Money Matters - Simplified

Is Costco Courting Disaster?

This article is part of our Rising Stars Portfolios series. Costco's (Nasdaq: COST) claim to fame is its ability to offer extremely high-end merchandise for low, low prices. Unfortunately for Costco and other discount-oriented retailers, a U.S. Supreme Court ruling left intact a law that could dry up those bargains. The ruling upholds manufacturers' ability to use copyright law to block discounters from reselling deeply discounted merchandise obtained from "gray market" secondary sources.

The Supreme Court evenly split 4-4 in a vote on the dispute. The complaint by Omega, a unit of Swatch, dealt with Costco's sale of discounted Seamaster watches purchased overseas, where Omega demands lower prices than it does in the U.S. Omega's defending itself using copyright laws that help it keep such products off discounters' shelves in the U.S.

The case will now get shot back to lower courts, where Costco has the opportunity to fight on regarding the sales of products obtained from the gray market. But for now, a previous ruling against Costco stands.

Costco has plenty of friends on its side in this case, including eBay (Nasdaq: EBAY), Google(Nasdaq: GOOG), (Nasdaq: AMZN), Target (NYSE: TGT), GameStop (NYSE:GME), and Intel, as well as a consumer advocacy group. Amazon, Target, eBay, and Google filed briefs supporting Costco, arguing that limiting resellers would lead to higher prices for consumers.

On the other hand, Omega had some big-industry buddies supporting it, too. Not surprisingly, given historical copyright cases, its allies included the film, publishing, and music industries.

This latest legal setback may not have made life easier for Costco, but whether it wins or loses in these continued skirmishes with Omega, I have a funny feeling that the court of public opinion will rule solidly on Costco's side.

Good deals on high-quality merchandise have led shoppers to love Costco and its corporate supporters, while investors appreciate these stores ability to offer such discounts profitably. So far, though, the courts don't seem to agree. That's an ongoing risk for Costco and other discounters, not to mention many consumers' budgets.

© 2010 UCLICK L.L.C.