U.S. top court to hear Costco-Swatch copyright case

Mon Apr 19, 2010 2:17pm EDT

* Costco backed by business groups, companies like eBay

* Appeals court ruled against Costco, prompting appeal

* Dispute involved imported Swiss-made watches

By James Vicini

WASHINGTON, April 19 (Reuters) - The U.S. Supreme Court said on Monday it would hear Costco Wholesale Corp's (COST.O) appeal in a copyright infringement dispute with a Swatch Group (UHR.VX) unit over imported Swiss-made watches.

The high court is expected to hear arguments in the case, which pits the top U.S. warehouse club operator against the world's largest watchmaker, during its upcoming term that begins in October.

Omega, a Swatch group unit, manufacturers watches in Switzerland and sells them globally through a network of authorized distributors and retailers. Engraved on the underside is a U.S.-copyrighted "Omega Globe Design."

Costco obtained watches bearing the copyrighted design from the so-called "grey market" through a series of transactions.

Omega first sold the watches to authorized distributors overseas. Unidentified third parties bought the watches and sold them to a New York company, which in turn sold them to Costco, which sold them to consumers in California.

Although Omega approved the initial foreign sale, it did not authorize importing the watches into the United States or the sales by Costco.

After Costco's sale of 43 watches in 2004, Omega sued and claimed that Costco's actions amounted to copyright infringement.

Costco argued that under the U.S. Copyright Act's first-sale doctrine the initial foreign sale of the watches precluded infringement claims over subsequent unauthorized sales.

A federal judge ruled for Costco, but a U.S. appeals disagreed and held the first-sale doctrine did not apply to imported goods manufactured abroad.

In the so-called "grey market," legitimate brand name goods protected by trademark or copyright are imported via third parties into the United States, frustrating brand owners who want ultimate control over distribution.

Retailers from Costco to Amazon.com Inc (AMZN.O) have faced legal problems over the resale of goods that brand holders say infringes their distribution rights.

Luxury brands, for example, do not like to see their pricey goods sold at retailers or online stores they do not control, arguing that such distribution undermines their cachet.

A number of business groups and companies, such as online auctioneer eBay Inc (EBAY.O), filed briefs in support of Costco.

In appealing to the Supreme Court, Costco's attorneys argued that the appeals court's ruling was inconsistent with the plain language of the copyright law and that the issue was of great importance.

But the U.S. Justice Department urged the Supreme Court to reject Costco's appeal. It said the appeals court's ruling reaffirmed well-settled law.

Costco and its supporters have argued that the appeals court decision could mark the end of secondary markets, lead to higher unemployment and encourage companies to move manufacturing overseas.

While such concerns are troubling, Justice Department lawyers said such potential adverse policy effects are a direct consequence of the decision by Congress in 1976 to expand the law's ban on authorized imports beyond pirated copies. (Additional reporting by Alexandria Sage in San Francisco; Editing by Richard Chang)

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