Gray’s Okay: Costco Can Sell Gray Market Omegas, Court Rules

Costco can sell gray market Omega watches at slashed prices even though it is not an authorized dealer, a three-judge panel declared on Jan. 20, in the seeming end to a roller-coaster 11-year court battle.

The ruling means that “Costco can continue to sell Omega watches at a discount because, in effect, they bought them, and they own them and can dispose of them however they wish,” writes David G. Post, a legal expert in the Washington Post, given a 2013 Supreme Court ruling on a related case.

Costco and Omega’s bitter battle dates back to 2004, and until recently it had produced a seeming victory for Omega. Following failed efforts to carry Omega watches at Costco in 2003, the discounter purchased 117 gray market Seamasters that the watchmaker had sold at reduced prices to a foreign distributor, intending them to be sold overseas. The discount chain retailed them for $600 less than U.S. retailers did, raising gripes from authorized sellers.

To combat this and other gray market sales, Omega, a Swatch Group subsidiary, began etching a barely perceptible 3 mm globe on the back of Omega timepieces, which it had copyrighted. The watchmaker then brought suit against Costco in California district court for using its copyrighted work (the globe) without permission.

Costco claimed a defense under the first sale doctrine—which essentially says that legal purchasers have a right to sell a copyrighted work however they like. (For instance, you can sell a used book on eBay.) Omega argued that didn’t apply for items that had been produced overseas—in this case, in Switzerland. 

Until recently, that logic prevailed, with a 9th U.S. Circuit Court of Appeals ruling in the  watchmaker’s favor in September 2008. Costco appealed to the Supreme Court, where justices split 4-4 and issued no ruling. (Justice Elena Kagan recused herself.) That means the decision in favor of Omega stood, but the case set no precedent beyond the 9th Circuit. 

Then Costco notched a victory. In a 2011 ruling deciding damages, a California district court judge said that Omega misused its copyright by etching the globes on the watches for the sole purpose of initiating litigation and awarded Costco attorney’s fees. The watchmaker appealed that ruling.

Two years later, the Supreme Court issued a ruling on a similar copyright case, Kirtsaeng v. Wiley, which involved a U.S. bookseller importing titles from Thailand. This time, a 6-3 vote affirmed that the first sale doctrine applies to items legally produced overseas.   

In this week’s ruling, the 9th Circuit U.S. Court of Appeals declared that the Kirtsaeng ruling means that “Omega has no infringement cause of action against Costco.”

It also held that the lower court was right in deciding that Omega was abusing copyright laws by devising the globe design for the main purpose of commencing litigation and eliminating retail competition. 

“Omega attempted to use the copyrighted Globe Design to decrease competition in the U.S. importation and distribution of its watches by it and its authorized dealers—an obvious leveraging of a copyright to control an area outside its limited monopoly on the design,” wrote Judge Dorothy Nelson in the majority opinion.

JCK News Director