purchasing practices of gray market

importers is a key insight, the trademark law principles Herend espouses are

irrelevant here. The Herend court found the defendant liable because its gray

market goods were materially different from the plaintiff's trademarked goods.

Martin's Herend Imports, Inc. v. Diamond & Gem Trading USA, Co., 112 F.3d

1296, 1303 (Sth Cir. 1997). The emphasis on "material differences” between

authorized and gray market goods that underlies the trademark cases is in

keeping with the primary goal of the trademark laws, that is, to prevent

consumer confusion as to source and quality of products. Societe des Produits

Nestle, S.A. v. Casa Helvetia, Inc., 982 F.2d 633, 638-40 (ist Cir. 1992). The

"material differences” test has no bearing in .opyright cases, since the goals of

the copyright laws are quite different from preventing public confusion as to

product source. See Parfums Givenchy, Inc. v. Drug Emporium, Inc., 38 F.3d

477, 483 (9th Cir. 1994) ("the Copyright Act has a purpose, scope, and statutory

scheme different from either the Tariff or Lanham Trademark Acts"), cert.

denied, 514 U.S. 1004 (1995).

importation of some copyrighted works. (Pet’r Br. at 10.) The

provision, Petitioner reasons, would still apply to items such as

stolen or piratical copies a defendant tries to import, or to copies

imported by a licensee lacking title to the goods without the

are artificial distinctions at best. There is no support in either the

legislative history or the case law governing Section 602(a) to

apply the importation bar to piratical, stolen and certain licensed

works, but not to gray market imports that the importers have

purchased abroad for resale in the United States.

Application of the first sale doctrine to Section 602(a)

would also render superfluous the explicit exceptions contained

in that section. Subsections 602(a\1), (2) and (3) detail three

specific exceptions to the ban on unauthorized imports. These

provisions sanction imports for some governmental uses; imports

for some private uses of "no more than one copy" and

importation of copies in the "personal baggage" of "any person

arriving from outside the United States"; and imports for some

scholarly, educational or religious purposes. Each of these

exceptions could involve, and indeed likely would involve, a first

sale outside the United States. For example, the "importation" of

copies in personal baggage by someone travelling to the United

States may occur when tourists buy gifts for others or items for

themselves to bring home, or foreign visitors buy gifts to

distribute in the United States. If the first sale defense would

negate infringement under Section 602(a), these exceptions would

have no meaning and would be "superfluous." C & C Beauty

Sales, 832 F. Supp. at 1388. See also Paul Goldstein, Copyright

§ 5.6.1.2, at 115-16 (2d ed. 1997).

Congress included three specific exceptions; the Court

should not make the first sale doctrine a fourth. See Andrus v.

Glover Const. Co., 446 U.S. 608, 616-17 (1980); Cash Currency

Exchange, Inc. v. Shine (In re Cash Currency Exchange, Inc.),

762 F.2d 542, 552 (7th Cir.) (citing general rule of statutory

construction that "the enumeration of specific exclusions from the

operation of a statute is an indication that the statute should apply

to all cases not specifically excluded"), cert. denied, sub. nom.

Fryzel v. Cash Currency, Inc., 474 U.S. 904 (1985). Section

602(a) should be interpreted as the House Report on the

applies, any unauthorized importer of copies or phonorecords

acquired abroad" can be sued. See H.R. Rep. No. 94-1476 at 170

(1976); see also T.B. Harms Co. v. JEM Records, Inc., 655 F.

Supp 1575, 1578 (D.N.J. 1987).

Il. AFFIRMANCE WOULD NOT PLACE AN UNFAIR

OR IMPROPER BURDEN ON RETAILERS AND

OTHER DISTRIBUTORS

Amici supporting Petitioner argue that, without resort to

a first sale defense, retailers and other distributors would

effectively be foreclosed from purchasing genuine goods from

middlemen for resale out of concern that those goods were

unauthorized imports. They contend that the language of Section

602(a) applies only to importers and not to distributors, and that

distributors should not have to bear the burden of tracing the

goods back to their source to discern whether or not their initial

importation was authorized.’ In truth, however, many retailers

and other distributors have continued to purchase imports from

middlemen, even in the wake of lower court rulings rejecting

application of the first sale doctrine. Cf Disenos Artisticos E

Industriales, S.A. v. Costco Wholesale Corp., 97 F.3d 377, 379

Brief of Amicus Curiae Jan-Bell Marketing, Inc. in Support of Petitioner,

at 2, 10-12: Brief of Amicus Curiae Costco Companies, Inc. et al., at 21-26.

a |

(9th Cir. 1996) (noting that Costco purchased foreign-made goods

from “alternative sources within the United States").

Moreover, as explained below, there are compelling

reasons, supported by fundamental principles of copyright law,

for subjecting distributors to liability for selling unauthorized

imports. And imposing such liability is not unfair, for

distributors may avail themselves of several common sense

measures to alleviate the "risks" that may attach to their

distribution of imported merchandise.

A. Distributors Should Not Escape Liability for

Disseminating Unauthorized Imports

The Ninth Circuit has held distributors liable under

Section 602(a). See Parfums Givenchy, Inc. v. Drug Emporium,

Inc., 38 F.3d 477, 482 (9th Cir. 1994) (affirming injunction

against national retail chain that purchased gray market goods

from unauthorized importers), cert..denied, 514 U.S. 1004

(1995). The Ninth Circuit’s approach should be reaffirmed in

this case, for it is the only logical means to preserving a

of its copyrighted products as provided in Section 106(3).°

As other amici note, distributors must be subject to

Section 602(a), because the statutory language of that section is

aimed at prohibiting importation that would lead to an

infringement of a copyright owner’s distribution rights.

Subjecting distributors to liability is also consistent with the

general principle that everyone in the chain of distribution may

* That section affords the owner of copyright the exclusive 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) (1997).

- 10-

be liable for infringement of a rightsholder’s copyrights,

trademarks, or other proprietary rights.

Beyond these arguments, there is another compelling

reason for subjecting distributors to the importation ban imposed

by Section 602(a). The Copyright Act explicitly grants to

their works in the United States. Harper & Row, Publishers, Inc.

v. Nation Enterprises, 47\ U.S. 539, 555 (1985) (The Copyright

Act, which affords the copyright owner the right to control the

initial public distribution of its work, "echoes the common law’s

concern that the author or copyright owner retain control

throughout this critical stage."). Retailers and other distributors

should not be permitted to invoke the first sale defense when the

owner of the exclusive U.S. distribution right in the copyrighted

goods has not yet exhausted that right. See Drug Emporium,

Inc., 38 F.3d at 482.

The facts in Drug Emporium illustrate this principle

perfectly. There, a French manufacturer marketed its perfume in

“distinctively decorated individual boxes" designed by its

employees. /d. at 479. The manufacturer assigned the exclusive

right to distribute perfume in its copyrighted boxes to plaintiff,

a U.S. distributor ("Givenchy USA"). Third parties then

imported the perfume without the French manufacturer’s or

Givenchy USA’s authorization and sold it to Drug Emporium, a

national retail discount chain, for distribution. Drug Emporium

argued that it should not face liability for selling the goods under

Section 602(a) because it was a retailer rather than an importer.

In rejecting this argument, the Court of Appeals stated:

This is not a material distinction because the

purchaser of illegally imported copies has no

more authority to distribute copies than does the

original importer. See H.R.Rep. No. 1476, at 79,

reprinted in 1976 U.S.C.C.A.N. 5659, 5693

("any resale of an illegally pirated phonorecord

would be an infringement"). Drug Emporium

therefore had no more authority to distribute the

copyrighted Amarige box design than did the

original importer. Nothing had happened to

divest Givenchy USA of its ‘exclusive rights.’ \7

U.S.C. § 106 ("the owner of copyright . . . has

the exclusive rights" to authorize distribution of

copies).

Id. (Emphasis supplied.)’

SAL’s situation also illustrates the danger in allowing

retailers to escape liability. Like Givenchy USA, SAL owns the

exclusive rights to distribute certain copyrighted works in the

United States.* The manufacturers of these works also sell many

of them abroad for foreign distribution, and some of these pieces

make their way into the United States on the gray market. Were

the first sale doctrine to shield retailers’ distribution of these

” Cf Hearst Corp. v. Stark, 639 F. Supp. 970, 978 (N.D. Cal. 1986)

(Defendants’ importations of books without authority of owner of exclusive

distribution rights violated Section 602(a) and were not protected by first sale;

"Defendants unauthorized importations have an undermining effect on the

works.").

* SAL is thus the copyright owner of the U.S. distribution rights in those

works. See 17 US.C. § 101 (1997) (an exclusive license of “any of the

exclusive rights comprised in a copyright” constitutes a “transfer of copyright

ownership"); Selchow & Righter Co. v. Goldex Corp., 612 F. Supp. 19, 21 n.2

(S.D. Fla. 1985).

imports, SAL would lose its exclusive rights to control first

distribution of the copyrighted goods in the United States.”

As Drug Emporium and amicus’ own situation make

clear, the first sale defense should not be available to shield the

subsequent distribution of unauthorized imports, for that defense

would effectively nullify a foreign manufacturer's ability to grant

exclusive U.S. distribution rights for its copyrighted works.

A contrary rule -- one that discriminates between

importers and retailers, and absolves the latter of liability under

Section 602(a) -- would simply reward the wholesalers, discount

warehouses, and the like that deliberately purchase gray market

goods intended for sale abroad for resale in the United States in

defiance of a copyright owner’s marketing plans. These

distributors are not merely "little gift shop" owners as amicus

Jan-Bell Marketing would imply."® Instead, they encompass

large, sophisticated discount outfits whose business includes

acquiring gray market products for resale in the United States.

In many cases, such outfits may well be-aware that the goods

they purchase are not authorized for sale in the United States or,

indeed, may even have engineered the importation of those goods

into the United States.''

* In any event, the first sale defense should not be available to unauthorized

distributors of SAL’s goods because those goods are manufactured and sold

abroad, rather than domestically. See BMG Music v. Perez, 952 F.2d 318, 319

(9h Cir. 1991), cert. denied, 505 U.S. 1206 (1992).

"© See Jan-Bell Br. at 12, quoting Disenos Artisticos E Industriales, S.A. v.

Costco Wholesale Corp., 97 F.3d 377, 380 (9th Cir. 1996).

'' Such distributors could also be liable as contributory infringers.

‘the

Moreover, imposing liability on a distributor several steps

removed from the manufacturing source is not a novel, untested

concept. As amici observe, such liability is already commonly

imposed in other areas of copyright law. Additionally, in the

product liability context, for example, retailers and distributors

are often strictly liable for injuries resulting from defective

products that are unreasonably dangerous to users, even though

they were not responsible for the manufacture of those products.

See Restatement (Second) of Torts § 402A (1965); Oser vy.

Wal-Mart Stores, Inc., 95\ F. Supp. 115, 119 (S.D. Tex. 1996)

(Under Section 402A of the Restatement (Second) of Torts

(1965), “retailers and manufacturers are jointly and severally

liable for injuries caused by defective products.").'”

B. Retailers May Avail Themselves of Common

Sense Measures to Reduce the Risk of Liability

To the extent that merchants may not know whether

products that they buy are authorized imports, there are at least

two ways to resolve this seeming dilemma. First, a merchant

may ask its suppliers for a representation, warranty and

'? Amici also contend that the “good faith purchaser for value” rule, codified

in the Uniform Commercial Code ("U.C.C."), should shield downstream

merchandisers from liability under Section 602(a). Jan-Bell Br. at 10-11;

Costco et al. Br. at 21-26. But the section of the U.C.C. upon which one

amicus specifically relies, Section 2-403, relates only to the passage of title in

goods, not to liability for their infringing nature. Moreover, nothing in the case

law, the Copyright Act or its legislative history bolsters the notion that this state

contract law provision, alien to federal copyright law and policy, should guide

the Court's interpretation of Section 602(a).

indemnity as to the source of the goods.'’ Analogous practices

are customary in other areas of potential liability. For example,

a company using a trademark, copyright or patent under license

often asks the licensor for a representation and warranty as to the

validity and enforceability of these intellectual property rights,

and for an indemnity against infringement claims. In addition,

retailers subject to strict liability for selling defective products

may seek an indemnification from their suppliers.'*

Second, a merchant, on some occasions, can determine

from an examination of the goods themselves whether or not they

were imported without the copyright owner's authorization.

Copyrighted goods intended for sale outside of the United States

often include different markings than their counterpart gray

market items. If such markings are not readily apparent, a

merchant may ask the manufacturer directly whether the goods

are authorized imports. Alternatively, the merchant may ask the

manufacturer to describe how to distinguish authorized goods

from unauthorized imports, which may be as simple as adding a

'* In fact, at least one merchant did so in a reported decision addressing

Section 602(a). Columbia Broad Sys. v. Scorpio Music Distribs.,569 F. Supp.

47, 49 n.6(E.D. Pa. 1983) ("[Defendant] Scorpio had the foresight to secure a

written indemnity agreement from International Traders. . . ‘to pay all legal fees

if [sic] in the event any legal actions are brought with regard to distribution of

these records.""), aff'd, 738 F.2d 421 (3d Cir. 1984).

‘* See Oser v. Wal-Mart Stores, Inc., 951 F. Supp. 115, 119 (S.D. Tex.

1996) ("If [retailer] Wal-Mart was in fact an innocent victim of the

manufacturer's sale of defective bags, then Wal-Mart would have a right to

indemnity from the manufacturer.").

particular label to its packaging.” This is not merely a

theoretical solution. SAL itself has provided such information on

its authorized imports to distributors who have asked for it. In

addition, SAL adopted a marking system for its authorized

imports that was fully described in the Price/Costco consent

judgment, which is publicly available."

Il. A BROAD REVERSAL BY THE COURT COULD

HAVE DEVASTATING EFFECTS ON

COPYRIGHTS IN INTRINSIC WORKS, NOT

MERELY LABELS

Petitioner and its supporting amici seize on the fact that

the copyrighted works at issue in Quality King are labels for hair

care products. They argue that simply placing a copyrighted

label on a “non-copyrighted", “non-creative” product allows a

manufacturer to extend its copyright monopoly unlawfully to

manipulate prices and amounts to copyright "misuse." (Pet’r Br.

at 12, 33; Brief of AFTA as Amicus Curiae in Support of

Petitioner, at 3, 24-25). They contend that a product label

exhibits little creativity, deserves little protection, and should not

form the basis for prohibiting gray market imports sold at a lovver

price that bear the same label.

‘Amicus Jan-Bell complains that copyright owners sometimes mark their

goods with “secret codes” (Jan-Bell Br. at 11). Any manufacturer who wished

to prevent gray market sales of its goods, however, would obviously benefit

from marking its authorized imports in a readily discernible way. Otherwise,

retailers who have no intention of selling unauthorized imports may

inadvertently do so.

'* Stipulation, Order and Final Judgment in Swarovski America Lid v. Costco

Wholesale Corp., Case No. CV 93-6365 SVW (SHx) (Dec. 21, 1994) and

Swarovski America Lid v. Price/Costcolnc. and The Price Co., Case No. CV

7, f

In SAL’s view, the fact that L’Anza’s copyrighted works

are labels should not affect the application of Section 602(a), or

provide any vehicle for overturning the Ninth Circuit's decision

below. Since those labels exhibit the requisite creativity for

subject to Section 602(a) for the reasons set out herein and in the

other briefs supporting Respondent.

The Court should be mindful, however, that its decision

may also reach copyrights in intrinsic works of authorship such

as paintings, books and sculptures. Were the Court to decide that

the first sale doctrine does limit the ban on unauthorized imports,

this decision would affect a wide array of copyrights subsisting

in these intrinsic works, which merit a much higher degree of

protection than labels. See Wildlife Express Corp. v. Carol

Wright Sales, Inc., 18 F.3d 502, 507-08 (7th Cir. 1994). Such a

decision would open the floodgates for gray market importers,

whose handling, marketing and sales practices would tarnish the

copyrighted products, deprive consumers of valuable services

provided by the manufacturer and its authorized representatives,

and dampen the copyright owners’ incentive to create and

distribute these works.

SAL’s situation is a prime illustration. SAL’s

copyrighted works are highly original decorative objects such as

crystal animal and floral figurines. These works are designed by

a small, select group of artisans at Swarovski’s "Design Centre”

in Austria and are manufactured by SAL’s European affiliates

based on a century-old tradition of skilled craftsmanship. SAL

maintains a carefully circumscribed network of 3,000 authorized

retailers nationwide, whose ranks include high end department

stores such as Macy’s and Marshall Field in Chicago and upscale

jewelers such as Bailey Banks & Biddle, as well as many small,

select independent jewelry and gift stores. These retailers operate

- 89 -

under specific written standards set by SAL for maintenance,

marketing and distribution of SAL’s works. They must display

the works in a separate mirrored floor display provided by SAL

that shows the works to best advantage. They are trained to

provide valuable information to customers on issues such as the

origin of the works, the handling of the works to prevent

breakage and the display of the works to maximize their

brilliance. SAL representatives regularly monitor the retailers’

activities through visits to their stores to ensure adherence to

these standards.

The influx of gray market goods has already adversely

affected these carefully constructed marketing plans, despite

SAL’s continued efforts to police the gray market. The gray

market copies crowded on the shelves of discount stores and

warehouse clubs devalues these works and their special appeal to

customers. Customers buying pieces from such chain stores

expect, but do not receive, the information on handling of their

purchases and other valuable services that SAL’s authorized

representatives have to offer. And authorized retailers lose sales

to the chain stores who sell the pieces at a substantial markdown,

and who "free ride" on the authorized retailers’ careful efforts to

display and market the Swarovski pieces in a carefully prescribed

manner."

'’ Gray market sales also undermine SAL’s efforts to offer an opportunity for

its customers to obtain limited edition works. A decade ago, SAL established

the Swarovski Collectors Society, which is now at least 100,000 U.S. members

sirong. Technically, only members of the Society may purchase SAL’s limited

series “Annual Editions” figurines. Recently, however, gray marketers have

begun selling SAL’s “Annual Editions” pieces to the general public, without

SAL’s authorization.

Were the Court to hold that the first sale doctrine shields

retailers and other distributors from Section 602(a) liability, these

problems may escalate to the point where SAL and other

market their copyrighted products in the United States. This

would not be merely a private business problem for a company

like SAL, but would raise public concerns, for it would greatly

discourage the creation of a whole class of artistic works by

Swarovski and others. Although the principal aim of the

creation for the public good, 7wentieth Century Music Corp. v.

Aiken, 422 U.S. 151, 156 (1975), the two go hand-in-hand: a

law that prevents authors from reaping any rewards from their

works will discourage further creation of those works for the

public’s benefit. Surely, this is not a result that the copyright

laws are designed to encourage.

The potential impact on SAL is only emblematic of a

much larger problem. A ruling that the first sale defense is

available to unauthorized importers and distributors of gray

market goods would have far-reaching effects on the multitude

of businesses whose livelihood depends on having the exclusive

rights to exploit their copyrighted goods in the United States. In

many industries, as in the collectibles industry, copyrights are

frequently allocated on a territorial basis. When copyrighted

goods are created overseas, the copyright owners often grant the

exclusive U.S. distribution rights to a single company that

possesses the know-how, expertise, and creative judgment to

select goods suitable for the U.S. market and to market them to

the American public. This happens in the publishing industry,

the record industry, the perfume industry, the crystal industry,

and a myriad of others. When the gray marketers enter,

however, the U.S. distributor loses its exclusive rights and,

consequently, the ability to realize fully the value in its copyright.

= PF

CONCLUSION

For the reasons stated above, the decision of Ninth

Circuit Court of Appeals sisould be affirmed.

Respectfully submitted,

Werner Kronstein

Roberta L. Horton

David E. Korn

Ranjit S. Dhindsa

ARNOLD & PORTER

555 12th Street, N.W.

Washington, D.C. 20004

(202) 942-5000

Counsel for Amicus Curiae

Swarovski America Limited

Dated: September 22, 1997

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.