A recent decision by the Second Circuit Court of Appeals has found that eBay has no contributory liability for sales of counterfeit products on its site in light of its efforts to combat counterfeiting, including termination of sales after notification by the trademark owner. The Second Circuit, in Tiffany (NJ) Inc. v. eBay, Inc., 08-3947-cv, 2010 WL 1236315 (2d Cir. April 1, 2010) upheld the Southern District of New York's 2008 judgment that eBay's facilitating and profiting from third parties' sales of counterfeit goods does not constitute contributory infringement in the absence of “contemporary knowledge of which particular listings are infringing or will infringe in the future.” In so holding, the Court rejected the concerns of Tiffany, and other parties that had filed amicus briefs, that trademark owners cannot afford the burden of policing eBay's Web site on their own.

The Second Circuit considered the jeweler's appeal of claims that eBay's facilitation of online sales of counterfeit TIFFANY goods as well as eBay's advertising of the availability of TIFFANY goods on eBay's Web site constituted trademark infringement, trademark dilution, and false advertising. The Court upheld the 2008 decision holding that eBay's actions did not constitute either direct or contributory infringement or dilution, but remanded the false advertising claim to the district court.

Characterizing this case as the first in the context of an online marketplace to consider the application of the Supreme Court's Inwood Laboratories, Inc. v. Ives Laboratories, Inc., 456 U.S. 5 844 (1982) test for contributory trademark infringement, the Second Circuit held that a service provider must have “contemporary knowledge of which particular listings are infringing or will infringe in the future” to be liable for contributory infringement. eBay knew only of specific listings with counterfeit goods when the trademark owner brought them to eBay's attention, and eBay made a substantial record as to its cooperation with trademark owners to remove such listings, bar repeat offenders and, in some cases, give refunds to purchasers of counterfeit goods. The Court said that eBay “appears to concede that it knew as a general matter that counterfeit Tiffany products were listed and sold through its website.” However this general knowledge was not specific enough to impart contributory liability.

The Second Circuit affirmed the lower court's finding that eBay had not acted with “willful blindness”; that is, “shield[ing] itself from learning of the particular transactions by looking the other way.” The Court favorably contrasted eBay's efforts to combat counterfeiting and to respond promptly to notices from trademark owners to those of defendants in the “flea market cases” such as Fonovisa, Inc. v. Cherry Auction, Inc., 76 F.3d 259 (9th Cir. 1996), where defendants made no effort to combat counterfeiting.

The Court held that eBay's actions were not direct trademark infringement because it is lawful to “use a plaintiff's trademark where doing so is necessary to describe the plaintiff's product and does not imply a false affiliation or endorsement by the plaintiff of the defendant.” eBay's use of the TIFFANY mark accurately described the genuine TIFFANY goods offered for sale on eBay's Web site and did not suggest an affiliation or endorsement by Tiffany.

Tiffany's claim of direct trademark dilution also failed because eBay did not use the TIFFANY marks to refer to a product of its own, nor was eBay using the TIFFANY mark in association with any counterfeit products. The Court acknowledged that counterfeiting may dilute the value of Tiffany's products, but “insofar as eBay did not itself sell the goods at issue, it did not itself engage in dilution.”

The false advertising claim arose from eBay's advertising in and prior to 2003, on its site and in sponsored links, of the availability of Tiffany merchandise on eBay. These advertisements were not literally false, since genuine Tiffany items were in fact available. However, the Court recognized that “the law prohibits an advertisement that implies that all of the goods offered on a defendant's website are genuine when in fact, as here, a sizeable proportion of them are not.” To succeed on a claim of implied falsity, a plaintiff must present extrinsic evidence of consumer perception. The Court was “unable to affirm” the trial court's findings that eBay's advertisements were not likely to mislead or confuse consumers as to the authenticity of the TIFFANY items available on eBay's Web site. The Court remanded this claim for reconsideration in light of its comments concerning the need for extrinsic evidence.

The Second Circuit was clearly impressed by the scope of eBay's anticounterfeiting efforts, which included more than 200 employees devoted to combating infringement and implementation of “fraud engines” to screen out counterfeit listings at an early stage. These efforts helped convince both the District Court and the Court of Appeals that eBay should have breathing room to continue the “notice and takedown” approach to counterfeiting on its site, and maintains the burden on trademark owners to police eBay for infringements. Those who operate other online marketplaces can take comfort from this decision, but must also be mindful of their own obligations to be responsive and proactive in working with trademark owners. “Willful blindness” will still result in liability for contributory infringement.

The full text of the Court's opinion is available on the Second Circuit's Web site.