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Originally published Monday, November 8, 2010 at 1:31 PM

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Costco argues before Supreme Court for ability to sell imported goods for less

The Supreme Court ruling on the case would affect Costco's and other retailers' ability to exploit price differences for goods sold around the world.

Seattle Times Washington Bureau

WASHINGTON — Costco became a $76 billion company by beating its competitors' prices. But did the Issaquah box-store giant go too far by undercutting the manufacturer itself?

That was the retailing quandary before the U.S. Supreme Court on Monday in the oral arguments in the copyright feud between Costco and the Swiss watchmaker Omega.

The legal question: Can Costco's pursuit of steeply discounted luxury merchandise legally include procuring watches from authorized Omega dealers in Paraguay?

More specifically, the dispute centers on whether Costco violated the Copyright Act by selling watches made in Switzerland expressly for other foreign markets. A ruling on the case would affect Costco's and other retailers' ability to exploit price differences for goods sold around the world.

Such "gray market" sales — unauthorized importation of copyright goods from authorized distributors overseas — are estimated to account for as much as $60 billion in annual sales in the United States.

The justices peppered attorneys for both sides over their dueling interpretations of key language in the Copyright Act.

Though not an authorized Omega dealer, Costco has carried several models of the Swiss watches, including the Seamaster, in its stores. Costco sold the Seamaster for $1,299, nearly $700 less than Omega's suggested retail price. It also extended the manufacturer's three-year limited warranty indefinitely.

Costco had tried to negotiate with Omega to acquire the watches via U.S. distributors. But the watchmaker was unwilling to meet Costco's price demands.

When Costco's competitors complained about the price cutting, Omega in 2003 began engraving a tiny copyright globe symbol on the backs of watches it sold outside the United States. Costco subsequently bought 43 of those watches from a supplier in New York who, it turned out, had imported some of them from authorized Omega distributors in Paraguay.

Omega sued for copyright infringement. Under U.S. law, Omega has exclusive rights to distribute the copyright watches in the United States, a right it argued was co-opted by Costco.

Costco countered by invoking the "first-sale doctrine" in its defense. That doctrine gives owners of "lawfully made" copyright goods one shot at a sale. So publishers, for instance, would have no say in whether a book buyer later sells her copy on eBay or to a used-book store.

The Supreme Court in 1998 had ruled unanimously that the first-sale doctrine applied to imported merchandise. But the 9th U.S. Circuit Court of Appeals in San Francisco ruled against Costco, holding that the earlier Supreme Court ruling involved only U.S.-made goods that were exported and then reimported.

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By contrast, the Omega lawsuit involved goods made and distributed abroad. That, according to the appeals court, meant the watches fell outside "lawfully made" goods governed under U.S. copyright protection.

Monday's oral arguments pivoted around the exact meaning of "lawfully made." Costco's attorney, Roy Englert, contended that nothing in the legal text supported the appeals court's interpretation that "lawfully made" hinges on the place of manufacture.

"And nothing in the text that supports your position," Justice Antonin Scalia shot back.

Instead, Engler argued the term is used to distinguish between authorized and pirated copies; Costco sold authentic Omega watches.

Aaron Panner, the attorney representing Omega, called the place of manufacture crucial because Swiss-made watches sold abroad "does not implicate U.S. copyright law at all."

The Obama administration argued in support of Omega. (Justice Elena Kagan, the former solicitor general, recused herself in the case). Deputy Solicitor General Malcolm Stewart said Congress wrote the Copyright Act to allow exactly what Omega is attempting to do, segment its markets and controlling the distribution of its merchandise.

Kyung Song: 202-662-7455 or ksong@seattletimes.com

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