Opinion ID: 3052861
Heading Depth: 3
Heading Rank: 2

Heading: The Impact of Quality King

Text: We next address the degree to which the Supreme Court’s decision in Quality King invalidates this circuit’s construction of § 109(a). This panel may overrule BMG Music, Drug Emporium, and Denbicare if Quality King “undercut[s] the theory or reasoning underlying the prior circuit precedent in such a way that the cases are clearly irreconcilable.” Miller, 335 F.3d at 900.
[7] It is clear that Quality King did not directly overrule BMG Music, Drug Emporium, and Denbicare. Quality King involved “round trip” importation: a product with a U.S.- copyrighted label was manufactured inside the United States, exported to an authorized foreign distributor, sold to unidentified third parties overseas, shipped back into the United States without the copyright owner’s permission, and then sold in California by unauthorized retailers. 523 U.S. at 138-39. The Court held that § 109(a) can provide a defense to an action under § 602(a) in this context. Id. at 144-52. However, because the facts involved only domestically manufactured copies, the Court did not address the effect of § 109(a) on claims involving unauthorized importation of copies made abroad. See id. at 154 (Ginsburg, J., concurring) (“[W]e do not today resolve cases in which the allegedly infringing imports were manufactured abroad.”). Moreover, the Court never discussed the scope of § 109(a) or defined what “lawfully made under this title” means. Costco did not import the disputed copies. See 84 F.3d at 1149. However, Costco waived this argument by not raising it in its opening brief. See Greenwood v. FAA, 28 F.3d 971, 977 (9th Cir. 1994) (“We review only issues which are argued specifically and distinctly in a party’s opening brief.”). In any event, we must still decide whether § 109(a) provides a defense against Omega’s claim under § 106(3). OMEGA v. COSTCO 12119
[8] We next consider whether the reasoning5 of Quality King is clearly irreconcilable with our general rule that § 109(a) is limited to copies “legally made . . . in the United States.” BMG Music, 952 F.2d at 319; see also Denbicare, 84 F.3d at 1150. The basis for that rule was our concern that applying § 109(a) to foreign-made copies would violate the presumption against the extraterritorial application of U.S. law. BMG Music, 952 F.2d at 319 (citing Scorpio, 569 F. Supp. at 49); cf. Subafilms, Ltd. v. MGM-Pathe Commc’ns Co., 24 F.3d 1088, 1093-98 (9th Cir. 1994) (en banc) (describing the “undisputed axiom” that United States copyright law has no extraterritorial application). Quality King dismissed a similar concern that the triggering of § 109(a) by foreign sales would require an invalid extraterritorial application of the Copyright Act, explaining that merely recognizing the occurrence of such sales “does not require the extraterritorial application of the Act any more than § 602(a)’s ‘acquired abroad’ language does.” 523 U.S. at 145 n.14. Costco contends that this explanation is irreconcilable with our interpretation of § 109(a) in BMG Music. [9] We reject Costco’s contention and hold that the Supreme Court’s brief discussion on extraterritoriality is not “clearly irreconcilable” with our general limitation of § 109(a) to copies that are lawfully made in the United States. Miller, 335 F.3d at 900. The common understanding of the presumption against extraterritoriality is that a U.S. statute “appl[ies] only to conduct occurring within, or having effect within, the territory of the United States, unless the contrary is clearly indicated by the statute.” Restatement (Second) of Foreign Relations Law of the United States § 38 (1965); see also 5 “[L]ower courts [are] bound not only by the holdings of higher courts’ decisions but also by their ‘mode of analysis.’ ” Miller, 335 F.3d at 900 (quoting Antonin Scalia, The Rule of Law as a Law of Rules, 56 U. Chi. L. Rev. 1175, 1177 (1989)). 12120 OMEGA v. COSTCO EEOC v. Arabian Am. Oil Co., 499 U.S. 244, 248 (1991). Recognizing the importance of avoiding international conflicts of law in the area of intellectual property, however, we have applied a more robust version of this presumption to the Copyright Act, holding that the Act presumptively does not apply to conduct that occurs abroad even when that conduct produces harmful effects within the United States. See Subafilms, Ltd., 24 F.3d at 1096-98; see also William S. Dodge, Understanding the Presumption Against Extraterritoriality, 16 Berkeley J. Int’l L. 85, 101 (1998) (characterizing this circuit’s approach under the Copyright Act as consistent with American Banana Co. v. United Fruit Co., 213 U.S. 347, 356 (1909), overruled on other grounds, Continental Ore Co. v. Union Carbide & Carbon Corp., 370 U.S. 690, 704-05 (1962), which described the presumption as a “general and almost universal rule . . . that the character of an act as lawful or unlawful must be determined wholly by the law of the country where the act is done”). [10] Given this understanding of the presumption, the application of § 109(a) to foreign-made copies would impermissibly apply the Copyright Act extraterritorially in a way that the application of the statute after foreign sales does not. Under the latter application, the statute merely acknowledges the occurrence of a foreign event as a relevant fact. The former application would go much further. To characterize the making of copies overseas as “lawful[ ] . . . under [Title 17]” would be to ascribe legality under the Copyright Act to conduct that occurs entirely outside the United States, notwithstanding the absence of a clear expression of congressional intent in favor of extraterritoriality. See 17 U.S.C. § 109(a); see also Subafilms, Ltd., 24 F.3d at 1096 (“There is no clear expression of congressional intent in either the 1976 Act or other relevant enactments to alter the preexisting extraterritoriality doctrine.”). Specifically, it would mean that a copyright owner’s foreign manufacturing constitutes lawful reproduction under 17 U.S.C. § 106(1) even though that statute does not clearly provide for extraterritorial application. This is preOMEGA v. COSTCO 12121 cisely what we proscribed in Subafilms, see 24 F.3d at 1098, and Quality King provides no basis for rejecting our approach. [11] Other significant parts of Quality King’s analysis are also consistent with BMG Music’s limitation of § 109(a) to domestically made copies. The Court found that copies of a work copyrighted under Title 17 are not necessarily “lawfully made under [Title 17]” even when made by the owner of the copyright: The category of copies covered by § 602(a), it was explained, encompasses “copies that were ‘lawfully made’ not under the United States Copyright Act, but instead, under the law of some other country.” 523 U.S. at 147. Because § 602(a) extends to such copies, but on its terms permits an infringement action only by the “owner of copyright under [Title 17],” copies of a work can be lawfully made “under the law of some other country,” rather than “under [Title 17],” even when the copies are protected by a U.S. copyright. In short, copies covered by the phrase “lawfully made under [Title 17]” in § 109(a) are not simply those which are lawfully made by the owner of a U.S. copyright. Something more is required. To us, that “something” is the making of the copies within the United States, where the Copyright Act applies. See 2-8 Nimmer on Copyright § 8.12(B)(6)(c), at 8-178.4(6)-(7). We also read one of the Court’s illustrations to be consistent with this understanding. The Court stated that given a publisher of [a] U.S. edition [of a work] and a publisher of [a] British edition of the same work, each such publisher could make lawful copies. If the author of the work gave the exclusive United States distribution rights—enforceable under the Act—to the publisher of the United States edition and the exclusive British distribution rights to the publisher of the British edition, however, presumably only those made by the publisher of the United States edition would be ‘lawfully made under this title’ within the meaning of § 109(a). The first sale doctrine 12122 OMEGA v. COSTCO would not provide the publisher of the British edition who decided to sell in the American market with a defense to an action under § 602(a). 523 U.S. at 148 (emphasis added and footnote omitted). Assuming the British edition was made outside the United States,6 this illustration suggests that “lawfully made under this title” refers exclusively to copies of U.S.-copyrighted works that are made domestically. Were it otherwise, the copies made by the British publisher would also fall within the scope of § 109(a). See 2-8 Nimmer on Copyright § 8.12(B)(6)(c), at 8-178.4(7). Finally, in the decision’s only direct language on the issue, Justice Ginsburg’s concurrence cited a copyright treatise for the proposition that “lawfully made under this title” means “lawfully made in the United States.” 523 U.S. at 154 (citing W. Patry, Copyright Law and Practice 166-70 (1997 Supp.)). The majority opinion did not dispute this interpretation, which aligns closely with the one adopted by our circuit. See BMG Music, 952 F.2d at 319. [12] Costco contends that BMG Music’s limitation of § 109(a) to domestically made copies is inconsistent with the plain language of the statute and its legislative history. This criticism has been made before, including by this court. See, e.g., Parfums Givenchy, Inc. v. C & C Beauty Sales, Inc., 832 F. Supp. 1378, 1386-87 (C.D. Cal. 1993), aff’d sub nom. Drug Emporium, 38 F.3d at 482 n.8. Perhaps most compelling is the objection that BMG Music would provide substantially greater copyright protection to foreign-made copies of U.S.- copyrighted works. A U.S. copyright owner, for example, 6 The illustration offers no specific justification for making this assumption over any other regarding the site of manufacture, but Quality King cannot be “clearly irreconcilable” with our precedent even if the decision merely permits assumptions that are consistent with that precedent. Miller, 335 F.3d at 900. OMEGA v. COSTCO 12123 would be unable to exercise distribution rights after one lawful, domestic sale of a watch lawfully made in South Dakota, but, without the limits imposed by § 109(a), the same owner could seemingly exercise distribution rights after even the tenth sale in the United States of a watch lawfully made in Switzerland. The difference would likely encourage U.S. copyright owners to outsource the manufacturing of copies of their work overseas. Drug Emporium and Denbicare, however, resolved this problem by clarifying that parties can raise § 109(a) as a defense in cases involving foreign-made copies so long as a lawful domestic sale has occurred. See Drug Emporium, 38 F.3d at 481; Denbicare, 84 F.3d at 1150. Insofar as Costco contends that § 109(a) should apply to foreignmade copies even in the absence of a lawful domestic sale, the surviving rule from BMG Music requires otherwise. See 952 F.2d at 319. In summary, our general rule that § 109(a) refers “only to copies legally made . . . in the United States,” id., is not clearly irreconcilable with Quality King, and, therefore, remains binding precedent. Under this rule, the first sale doctrine is unavailable as a defense to the claims under §§ 106(3) and 602(a) because there is no genuine dispute that Omega manufactured the watches bearing the Omega Globe Design in Switzerland. Id.; Fed. R. Civ. P. 56(c); see also Swatch S.A. v. New City, Inc., 454 F. Supp. 2d 1245, 1253-54 (S.D. Fla. 2006) (concluding that Quality King is consistent with the interpretation that “lawfully made under this title” means “legally made . . . in the United States”); 2 Goldstein on Copyright § 7.6.1, at 143-44 (concluding that Quality King “indicates an intention not to disturb lower court holdings that the first sale defense is unavailable to importers who acquire ownership of gray market goods made abroad”).
We need not decide whether Drug Emporium’s and Denbicare’s exception to the rule in BMG Music also survives 12124 OMEGA v. COSTCO Quality King. There is no genuine dispute that the copies of the Omega Globe Design were sold in the United States without Omega’s authority. The exception, therefore, does not apply in this case. See Denbicare, 84 F.3d at 1145-46 (“[Section] 109 applies to copies made abroad only if the copies have been sold in the United States by the copyright owner or with its authority.”). Because the exception does not apply, the question of its continuing viability cannot affect our conclusion that § 109(a) provides no defense to Omega’s claims.