Tiffany and Costco are once again involved in high-profile accessories-related intellectual property litigation, this time against each other. On February 14, 2013, Tiffany sued Costco in an action filed in federal court in Manhattan over sales of diamond rings in a Costco warehouse store that Tiffany claims violate its famous trademarks. Tiffany, as you may recall, sued eBay claiming it infringed Tiffany’s trademarks by allowing the sale of counterfeit Tiffany merchandise on its online marketplace. [InFashion Fall, 2008, Summer, 2010, Fall, 2010] In this new suit, Tiffany claims that Costco has infringed and diluted the famous “Tiffany” marks by advertising diamond rings at the point of sale in warehouse stores as “Tiffany” brand rings when they are not.

The Tiffany complaint is somewhat unusual in several respects. First, Tiffany acknowledges that Costco had agreed to stop describing its diamond rings in the manner challenged by Costco. Nevertheless, Tiffany seeks injunctive relief. Tiffany also seeks damages and asserts claims under New York law, even though its complaint only pointed specifically to allegedly infringing signs for two styles of ring in one California store. Tiffany did claim that all Costco jewelry sales benefitted from association with the allegedly improper use of the “Tiffany” name, a harder claim to prove. Second, Tiffany asserted a counterfeiting claim against Costco. It is rare to see counterfeiting allegations made by one large, sophisticated company against another.

Costco has come back swinging. In its answer and counterclaims filed in March, Costco not only denies Tiffany’s claims but also challenges the validity of Tiffany’s trademark registrations. Costco asserts that its use of “Tiffany” merely followed common jewelry practice to describe a particular setting for rings, consisting of multiple slender prongs extending upward from the base of the ring to hold a single diamond. Costco attaches as exhibits copies of dictionaries and other sources in the jewelry field that use “Tiffany” to describe such a setting. Put differently, Costco asks the court to find that “Tiffany” has become a generic term, at least when used to describe certain ring settings. Tiffany denies that, and just moved to dismiss the generic claim as we went to press.

The stakes are high for Tiffany; Costco asks the court to determine that the “Tiffany” trademark registrations should be modified or partially cancelled because it is a descriptive term rather than a designator of source. Costco took a similarly aggressive position in responding to a copyright infringement lawsuit filed against it by Omega watches. In that case, it argued that Omega had lost its right to control the distribution of the watches in issue following their “first sale” overseas prior to importation into the U.S. for sale in the Costco warehouse stores. Costco took that argument all the way to the U.S. Supreme Court.

The claims and counterclaims in Tiffany v. Costco echo some of the claims and counterclaims in the recent high-stakes litigation between Christian Louboutin and Yves Saint Laurent. While it is clear that accessories brands must police and protect their trademarks, it is also important that brands carefully evaluate the escalating risks of commencing a copyright or trademark litigation.