Counterfeits in Court

They were hot commodities. The sellers raked in millions from these online sales.

And so did eBay, the company that enabled the sales. Between April 2000 and June 2004, the online auction site sold hundreds of thousands of silver Tiffany & Co. jewelry items, garnering the company $4.1 million in commissions and fees.

Everyone involved was happy--except the buyers, who found that a large percentage of the "Tiffany" items were counterfeit.

Thousands of these customers complained to eBay and to Tiffany. Some even marched into Tiffany stores and demanded their money back.

Tiffany struck back. In order to protect its good name (and its sales), the internationally renowned jewelry chain took the usual legal measures--and got the usual frustrating results. The company sent warning letters and filed infringement suits against myriad counterfeiters, but this failed to stem the deluge of counterfeit Tiffany jewelry sold on eBay.

So in June 2004, Tiffany changed tactics. Instead of suing the counterfeiters, the company went after eBay. In Tiffany & Co. v. eBay Inc., the jewelry company alleged the online auction site was guilty of contributory trademark infringement.

After a bench trial, a Federal District Court ruled against Tiffany in July. The company is now appealing to the 2nd Circuit.

The stakes are high, and not just for Tiffany and eBay. The case could have important ramifications for brand owners fighting their own uphill battles against online counterfeits and for Internet companies such as Facebook and YouTube that allow third parties to post material online.

The eBay Way
Tiffany argued eBay was a contributory infringer under the legal standard set out by the Supreme Court in Inwood Laboratories Inc. v. Ives Laboratories Inc. In that 1982 case, the court said a company commits contributory trademark infringement if it provides goods or services "to one whom it knows or has reason to know is engaging in trademark infringement."

In the current dispute, eBay allowed people to sell silver Tiffany jewelry on its site, even though it knew a large percentage of this jewelry was counterfeit. This generalized knowledge, Tiffany argued, was sufficient to make eBay liable.

U.S. District Judge Richard Sullivan of the Southern District of New York disagreed. He held that a company is not a contributory infringer simply because it knows that some unidentified customers are using its products or services to commit infringement. Liability exists only if the company knows (or should know) that specific customers are committing infringement--and nevertheless supplies those customers with goods or services that help the infringement to occur.

In this case, eBay knew counterfeiting was a significant problem on its auction site. If the company had turned a blind eye to this problem, that could be grounds for a finding of contributory infringement. But eBay made vigorous efforts to track down and stop specific instances of counterfeiting, the court found.

The company, among other things, "made substantial investments in anti-counterfeiting initiatives," "invested as much as $20 million each year on tools to promote trust and safety on its website," and hired more than 200 employees to "focus exclusively on combating infringement," Judge Sullivan noted.

"[W]hen eBay possessed the requisite knowledge, it took appropriate steps to remove listings [of counterfeit items] and suspend service [to the sellers of those items]," the judge wrote. "Under these circumstances, the Court declines to impose liability for contributory trademark infringement."

Brand-Owner Burden
Tiffany was disappointed by the ruling, and it wasn't alone. "There are a lot of other brand owners who have followed this case closely and are upset with the result," says James Swire, an Arnold & Porter partner who represents Tiffany in this litigation.

Many brand owners fear the ruling validates the status quo--leaving them with the costly and time-consuming burden of hunting down individual online counterfeiters instead of shifting this expense and effort to online intermediaries such as eBay.

It's not an expense all brand owners can bear. "When a trademark infringement suit can cost easily more than $100,000, it is virtually impossible for a small company to go after each infringer," says Martin Schwimmer, of counsel at Moses & Singer. "I've seen a lot of small brand owners driven out of business by online counterfeits."

This case, however, is about more than who bears the responsibility for stopping online counterfeits. A lot of brand owners, particularly those with luxury brands, have another agenda. They want to squelch the proliferating Internet marketplace for resales of their goods, especially when they don't see any profit from it.

If Tiffany wins this case, the online resale market would be crippled, according to G. Roxanne Elings, a shareholder in Greenberg Traurig. "eBay would look very different," she says. "I don't think it could carry many brand-name items. ... If any seller offered more than a few brand name items, they couldn't be listed."

Consolation Prize
The ruling does offer some consolation to brand owners.

The District Court indicated that online intermediaries can be held contributorily liable if they fail to respond to trademark owners' requests to remove specific infringing material posted by third parties. "Once you tell them of a specific instance of counterfeiting, they have to act," Elings says.

Moreover, by emphasizing eBay's efforts to minimize counterfeiting, the opinion leaves the possibility of imposing contributory liability on online intermediaries that lack eBay's vigorous initiatives.

"eBay has a specific set of [anti-counterfeiting] procedures that are almost unmatched in the industry," says Eric Goldman, who teaches IP law at Santa Clara University School of Law.

"They do a lot that most online companies don't do. And if a company doesn't do as much as eBay, we don't know what the courts will do."

The 2nd Circuit has yet to hear oral arguments in this case, and given the court's backlog, observers say it is unlikely to issue a decision on the appeal any time soon. In the meantime, Tiffany and other trademark owners will continue to bear the burden of policing the Internet against counterfeits.

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Steven Seidenberg

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