Why Costco Is Teeing Off on Titleist

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Golf is on everyone’s mind with the Masters Tournament at Augusta coming up in just a couple weeks, but especially for one major discount retailer. Costco Wholesale Corp. (NASDAQ: COST) is suing Titleist — owned by Acushnet Holdings Corp. (NYSE: GOLF) — over its golf balls. Costco is seeking a declaratory judgement that it is not infringing on any patents or conducting in any false advertising.

Some people might not be above stretching the truth on the golf course about how far they can drive, which can be harmless. But patent infringement on golf ball performance and how it stacks up against competitors is a serious issue, especially when a company’s reputation is on the line.

It’s worth noting that the story originally started with Acushnet accusing Costco of infringing on its patents. The golf equipment manufacturer sent a letter to Costco alleging that its Kirkland Signature golf ball was infringing on 11 patents, and that the company was conducting some false advertising.

False advertising is a much harder sell, because it must be proven that the company is attempting to mislead customers with false information. Acushnet said in its letter that Costco had engaged in false advertising on its Kirkland Signature guarantee that all Kickland Signature products “meet or exceed the quality standards of leading national brands.”

As mentioned, Costco is refuting these initial charges against it by filing suit against Titleist. According to the complaint:

Costco has never publicly compared the KS ball with any Acushnet ball, including Acushnet’s Pro V1 golf balls … a reasonable consumer would not interpret the Kirkland Signature guarantee as intended to convey a statement of fact about any specific comparisons of quality between the KS ball and any specific manufacturer or ball, including Acushnet and its Pro V1 ball.

Costco continued with its refutation in the complaint, citing specific examples of how the patents were not in fact infringed.

Shares of Costco were up fractionally Tuesday morning to $168.44, with a consensus analyst price target of $181.69 and a 52-week trading range of $138.57 to $178.71.

Acushnet shares traded at $18.14, in a post-IPO trading range of $16.90 to $22.31. The consensus price target is $22.23.