Supreme Court Deadlocked Over Costco Grey Market Case

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Washington—Due a 4 to 4 split in the U.S. Supreme Court today on whether Costco Wholesale Corp. could be held liable for copyright infringement for reselling Omega Swiss watches it obtained through “grey market sources,”  the lower court ruling, which favored Omega, remains in place.

The rare deadlock was the result of recently appointed Justice Elena Kagan who was recused from the case. Even though the tie vote leaves intact the 9th U.S. Circuit Court of Appeals decision that favored Omega, it leaves the issue unsettled outside the jurisdiction of the ruling appeals court.

Implications for ‘Grey Market’ Distribution

The case is being closely watched by retailers and manufacturers, especially in luxurygoods, since it could make it difficult for retailers to buy luxury and foreign-made goods through “parallel” sales—the so-called “grey market”—where third party distributors sell branded goods into retail channels without the manufacturer’s permission.

In this case, Omega sold the watches to authorized distributors overseas then unidentified “third parties” bought and sold them to a New York company where Costco obtained them. Costco was able to sell the watch for $1,299, compared with Omega’s authorized dealers who sold them for $1,995 suggested retail price.

According to a Deloitte LLP analysis conducted for Bloomberg last year, the gray market distributions similar to this one cost manufacturers as much as $63 billion in sales a year. A manufacturer with $10 billion in sales can lose as much as $450 million, Deloitte found.

In an effort to stop the flow of its watches through grey market sources, Omega alleged Costco infringed on its copyright since the watches question were engraved on brand’s logo, one registered with the U.S. Copyright Office.

A pivotal point in the case is the Copyright Act’s “first sale” doctrine, which holds that copyright holders can’t stop the resales of their products. A 1998 Supreme Court decision held that the doctrine applies to imported goods, so that copyright holders cannot prevent their resale. But ruling in the Costco case, the 9th Circuit said the 1998 decision applies only to goods made in the United States, not to goods made overseas.

More Court Action Planned

The case now returns to a federal trial court, where Costco can mount additional arguments, including its contention that Omega engaged in so-called copyright misuse.

Other retailers, including eBay, Google, Amazon, Target and Intel Corp. have sided with Costco in the case. Omega was backed by the film and music industries and office equipment suppliers like Seiko Epson and the Obama administration.

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