`Gray Market' Ruling Favoring Swatch Affirmed as Supreme Court Splits 4-4

The U.S. Supreme Court divided evenly in a clash over the multibillion-dollar “gray market,” leaving intact a ruling that lets manufacturers use copyright laws to keep some products out of U.S. discount stores.

The 4-4 high court split, which doesn’t set a nationwide precedent, upholds a federal appeals court decision favoring Swatch Group AG’s Omega unit in a dispute with Costco Wholesale Corp. over discounted Seamaster watches.

Retailers had sought to overturn the appeals court ruling because it exposes them to lawsuits if they try to exploit worldwide price differences on foreign-made products by importing them through unauthorized channels. In Costco’s case, the largest U.S. warehouse club acquired the Swiss-made watches at a discount and then sold them at $1,200, or $700 below Omega’s suggested retail price.

Today’s high court action means that “if someone is selling goods 30 percent cheaper in some other country, any retailer who wants to pass that cost benefit on to the consumer would likely be denied,” said John Mitchell, a Washington lawyer who filed a brief backing Costco on behalf of trade groups that represent video-game, home-video and music retailers.

Whether that proves to be a permanent result may depend on Justice Elena Kagan, who stands to be the deciding vote should the justices revisit the issue in a later case.

Kagan Abstains

Kagan didn’t take part in today’s high court action because she had participated in the case as President Barack Obama’s solicitor general. In that capacity, she filed a brief urging the court not to hear Costco’s appeal, arguing that the San Francisco-based 9th U.S. Circuit Court of Appeals had reached the right conclusion.

Copyright owners have reason to be “guardedly optimistic that if and when this issue did make it back to the Supreme Court, you’d win it,” said Charles Sims, a New York lawyer who filed a brief supporting Omega on behalf of the publishing industry.

The high court, as is its practice in evenly divided rulings, didn’t reveal which justices voted on which side of the issue.

The gray market, also known as parallel sales, costs manufacturers as much as $63 billion in sales a year, according to a Deloitte LLP analysis conducted for Bloomberg last year. A manufacturer with $10 billion in sales can lose as much as $450 million, Deloitte found.

First-Sale Doctrine

The case turned on the scope of the first-sale doctrine, which says a copyright holder can profit only from the original sale of a product. In 1998, the Supreme Court unanimously ruled against copyright holders by saying the doctrine applies to U.S.-made products sold overseas. The court said copyright holders can’t block those goods from being brought back into the U.S. through unauthorized channels.

The latest question was whether that same reasoning applies to goods manufactured abroad, including Omega’s Seamaster watches, which carry a copyrighted logo on the back. The 9th Circuit sided with Omega on the issue, ruling that the first- sale doctrine doesn’t apply to foreign-made goods.

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

Roy Englert, who argued the case at the Supreme Court for Costco, and Aaron Panner, who argued for Omega, declined to make any immediate comment. Richard Galanti, Costco’s chief financial officer, didn’t immediately return a phone call and e-mail seeking comment.

Costco had support in the case from EBay Inc., Google Inc., Amazon.com Inc., GameStop Corp., Target Corp., Intel Corp., a consumer-advocacy group and six library associations. Omega had backing from the film and music industries and office equipment makers including Seiko Epson Corp.

The case is Costco v. Omega, 08-1423.

To contact the reporter on this story: Greg Stohr in Washington at gstohr@bloomberg.net.

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net.

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