Omega v. Costco and discounted luxury goods

Omega v. Costco and discounted luxury goods

Anjli Patel is an LLB Candidate at the University of Calgary Faculty of Law.

Today’s post will be of interest to anyone who has ever extensively compared prices on big-ticket items before making a purchase.

The US Supreme Court recently announced that it will review the case of Omega S.A. v. Costco Wholesale Corporation, 541 F.3d 982 (2008) (Omega v. Costco) on the issue of international copyright exhaustion and the First Sale Doctrine.

Omega filed suit against Costco when it discovered that Costco was selling a particular Omega watch for $1300, 35% off the manufacturer’s suggested retail price (MSRP) of $2000.  How did Omega watches end up at Costco, you ask?  The paper trail is as follows: Omega manufactures its watches in Switzerland and sells them worldwide through a network of authorized dealers.  Omega sold the watches in question to authorized dealers overseas.  Then, in the words of Circuit Judge Milan D. Smith, Jr., “unidentified third parties” bought the watches and imported them into the United States.  ENE Limited, a company based in New York, bought the watches upon importation.  Costco subsequently purchased the watches from ENE, which is how they ended up in Costco’s California retail outlets for $700 less than the MSRP.

Specifically, Omega sued Costco for copyright infringement of the “Omega Globe Design” on the back of the watch under 17 U.S.C. §§ 602(a) (unauthorized importation of a copyrighted work), and 106(3) (distribution rights) of the United States Copyright Act.  Costco claimed the First Sale Doctrine in defence.  

The First Sale Doctrine is a limitation on copyright, codified in 17 U.S.C. § 109(a) of the United States Copyright Act. It allows the holder of a legitimate copy of a copyrighted work to transfer or sell that copy without the permission of the copyright owner. It can be used as a defence to copyright infringement in specific situations.  In Quality King Distributors, Inc. v. L’anza Research International, Inc., 523 U.S. 135 (1998), the Supreme Court held that the First Sale Doctrine is a defence in cases of imported copies manufactured domestically.  In Omega v. Costco, the Ninth Circuit further clarified that the Doctrine is a defence in cases of imported copies legally manufactured overseas, if those foreign-made copies have already been sold domestically with the copyright owner’s permission, thus “exhausting” the copyright.

Omega watches are made in Switzerland, and Costco sold them in the US without authorization from Omega, thus invalidating the First Sale Doctrine as its defence to Omega’s claims.  The Ninth Circuit found in favour of Omega, reversing the preceding decision of the district court.

The Supreme Court’s review of Omega v. Costco is important because its decision will either aid big box stores and consumers seeking the best possible price for a particular product, or international brands seeking to rein in unauthorized distribution and sales of their products.

A savvy consumer or watch aficionado will tell you that 20% off is the largest discount one can expect from an authorized dealer selling a watch listed at its full retail price.  This makes Costco’s offering of Omega watches at 35% off the retail price extremely tempting.  The problem with purchasing a watch from an unauthorized dealer (in this case, Costco) or second-hand is that such a purchase often invalidates the warranty on the item (see Seiko's, Rado's, Movado’s and Omega’s websites for such warnings).  Obviously the issue of an invalid warranty on a watch isn’t enough to deter consumers from making such a purchase, or else online markets like eBay would not be thriving.

While Omega’s lawsuit may appear to be a thinly-veiled attempt to control the prices at which its watches are sold under the guise of copyright infringement, the issue of brand dilution likely played a role in Omega filing suit as well.  Costco is known for selling items at prices significantly lower than other retail outlets, and at a high volume – two characteristics with which a higher-end watch brand like Omega would not want to be associated.

As a student, often with limited funds, buying a big-ticket item at the best available price is important to me.  At the same time, I’m not sure that I would feel comfortable divulging the source of my high-end purchase if that source was a deep-discounter.  In the case of luxury goods, provenance is everything.

How do you think the US Supreme Court will decide the case?  Leave your thoughts in the Comments.