Costco Wholesale Corporation v. Omega, S.A. – Oral Argument – November 08, 2010

Media for Costco Wholesale Corporation v. Omega, S.A.

Audio Transcription for Opinion Announcement – December 13, 2010 in Costco Wholesale Corporation v. Omega, S.A.

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John G. Roberts, Jr.:

We will hear argument first this morning in Case 08-1423, Costco Wholesale Corporation v. Omega.

Mr. Englert.

Roy T. Englert, Jr.:

Mr. Chief Justice, and may it please the Court:

This case is a repeat of Quality King v. L’anza with only one pertinent difference.

Both cases involve goods not authorized for importation into the United States.

Both cases involve arguments that the first sale doctrine must be narrowly construed, thus the Copyright Act’s importation ban, section 602(a), be given less than its supposedly intended scope.

The only difference is place of manufacture of the goods.

Quality King involved U.S. manufactured goods; this case involves goods made in Switzerland.

According to the Ninth Circuit in Omega, Congress intended to treat foreign manufactured goods better in this respect than goods made in the United States.

It is wildly implausible that Congress had any such intent.

From 1790 to 1891, foreigners were categorically ineligible to hold U.S. copyrights.

From 1891 to 1986, the United States discriminated against foreign manufacturing of copyrighted goods through a series of so-called manufacturing clauses, including section 601 of the 1976 Act.

If Congress intended to make the first sale doctrine discriminate in favor of foreign manufacturing at the same time, one would expect some note to be taken of that fact in the legislative history, but none is.

And yet the Ninth Circuit held that Congress in 1976 altered the long-established first sale doctrine to make it uniquely favorable to foreign manufacturing of copyrighted goods and did so through the obscure phrase, 109.

No one in all the briefs in this case has identified a single reason why Congress would have wanted to do so.

Moreover, the words 109.

Most instructive is the very next section after section 109, section 110, which governs educational use of copyrighted works and was enacted contemporaneously with 109.

In describing the kinds of works teachers may show students in their classroom without fear of copyright liability, Congress referred to works lawfully made under this title.

Our briefs have pointed out the absurdity of construing the phrase in section 110 to mean made in the United States, and it’s very revealing how Respondent and its amici have tried to answer that point.

Omega says “lawfully made under this title” means either made in the United States or authorized for distribution in the United States.

That argument gives up any pretense–

Sonia Sotomayor:

Would you clarify for me what your exact meaning is?

There — your blue brief and your reply brief appear to give two different meanings.

Roy T. Englert, Jr.:

–I hope not, Your Honor.

I believe our–

Sonia Sotomayor:

Your reply brief suggests that if Omega grants foreign reproduction and distribution rights but retains U.S. rights, that the first sale doctrine would allow Omega to bar importation.

Roy T. Englert, Jr.:

–If it grants exclusive foreign distribution.

Sonia Sotomayor:

Why does it matter?

Because your blue brief says that “lawfully made” means anything that was made with Omega’s consent or authority.

So why the difference at all?

Roy T. Englert, Jr.:

It matters, Your Honor, because of the underlying rationale of the first sale doctrine and the underlying rationale of the import ban in section 602.

The purpose of the first sale doctrine is to make sure that the copyright owner gets one and only one recompense for each copy, for each lawfully made copy.

Sonia Sotomayor:

So if he sells his rights to a foreign manufacturer and distributor, he gets paid for those rights.

Why should he now have any additional rights to bar that authorized copy–

Roy T. Englert, Jr.:

The reason, Your–

Sonia Sotomayor:

–from being imported into the United States?

Roy T. Englert, Jr.:

–Yes, Your Honor.

The–

Sonia Sotomayor:

I — I don’t understand what–

Roy T. Englert, Jr.:

–The reason is to give effect to the examples given in the legislative history of section 602.

Sonia Sotomayor:

–Not — you mean to the examples in the legislative history or in the examples in Quality King?

Roy T. Englert, Jr.:

Oh.

The Quality King has a paragraph, much discussed in the briefs, which cites to the legislative history of section 602 and in particular, cites to witness statements that are in the committee prints that are part of the legislative history of section 602.

Sonia Sotomayor:

So do you think that there is a difference between assigning a copyright to a foreign entity or merely licensing a foreign entity?

One of the criticisms of your approach is that you would draw a line between those two.

Roy T. Englert, Jr.:

We don’t draw a line between those two, Your Honor.

The line is — depends on whether the copyright owner has given exclusive foreign rights to someone else.

And the reason the exclusivity of the foreign rights matters is because that is the example given in the legislative history of 602 and in the paragraph in Quality King.

And to give meaning to section 602 and to be completely consistent with the rationale of the first sale doctrine, one must draw some line.

Drawing a line between the U.S. manufacturer and the foreign manufacturer makes no sense.

It’s not consistent with the purposes of anything.

Drawing a line between the exclusive grant of rights, whether by license or assignment to a foreign manufacturer — or a foreign distributor, rather, and not granting such exclusive rights is perfectly consistent with the rationale–

Stephen G. Breyer:

You are talking about the first sale doctrine.

The perfectly consistent rationale would be whether there is a first sale.

So — so 109, though it doesn’t say it, but if you look at the history and title, there has to be a transfer.

So in fact, if a British publisher with a British right given by an American author or publisher makes this, 109 doesn’t apply — I mean, 109 doesn’t apply until there’s a sale.

Now, that makes — you — you haven’t adopted that.

Nobody — I guess maybe one of the amicus briefs does, but I don’t see why that isn’t perfectly sensible and I find no authority against it.

Roy T. Englert, Jr.:

–Well, Your Honor, since that’s a — a broader position than ours, and we would–

Stephen G. Breyer:

I know it is, but it — the trouble with your position is it gets everybody, I think, going to be — I mean, I don’t know what all these contracts say.

Stephen G. Breyer:

There are hundreds of thousands of them, if not millions.

What I don’t see is why you don’t just say: The first sale doctrine has always meant there was a transfer or sale.

It meant that in 1792, when I took Phil Arita’s antitrust course, and he used to bring it up.

You go back to the 18th century.

It’s always meant there has to be a sale or transfer.

So why don’t we just read 109 that way, and there you give meaning to everything, and there is just no problem?

Now, I raise that not because — I raise it because since there’s only a few people really supporting this, there must be some problem with what I say.

So what is it?

Roy T. Englert, Jr.:

–Well, the issue, Your Honor — and you’re putting me in a position of arguing against myself a little bit, but the issue is a fair reading of the legislative history of section 602 — not the text, but the legislative history — is that Congress did intend to allow certain blocking of imported goods when there had been–

Stephen G. Breyer:

Of course, if you say there has to be a first sale, there is no problem.

You block that British manufacturer from sending his books to the United States, but you don’t block the person to whom he sells it.

Gives meaning to everything.

Roy T. Englert, Jr.:

–Okay, Your Honor.

Stephen G. Breyer:

I mean, no, I’m putting that to you, because since you haven’t advocated it, I must be missing something, and I’m not an expert in copyright law.

What am I missing?

Roy T. Englert, Jr.:

Well, there is a dictum in this Court’s opinion in Quality King that suggests that if a publisher and a — an American publisher gives exclusive rights to a British publisher, if an American author or a British author gives exclusive territorial rights to two different publishers, then 602 retains meaning in that–

Stephen G. Breyer:

Exactly, and that’s what it does under my theory, because there has been no first sale.

Roy T. Englert, Jr.:

–No, but — with respect, Your Honor, it’s my understanding of both the legislative history and this Court’s dictum that they refer to second and subsequent sales.

Stephen G. Breyer:

Oh, you mean you are talking about jobbers?

Somebody goes and buys, and so they’re — and so then you lose, because if that’s what we are supposed to follow, those excerpts in the legislative history, then it would mean that a person who buys from the British publisher cannot import into the United States because 109 doesn’t apply.

Roy T. Englert, Jr.:

No, that’s not what the example means.

It doesn’t say categorically all second sales from British publishers are not subject to the first sale doctrine.

What it says is in a situation in which rights have been divided and exclusive territorial rights have been given in two different countries, or to put it in copyright language, in the language you also used in the legislative history, when the copyright owner has divided its rights because an innovation of the ’76 act, the Copyright Act, the copyrights became divisible.

Antonin Scalia:

Where do you get that in the text?

I mean, that’s lovely, and you’re saying that what Justice Breyer suggests makes perfect sense except for dictum and legislative history.

Does your position make any sense with regard to text?

Roy T. Englert, Jr.:

Yes, absolutely, Your Honor.

Antonin Scalia:

Where?

Where is that limitation in the text?

Roy T. Englert, Jr.:

The other side’s effort to read 602 broadly has no support in the text after Quality King, but–

Antonin Scalia:

I’m talking about your–

Roy T. Englert, Jr.:

–I understand.

Antonin Scalia:

–your limitation on exclusive rights abroad versus nonexclusive rights abroad.

Where can you possibly find that in the text?

Roy T. Englert, Jr.:

You cannot.

Antonin Scalia:

Oh.

Well, that’s the end of it for me.

Roy T. Englert, Jr.:

Let us–

Stephen G. Breyer:

I have to say, I didn’t even see it in the legislative history.

I didn’t think they made a big deal about jobbers.

I like history here.

Go back to 1792.

Ruth Bader Ginsburg:

Mr. Englert, also talk about what, if anything, 602(a)(1) does, then.

It seems 602(a)(2) is dealing with infringing goods, with pirated goods.

So given the first sale doctrine as you construe it, what does 602(a)(1) protect?

Roy T. Englert, Jr.:

–602(a)(1) is limited to imports and doesn’t confer a private right of action.

602(a)(2), which was enacted after the Ninth Circuit ruled in this case, adds a private right of action and adds exports.

But it is — 602(a)(2) is a new statute.

It was not part of the 1976 Copyright Act.

So it — it is a subsection in which Congress expanded on what was already prohibited in 602(a)(1).

Now, with respect to text, the text that the Court is construing is five words, “lawfully made under this title”.

And those five words are used several places in the Copyright Act, including section 110, “for educational use”.

The government says 109 and section 110, provisions of the same chapter of the Copyright Act enacted contemporaneously.

As a fallback position, the government says there is nothing wrong with having copyright liability for teachers who show foreign-made films in the classroom as long as they know they weren’t made in the United States.

So, for example, showing an Ingmar Bergman film, The Seventh Seal, in class would be copyright infringement according to the government.

Even the people who make movies don’t agree with that argument.

The Motion Picture Association of America has filed an amicus brief in this case, and on page 19 of its brief, the MPAA says that the result the government says is A-OK is, quote, “a nonsensical and unintended consequence”.

The MPAA goes on to say there is no evidence that such liability has ever been imposed, but that argument misses the point.

We are trying to ascertain what Congress meant by using the phrase 110 remains a powerful argument that Congress didn’t use the phrase to mean “made in the United States”.

There is nothing extraterritorial about construing U.S. Copyright Act anywhere in the world.

Roy T. Englert, Jr.:

In that respect, this case is no different from Quality King, in which the court rejected an extraterritoriality argument in a two-sentence footnote.

Antonin Scalia:

You don’t really mean — your position is that “lawfully made under this title” means that — means

“would have been lawfully made under this title if this title governed. “

Isn’t that basically what you are saying?

Roy T. Englert, Jr.:

Yes.

Antonin Scalia:

Okay.

But there is another provision of the statute — I forget where it is — which says that in so many words.

Roy T. Englert, Jr.:

Not quite, Your Honor.

In section 602(a)(2) and in section 602(b), Congress used the phrase,

“would have constituted an infringement if this title had been applicable. “

and it says–

Antonin Scalia:

“If this title had been applicable. “

right?

We say “applicable”.

Much prettier.

Roy T. Englert, Jr.:

–Okay, sir.

Yes, that is the phrase Congress used to express a certain disfavored class of goods, goods that would have been infringing if this title would have been applicable.

110 — 109, excuse me, and 110 are a different purpose.

They are the purpose of favoring goods, goods that have been lawfully made under this title.

So, yes, Congress could have chosen to use a variation of the phrase

“if this title had been applicable. “

under 109, but it didn’t.

And we are left with the language Congress enacted, but it is language that Congress uses at least four different places in the Copyright Act, and we have a pretty good idea that it doesn’t mean “made in the United States” and it doesn’t mean what Omega says it means, which is

“made in the United States or authorized at any time for distribution in the United States. “

Ruth Bader Ginsburg:

May I ask you — I see that 602(a) is now broken into (1) and (2) and it’s 602(b) that you put entirely in quotes.

But what does 602(a) shelter?

How does it coexist with the first sale doctrine?

Roy T. Englert, Jr.:

Well, Your Honor, as you know, there is no reference in the legislative history to the interaction between 602(a) and 109, and therefore, this Court had to address that question for the first time in Quality King, and the Court rejected the argument that 109 is inapplicable to imported goods altogether.

The Court did say in a dictum which has been discussed already this morning that if a British and an American publisher divide rights, then section 602(a) does have a role to play.

But the Court did not say books manufactured in Britain are not subject to the first sale doctrine.

Ruth Bader Ginsburg:

There was a concurring opinion that says — that said this case is about a round trip and doesn’t talk to goods that–

Roy T. Englert, Jr.:

Correct, and the concurring opinion cited two distinguished copyright treatises that suggested there was some concern about extraterritoriality in this case.

Well, even the government has conceded there is no concern about extraterritoriality in this case, so the rationale of those treatises, learned though they are, is undermined.

If one looks more closely at those treatises, they argue the language is so plain that it can only be construed one way.

The government concedes that’s not true.

They argue extraterritoriality, as I’ve already said, and they argue that this court’s dictum in Quality King — the later additions to those treatises argue that this Court’s dictum in Quality King drew a distinction based on place of manufacture, but it’s only the concurring opinion, not the dictum in the court’s opinion that mentions place of manufacture.

So it’s a vert thin reed to say that the case turned on place of manufacture.

And again, one can find nothing in the Quality King dictum, nothing in the legislative history of 602, nothing in the legislative history of 109 that talks about place of manufacture.

Antonin Scalia:

And nothing in the text that supports your position.

Roy T. Englert, Jr.:

No.

What supports our position, Your Honor, is the text of 109, the use of the phrase “lawfully made under this title”, and the use of that phrase “elsewhere in the Copyright Act”.

Antonin Scalia:

You pulled out of the sky this distinction between having created exclusive rights abroad and having created nonexclusive rights abroad.

Where does that come from?

Roy T. Englert, Jr.:

That comes from the legislative history, Your Honor.

And for those who prefer not to look at legislative history–

Antonin Scalia:

You use–

Roy T. Englert, Jr.:

–that distinction may not hold up.

But if that distinction doesn’t hold up–

Antonin Scalia:

–I don’t know why using–

Roy T. Englert, Jr.:

–that strengthens my position.

Antonin Scalia:

–Did the legislative history suggest what part of the text this — this novel suggestion was based upon?

Roy T. Englert, Jr.:

It does not.

The relevant legislative history is witness statements.

Stephen G. Breyer:

I do read legislative history, but I didn’t really find anything that said that they were worried about an American and a British publisher dividing rights, and they want them to do that.

There is no problem with that, because there has never been a sale.

So they divide the rights.

And there isn’t even a problem with — with buyers from the British publisher, because a reasonable vertically imposed territorial agreement or other restriction on resale is lawful.

Roy T. Englert, Jr.:

Well, if–

Stephen G. Breyer:

And if it’s reasonable, they don’t even need copyright.

Roy T. Englert, Jr.:

–That was not true at the time.

Stephen G. Breyer:

If it isn’t reasonable, why should they have it?

Roy T. Englert, Jr.:

Pardon me, Justice Breyer.

Stephen G. Breyer:

That’s all you — yes, I just want you to respond.

Roy T. Englert, Jr.:

It was not lawful at the time of the enactment of this statute.

This Court had not yet decided GTE Sylvania, and territorial restrictions were per se unlawful at the time Congress enacted this statute.

Stephen G. Breyer:

Here.

But in Europe, I guess, they were lawful.

Roy T. Englert, Jr.:

I don’t know the state of the law in Europe.

Stephen G. Breyer:

I think — I think it’s always been true.

Roy T. Englert, Jr.:

But, again, what the Court has asked me many questions about is whether I’m giving too broad a scope to section 602 and too narrow a scope to section 109.

Our position is that section 109 has a necessarily broad reach, and we have tried to accommodate the legislative history and the dictum in Quality King to give some role for section 602 to play in the case of nonpiratical goods.

If the Court wants to reject anything, if it wants to reconsider the dictum in Quality King or not rely on legislative history, that makes my position–

Stephen G. Breyer:

My question really wasn’t to argue with you.

My question was: Where in the legislative history does it say that the point of 602 is to prevent a foreign publisher from selling copies to a distributor and then that distributor resells them to the United States?

I’m not saying it doesn’t; it’s just that I didn’t focus on those particular words directly.

Roy T. Englert, Jr.:

–And Justice Breyer, to be fair about what the legislative history says, it is statements by witnesses.

It is not statements by committee, so it’s a little bit hard to tell where they’re drawing the line.

Stephen G. Breyer:

Oh.

In other words, somebody wanted that.

I understand the industry wanted it.

But — but I — is there anything in there that suggests that this is what Congress wanted to do, members of Congress?

Even I draw the line somewhere.

[Laughter]

Roy T. Englert, Jr.:

Yes.

Antonin Scalia:

Let me write that down.

[Laughter]

Roy T. Englert, Jr.:

Justice Breyer, we do know that section 602(a) has some role to play.

And when this Court was trying to figure out in Quality King what role it had to play it did look to the statements of Mrs. Harriet Pilpel, Mr. Horace Manges from the American Book Publishers Council.

And those are the statements that the Court said in dicta presumably reflected congressional intent, and so I am relying on those statements for the limitation of section 109 to accommodate section 602.

But again, if the Court disagrees with me and wants to give less of a role to 602 and more of a role to section 109, that is, of course, further assistance to my position.

Roy T. Englert, Jr.:

I would like to reserve the balance of my time for rebuttal.

John G. Roberts, Jr.:

Thank you, Mr. Englert.

Mr. Panner.

Aaron M. Panner:

Mr. Chief Justice, and may it please the Court:

Section — section 602(a)(1) allows the distribution of foreign-made copies abroad without the U.S. copyright holder forfeiting the exclusive right to distribute copies domestically, which is guaranteed by section 106(3), and that provision applies in this case.

And unlike in Quality King, section 109(a) provides Costco with no defense because the copies at issue were not lawfully made under this title.

That is, the making of the copies was not subject to or governed by U.S. copyright law.

The decision of the court of appeals should not be affirmed for three basic reasons, and the first depends on the plain language of section 109(a), which applies only to copies that were lawfully made under this title.

Samuel A. Alito, Jr.:

What do you say “made” means?

Aaron M. Panner:

Well, “made” certainly includes the creation of the physical copy.

It also includes the addition of any necessary intellectual property rights that would permit distribution in the United States.

So that is to say that we understand section 109(a) should be read to reach a situation in which copy has been subject to an authorized sale in the United States.

Samuel A. Alito, Jr.:

See, I’m with you, and I think you — the text supports you up to the point where you add the qualification.

But once you’ve added that qualification, I think you’re — you’re outside the text, just as Costco is outside the text with the qualification that they had.

Aaron M. Panner:

I don’t think so, Your Honor, and let me try to explain why.

Section 202 of the Act draws a — a distinction between the material object and the intellectual property rights that are involved in the copyright.

And it makes sense.

The word 106(1).

It’s a broader term that can also refer to the addition of these necessary intellectual property rights.

And the — what is, I think, important is the decision whether the copy was lawfully made under this title will, of course, be made at the time of the sale.

It is not — the decision doesn’t need to be made at the time of — of manufacture, because the question is: How should section 109(a) or another provision apply to that particular copy?

Anthony M. Kennedy:

Well, in their brief, the brief for the National Library Association indicates at the bottom — the American Library Association indicates at the bottom of page 38 that U.S. copyright law lawfully could apply; so that if you lawfully import it into the United States, it would then apply at that time.

Aaron M. Panner:

Well, I think that that probably gets us to pretty much the same place, Justice Kennedy.

I think the point is–

Anthony M. Kennedy:

And it makes the exemption work, then, too.

Aaron M. Panner:

–That’s correct, Your Honor.

And the — that also gives effect to the language of 602(a)(1), because section 602(a)(1) is actually written in a very broad term.

It’s written to apply to copies that have been acquired outside of the United States.

I think — that is, I think, an answer, Justice Breyer, to your objection that any sort of sale ought to suffice.

Section 602(a)(1) is designed to permit a U.S. copyright owner to exclude legitimate copies, and if you ask where Congress said that, it’s right in the House Committee report, in the legislative history.

Stephen G. Breyer:

And it can.

It can exclude legitimate copies before there’s a first sale.

Aaron M. Panner:

But the–

Stephen G. Breyer:

And the — the — question is — I mean, the text seems to say 602 expands or falls within 106.

All right?

So that’s what it says.

It says — it says it’s an infringement of the exclusive right to distribute copies.

That’s the 106 right.

Aaron M. Panner:

–That’s correct.

Stephen G. Breyer:

And then 109 is an exception from 106.

So it’s automatically an exception from 602.

Aaron M. Panner:

And I think–

Stephen G. Breyer:

Now, that’s the text.

And therefore, you are back at what the meaning of 109 is, if I understand your argument.

And it seems to me that’s the choice.

If you are going to take 109 literally, then everything that comes into the United States can’t, without the permission of the copyright holder, but for the exception in (a)(3), and a library that brings them in under (a)(3) cannot even lend out the books.

That’s one choice.

And the other choice is to say that “lawfully made” means it’s made without contravening any provision of the Act, if the Act were applicable.

Aaron M. Panner:

–Well, Your Honor–

Stephen G. Breyer:

What’s a third choice?

Maybe you want a third choice.

Aaron M. Panner:

–Well, a small qualification, Your Honor.

The exception in section 602(a)(3) does allow libraries to lend copies that are imported pursuant to that section.

It’s for archival or lending purposes.

But in any event, I think that that’s — I don’t want to get caught up on the small point.

The more significant point is that section 602(a)(1) is designed to permit a U.S. copyright owner — as Costco admits, it’s designed to permit a U.S. copyright owner to exclude legitimate copies that are made overseas.

If the only issue were one of contract, there would be no need for section 602(a)(1) because there would be no need to create a copyright remedy where contractual remedies are sufficient; that is, in circumstances where there is privity between the U.S. copyright owner or the U.S. copyright owner’s direct party and the foreign copyright owner.

Stephen G. Breyer:

That’s why I started with the first sale doctrine, because if you apply the first sale doctrine as it traditionally has been applied and if you believe that 109 incorporates that, there is loads of room for 602(a)(1) to act.

That’s all the instances where the British publisher published — makes the book.

What they do is they have a license and they try to send it to the United States and they can’t without permission because of 602(a)(1), and then 109 doesn’t come into play because there’s been no first sale.

Stephen G. Breyer:

That’s the part of this case that I’m finding the hardest, because, literally, 109(a) — as you correctly point out, 109 doesn’t say that literally.

Aaron M. Panner:

Well, Your Honor, section 602(a)(1) refers specifically to copies that have been acquired outside of the United States.

So it does not make sense to say that it’s limited to the publisher, because the publisher hasn’t acquired the copies.

It has produced the copies.

Stephen G. Breyer:

That’s all right.

Aaron M. Panner:

So I think that the difficulty with Costco’s reading, by contrast — and I think that some of the Court’s questions brought that out this morning — is that either they — Costco’s reading tends to eliminate any practical effect for section 602(a)(1) by making it not apply to legitimate copies or it makes substantive rights turn on formalities of title, which is quite inconsistent with the structure of the Copyright Act, which actually goes out of its way to make clear that the nature of the rights that are held by the copyright owner, which is defined to mean the owner of any of the many rights that comprise the copyright, are the same regardless of whether there’s been a transfer.

And so when Costco says, for example, that Omega would have the right to exclude foreign-made copies that were produced by a transferee, but cannot do so if it manufactures the copy abroad itself, it really draws a distinction that has absolutely no basis in the text of the Copyright Act and that would make substantive rights, the value of the rights under 602(a)(1) and 106(3), turn on formalities and, again, transfers that really should make no difference in terms of the substantive rights that are available to the copyright owner.

Antonin Scalia:

It seems to me — why didn’t they say — instead of “lawfully made under this title”, why didn’t they just say “made in the United States”?

Aaron M. Panner:

Well, Your Honor–

Antonin Scalia:

I mean, that’s what you say it means.

“Made under this title” means “made in the United States”.

Aaron M. Panner:

–That is not our position, Your Honor.

Our position is that 1(e) of our brief, we discuss the fact that an interpretation of 109(a) is intended to reflect an exhaustion principle.

So where a U.S. copyright owner has exhausted rights with respect to a particular copy by having been compensated for a right that has been invested into that copy, that can be included in the making.

Antonin Scalia:

That’s just not in the text.

I mean, like the other side, in order to make your theory of the text appear reasonable, you have to bring in a skyhook with a limitation that finds no basis in the text.

Aaron M. Panner:

I don’t think so, Your Honor.

Again, there is — because the textual evidence is that there is a distinction between reproduction, which is the narrow term used in section 106(1), and the broader term that is used in section 109(a), which is “made” — and again, that inquiry is always going to occur at the time of the challenged sale in the United States.

And so the question is as to that topic.

Sonia Sotomayor:

Then you are trying to rewrite Quality King.

Now you are saying that the entire premise of Quality King is wrong.

Aaron M. Panner:

Not at all, Your Honor, because in Quality King, what the Court held was that a copy that is made in the United States is lawfully made under this title.

Sonia Sotomayor:

Where in Quality King do you see anything Quality King turning on where the goods were made?

Aaron M. Panner:

Well, Your Honor, the reason–

Sonia Sotomayor:

I read the decision and it barely mentions that, if at all.

Its whole premise was on what the owner did: Did the owner sell this copy?

Aaron M. Panner:

–I don’t think so, Your Honor.

What — there was no challenge in Quality King to the idea that the copy was lawfully made under this title, precisely because the copy was made in the United States where the Copyright Act governs.

This Court said in our Descani case that the natural reading under this title is subject to or governed by this title, and therefore it is a perfectly straightforward reading of the text.

Antonin Scalia:

But you don’t say that.

Antonin Scalia:

I mean, you bring in this other qualification.

Aaron M. Panner:

But Your Honor, again, the distinction is between the question whether — what the conduct that is being addressed is simply the manufacture.

That’s the case here.

There’s — all that happened here is that the copies were manufactured in Switzerland and sold in Switzerland for distribution abroad.

That does not implicate U.S. copyright law at all.

U.S. copyright law provides the copyright owner with certain rights to exclude.

It has no right to exclude the making of a copy, whatever you want to say the making means, in Switzerland.

And it is for that reason that the Ninth Circuit correctly determined that the copies at issue here were not lawfully made under this title.

Samuel A. Alito, Jr.:

How often does this situation–

Antonin Scalia:

But it would be lawfully made under this title, even though it was made — you know, made abroad, if what?

Aaron M. Panner:

If it were made, for example, pursuant to a license that allowed for distribution in the United States, there would be an affirmative exercise of the exclusive right that the copyright holder has under section 106(3) with respect to that particular copy.

And so it makes perfect sense to say that that copy is lawfully made under this title, because you need to look to U.S. law to determine whether the making of that copy — even though it took place overseas, for example — was governed by — was lawful as determined by the rights that are granted–

Antonin Scalia:

Is isn’t the making that is rendered lawful.

It’s the importation into the United States that is rendered lawful by the agreement that you are relying upon.

Aaron M. Panner:

–Well, Your Honor, the — the making — the question is whether it was lawfully made under this title.

If it was made for distribution in the United States, it could only be lawfully made for distribution in the United States if the appropriate rights were granted by the owner of those rights.

And that is why it makes perfect sense to say–

John G. Roberts, Jr.:

So you are saying — you are saying that whether or not it’s lawfully made depends on something that happens after it’s made?

Aaron M. Panner:

–In a particular case, it might be, Your Honor, but in the typical case — let’s say the Heartland case — if a manufacturer has a license under U.S. copyright to distribute in the United States, it could be lawfully made at that time.

But I think, Justice Alito, you were going to ask a question about how often the situation arises, and I think it’s important to point out that there is no case that Costco has pointed to, and we are not aware of them, where a U.S. copyright owner has sought to challenge the resale of a copy where there was an acknowledged, authorized sale in the United States.

Obviously, this is a significant issue to bringing–

John G. Roberts, Jr.:

Well, they still have that right.

You say there is no case.

But under what theory of yours do they not have that right?

Aaron M. Panner:

–Because if the sale is authorized in the United States, then that copy would be considered lawfully made because it includes the license.

That copy carries with it a license to be distributed in the United States, which would include then the right for a lawful owner to resell it.

Again, that’s consistent with the language of 602(a)(1), which is clearly intended to allow the owner of the U.S. distribution right to exclude legitimate copies that were made overseas, and it also sensibly construes section 109(a) to give affect to the exhaustion principle that underlies it.

Which is where a U.S. copyright owner has exercised his U.S. distribution rights with regard to a particular copy.

Ruth Bader Ginsburg:

Mr. Panner, can you answer Mr. Englert’s point what earthly sense would it make to prefer goods that are manufactured abroad over those manufactured in the United States?

Aaron M. Panner:

Your Honor, it doesn’t create any sort of a preference, as Mr. Englert — Mr. Englert suggests that this is somehow — prefers the — the — the copies that are made abroad.

Aaron M. Panner:

But in the same breath, he suggests that this will actually promote the sale of U.S. — U.S. manufactured goods because foreign-manufactured goods may therefore be of suspect legitimacy for purposes of resale in the United States.

But the key point is that in Quality King this Court looked at the language of section 109(a), and it says — and — and — and it emphasized that to determine the scope of the first sale doctrine that text is what matters.

And it says section 109(a) applies to goods that are lawfully made under this title.

There was no dispute that goods that are reproduced in the United States are lawfully made under this title, because one must have a U.S. — the U.S. right in order to lawfully make a copy in the United States.

Stephen G. Breyer:

There’s a whole brief filed that traces the history of that language, and I think comes to a somewhat different conclusion.

Do you want to say anything about that?

It was on the other side.

Aaron M. Panner:

Well, I think that the — the — the tracing of the language is — is helpful, actually, to understand how section — the current section 60 — excuse me current section 109(a) differs from section 27, which is, in section 27, what happened was is that Congress codified in 1909 the idea that the material object is different from the copyright.

And when it did that, it added that language as a tag-on to that principle to ensure that it did not end up overruling legislatively Bobbs-Merrill.

And when the — when the Congress recodified the provision in 1976, it actually took section 202, put it separately, and it — it codified 109(a) in a way that is significantly different and then it says notwithstanding the rights under 106(3) the owner of a copy lawfully made under this title is entitled to resell it.

And that needs to then be read in harmony with section 602(a)(1), which after all, was part of the same act in 1976, it must be read in such a way as to give section rule 602(a)(1) sufficient room to perform the function that it was intended to perform, which is to ensure that a U.S. copyright owner could protect domestic distribution rights against competition from legitimate foreign copies.

And that’s what it — that’s precisely what’s at issue here.

Samuel A. Alito, Jr.:

–How often do issues involving 602(a)(1) come up with respect to things like books, musical recordings, movies, as opposed to the copyrighted — the — the — the material that is copyrighted here, a little — a little insignia, a place to a label — put on a label or put on a — on goods?

Aaron M. Panner:

Thank you, Your Honor, that’s a very good question.

There are a number of cases coming up right now through the Second Circuit that involved textbooks.

This has been — this has been applied to all sorts of traditional copyrighted materials, and indeed that’s why the amici who have filed in this case are not at all limited but include all of the traditional copyright industries, software, publishing, movies, music.

And, indeed, Costco does not argue that there is any legal significance to the fact that — to the nature of the image or the fact that it — that it is placed on a watch, because I think that Costco is quite aware that what is really at stake here is whether section 602(a)(1) will continue to provide effective protection for the exclusive–

Stephen G. Breyer:

The other side, if you go to — you go to — go to Home Depot and buy a desk, and how do you know — are you worried that maybe on this desk it says there was a restriction somewhere, you could only use it for homes and not for offices?

Does that kind of thing worry you?

Aaron M. Panner:

–No, Your Honor, it doesn’t.

Stephen G. Breyer:

And the reason it doesn’t is because there is a first sale doctrine.

Now, aren’t you importing those very things that don’t worry us about Home Depot into the entire world of books, everything you are talking about?

John G. Roberts, Jr.:

You may answer, counsel.

Aaron M. Panner:

Thank you, Mr. Chief Justice.

I don’t think so.

And the reason why is because, first of all this doctrine has existed for nearly 30 years.

It’s hornbook law that — that the first sale doctrine does not provide a defense in circumstances where a — a — a copyrighted article is manufactured or reproduced abroad.

That has been well–

John G. Roberts, Jr.:

That was first.

Do you have a second quickly?

Aaron M. Panner:

–Thank you, Your Honor.

And I forgotten what it was.

[Laughter]

John G. Roberts, Jr.:

Thank you, Mr. Panner.

Aaron M. Panner:

Thank you.

John G. Roberts, Jr.:

Mr. Stewart?

Malcolm L. Stewart:

Mr. Chief Justice, and may it please the Court:

If the government’s interpretation of section 109(a) is a little bit different from either of the parties, since I want to make clear precisely what it is, in our view, the words 17.

And because the Copyright Act doesn’t apply abroad, in order for a copy to be made subject to Title 17, it would have to be created in the United States.

Now, I think our interpretation of the statute still gives it a slightly different meaning from the alternative

“lawfully made in the United States. “

because at least in theory, it would be possible for the creation of a copy to entail a violation of environmental laws, workplace safety laws, minimum wage laws, et cetera.

And it wouldn’t be accurate to characterize a copy made in that way as lawfully made in the United States, but it would be made — it would be lawfully made under this title, because it would be made subject to and in a manner consistent with the requirements of the Copyright Act.

Now, with respect to the types of copyright materials at issue here, the watches are clearly very different from what Congress had in mind when it enacted section 602(a)(1).

But in other respects, what Omega was trying to do in this case was exactly what Congress intended to allow when it expanded the importation provisions beyond restrictions on importation of radical copies.

The ideal was to allow a copyright owner to segment markets either to give — either retain for itself or to give to another entity exclusive rights within the United States, but give other rights abroad to other producers.

And consequently, we argued in Quality King and we are arguing here that the Court should construe section 109(a) in a way that doesn’t prevent section 602(a) from performing that function.

And the Court in Quality King grappled with the question of whether applying the — section 109(a) to the labels that were at issue in that case would have the effect of negating 602(a)(1) and the Court said no it wouldn’t, because section 109(a) applies only to copies that are lawfully made under this title.

And the Court specially said it wouldn’t apply to copies that were made — lawfully made under the law of the foreign country.

Now, the Court didn’t refer specifically to the place of manufacture.

In giving the example of the British publisher who would be creating copies under the law of Great Britain, it didn’t specifically say that’s because British law would apply when the copies are made in England.

But I think that’s the necessary inference, because the Court’s analysis made quite clear that it viewed a particular copy as being lawfully made under the law of one and only one question–

Samuel A. Alito, Jr.:

Well, what is your answer to the argument that if “lawfully made under this title” means basically made in the United States, that provides a great incentive to manufacture goods abroad and that can’t possibly be what Congress intended?

Malcolm L. Stewart:

–Well, I think there are — I think we would say a couple of things.

The question has been raised whether this gives favored status to a foreign manufactured goods.

And in one sense our reading — from — from the perspective of the copyright owner, it’s true, that this creates something of potential incentive to manufacture abroad.

Now, from the perspective of the potential importer, you could say this makes foreign manufactured goods disfavored because they were harder to get into the country than would be the case if they had been manufactured within the United States and had then been sent abroad and — and reimported.

I guess the best we can say about the treatment from the copyright owners’ prospective, the differential treatment of foreign and domestic manufactured goods is that at least with respect to goods that were made within the United States, the copyright owner has exercised rights under United States law.

He has — it has exercised its exclusive right to produce the copies in the first instance, whereas the manufacturer in Omega’s position by creating and then selling the watches abroad, never exercised any of its Title 17 rights.

And the theory underlying the first sale doctrine tracing it back to — to Bobbs-Merrill, the first articulation by this Court of the — the doctrine of the copyright context, the theory is that a copyright owner who sells the goods, places them in the stream of commerce, has exercised, as the Court put it in Bobbs-Merrill, its exclusive right to vend, and therefore it can claim no more rights under the copyright laws.

Malcolm L. Stewart:

Omega with respect to the watches at issue here, never exercised any its rights under title 17, not — not when the watches were made and not when they were sold.

I do also want to address the question of what happens in the circumstance where Omega manufactures watches abroad, but then voluntarily imports them into the United States, sells them here; can it place restrictions on resale because I think it’s an important policy question and here again we get to the same point in the end as the Respondents do, but we have a somewhat different textual route to get there.

Our view is that in that circumstance section 109(a) still would not apply, because even though the goods were imported into the United States, they were made abroad, and that’s what counts for determining whether they were lawfully made under this title.

But section 109(a) is simply a safe harbor.

It doesn’t prohibit anything.

Section 109(a) says if your conduct falls within these contours then what you are doing is legal, whether or not it would otherwise violate the copyright act.

But if there is a dispute as to whether section 109(a) applies, and a court held that it doesn’t, the consequence is not necessarily that the conduct is unlawful.

The consequence is that you look to other provisions of title 17 to see whether it is lawful or not.

Anthony M. Kennedy:

Well, in your example, if there is a lawful importation of the foreign-made good, then if you interpret “made” as causing to exist of appear or under these laws, as the library brief suggests, the first sale doctrine would operate.

Malcolm L. Stewart:

I think we would say the first sale doctrine as articulated in Bobbs-Merrill would operate, but we wouldn’t place this within section 109(a).

John G. Roberts, Jr.:

Well, that’s the problem I have with your position.

You are suddenly saying a copyright — these issues have to be resolved not within the confines of the Copyright Act, but then you have to look to — to common law as well, which is a very confused situation.

Malcolm L. Stewart:

I think we would still be looking to other provisions of the Copyright Act rather than to common law.

That is, in the hypothetical I describe, clearly there could be no violation of 602(a)(1), because the copies would have been imported by Omega itself.

And so the question is if Omega sells them within the United States and the buyer attempts to resell them, would that be an infringement of Omega 17’s rights?

And the only claim that Omega could — I mean that — Omega could plausibly make in that circumstance would be to say, that is a violation of my exclusive right to distribute copies to the public protected by section 106(3).

And I think the response would be under Bobbs-Merrill, the Court already held that once the copyright owner exercised its exclusive right to vend — the word which appeared at the statute at the time — once it had exercised its exclusive right to vend the copies, it was done with them and had no more rights to assert.

And there is no reason to give the right to vend — the right to distribute under the current law a broader reading than the right to vend had at that time, simply because Congress has enacted section 109.

And — so I think that the — it would still be the case that in order to prevail in a copyright suit, Omega would have to show that not only that section 109 was inapplicable, but there was a violation of the exclusive rights and I don’t think it would be able to do that here.

Now in Bobbs-Merrill, the Court was certainly drawing on common law principles but it said in the end, its words:

“This is exclusively a question of statutory interpretation. “

It — it based its holding on the language of the Copyright Act as it existed at that time, specifically the exclusive right to vend; and the exclusive right to distribute copies to the public is no different for these purposes under the current statute.

Stephen G. Breyer:

I found the brief I was looking for which is the American Intellectual Property Law Association.

And they trace this back to Professor Nimmer’s 1965 letter, and they say that the point there was that they were reading Bobbs-Merrill as it was a pre-emption question, that they thought that the copyright law was not pre-empting State law of contract, and State law of contract had the exception in it which applied the first sale doctrine.

Now if that’s the reasoning, that reasoning would seem to me to apply.

We could look up what the State law is, but my guess is that the first sale doctrine applies just as much to goods that come from abroad as to goods that are here at home.

Malcolm L. Stewart:

I — I think with — with respect to the pre-emption question, what they had in mind was a situation in which Omega sells the watch to a reseller — to a retailer on condition, for instance, that the retailer only sell them in a particular way, or do particular types of advertising, and the reseller sells them in violation.

Stephen G. Breyer:

What Nimmer said is, he said we want to be sure in his — in bill back in ’64, ’65 — not to invalidate any State law contractual restriction on the right of the owner of the particular copy to dispose, exhibit, et cetera the same.

Malcolm L. Stewart:

Exactly.

I think the language was chosen in part at least to make clear that although Omega under in that hypothetical circumstance would have no remedy under the Copyright Act, it might potentially have a breach of contract suit against the retailer if the retailer had breached the agreement with Omega, and that nothing was — in the Federal law was intended to preempt the State law contractual remedies that would otherwise be available.

Malcolm L. Stewart:

And I think the language adequately accomplishes that purpose.

Sonia Sotomayor:

So why don’t we let–

Malcolm L. Stewart:

I’m sorry?

Sonia Sotomayor:

–Why don’t we let contract law control the violations of any agreements with foreigners?

Malcolm L. Stewart:

Well, I think–

Sonia Sotomayor:

With respect to manufacturing and distribution?

Malcolm L. Stewart:

–I think in 1960 — may I?

John G. Roberts, Jr.:

Very briefly.

Malcolm L. Stewart:

Because many of the people with which Congress were concerned would not be in privity of contract with the U.S. copyright owner.

John G. Roberts, Jr.:

Thank you, counsel.

Mr. Englert, you have nine minutes remaining.

Roy T. Englert, Jr.:

Thank you, Your Honor.

Justice Ginsberg asked Mr. Panner what policy Congress could have had in mind to give this different status to foreign-made goods than to U.S. made goods, and Mr. Panner’s answer, and Mr. Stewart said something similar, was that in one respect Congress is disfavoring foreign goods under their interpretation by making them harder to import.

That’s not true.

Under both of their theories, as long as the manufacturer chooses to authorize importation, which is Omega’s test, or as long as an authorized first sale takes place in the United States, then the first sale doctrine does apply.

So the copyright holder has control under their theory and it’s not harder to import the goods.

In the briefs in this case you will not find anyone making any policy argument as to what Congress could have had in mind to favor foreign-manufactured goods.

The heart of Mr. Panner’s argument was that Costco’s position either eliminates any significant role for section 602(a)(1) or makes section 602(a)(1) turn on formalities of transfer of title.

Neither of those propositions is true.

This Court in Quality King addressed the role that section 602(a)(1) has to play if section 109 is applicable to imported goods, and the answer was it still applies to nonowners.

That was the Court’s first answer.

The dictum that has been much discussed this morning was another answer but the Court’s first answer was that it still applies to nonowners, and because, for example, software is licensed there is a very live issue about whether the first sale doctrine applies to lawfully acquired copies of — of software.

So 602(a)(1) has a role to play under anyone’s interpretation.

Now Mr. Panner asserts that our answers to some of the questions that the Court has asked in our efforts to harmonize our position with the dictum in Quality King make 602(a)(1) turn on formalities of transfer of title.

Our position can perhaps be criticized and has been criticized this morning not for having a textual basis, but it cannot be criticized for making anything turn on formalities.

Our position turns on the economic realities of the situation.

If the copyright owner gets its one reward, the first sale doctrine applies; if the copyright owner doesn’t get its run reward, because for example it has given the exclusive foreign manufacturing rights to someone else, and retained or assigned or licensed the exclusive U.S. manufacturing rights, then 602(a)(1) has a role to play.

So neither of Mr. Panner’s criticisms of our position is correct.

Mr. Panner asserted that section 109(a) differs from section 27, the predecessor statute in the 1947 Act, which in turn was Section 41 of the 1909 Act.

This Court said the exact opposite in Quality King.

Roy T. Englert, Jr.:

It said there is no evidence of any attempt to narrow the first sale doctrine through the language of section 109(a).

And if one looks at the House report — again, getting into legislative history, which some members of the Court do not like to get into — but if one looks at the House report, the first sentence of the relevant part of the House report is section 109(a) restates and confirms the principle that where the copyright owner has transferred ownership of a particular copy or phonorecord of a work, the person to whom the copy or phonorecord is transferred is entitled to dispose of it by sale, rental or other means.

No hint that using “lawfully made” under this title to narrow the doctrine.

The last sentence of the relevant part of the House report: To come within the scope of section 109(a) a copy or phonorecord must have been lawfully made under this title though not necessarily with the copyright owner’s authorization.

For example, any resale of an illegally pirated phonorecord would be an infringement, but the disposition of a phonorecord legally made under the compulsory licensing provisions of section 115, would not.

So what does the House report on section 109 tell us?

It tells us that lawfully made under this title was intended to expand the category of covered works beyond just those made by the copyright owner, or with the authorization of the copyright owner.

But under Omega’s and the government’s position, that phrase is used to contract the scope of the first sale doctrine in derogation of the common law, imposing a restraint on alienation for foreign-made goods that is not imposed on U.S. made goods.

With respect to the policy incentives that it creates it’s undeniable that it creates an incentive for outsourcing of manufacture.

The government admitted that in its cert stage brief, and again, in its brief in this Court.

Obviously if Congress wants to create an incentive for outsourcing, that’s probably within its power as long as it can be said somehow to advance science and the useful arts; but there is simply not a shred of evidence in text or legislative history that Congress intended to encourage outsourcing; quite the contrary.

The very controversial section 601, the adjacent section to section 602, required that nondramatic literary works in the English language be manufactured in the United States or Canada or else they would not be eligible for a U.S. copyright.

So we know that the 1976 Congress wanted to favor the domestic printing industry, not to disfavor it; and yet their interpretation of 602 and 109 would disfavor domestic printing industry and any domestic manufacturing industry.

Thank you.

John G. Roberts, Jr.:

Thank you, counsel.

The case is submitted.