Costco v. Omega
The U.S. Supreme Court has agreed to hear a case that pits the Swiss watchmaker
Omega against Costco over the warehouse club’s sales of the company’s timepieces
bought on the "gray market."
The case has made its way to the top court after a lower court sided with
Omega in the dispute. The watchmaker asserted it could restrict Costco’s sales
of its products because its symbol appears on each item and the logo is protected
under U.S. copyright law.
In the past, the Supreme Court has ruled that copyright protection does not
apply to products made in the U.S. that are sold outside the country and later
imported back for resale. What makes the current case different is that Omega
 manufactures its watches outside the U.S.
Costco, which bought the watches from distributors and sold them below prevailing
market rates, has said that Omega is simply looking to use the copyright to
control who sells its products and at what price,
Discussion Questions: Is
the gray market a legitimate means for retailers to obtain goods from overseas
for resale in the U.S.? What control, if any, should manufacturers have over
the prices charged by retailers?
Somehow I think the issue is bigger than setting a minimum price. When a manufacturer sells product to one company for less than it sells it to others, is it legal and/or appropriate for that company to re-sell it to another business?
This case is slightly different, because the product was sold to a distributor. At that point, it’s all fair game.
But what about product sold at a special price to one retailer, who then sells it to another (even within the US)?…I think the term is “diverting”. Is that legal? Technically, the first sale is NOT legal – the Robinson Patman act prohibits it….but once it happens, all bets are off, in my opinion.
So the long and the short of it is, if you’re going to sell your product for below wholesale, don’t be surprised when a retailer sells it below retail.
I think that’s the very question the Court will decide. Personally there’s a lot of “gray” involved when anyone starts dealing with gray market goods.
When a manufacturer sells an item, it loses control of how it is further priced on the next sale or two. That may be tough on the manufacturer’s marketing mystique, but it’s life. There are, of course, two sides to this issue so I suspect some will not agree with this opinion.
Could Costco have such a great selection without the gray market? Most of their TVs are sold at great prices because of they way they are purchased–the gray market. I think Omega should just be happy that they have a high volume retailer selling their product. I don’t think purchasing luxury goods at a store like Costco has an effect on brand equity. I have news for Omega: your customers are shopping Costco already because of the quality of goods they sell.
This is an issue anyone who has ever done business in the U.S. CPG world has had to deal with–especially if you are a salesperson trying to make your shipment quota in a market with heavy diversion into it.
Retailers have been buying off “the wire” for decades. (Apologies to RetailWire–but I think this version predates you on “first use” grounds by quite a few years.) My first, and favorite, experience was as a youngster working in the Betty Crocker Division at General Mills. For some reason our New York Region Manager kept getting upset when Arabic language packaging kept showing up in Stop ‘N Shop.
I’m very surprised Omega has gotten this far in the courts.
This is a very complex question with the probability of a lot of unintended consequences for both retailers and manufacturers based on how the court rules.
Manufacturers must balance the desire for brand integrity and price control with the need to maximize revenue. In pursuing the latter goal, they will sell products to channels who may, for a variety of reasons good and not so good, find it necessary/desirable to re-sell the products into other channels (the “gray” market). In a typical example, Retailer X finds itself in an overbought position and Brand Y will not take returns. Broker Z will and does take the goods, which then end up going to the highest bidder (who Brand Y doesn’t do business with). This is, parenthetically, how the fragrance business grew to its enormous size.
Seems pretty clear-cut, right? Well, what about eBay and Amazon? What about the off-pricers (in the early days at least)? And more interesting, what about Brand Y, who finds that their revenue goes down significantly? In the end, everybody loses, most significantly the consumer who sees prices go up.
Like I said, complicated.
Here’s a slightly different angle; what if I make products in the US for sale in a different market that has different consumer protections (let’s say, for argument, lead content). I export that product, then a retailer buys on the gray market and sells here. How do I prevent from getting crushed by CPSC on this?
In my opinion, Omega is seeking legal support for its own self-serving pricing practices.
The “gray” market would not exist if Omega and other luxury brands maintained price parity across different national markets. By selling its watches more cheaply to dealers in South America, Omega creates a differential that is tempting to the middlemen. Asking the U.S. courts for “protection” is really an attempt to support its opportunistic margins.
Costco is no stranger to this type of dispute. In the late 1980s Price Club offended the U.S. distributor of Carrera sunglasses by selling gray market models at a discount that was below the wholesale price the manufacturer charged to opticians. I was a young reporter then, and covered the story for a trade magazine. In the end, Carrera’s best solution was to go into the stores and buy up all the cheap inventory.
The legal theory being employed in the present case is a novel application of U.S. Copyright law. A logo may be protected from counterfeiting, but not from redistribution, as I (not a lawyer) understand it. This case seems unlikely to be upheld in the end, but you can’t blame a company for trying.
Finally, Omega should consider that the gray market cuts two ways. Manufacturers are loath to admit it, but when their warehouses get over-full, diverters often become the safety valves that restore cash flow. Very useful option when a product–like those old Carrera goggle glasses–falls hopelessly out of fashion.
Omega is just going after Costco because they are a big company. What if they are sold on eBay by individuals? They would do nothing. Once items hit the gray market, all bets are off. We need to pass laws that limit or restrict the rights of overseas companies on these issues so they do not waste the time of American based companies that sell items on the gray market.
Ah yes, that hardy perennial–control of the distribution channel–rears its head again…with the added complication of international law thrown in.
These issues are never settled to everyone’s satisfaction, since there isn’t any obvious answer, but I have an idea: one of the higher-end watches (I think it’s Patek Philipp, but whoever) advertises that “you never really own–you just look after it for the next generation”; perhaps such companies should take such advice to heart and rather than selling their products, only offer them on long-term leases…it’s done with cars and yachts and planes, and heck, some of these watches almost cost as much.
I wonder if it would work for Omega to insert a “first right of refusal” clause in their sales contract. That is, we are selling you this merchandise with the express understanding that you will sell it to X, Y, Z and others specified. If you elect to sell it outside this defined group, we Omega, retain the first right of refusal. That is, you must offer it to us first, possibly at a defined price. If we do not accept your offer, then you are free to pursue other “refusals” or sales, as the case may be.
Costco seeks to play in gray water, but do they advise their customers that products bought at Costco may not be covered by a manufacturers warranty. While Omega produces a fine product, we all know that any product can be flawed. What is the point of saving $100 if you take a chance on being stuck with a defective product and having to pay hundreds to get it fixed? Watch and camera manufacturers routinely require proof of purchase with warranty claims and have the right to refuse service if the product was not purchased at an authorized dealer. If Costco is going to play these games, then they need to be up front with their customers on warranty coverage.
I don’t think Omega will win this battle, but COSTCO will end up losing the war!