"Tiffany" diamond rings that don't come in the blue box

Last Updated Sep 9, 2015 4:40 PM EDT

Retail giant Costco Wholesale (COST) is known as a place to buy products in bulk, such as 30 rolls of toilet paper or a 40-pound tub of sugar. Less known as a source for diamond engagement rings, Costco this week found itself on the losing end of a multi-year legal dispute over "Tiffany" display signs atop cases filled with betrothal gems.

On Tuesday, a federal judge in New York granted Tiffany & Co.'s (TIF) motion for summary judgment in its suit against Costco, rejecting the warehouse club's claim that "Tiffany" is a generic term for a ring with prongs to hold a gemstone and finding Costco liable for trademark infringement and trademark counterfeiting.

"No rational finder of fact could conclude that Costco acted in good faith in adopting the Tiffany mark," U.S. District Judge Laura Taylor Swain in Manhattan wrote in her ruling.

Tiffany filed suit against Costco on Valentine's Day 2013 after an individual alerted the jeweler that a Costco store in Huntington Beach, California, was selling diamond engagement rings promoted on in-store signs as "Tiffany."

The nearly 180-year-old company said its investigation determined that Costco had been selling different styles of rings identified as "Tiffany" for many years, despite not being made by the upscale jeweler.

"Costco led its members to believe they were purchasing authentic Tiffany products at significant discounts, when in fact, that was simply not true," Tiffany stated in a news release. "Tiffany has never sold nor would it ever sell its fine jewelry through an off-price warehouse retailer like Costco, either directly or indirectly."

"People thought they bought a Tiffany ring at Costco when they didn't, and the court found that customers had been intentionally misled," attorney Jeffrey Mitchell of law firm Dickstein Shapiro, Tiffany's counsel in the case, said in an email Wednesday. "We look forward to the trial on damages, and are gratified the court has allowed Tiffany to seek punitive damages as well."

Costco unsuccessfully claimed "Tiffany" to be a generic term for the type of setting that the New York-based retailer's founder, Charles Lewis Tiffany, made popular in 1886. The phrase 'Tiffany setting" is common enough to appear in the dictionary, with the description of "a setting, as in a ring, in which the stone is held with prongs."

"We have already sent a letter to our members offering return privileges," Bob Nelson, a Costco spokesman, said Wednesday in an email to CBS MoneyWatch. He declined further comment.

Tiffany is seeking punitive damages, to be determined by a jury.

Swain ordered Tiffany and Costco to "make good faith efforts to settle the outstanding issues" and scheduled a hearing for Oct. 30.