Providers of online services have long struggled with claims being brought against them based on activities of the users of the service. The rules that have developed generally protect web site operators for claims arising in copyright and in tort such as libel. However, there remain open questions regarding trademark infringement claims brought against a web site operator based on activities of the web provider's users. And, setting aside legal subtleties, that leads to a practical question of costs: Who should bear the burden of seeking out infringing third-party sellers—the trademark owner or the web site operator? A recent federal appellate court decision has placed the burdens of identifying infringing offerings on the trademark owner, but with some caveats that leave site operators at risk.

The recent decision arises out of the nearly six-year old battle between Tiffany & Company, the well-known high-end jewelry purveyor, and the online auctioneer eBay. In short, the issues arose over the high number of eBay sellers who were purporting to be offering genuine Tiffany products through eBay auctions but were instead offering counterfeit Tiffany goods.

Counterfeit Tiffany Goods on eBay

It is important to note that eBay did not completely ignore this reality. eBay, likely seeking to protect its own reputation, had invested many millions of dollars in combating fraudulent sales on its site, including running buyer protection programs to reimburse buyers who were victims of fraudulent sales, hiring some 4,000 employees to combat fraud, and implementing sophisticated filters to lessen the number of fraudulent listings. Much of the filtering system was based on keywords provided by Tiffany itself. eBay even allowed Tiffany to post a page on the eBay site, with text entirely controlled by Tiffany, in which Tiffany claimed that "most" of the products offered on eBay as Tiffany were fake.

eBay also created a notice-and-takedown system for its site called the Verified Rights Owner (VeRO) program, which allows owners of trademark rights to report infringing offerings to eBay, and eBay will in turn take down the offering and investigate. Tiffany was a frequent user of the VeRO program, filing thousands of notices of infringing product sales. eBay was diligent in responding to these notices once filed by Tiffany, usually removing most listings within a half day and in some cases unwinding money transactions that had already occurred. eBay later implemented essentially a three-strikes policy, permanently banning sellers who had been the subject of multiple fraudulent-goods notices. Tiffany did not dispute eBay's good faith and speed in operating the VeRO program.

Tiffany's Legal Claims

Nonetheless, Tiffany pursued a legal claim for contributory trademark infringement against eBay, claiming that eBay's "general knowledge" that many, if not most, of the claimed offerings of Tiffany-branded merchandise were for fake goods should make eBay essentially responsible for the acts of its sellers. Tiffany felt that the VeRO program, as well as the other efforts by eBay to prevent fraudulent listings, were not enough to protect eBay from being responsible for the acts of its customers, and that eBay was liable because it set up a system to allow the infringing acts to occur.

Boiled down, what is really at stake here is quite simple: Who has to do the hard work to find the infringers? eBay feels that it does its job by providing the mechanism for the notice-and-takedown, the VeRO program, and by quickly following through once it receives the reports from the trademark owners. Tiffany, on the other hand, feels that it should ultimately not be its responsibility to look for infringers on a platform created by a third-party, that the costs of that searching should be borne by the web site operator, and that a site operator who is not able to essentially eliminate fraudulent sales without assistance from the trademark owners should be held directly liable for the infringing acts of the site operator's customers.

Victory for eBay

The court here does not give an outright free pass to the web site operator. Here, the opinion focuses quite heavily on the efforts and investments eBay had made in trying to combat fraudulent sales being conducted through eBay systems. It seems doubtful that the decision would have gone the same way had eBay not done that hard work or even willfully ignored what its customers were doing, since it does make clear that eBay would be liable for failing to act once it had "contemporary knowledge of which particular listings are infringing."

But, the court did not go so far as Tiffany asked and sided with eBay. The court held that eBay was not liable for contributory trademark infringement based on mere "general knowledge or reason to know that its service is being used to sell counterfeit goods." This means that eBay has no legal obligations to take down any particular listing unless eBay has actual knowledge of its infringing nature, and eBay has no positive obligation to seek out and find infringing listings. For all practical purposes, eBay's takedown obligation does not arise until after the trademark owner has provided in good faith a particularized notice pointing to a specific auction offering on the eBay site.

With that decision, the court decided where the cost of investigating is assigned. Tiffany complained that this standard would force trademark owners to "police eBay's website - and many others like it - '24 hours a day, and 365 days a year,'" and that this cost was an undue burden on the trademark owners. To that, the court essentially responded that the law is the law, and concluded that the cost of such policing is essentially to be borne by the owners of the marks as long as the site owner makes good faith efforts to respond once put on particularized notice.

Practical Advice for Web Site Operators

Web site operators who allow for third-parties to post trademarks on the web site cannot view the Tiffany case as a complete shield against trademark claims. In order to be shielded against trademark claims, the case suggests that a web site operator is required to do more than just a token effort to respond to users' bad behavior. Site operators who allow users to post, and to offer for sale, items protected by third-party trademarks should invest in systems to mitigate the level of infringing activity, and follow-through on those systems, if they wish to be protected by the rule of Tiffany. However, good business sense may make that easy for the site operator in the first place, since that site operator's own reputation as a safe place for consumers to transact business may be more valuable to the provider than even preventing a trademark infringement suit.

(The case discussed above is Tiffany (NJ) Inc. v. eBay, Inc., decided on April 1, 2010 by the US Court of Appeals for the Second Circuit.)