Hilarious story. Interesting responses. If Cartier smashed my watch with a hammer, I'd slap a Federal suit on their asses just out of principal. "Protection of trademark" my ass. This is not a trademark infringment issue. This is in fact a private property issue...
Here are the important questions:
1) Are counterfeit goods considered contraband?
Answer: In the USA, NO. (See: http://www.chronocentric.com/watches/counterfeit.shtml) We're not talking about the import/export of counterfeit goods, we're talking about possession. And possessing such a watch is not illegal. It is the maker and sellers of replicas that are usually in violation of the legal copyrights on the original manufacturer's copyrights and trademarks. Therefore, my replica watches are not contraband - they are my private property.
2) Is it ok for a private entity to destroy somebody else's property?
Answer: In the USA, emphatically NO. If a private entity destroys my property without permission THEY CAN BE LIABLE. Period. It doesn't matter that the property is a counterfeit watch. It doesn't matter that I willingly handed it over to them. I handed it over to them for the purpose of repair, not destruction, and I have the legal right to possess that watch whether they like it or not. Sure, I might get a threatening letter from their lawyers, but my rights stand and their threats don't change that.
If Cartier is smart, they'll either refuse the job and refund the $400 or they'll do the work and take the money. If they smash the watch with a hammer, they're not smart.