Jewelry Business Insight

Court Rules Costco Can Sell Grey-Market Omega Watches

Court Rules Costco Can Sell Grey-Market Omega Watches

A three-judge panel has ruled that Costco has the right to sell Omega watches that were purchased from a foreign distributor, despite the fact that Costco is not an authorized dealer of Omega products.

The ruling marks the end of an 11-year court battle. In 2004, Omega sold a shipment of Seamaster watches to ENE Limited, a third party distributor, at a reduced price on the understanding that the watches would be sold in European markets. However, instead of sending the Seamasters to Europe, ENE Ltd. sold 117 of the watches to Costco. Costco then retailed the watches in U.S. stores for $600 less than authorized retailers of Omega products, generating a flurry of complaints from authorized sellers.

Omega retaliated against this ‘grey market’ selling of its products by adding a barely-visible, 3mm-wide image of a globe on the back of new Omega watches, and then copyrighted the image. The watchmaker then filed suit against Costco in California for copyright infringement, claiming that Costco used the image of the globe without Omega’s permission.

Costco defended their practices under the first sale doctrine, which says that the legal buyer of an item, even a copyrighted one, has the right to re-sell the item in any way they choose. In their claim Omega took the position that the first sale doctrine does not apply to items produced in a foreign jurisdiction (Omega watches are produced in Switzerland).

The first ruling on the case happened in 2008, and the 9th U.S. Circuit Court of Appeals decided in Omega’s favor. Costco appealed the decision and brought the case to the Supreme Court, where the justices split 4-4 and declined to issue a ruling. As a result, the previous decision in favor of Omega was upheld.

Costco, however, won the next round. In a hearing to determine if there were any damages to be paid between Omega and Costco, a California judge ruled that Omega had misused its copyright - the image of the globe – because, the judge said, Omega had added the image solely to create an opportunity to begin litigation against Costco. The judge awarded Costco attorney’s fees; Omega appealed the ruling.

Two years later, the Supreme Court came to a decision in an unrelated copyright case, Kirtsaeng v. Wiley. The 6-3 decision held that the first sale doctrine does indeed apply to items that have been legally produced in foreign countries, setting a precedent that supported Costco’s position in their ongoing litigation with Omega. Because of the Kirtsaeng ruling, on January 20th, 2015, Judge Dorothy Nelson of the 9th U.S. Circuit Court of Appeals dismissed Omega’s infringement claim against Costco. In the summary of the ruling, it was noted that “Omega’s copyright distribution and importation rights expired after an authorized first sale of the watches in a foreign jurisdiction”. 

Nathan Munn |

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