The Kuala Lumpur High Court ruled that the watches were seized illegally without a warrant, the Bernama national news agency said. The court ordered the watches to be returned within 14 days and said Swatch can demand compensation if the watches were damaged, Bernama reported.
Swatch officials couldn't be immediately reached for comments.
Predominantly Muslim Malaysia criminalizes same-sex relationships, with punishments ranging from caning under Islamic laws to 20 years in prison for sodomy under colonial-era civil laws.
Authorities raided Swatch outlets in various malls across Malaysia in May last year, seizing watches from the Pride Collection. The watches come in various designs, some with rainbow colors on their straps and others in a choice of six single colors that correlate to the gay pride flag. Swatch contested allegations that the watches were harmful, saying they carried a message of peace and love.
A few months after the seizure, the government banned all Swatch products that contain lesbian, gay, bisexual, transgender or queer elements — including watches, wrappers and boxes. The ban was made part of a printing law that includes distribution and possession, amid concerns that such products were detrimental to the nation's morality. Anyone found with one could be jailed for up to three years or face a fine.