Article - L'anza Research International Inc. v. Quality King Distributors, Inc

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Source:
http://www.utexas.edu/law/journals/tiplj/volumes/vol5iss2/mcdaniel.html
This article was edited to remove extraneous information. Otherwise content has not been altered.
This decision was reversed by the Supreme Court.

L'anza Research International Inc. v. Quality King Distributors, Inc 98 F.3d 1109, 40 U.S.P.Q.2d (BNA) 1385 (9th Cir. 1996).
A. Importation-Gray Market Goods
In L'anza Research International Inc. v. Quality King Distributors, Inc.,[10] the Ninth Circuit addressed the issue of whether the first sale doctrine embodied in section 109(a) of the 1976 Copyright Act bars an action under section 602(a) involving the exportation and reimportation into the United States of copyrighted goods originally manufactured in the United States.[11] In a series of prior decisions, the court held that the first sale doctrine does not bar an action under Section 602(a) where there has been a lawful sale abroad of foreign manufactured U.S. copyrighted goods.[12]
The L'anza decision is significant to the issue of "gray market" imports. Section 602(a) of the 1976 Copyright Act provides that the unauthorized importation of copies or phonorecords of a work that have been acquired outside the United States constitutes an infringement of the distribution right.[13] The importation right can prove potent for manufacturers of a wide array of goods. A multi-billion dollar industry has emerged around the parallel importation of foreign manufactured merchandise bearing U.S. trademarks.[14] This "gray market" hurts American trademark owners because they cannot reap the exclusive benefit of the U.S. market for their marks. Trademark law, which seemed to offer the best chance for stemming the flood of gray market imports, has proven much less potent than trademark owners had hoped.[15] However, given that a great number of manufactured goods incorporate labels, designs, instruction sheets, or other materials that are subject to copyright protection, section 602(a) (which bars importation of certain copyrighted works) frequently reaches gray market importation.[16]
The plaintiff in this case, L'anza, owns copyrights for packaging labels included on certain hair care products that it manufactures and distributes to vendors in the United States and abroad.[17] Foreign vendors pay approximately 40% less for L'anza products because they do not directly receive the benefits of the extensive advertising conducted by L'anza within the United States.[18]
The defendant, Quality King, purchased some of the labeled products from one of L'anza's foreign distributors, who was only authorized to distribute the products outside the United States.[19] Quality King then reimported the products into the United States for subsequent sale.[20] The district court concluded that the reimportation and sale of the L'anza products violated section 602(a) of the 1976 Copyright Act, and that the first sale doctrine embodied in section 109(a) did not apply as a defense.[21]
On appeal, the Ninth Circuit upheld the district court's decision, reasoning that section 602(a) would be rendered meaningless if section 109(a) were found to supersede the prohibition on importation.[22] In so doing, the court declined to follow the Third Circuit's decision in Sebastian International Inc. v. Consumer Contacts Ltd.,[23] in which the court held that the first sale doctrine bars an action under section 602(a) even if the goods in issue were sold outside of the United States, provided that they were manufactured in the United States and sold by the copyright owner.[24],[25]
The L'anza court reviewed the legislative history of the 1976 Copyright Act and found no explicit reference to the interaction between sections 602(a) and 109(a).[26] However, the court was sympathetic to concerns that the importation of copies from outside the United States was undermining the right guaranteed to U.S. copyright holders in section 106(3)-namely, the right to "control the distribution (including the price and quantity) of copies through authorized channels within the United States."[27] As a result, "copyright owners were deprived of the 'full value' to which they were entitled for the copies sold within the United States even though the imported copies may have been the subject of a valid first sale."[28]
The court cited Parfums Givenchy, Inc. v. C & C Beauty Sales, Inc.[29] for the proposition that the "'full value'-the price at which the copyright owner is willing to sell copies of his work-depends on market conditions that, in today's global market economy, varies from country to country."[30] L'anza's interest in obtaining full value from the U.S. market was undercut by the unauthorized importation of its goods, even though the imported products were manufactured in the U.S. and sold by L'anza.[31] The court distinguished Sebastian along these lines:
The Sebastian court arrived at a contrary conclusion because it found that the copyright owner received the full value for the products that it sold to the South African distributor, in the form of the purchase price. … It may be that in Sebastian, the hair care products were not sold at a substantial discount, as they were in this case. Nonetheless, the Sebastian court appears to have missed the crucial point that unauthorized imports cause copyright owners to lose control over domestic distribution, thus driving down prices for goods sold through authorized channels in the U.S. market. This is just the evil that Congress sought to prevent in adopting Section 602(a).[32]
Professor Nimmer appears uneasy with this treatment of the difficult juxtaposition between sections 602(a) and 109(a). The problem, according to Nimmer, is that denying application of the first sale doctrine in situations involving the exportation and reimportation of goods made in the United States effectively ignores the language of section 602(a), which expressly limits application to "copies … acquired outside the United States."[33]
[10] 98 F.3d 1109, 40 U.S.P.Q.2d (BNA) 1385 (9th Cir. 1996).
[11] Id. at 1111, 40 U.S.P.Q.2d at 1386.
[12] Id. at 1113, 40 U.S.P.Q.2d at 1388; see Parfums Givenchy v. Drug Emporium, 38 F.3d 477, 480-81, 32 U.S.P.Q.2d (BNA) 1512, 1515 (9th Cir. 1994), cert. denied, 115 S. Ct. 1315 (1995); BMG Music v. Perez, 952 F.2d 318, 319, 21 U.S.P.Q.2d (BNA) 1315, 1318 (9th Cir. 1991).
[13] 17 U.S.C. § 602(a) (1994).
[14] See 2 Melville B. Nimmer and David Nimmer, Nimmer on Copyright, § 8.11 [B], at 8-139 (1996).
[15] Id. at 8-140.
[16] Id. at 8-141.
[17] L'anza, 98 F.3d at 1111-12, 40 U.S.P.Q.2d at 1386.
[18] Id. at 1111, 40 U.S.P.Q.2d at 1386.
[19] Id.
[20] Id.
[21] Id. at 1113-14, 40 U.S.P.Q.2d at 1388.
[22] Id. at 1115, 40 U.S.P.Q.2d at 1389.
[23] 847 F.2d 1093, 7 U.S.P.Q.2d (BNA) 1077 (3d Cir. 1988).
[24] Id. at 1098, 7 U.S.P.Q.2d at 1082.
[25] L'anza, 98 F.2d at 114, 40 U.S.P.Q.2d at 1388-89 (declining to follow Sebastian Int'l Inc. v. Consumer Contacts Ltd., 847 F.2d 1093, 7 U.S.P.Q.2d (BNA) 1077 (3d Cir. 1988)).
[26] Id. at 1116, 40 U.S.P.Q.2d at 1390.
[27] Id.
[28] Id.
[29] 832 F. Supp. 1378, 29 U.S.P.Q.2d (BNA) 1026 (C.D. Cal. 1993).
[30] L'anza, 98 F.3d at 1116, 40 U.S.P.Q.2d at 1390.
[31] Id. at 1117, 40 U.S.P.Q.2d at 1391.
[32] Id. at 1117, 40 U.S.P.Q.2d at 1391 (citations omitted).
[33] Nimmer, supra note 14, § 8.12 [B] [6], at 8-158 n.101.

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