Going once, going twice … sold!

The popularity of Internet auction services such as eBay has proven to be a boon for sellers of counterfeit goods. In frustration, some trademark owners have fought back by going after not only the sellers for direct infringement, but also the service providers for contributory infringement. In one recent case, the U.S. Second Circuit Court of Appeals looked at eBay’s “generalized knowledge” of counterfeiting on its site and considered whether it should impose liability for contributory infringement. A sidebar discusses how, even though the court found for eBay, it remanded the plaintiff’s false advertising claim for further consideration.

Court addresses eBay’s liability for contributory infringement

The popularity of Internet auction services such as eBay has proven to be a boon for sellers of counterfeit goods. In frustration, some trademark owners have fought back by going after not only the sellers for direct infringement, but also the service providers for contributory infringement.

In one recent case, Tiffany Inc. v. eBay, Inc., the U.S. Second Circuit Court of Appeals looked at eBay’s “generalized knowledge” of counterfeiting on its site and considered whether it should impose liability for contributory infringement.

Bid History

eBay is an online marketplace that allows users to buy and sell goods under an auction format. It generates revenue by charging fees to use its listing services and through its arrangement with PayPal, which facilitates the processing of users’ purchases in exchange for a fee. Tiffany sells its “world famous” jewelry exclusively through its retail stores, catalogs and Web site. It does not sell its goods at discounted prices.

Sometime before 2004, Tiffany became aware that counterfeit Tiffany merchandise was being sold on eBay, though a substantial amount of legitimate Tiffany products was also available on the site. Between April 2000 and June 2004, eBay earned $4.1 million in revenue from transactions with “Tiffany” in the listing title in its “Jewelry & Watches” category.

The district court found that eBay spent as much as $20 million annually on tools to promote trust and safety on its site, including establishing a “Trust and Safety” department of about 4,000 employees. More than 200 of those employees focus exclusively on combating infringement.

eBay also uses a “fraud engine” to search out counterfeit listings and operates a “notice-and-takedown” system. The system allows owners of intellectual property rights, including Tiffany, to “report to eBay any listing offering potentially infringing items, so that eBay could remove such reported listings.”

Tiffany sued eBay in 2004, alleging, among other things, contributory infringement. After a bench trial, the district court ruled in favor of eBay on all claims.

Tiffany Bids Again

On appeal, Tiffany argued that eBay should be held liable as a contributor to the infringing conduct of its counterfeiting vendors. The Second Circuit noted that the law of contributory trademark infringement is ill defined — particularly in the context of the online marketplace. Nonetheless, it assumed (without deciding) that a 1982 decision by the U.S. Supreme Court, Inwood Laboratories, Inc. v. Ives Laboratories, Inc., applied to the circumstances here.

According to the appellate court, under Inwood, a service provider can be held liable for contributory infringement in relation to another party’s infringement if the service provider:

Intentionally induces another to infringe, or Continues to supply its service to one who it knows or has reason to know is engaging in infringement. Only the second prong was at issue here. The court held that a service provider can be held liable for contributory infringement under that prong only if it has “more than a general knowledge or reason to know that its service is being used to sell counterfeit goods. Some contemporary knowledge of which particular listings are infringing or will infringe in the future is necessary.”

The court pointed out that Tiffany didn’t identify particular sellers as counterfeiters for eBay. When eBay did have reason to know specific sellers were selling counterfeits, through buyer complaints or as part of the notice-and-takedown system, it removed those sellers’ listings and suspended repeat offenders. “Thus, Tiffany failed to demonstrate that eBay was supplying its service to individuals who it knew or had reason to know were selling counterfeit Tiffany goods.”

Willfully Blind Auctions

Critically, the Second Circuit also acknowledged that a service provider isn’t entitled to “willful blindness.” According to the court, “when it has reason to suspect that users of its service are infringing a protected mark, it may not shield itself from learning of the particular infringing transactions by looking the other way.” The court concluded, however, that eBay wasn’t willfully blind to the counterfeiting of Tiffany’s products because it didn’t ignore the information it received about counterfeit goods. '

Trademark Owners on Notice

The Second Circuit’s decision in this case puts trademark owners on notice. To protect their rights, trademark owners must remain vigilant about policing online outlets for potential counterfeits and give the service providers notification of specific offenders whenever possible.

Sidebar: All is Not Lost For Tiffany

In Tiffany Inc. v. eBay, Inc., the U.S. Second Circuit Court of Appeals affirmed the district court’s ruling in favor of eBay on the infringement claims. (See main article.) But all was not lost for Tiffany, as the court remanded the jewelry company’s false advertising claim for further consideration. The Second Circuit found that the district court hadn’t adequately considered whether eBay’s ads for Tiffany’s products were likely to mislead consumers in light of the fact that some of the products labeled as Tiffany’s were counterfeit.

eBay advertised the sale of Tiffany’s goods in various ways. It purchased ad space on search engines and had links on its site to “Tiffany,” “Tiffany rings” and similar phrases. The court found that the ads weren’t literally false because a user could find genuine Tiffany goods on eBay. It noted, though, that “the law prohibits an advertisement that implies that all of the goods offered on a defendant’s Web site are genuine when in fact, as here, a sizeable proportion of them are not.”

Interestingly, the court advised that online advertisers don’t need to cease their ads for a kind of goods solely because they know some of those goods are counterfeit. In such circumstances, it said, “a disclaimer might suffice.”

About the firm:

Klemchuk LLP is an Intellectual Property (IP), Technology, Internet, and Business law firm located in Dallas, TX.  The firm offers comprehensive legal services including litigation and enforcement of all forms of IP as well as registration and licensing of patents, trademarks, trade dress, and copyrights.  The firm also provides a wide range of technology, Internet, e-commerce, and business services including business planning, formation, and financing, mergers and acquisitions, business litigation, data privacy, and domain name dispute resolution. 

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