Supreme Court hears Costco case over Swatch sales

By Greg Stohr
Monday, November 8, 2010; 6:41 PM

The U.S. Supreme Court grappled on Monday with a case that will shape the future of the multibillion-dollar "gray market," which retailers including Costco Wholesale use to sell foreign-made products at a discount in U.S. stores.

During oral arguments, the justices debated whether Swatch Group's Omega unit can use a copyrighted logo on its Swiss-made watches to block Costco from selling them in U.S. stores.

Costco is asking the high court to extend a 1998 ruling that limited the ability of manufacturers to block the importation of goods originally sold overseas into the United States. That ruling said that if a copyright owner sells domestically made products abroad, it can't bar them from later being imported back into the United States.

The question in the latest case is whether U.S. copyright law imposes a similar rule on goods made overseas. The high court on Monday didn't clearly indicate how it would rule, though some of the justices voiced concern about giving manufacturers an incentive to make their products overseas.

"What earthly sense would it make to prefer goods that are manufactured abroad over those manufactured in the United States?" Justice Ruth Bader Ginsburg asked.

The gray market, also known as parallel sales, stems from efforts by retailers to exploit worldwide price differences on some products. The gray market costs manufacturers as much as $63 billion in sales a year, according to a Deloitte analysis conducted for Bloomberg last year. A manufacturer with $10 billion in sales can lose as much as $450 million, Deloitte found.

In the case before the justices, Costco, the largest U.S. warehouse club, worked out a way to sell Omega's Seamaster watches for a third less than the suggested retail price. Costco found a distributor offering watches originally sold overseas, where Omega charged less than it did in the United States for its goods. The discount let Costco sell the watch for $1,299, compared with the $1,995 suggested retail price.

The Supreme Court case turns on the scope of the first-sale doctrine, which says a copyright holder can profit only from the original sale of a product. In the 1998 case, the Supreme Court unanimously ruled against copyright holders by saying the doctrine applies to U.S.-made products sold overseas.

A San Francisco-based federal appeals court said that reasoning doesn't apply to goods made abroad, ruling that Omega could block importation of its foreign-made watches.

Several justices on Monday voiced frustration that federal copyright law didn't give a clearer indication about the scope of the first-sale doctrine.

"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," Justice Antonin Scalia told Omega's lawyer.

The ramifications could extend beyond the gray-market context. Costco's allies, including eBay, Google and Amazon, say a ruling for Omega might imperil sales of secondhand items and even the lending of library books.

Omega has support from the Obama administration; the publishing, film and music industries; office equipment makers, including Seiko Epson Corp.; and the Intellectual Property Owners Association, a trade group whose members include drugmakers, oil companies and computer companies.

The justices will issue a ruling by July.

Bloomberg News

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