Judge Awards Attorney Fees in 'Gray Market' Copyright Fight

A California federal judge awarded nearly $397,000 to Costco Wholesale Corp. for attorneys fees it spent battling watchmaker Omega S.A.’s eight-year infringement suit against the warehouse club retailer, ruling that Omega’s actions constituted copyright misuse.

Senior U.S. District Judge Terry J. Hatter Jr. on June 20 awarded nearly $397,000 to Costco in Omega S.A. v. Costco Wholesale Corp.

Hatter cited reasons including Costco’s successful defeat of Omega’s infringement claim; what he deemed Omega’s improper motivation for the lawsuit; and the need to deter improperly motivated infringement lawsuits.

Omega’s case “was arguably unreasonable and frivolous,” Hatter wrote.

“By affixing a barely perceptible copyrighted design to the back of some of its watches, Omega did not provide — and did not seek to provide — creative works to the general public,” he continued. “Omega sought to exert control over its watches, control which it believed it could not otherwise exert. Thus, even though the defense of copyright misuse may not have been articulated in a way that explicitly and directly prohibited Omega’s particular actions, it should have been clear to Omega that its actions were not condoned or protected by copyright law.”

Hatter’s rulings in the case represent “an unprecedented expansion of the copyright misuse doctrine,” said Julia Huston, who chairs the trademark, copyright and unfair competition practice group at Foley Hoag in Boston, and who wasn’t involved in the case.

“The opinion seems to be based on Hatter’s belief that it was improper for Omega to apply a copyright design to its watches solely for the purpose of preventing them from being imported into the U.S.,” she said. “In reality, it’s a common practice for brand owners to use copyright and trademark to prevent importation of counterfeit and gray market goods.”

Hatter initially awarded Costco $373,000 in attorney fees in August 2007, before the case was appealed to the U.S. Court of Appeals for the Ninth Circuit.

The Switzerland-based Omega sued Costco in July 2004 for selling its copyrighted products without its authorization.

Costco obtained the watches, which Omega hadn’t intended for import into the United States, through unauthorized channels — the so-called “gray market.”

In February 2007, Hatter granted Costco summary judgment. He ruled that Omega’s initial foreign sale of the watches barred infringement claims related to distribution and importation in connection with later sales of the products. Hatter cited the “first sale” doctrine, which holds that once a product is sold or transferred for free, the copyright owner’s interest in the copyrighted object is exhausted.

In September 2008, the Ninth Circuit reversed and remanded the case.

“Because there is no genuine dispute that Omega made the copies of the Omega Globe Design in Switzerland, and that Costco sold them in the United States without Omega’s authority, the first sale doctrine is unavailable as a defense to Omega’s claims,” Circuit Judge Milan Smith Jr. wrote, joined by Circuit Judges Johnnie Rawlinson and Barry Silverman.

Costco’s Supreme Court challenge to that ruling ended with a 4-4 split decision, which affirmed the Ninth Circuit.

On remand in November 2011, Hatter again granted summary judgment to Costco, ruling that “Omega misused its copyright of the Omega Globe Design by leveraging its limited monopoly in being able to control the importation of that design to control the importation of its Seamaster watches.”

Omega second appeal to the Ninth Circuit is pending.

Omega’s lawyers at Collen IP in Ossining, N.Y., declined to comment. The company’s additional lawyers at Theodora Oringher in Los Angeles and Diserio Martin O’Connor & Castiglioni in Stamford, Conn., did not respond to requests for comment. Omega could not be immediately reached for comment.

Costco’s lawyers at Greenberg Glusker Fields Claman & Machtinger in Los Angeles also declined to comment. Costco officials also did not respond.

According to Huston, copyright-misuse cases are rare; they tend to arise in a different type of case, about whether a copyright owner has placed unreasonable restrictions in a license agreement.

Ultimately, the ruling will be controversial “because there is no precedent for applying the copyright-misuse doctrine to facts like this, where the sole basis for the defense is the fact of enforcement,” Huston said.

The copyright-misuse doctrine is “is not designed for this kind of a case, which does not seek to impose monopoly powers by a seller of goods,” said Mark Schonfeld, a partner at Boston-based Burns & Levinson whose practice includes gray-market litigation. Schonfeld wasn’t involved in the case.

“It’s sort of the wrong application of a doctrine that is very rarely successful anyway,” Schonfeld said.

Sheri Qualters can be contacted at [email protected].

This article originally appeared in The National Law Jounal.