In what appears to be a blow to brand owners in the United States, a New York court has held that eBay is not liable for sales of counterfeit Tiffany goods on its website. (Decision available at: http://www.daypitney.com/news/docs/dp_2198.pdf.) This holding contrasts starkly with recent decisions in Europe finding eBay liable for similar activities.

The dispute in the U.S. arose when a robust market for Tiffany jewelry – most of which Tiffany believed were counterfeit rather than legitimate resales – developed on eBay. For several years Tiffany used eBay’s “verified rights owner” program (“VeRO”) to complain about specific Tiffany auctions. Whenever eBay received a complaint, eBay took that auction down. Despite the success of this relationship, Tiffany wanted eBay to ban certain suspect auctions in advance, namely, any auction for sales of five or more Tiffany pieces and any auction for Tiffany silver jewelry. eBay refused Tiffany’s request for this outright ban, and litigation ensued.

While Tiffany brought several claims, the most significant alleged that eBay was liable for the sellers’ acts of trademark infringement as a contributory infringer. The court applied the Supreme Court’s standard set forth in Inwood Labs., Inc. v. Ives Labs., 456 U.S. 844 (1982). Under Inwood, it is not enough that eBay could “reasonably anticipate” sales of counterfeits; instead, eBay had to “know or have reason to know” that the sellers were infringing. Having “generalized knowledge” that counterfeit sales were taking place on its website did not require eBay to suspend all sellers who might be infringing. Tiffany’s theories for eBay’s actual or constructive knowledge of infringement – including that silver items or items in lots of five or more were presumptively fake – were unsubstantiated.

The court focused on eBay’s diligent and continuous efforts to ferret out infringements on its website. While Tiffany chose to deploy “limited” technology and staff resources on policing, eBay went to great lengths to stop infringers, devoting personnel to combating infringement, creating a “fraud engine” to root out illegal auctions, and forming the VeRO Program. The evidence showed that many eBay-hosted auctions of Tiffany products were legitimate, and therefore, eBay was justified in not assuming that all Tiffany sales were fakes and not shutting down all sellers as a result.

In contrast, courts in Europe, namely Germany and France, have a different view concerning eBay’s liability, finding eBay strictly liable for permitting infringing sales via its auction site. It appears that the laws in these countries are more restrictive of resale rights, and more protective of the brand owner’s right to control the manner in which branded products are sold even after those products have been purchased in the marketplace. While U.S. law permits a brand owner to control distribution of its products, once a customer has legally purchased branded goods, he or she may freely resell them through any channel, whether it be the Internet or a yard sale.

What the Tiffany Decision Means for Internet Businesses and Trademark Owners

The contrasting U.S. and European decisions leave Internet auction sites in a somewhat awkward position if they host or facilitate sales of branded products worldwide. eBay is appealing the French and German court rulings, and while its chances of success look promising, the appeals may not be decided for some time. So while the U.S. market looks like a safe haven, Internet auction and reseller sites should be mindful of these European and other territorial rulings and stay tuned for how they can proceed outside the U.S. At a minimum, Tiffany makes clear that Internet auction and similar sites need to have procedures in place to deal with infringement matters and need to be responsive to the specific complaints of trademark holders.

For trademark owners, Tiffany underscores what they already know – they must police their marks and prosecute infringers if they wish to combat this illegal trade. No assumptions will be made that infringement abounds. This includes identifying suspected infringers and giving specifics to the online business owner. After Tiffany, at least in the U.S., trademark owners should work with the “eBays” of the world on creative ways to stop counterfeiting. One option is a registration system for branded products, under which online auction sites could require sellers to provide a registration number to show authenticity. For a discussion of this option by one of the authors of this Alert, see “Is eBay Liable for Auctions of Counterfeit Tiffany Products?,” http://www.daypitney.com/news/docs/dp_1992.pdf, The Licensing Journal, June 2007 issue, (discussing Tiffany’s claims and forecasting the New York court’s decision). While not foolproof, this would add a layer of protection to online sales that both the brand owner and auction site can easily implement.