One of Costco's greatest perks is under siege

Costco was just ordered to pay Tiffany & Co. $19.4 million after selling rings under the "Tiffany" name. This isn't the first time the retailer's approach to designer brands has raised questions, as seen by a 2013 Michael Kors lawsuit. Customers are losing interest in designer brands like Kors and Ralph Lauren. Costco's ability to sell designer brands like Ralph Lauren and Calvin Klein is a huge draw for many budget shoppers.

However, the legality of parts of the retailer's strategy is being called into question.

On Monday, a federal judge ruled that Costco owed the jewelry company Tiffany & Co. $19.4 million after the budget retailer sold diamond engagement rings using the Tiffany name.

While Costco had argued that the word was understood as a generic reference to a ring's setting, not the brand itself, a court determined in 2015 that selling items described simply as "Tiffany" infringed on Tiffany's trademark.

This isn't the first time Costco has been accused of falsely marketing designer products.

In 2013, Michael Kors sued Costco for allegedly advertising the designer's handbags without being authorized to sell them. According to the lawsuit, Costco advertised $99 Michael Kors handbags, but did not actually stock the bags in stores (and was not authorized to do so). The companies settled the case out of court in 2014.

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Costco also has a history of selling what Refinery 29 calls "gray market goods" — designer items that were obtained through channels that aren't illegal, but that are unintended by the original makers. Aspirational designer brands like Michael Kors and Ralph Lauren don't want to be linked to Costco, but some of there items end up sold there nonetheless.

Designer brands "may have an abundance of fabric, or fabric may have come in that didn't meet their standards," Marshall Cohen, chief industry analyst at The NPD Group, told Refinery 29. "They can't sell it openly on the off-price market, so they sell it to the warehouse stores."


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Costco did not immediately respond to Business Insider's request for comment on its design brand strategy. In addition to legal questions, Costco's designer brand business is in also in danger due to consumers' growing disinterest with once aspirational brands.

The rise of fast fashion and the decline of retailers like Macy's and Sears has hit designer brands like Michael Kors and Ralph Lauren hard. Customers who once would have hunted for deals on these brands are increasingly saving money by buying less expensive private label items instead, such as Costco's Kirkland brand.

In fact, as customers' desire for designer shrinks, Costco has been growing the Kirkland brand. The retailer now sells everything from maternity wear to vodka under the Kirkland name.

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