eBay did not violate Tiffany & Co.’s trademark rights by allowing sellers to list used items from the retailer on its Web site, but the Web site could be liable for false advertising, the Second Circuit has ruled.

Jewelry maker Tiffany & Co. sued Internet-based marketplace eBay claiming that it facilitated and advertised the sale of counterfeit “Tiffany” goods, which constituted direct and contributory trademark infringement, trademark dilution, and false advertising.

After a weeklong bench trial, U.S. District Court Judge Richard J. Sullivan ruled in favor of eBay on all claims. On appeal, the Second Circuit agreed that eBay had not violated Tiffany’s trademark rights, either directly or contributorily.

“eBay’s use of Tiffany’s mark on its Web site and in sponsored links was lawful. eBay used the mark to describe accurately the genuine Tiffany goods offered for sale on its Web site. And none of eBay’s uses of the mark suggested that Tiffany affiliated itself with eBay or endorsed the sale of its products through eBay’s Web site,” the court said.

Even though eBay knew or had reason to know that there was a substantial problem with the sale of counterfeit Tiffany jewelry on its Web site, that was “not a basis for a claim of direct trademark infringement against eBay, especially inasmuch as it is undisputed that eBay promptly removed all listings that Tiffany challenged as counterfeit and took affirmative steps to identify and remove illegitimate Tiffany goods. To impose liability because eBay cannot guarantee the genuineness of all of the purported Tiffany products offered on its Web site would unduly inhibit the lawful resale of genuine Tiffany goods,” the court said.

Further, the court said that “[f]or contributory trademark infringement liability to lie, a service provider must have 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.” However, the court said that eBay’s knowledge of counterfeit sales on its Web site could form the basis of liability for false advertising. The company advertised Tiffany goods on its Web site by providing hyperlinks to various keyword searches, and purchased advertising space on search engines. “It is true that eBay did not itself sell counterfeit Tiffany goods; only the fraudulent vendors did, and that is in part why we conclude that eBay did not infringe Tiffany’s mark. But eBay did affirmatively advertise the goods sold through its site as Tiffany merchandise. The law requires us to hold eBay accountable for the words that it chose insofar as they misled or confused consumers,” the court said. The court remanded the case to the U.S. District Court to determine whether or not eBay’s advertisements misled or confused consumers.

Why it matters: The victory is the second for eBay in the United States alleging trademark violations based on the resale of trademarked products. In the Tiffany case, the court noted that “private market forces” would give eBay and similar sites a strong incentive to minimize the sale of counterfeit goods because of the risk of alienating consumers (evidence at trial showed that 125 consumers had complained to eBay about counterfeit Tiffany items over just a six-week period). Tiffany disagrees; the company has indicated that it is considering an appeal to the U.S. Supreme Court.