A federal appeals court Monday overturned a $21 million verdict against Costco Wholesale Corp. for trademark infringement over its marketing of diamond rings labeled as “Tiffany,” ruling that the lower court judge who had issued an initial ruling in the case had failed to adequately consider contrary evidence.

The litigation arose from Issaquah, Washington-based Costco’s sale of unbranded diamond engagement rings that were identified by point-of-sale signs containing the word “Tiffany,” according to Monday’s ruling by the 2nd U.S. Circuit Court of Appeals in New York in Tiffany and Co.; Tiffany (NJ) LLC v. Costco Wholesale Corp.

New York-based Tiffany filed suit against Costco in U.S. District Court in New York charging the retailer with trademark infringement and counterfeiting in violation of the federal Lanham Act and New York law.

In 2015, the district court granted Tiffany’s move for summary judgment in the case, dismissed Costco’s counterclaim and held the retailer liable for trademark infringement and counterfeiting.  A jury subsequently awarded Tiffany $13.8 million, which was increased to $21 million by the court.

The ruling was overturned by a unanimous three-judge appeals court panel. At some point in the late 19th century, Charles Lewis Tiffany developed and sold an engagement ring that incorporated a particular style of six-prong diamond setting, the ruling said. 

Since then, “numerous advertisements, dictionaries, trade publications and other documents have referred to diamond setting reminiscent of that style as ‘Tiffany settings,’ ” the ruling said.

Costco’s evidence “was sufficient to raise a question as to whether potential buyers of Costco’s diamond engagement rings were actually confused by the appearance of the word “Tiffany” on Costco’s signs,” the ruling said.

It said after the complaint was filed, Costco sent a letter to all customers who had purchased the engagement rings with Tiffany settings and reminded them that its return policy entitled them to return their rings for a full refund at any time, but only 1.3% of its customers returned their rings.

“Although a jury could reasonably draw the conclusion that Costco’s interest in emulating Tiffany’s designs spilled over into an intent to mislead buyers as to the origins of its own jewelry, it could also reasonably conclude that Costco intended to borrow ‘certain successful features (from Tiffany’s product)’ without implying that Tiffany actually produced or endorsed the jewelry at issue” the ruling said, in citing an earlier case.

“We have consistently recognized that intent to copy a product’s useful nonprotected attribute should not be equated automatically with an intent to deceive,” the ruling said, in vacating the district court’s judgment and remanding the case for trial.

Leigh Harlan, Tiffany & Co. senior vice president, secretary and general counsel, said in a statement, “We are disappointed in the Court’s ruling, which finds that a jury, rather than the judge, should have decided the question of liability in the first trial.

“We continue to believe that the District Court was correct in its findings, and that the jury’s finding on damages, which resulted in a $21 million award for Tiffany & Co., is a clear indicator of the strength of the Tiffany brand, and of the jury’s outrage over Costco’s actions.

“We have no qualms about trying this case again, and remain confident that a jury will find counterfeiting and infringement upon retrial, just as the District Court judge originally ruled.”

Costco’s attorney had no immediate comment.