There are few people in the business world for whom I have come to respect more than's (NASDAQ:OSTK) CEO Patrick Byrne and Tiffany & Co. (NYSE:TIF) Vice President for Investor Relations Mark Aaron. So it pains me to see two of them locked in a conflict that could lead to a messy lawsuit. But after customers began complaining that the Tiffany pendants they purchased from Overstock were not, in fact, Tiffany pendants that seems to be exactly where we are heading.

This incident highlights the difficulties that both businesses have -- Overstock, as a closeout retailer, requires vigilance to make sure that it doesn't get stuck with knock-off goods in a market where such items are rife. Tiffany, for its part, has no choice whatsoever but to defend its brand with vigor.

The brand name Tiffany is synonymous with quality, exclusivity, and prestige. Consumers are willing to pay more for a Tiffany product for both reasons, but like many top-shelf brand companies, much of Tiffany's value comes from its trademarks. Those Tiffany robin's egg blue boxes may not be that expensive, but for the company, they're priceless. In fact, when I sat down with Aaron in early 2001, he stated that the primary image that Tiffany evokes in both customers and non-customers alike is "trust." With this comes a fanatical protection of the brand, and an attitude toward inventory management that states that the company would rather sit on items than sell them in a fashion that dilutes the brand. Aaron's words were the next best thing to Churchillian: "We never discount. We never ever discount. We never, ever, ever discount."

OK, he didn't say it just like that. But you get the idea.

But when a reputable dealer flashed a Tiffany invoice and stated emphatically that he had bought the pendants directly from Tiffany's Italian division, Overstock snapped them up. Soon after, customer complaints started up. Byrne responded quickly and aggressively stating that Overstock had re-verified Tiffany as the source of these pendants, going so far as to post an original invoice on the website. Nevertheless, Overstock waived fees and covered shipping costs for any returns for these items.

Now, it strains credibility to suggest that Overstock is unaware of the preponderance of goods that are knockoffs of name-brand luxury companies, and there is zero chance that Overstock would risk both the legal and the public relations headaches by selling counterfeit goods on purpose. Just this past week Tiffany scored a half-million dollar verdict from for trademark infringement, and it has sued several merchants who offer fake Tiffany products on eBay (NASDAQ:EBAY). Overstock has nothing to gain from tempting such fate, so when the company claims that it is obsessive in its screening for counterfeit goods, I don't doubt it for a second. Overstock does sell some top-shelf brands, including Vera Wang, Ebel, Gucci (NYSE:GUC), and Steve Madden (NASDAQ:SHOO). It knows the business of brands. But that doesn't mean that something couldn't slip through.

We also should not discount the possibility that someone at Tiffany really did sell these items into the secondary market. Tiffany claims the items are fake, as is the invoice, but given the bad publicity and the apparently poor quality of the items, of course that's what Tiffany would say. Still, the circumstantial evidence of there being a paucity of Tiffany goods ever available at closeout retailers suggests that Tiffany does what it says -- it eats inventory rather than move it at a discount. That being the case, one would hope that extra alarms would go off at Overstock when Tiffany goods are on the table. I don't have any answers here, which is partly why I'm so troubled to see these companies at odds with one another.

It's a tough situation for Overstock, since any violation of Tiffany's brands would have certainly been unintentional on its part. It just doesn't make any sense, otherwise. And for Tiffany, they most certainly must defend their brands with vigor. Trademark law doesn't leave much room for nice guys. A company that fails to defend its brands runs the risk of diluting them.

Just the same, Overstock now needs to bolster its image as a place where people can buy name-brand goods at deep discounts, and assure people that its verification systems are sound. From an investing perspective, watch Overstock's response. A problem of this sort needn't be mortal, but it's incumbent upon Byrne and the management team to illustrate to both consumers and business partners why this is a company that helps protect brands, not circumvent them. I have no doubt that Overstock will succeed, but that doesn't mean that its not in for some difficulty with Tiffany.

Bill Mann owns shares of Tiffany and has beneficial interest in