Omega v. Costco: Costco Awarded Attorneys' Fees After Prevailing on Copyright Misuse Defense

In Omega S.A. v. Costco Wholesale Corp., the US District Court for the Central District of California awarded Costco $396,844.17 in attorneys' fees after having granted Costco's previous motion for summary judgment based on a copyright misuse defense. 

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On June 20, 2012, in Omega S ...show full speedread

On June 20, 2012, in Omega S.A. v. Costco Warehouse Corp., a federal district court in California awarded defendant Costco nearly $400,000 in attorneys' fees after it prevailed in a copyright infringement action brought by plaintiff Omega based on a copyright misuse defense. The award was the latest development in high profile litigation regarding the unauthorized importation by Costco of Omega watches bearing a copyrighted design.

Omega has appealed the district court's summary judgment decision on the merits of the copyright misuse defense to the Ninth Circuit. If affirmed on the merits, the case shows the potential viability of a copyright misuse defense in certain circumstances and creates challenges for companies seeking to address gray market imports through copyright law.

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Key Litigated Issue

The key litigated issue in Omega S.A. v. Costco Warehouse Corp., was whether Costco was entitled to attorneys' fees after prevailing against a copyright infringement action by Omega based on the equitable defense of copyright misuse.

 

Background

Swiss company Omega is a manufacturer of watches. Omega sells watches worldwide through a network of authorized distributors and retailers. A particular model made outside of the US, Seamaster, bears a copyrighted globe design engraved on the bottom face of the watch. Costco Warehouse Corp. (Costco), a US-based discount retailer that is not an authorized retailer of Omega watches, imported Seamaster watches through a third party and began selling the watches in its US warehouse stores. Omega filed suit against Costco alleging that Costco's activities constituted copyright infringement under the Copyright Act through unauthorized importation of a copyrighted work, and moved for summary judgment. Costco filed a cross-motion, arguing its activities were protected by the first sale doctrine, as embodied in Section 109(a) of the Copyright Act. The district court ruled for Costco on both motions, and also awarded Costco $373,003.80 in attorney's fees as a prevailing party under Section 505 of the Copyright Act.

On appeal, the US Court of Appeals for the Ninth Circuit reversed the district court's ruling, holding the first sale doctrine applies only to works made in the US and that because the Omega watches bearing the copyrighted design were manufactured outside of the US the first sale doctrine did not apply to Costco's activities. Additionally, the Ninth Circuit found that the district court abused its discretion in awarding attorney's fees to Costco as neither party had prevailed in the litigation. The decision was reversed and remanded to the district court.

The Ninth Circuit decision was affirmed by the Supreme Court in a 4-4 per curiam split decision, with Justice Kagan recused.

The case then returned to the district court, where Omega moved for summary judgment on its copyright infringement claims and to dismiss Costco's affirmative defenses. Costco also moved for summary judgment on its copyright misuse defense. During the course of the litigation, Omega had conceded that it engraved its copyrighted design on the bottom face of the watches to take advantage of the Copyright Act's importation limitations, which would not apply to the watches themselves as they are uncopyrightable useful articles. The district court determined that Omega's actions constituted copyright misuse and granted Costco's motion for summary judgment based on the misuse defense, an equitable defense traditionally asserted where a plaintiff attempts to use copyright in a manner that violates antitrust laws. The court found that Omega misused its copyright when it leveraged its limited monopoly in being able to control the importation of the copyrighted design to control the importation of the Seamaster watches. Following this decision, Costco filed a renewed motion for attorney's fees. Omega has appealed the district court's summary judgment decision to the Ninth Circuit, which is pending.

 

Outcome

In its June 20, 2012 decision (www.practicallaw.com/7-520-0986), the US District Court for the Central District of California determined it was appropriate to award reasonable attorneys' fees to Costco as the prevailing party in the copyright infringement action as authorized by the Copyright Act. In reaching this decision, the court considered five non-exclusive factors:

  • The degree of success obtained by the prevailing party.

  • The frivolousness of the claim.

  • The plaintiff's motivation in bringing a claim.

  • The objective reasonableness of the losing party's legal and factual arguments.

  • The need to advance considerations of compensation and deterrence.

Applying these factors, the district court found:

  • Costco achieved a high degree of success by defeating Omega's infringement claim.

  • Omega's infringement suit was improperly motivated.

  • Awarding Costco attorney's fees would deter the filing of improperly motivated infringement actions and would encourage future defendants to defend against such claims.

  • Omega's infringement was arguably unreasonable and frivolous.

The court noted that though Omega did have certain rights under the Copyright Act, Omega's actions were not done to seek to provide creative works to the public but to exert control over its watches.

Based on these determinations, the district court awarded Costco attorneys' fees for work:

  • Related to work performed from when the case was remanded back to the district court from the Ninth Circuit.

  • Performed in connection with the first round of litigation at the district court level.

Though the district court reduced the fee request, it nonetheless awarded Costco $396,844.17 based on reasonable hours and rates.

 

Practical Implications

If the Ninth Circuit affirms the district court's decision on the merits, the case:

  • Shows the potential viability of a copyright misuse defense in certain circumstances.

  • Creates challenges for companies seeking to address gray market imports through copyright law and cautions against attempting to address gray market imports through copyright law by purposely applying a copyrighted design to otherwise uncopyrightable products.

Defendants that successfully invoke a copyright misuse defense can not only prevail on the merits but, as the district court award demonstrates, recover attorneys' fees.

 

Court Documents

 
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