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Originally published April 19, 2010 at 5:46 PM | Page modified April 20, 2010 at 12:10 PM

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Supreme Court agrees to hear case about Costco selling Omega watches at discount

Costco plans to argue that it should be allowed to sell watches it buys from distributors who offer better prices than the manufacturer.

Seattle Times business reporter

Costco Wholesale has taken its battle with Swiss watchmaker Omega all the way to the U.S. Supreme Court, arguing that it should be allowed to sell watches it buys from distributors who offer better prices than the manufacturer.

The Supreme Court said Monday it will hear Costco's appeal of a lower-court ruling that sided with Omega, which has invoked U.S. copyright law to stop discounting.

The watches are not copyrighted, but a symbol of a globe on some of the watches is.

Companies that make high-end products often try to control distribution so that the goods do not end up selling for less. However, many offer cheaper prices to distributors in other countries. Costco and other retailers buy the products from those distributors, ship them to the U.S. and sell them at a discount.

Called the "secondary" or "gray" market, it represents $58 billion in products for the technology industry alone, which loses up to $10 billion a year in profits from it, according to a study by KPMG and the Alliance for Gray Market and Counterfeit Abatement.

Costco Chief Financial Officer Richard Galanti said the company does not buy a significant portion of its goods from the secondary market.

"The vast majority of what we do is bought directly from manufacturers," Galanti said. Still, he pointed out that even a small percentage of Costco's $70 billion in annual sales is a large dollar amount.

Costco's secondary-market dealings have come up before.

In 2008, colorful clogs maker Crocs saw its stock fall 8 percent in one day after Galanti said there was "huge availability" of branded apparel such as Crocs, jeans and women's clothing.

Speculation that the Colorado-based company was dealing with Costco was "untrue," Crocs said at the time. "However, we have discovered instances where we believe our products were being sold indirectly to Costco, and we promptly terminated those relationships."

The Supreme Court previously ruled against a manufacturer in a similar case, saying its hair products were not protected by copyright law simply because it had copyrighted the label on the bottle. That meant the products could be resold.

In that case, the manufacturer made the products in the U.S., but they were shipped overseas where the maker expected them to be sold. Another company bought them and shipped them back in to the U.S. to sell at a discount.

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The 9th U.S. Circuit Court of Appeals in San Francisco ruled against Costco, saying copyright protection does apply to products made overseas, thus allowing Omega to protect its globe image against resale in the U.S.

If the high court upholds that opinion, "from our perspective, all any copyright owner would have to do is ship all those jobs overseas and have their goods manufactured elsewhere to prevent lawful resale at discounted prices," said Seth Greenstein, an attorney representing the Retail Industry Leaders Association.

The association, which represents big retailers like Wal-Mart and Sears, joined Amazon.com, eBay and others supporting Costco in the case.

The Obama administration said it was troubled by aspects of the appeals-court ruling, but had urged the justices to stay out of the case, which will be argued in the fall.

Seattle Times researcher David Turim and The Associated Press contributed to this article. Melissa Allison: 206-464-3312 or mallison@seattletimes.com

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