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A US court has ruled that Costco can sell grey market Omega watches at a discounted price
A US court has ruled that Costco can sell grey market Omega watches at a discounted price

Costco wins approval to sell discounted Swiss watches

In a blow for the luxury watch and jewellery industry, a court ruling has declared retail chain Costco can legally sell Swiss watches at a heavily discounted price, despite not being an authorised distributor.

The decision is the latest in a long-held court battle between Costco – the global warehouse retail giant – and Omega, a subsidiary of the Swatch Group.

In 2004, Costco purchased 117 Omega Seamaster watches from a non-US, authorised distributor and began selling them for US$600 (AU$758) less than the Swiss watchmaker’s recommended retail price.

The two parties had failed to reach an agreement one year earlier when Costco sought permission to carry the watches as an authorised dealer. As a result, Costco turned to the grey market to source the products. The grey market refers to the trade of genuine brand-name products typically manufactured abroad, purchased and imported by third parties. While legal, the distribution is generally unauthorised by the original manufacturer.

In response to mounting complaints from authorised Omega retailers, Swatch began making inconspicuous engravings of its copyrighted globe design on the underside of the Seamaster watches. The Swiss giant subsequently took legal action against Costco in July 2004 for copyright infringement after the retail chain sold 43 of the engraved watches to its customers.

Cannot claim infringement
In 2007, a court initially ruled in favour of Costco stating that the first sale doctrine – which stipulates that a copyright owner cannot claim infringement for distribution of copies of copyrighted work after consenting to the initial sale – was a “complete defence to Omega’s claims”.

However, the judgement was reversed in 2008 on the basis that the doctrine did not apply to products that had been manufactured overseas and imported into the US without the copyright owner’s permission.

The latest episode means Costco has come out on top with a three-judge panel for the Ninth Circuit of the US Court of Appeals reaffirming the original court decision on the basis that Omega had misused its copyright of the globe design by “leveraging its limited monopoly over the design to control the importation and sale of Seamaster watches”.

“[Omega’s] anticompetitive acts promoted neither the broad public availability of the arts nor the public welfare. Instead, they eliminated price competition in the retail market for Omega watches and deprived consumers of the opportunity to purchase discounted grey market Omega watches from Costco,” circuit judge Kim McLane Wardlaw explained.

“Omega misused its copyright by engraving the globe design on the underside of its watches, and attempting to use copyright law to eliminate intrabrand competition from Costco in the retail watch market.”

While the legal case concerns trading in the US, the decision might also have future implications in Australia, given the local arm of Costco sells high-profile watch brands. Jeweller approached the Australian Competition and Consumer Commission (ACCC) for a local perspective on the matter, but a spokesperson declined to comment.

At the time of publication, Costco operated seven stores in Australia and had recently entered the retail petrol market.

Costco vs watch and jewellery industry
This is not the first time that Costco has come under fire from the luxury watch and jewellery industry. As previously reported by Jeweller, the retail chain is currently embroiled in another legal battle with Tiffany & Co over the use of the term “tiffany setting” to describe a range of its engagement rings.

The iconic jeweller filed a lawsuit against Costco in February 2013 claiming the retail giant was falsely selling Tiffany-branded rings, however, Costco responded with a counterclaim stating that “tiffany setting” was a generic industry term.

Costco moved to have the counterclaim dismissed but a US federal court found there was a “genuine factual dispute” over the use of the term in January last year, allowing Costco to proceed.

At the time of publication, the dispute had yet to go to trial.

More reading
Massive Swiss watch discounts revealed
Tiffany and Costco battle continues
Tiffany vs Costco – round 3
Leaked email could affect Tiffany case
Tiffany & Co sues supermarket chain

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