Supreme Court Rules Against Consumers in Costco vs. Omega

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In the first major business decision of the 2010 October term, the U.S. Supreme Court has decided that Swatch's Omega (SWGAY) can effectively control the pricing of its luxury watches in the U.S., which means consumers will pay more. The decision was 4-4, with Justice Elena Kagan sitting out because of her time as U.S. Solicitor General. Such a split decision upholds the lower court's ruling, which in this case was in favor of Omega.

Divided 4-4 rulings don't have the same impact as true majority decisions as they don't set a nationwide precedent. So the collision of copyright law and "gray market" goods -- items originally sold abroad, brought into the U.S. and resold here -- is still unsettled outside the boundaries of the Court of Appeals for the Ninth Circuit.

Reflecting the lack of precedential value, no opinion explaining any judge's reasoning was issued. Unfortunately for consumers, the U.S. was on Omega's side in this case, so presumably if Justice Kagan had voted on the case, she would have voted for Omega. That suggests that next time around, assuming there is a next time, consumers could lose definitively, 5-4.

The Pricing Practices at Issue

Omega watches, like most goods, are not priced the same in every country; in some countries, they are much cheaper than in the U.S. Discounters like Costco (COST) have exploited this difference by buying new Omega watches on the "gray market" from middlemen abroad at prices that are above the foreign price but still well below the U.S. price, and then profitably selling them in the U.S. at a steep discount to the standard U.S. retail price. For example, Costco was able to sell Omega's Seamaster watch for $1,299, while other U.S. retailers were charging $1,995 for it.

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Although Omega knew Costco was doing this for years, the watchmaker didn't care until other retailers began to complain. At that point, Omega slapped a small, copyrighted logo on the back of its watches and attempted to use copyright law to block the importation of the watches.

Copyright law generally allows someone who has purchased a copyrighted work to do whatever they want with it -- that's how libraries lend books and why yard sales are legal. But part of the copyright law makes it unclear if the "first sale doctrine" applies when the product is manufactured outside the U.S. and the "first sale" is out of the U.S. It's this issue that the Court effectively failed to decide this time.

Ramifications for U.S. Labor Force?

As Google, eBay and others supporting Costco noted, letting Omega control the resale price of goods manufactured and first sold abroad, but not the resale price of goods manufactured in the U.S. and first sold abroad (that was a different case decided before this one) provides a strong incentive (on top of any others, like cheaper labor, lack of environmental laws, etc.) to move manufacturing jobs out of the U.S. Whether or not that incentive will trigger factory relocation remains to be seen. But it's not a good omen for our already struggling workforce.

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