With the advent of the Internet, counterfeiting activities are thriving on a worldwide scale, in spite of efforts to combat such activities made by global online service providers and rights holders. Balancing the interests of every party involved is a daunting task.

Background

Courts in the U.S. and France recently issued decisions in cases involving trademark infringement and other claims made by Tiffany (in the U.S.) and general French tort law claims made by Louis Vuitton and Christian Dior Couture (in France) against eBay. In each instance, the rights holder sued solely eBay, not the individual sellers, with the aim of halting the increase of counterfeiting activities on the prominent online marketplace. The District Court for the Southern District of New York found for eBay in a decision dated July 14, 2008. The Paris Commercial Court found for Louis Vuitton and Christian Dior Couture in two identical decisions (except for the amount of damages granted), both dated June 30, 2008.

The facts in the cases at hand were similar. In each instance, the owner of a trademark for luxury products of worldwide renown, with closely-controlled distribution channels, objected to the allegedly rampant sales of counterfeit goods on eBay. To support their claims, the rights holders conducted surveys that concluded that a high portion of products bearing the respective plaintiffs’ marks sold on eBay were counterfeit. For its defense, eBay submitted evidence regarding the significant measures initiated by the company to curtail and prevent counterfeiting activities. The U.S. decision offers a comprehensive description of eBay’s anti-fraud efforts. First, eBay developed a fraud engine to detect indicia of counterfeiting apparent on the face of listings. Second, eBay created a Verified Rights Owner (“VeRO”) program, pursuant to which rights holders are provided with tools to police their trademarks and alert eBay through a form of notice-and-takedown procedure. eBay also allowed rights holders to create an “About Me” page to inform eBay users about their products and intellectual property rights.

Balancing the interests of eBay and rights holders requires courts to decide whether the ability of the trademark owner to identify counterfeit goods and enforce its rights should prevail over the extent of eBay’s control of its platform.

At first glance, the decisions appear to contradict one another. Despite the fact that they rest upon similar factual findings, the U.S. and French decisions significantly differ as to the standards of liability applied. Because the applicable standards of liability pervade the reasoning and the findings of both the district court and the French court, we will address this issue before discussing the facts themselves.

Who Should Bear the Burden of Policing Counterfeiting Activities?

The standards applied by the French and U.S. decisions differ not only in their substance but also in their subject matter. The French decisions discussed almost exclusively the applicability of the liability regime of Internet service providers (ISPs) and online hosting providers, whereas the U.S. decision focused on trademark infringement.

Tiffany: U.S. District Court Holds That Rights Holders Bear the Burden of Protecting Their Trademarks

As noted by the district court, “Tiffany’s contributory trademark infringement claims dominated the trial testimony and the post-trial submissions.” Nonetheless, we will briefly address Tiffany’s direct trademark infringement, unfair competition, false advertising, and direct and contributory trademark dilution claims.

Direct Trademark Infringement, Unfair Competition, False Advertising, and Trademark Dilution

To support its direct trademark infringement claim, Tiffany submitted that eBay promoted the availability of Tiffany jewelry on eBay using the Tiffany name, in particular by advertising the sale of Tiffany jewelry on its home page, advertising to its sellers and buyers alike that “Tiffany” and “Tiffany & Co.” are two of the top search terms in the Jewelry and Watch category, and providing a list of popular brand names, including “Tiffany,” on its Web site that, when clicked on, bring a user directly to the listings offering Tiffany merchandise. Tiffany also submitted that eBay purchased sponsored links to advertise the availability of Tiffany goods on outside search engines such as Google or Yahoo! Tiffany contended that such acts demonstrated the participation of eBay in the sales of counterfeit merchandise on its Web site, and that eBay profited from this activity by taking a listing fee and a percentage of the sales prices of each item sold.

The court applied a two-pronged test pursuant to which Tiffany had to prove that it held a valid trademark entitled to protection, and that eBay’s use of the trademark was likely to cause confusion as to the origin of the goods in order to succeed. The court concluded that Tiffany satisfied the first prong of the test; however, under the second prong, the court focused on the defense of nominative fair use. Because it is impossible for consumers to identify the source of Tiffany goods without using the Tiffany trademark, the court concluded that, even if eBay’s use of the trademark met the second prong of the direct infringement analysis, such use was protected under the nominative fair use doctrine.

The statutory defense of nominative fair use also was pivotal to the dismissal of the claims of unfair competition, false advertising, and trademark dilution.

Contributory Trademark Infringement

The court held that rights holders bear the principal responsibility to police their trademarks. Consequently, for its contributory trademark infringement claim to succeed, Tiffany had to prove that eBay “continued to supply its service to those whom it knew or had reason to know were engaging in infringement” and did not take “appropriate steps to cease making its Web site available in those instances where Tiffany brought objectionable conduct to its attention.” Absent such requisite knowledge, the court held that eBay was “under no affirmative duty to ferret out potential infringement.”

In its discussion of knowledge, the court refused to endorse the “reasonable anticipation” standard as the appropriate standard for knowledge. Under the reasonable anticipation standard, a party may be found liable where “the actor fails to take reasonable precautions against the occurrence of the third person’s infringing conduct in circumstances in which the infringing conduct can be reasonably anticipated.” Relying on a Supreme Court precedent, the district court dismissed the “reasonable anticipation” standard as a “watered down standard.”

The district court instead examined whether eBay’s generalized knowledge of trademark infringement on its Web site was sufficient to meet the “knowledge or reason to know” prong of another case. The court decided as a matter of law that generalized knowledge of counterfeiting activities, rather than specific knowledge tied to particular instances of infringement, was insufficient to impose upon eBay an affirmative duty to take action to remedy the infringing activities.

hristian Dior Couture/Louis Vuitton: eBay is Not a Mere Hosting Provider

The main inquiry undertaken by the French court was to determine the status of eBay, i.e., to what extent eBay could rely on the safe harbor provided to hosting providers pursuant to French law.

The French act of June 21, 2004, on digital economy was enacted to implement the European Directive 2000/31/EC of June 8, 2000, on electronic commerce. It created a so-called “safe harbor,” similar to the safe harbor of the U.S. Digital Millennium Copyright Act, pursuant to which Internet service providers and hosting providers are under no general obligation to monitor the information that they transmit or store. Hosting providers are liable only to the extent that they have knowledge of the existence of manifestly illegal content and do not take down this content. Hosting providers will be presumed to have knowledge if they are served with an appropriate notice, the so-called “notice-and-take-down procedure.”

The applicability of the safe harbor provisions currently is highly debated before French courts. Case law is shifting as to whether such platforms are hosting providers protected by the safe harbor or publishers subject to stringent duties. Some decisions even departed from the regime provided under the act on digital economy and held that hosting providers, under certain circumstances, must take further steps to prevent copyright infringements.

In this case, the court held that eBay was not eligible for the safe harbor protection because eBay was not a mere technical intermediary hosting third-party classified advertisements, but instead acted as a facilitator that participated actively in the sale of products on its platform.

The court therefore applied general French tort law and held that eBay was under the obligation to ensure that its activities do not generate unlawful acts. The court ultimately decided that eBay failed to exercise the proper duty of care with regard to unlawful activities taking place on its platform.

The court determined that the activities of eBay facilitated and increased the selling of counterfeit goods and was wrongful.

Why Should One Bear Such a Burden?

The standard that each court deemed applicable to the case at hand deeply affected the findings and the reasoning applied.

eBay’s Role

The Extent of eBay’s Control

The French court stated that because eBay acts principally as a facilitator, it has knowledge and control over the information transmitted on its Web site. The court further stated that eBay’s users were acting under the control or the authority of eBay.

The district court, on the other hand, appeared more concerned about eBay’s lack of physical control of the goods, noting on several occasions that eBay is never in possession of the goods sold on its Web site, than it was with the extent to which eBay could exert more control over listings. The district court clearly took into account the statement of eBay’s Senior Vice President and Deputy General Counsel, who testified that eBay “reached the end of what is technically feasible to do.” However, the district court also acknowledged that eBay “maintains significant control over the listings on its Web site” noting that “certain categories of items are entirely barred from the Web site.”

The Extent of eBay’s Participation

The district court acknowledged the participation of eBay in sales on the site, noting that eBay “takes an active role in supplying customers – namely, registered buyers – to registered sellers, and actively facilitates transactions between them,” and “has actively promoted the sale of Tiffany jewelry items” by mentioning the term “Tiffany” to eBay sellers as one of the most effective keywords, and even by purchasing sponsored links for this term. The district court also acknowledged that eBay derived profits “from the listing of items and successful completion of sales, through insertion fees and final value fees.” This analysis is similar to the findings of the French court.

However, the district court and the French court do not attribute the same effects to eBay’s role. In the district court decision, eBay’s active role merely justified the application to an online service provider of the above-mentioned contributory infringement standard used inter alia for flea markets, which retain physical control of the goods offered. Because “eBay exercises sufficient control and monitoring over its Web site,” the court concluded that eBay was analogous to a flea market, rather than to a mere online classified ad service. With regard to the other claims, eBay was protected under the nominative fair use doctrine.

For the French court, the extent of eBay’s participation provided nearly all of the justification for the denial of the safe harbor protection.

The Extent of Counterfeiting Activities on eBay

Both French decisions rested heavily upon the non-adversarial findings of the same “well-known” expert for both cases. This expert estimated the total percentage of counterfeit goods available on eBay at 90 percent in both cases, based on a three-month survey. The court dismissed eBay’s challenge of the validity of this expertise and based the amount of damages to be granted solely on the estimates of the expert, which were based on an extrapolation of the actual survey and an increased license fee.

By contrast, the district court proved to be skeptical toward the evidence presented by Tiffany. Tiffany conducted two surveys on eBay, coined “Buying Programs,” which determined respectively that 73.1 and 75.5 percent of the items purchased were counterfeit. The district court dismissed this initiative as flawed, stating among other things that “the Buying Programs provide limited evidence as to the total percentage of counterfeit goods available on eBay at any given time.” While the surveys were being conducted, Tiffany suspended its reporting to eBay of infringements, which caused the court to criticize the results of the services because “the items identified by Tiffany during the Buying Programs would likely have been removed by eBay had they been reported.” The district court also focused on the size of the legitimate secondary market in Tiffany goods, noting the absence of any element to appraise this market, and appeared mindful in its ruling to avoid stifling the sale of authentic Tiffany jewelry.

Conclusion

The Merits of the Decisions

These conflicting decisions demonstrate the challenges faced by judges when applying principles of liability to the economy of new media. The French decisions are predicated on the significant revenues that eBay derives from its activities. By contrast, the U.S. decision focused on the duty of the trademark owner to police its trademarks in electronic commerce.

The U.S. decision rested upon the traditional trademark liability scheme. As acknowledged by the court, “policymakers may yet decide that the law as it stands is inadequate to protect rights owners in light of the increasing scope of Internet commerce and the concomitant rise in potential trademark infringement.” The French decision, on the other hand, contemplated the application of the existing legal framework applicable to electronic commerce, but decided against granting the safe harbor protection to eBay.

Regardless of the result, the U.S. decision deserves credit for clearly establishing the burden of policing counterfeiting activities. The French decisions are difficult to interpret to the extent that they did not address in detail the efforts made by eBay to combat counterfeiting activities on its Web site. The French court did not take into account efforts made by eBay, such as the VeRO program, because the claims were related to prior infringements. On the contrary, the court noted that such measures evidenced prior negligence and eBay’s knowledge of its liability. It is therefore not possible to accurately assess the position of French courts regarding eBay’s current anti-fraud efforts. It also should be noted that the French decisions were rendered by the Paris Commercial court, which is a system of special courts for litigation between merchants composed of lay judges with a simplified procedure. Commercial courts tend to be less sophisticated than the specialized divisions of French civil courts regarding intellectual property matters. Pursuant to a recent reform, commercial courts soon will no longer have a competing jurisdiction over intellectual property matters.

An eBay spokesperson announced that the company will appeal the French decisions, which will be reviewed by the Paris Court of Appeal, i.e., the regular French civil court of second instance. In addition, Tiffany has filed a notice of appeal to the 2nd Circuit.

Recommended Response to Counterfeiting Activities for Rights Holders and Service Providers

Notwithstanding the standard of liability applied, the district court clearly heeded eBay’s anti-fraud efforts. The district court concluded that “it cannot be said that eBay failed to make reasonable inquiries or to take further steps to pursue counterfeiters.” To reach this conclusion, the court took into account various measures implemented such as a delay in displaying certain listings or the prohibition of one-day to three-day auctions to enable rights holders to monitor eBay’s Web site more effectively, the display of warning messages, and the implementation of Tiffany-specific filters, and Tiffany-specific manual searches. Conversely, the district court found that Tiffany invested “relatively modest resources” to combat counterfeiting, noting the existence of service providers or algorithm-based methods to address the issue. The court concluded that Tiffany made no effort to expedite or facilitate the process of policing counterfeiting activities.

Despite stringent applicable standards, both French and U.S. courts were mindful of the efforts and resources engaged by both parties. The issue of counterfeiting activities requires the diligence of every party involved. Consequently, rights holders should use all the tools and features available and dedicate a sufficient amount of resources to combat counterfeit sales. At the same time, service providers should continue to design and improve tools by exploiting emerging technologies in order to streamline their activities and facilitate monitoring by their internal services as well as by rights holders.

As explained by both courts, the issue is not whether counterfeit sales should flourish on eBay. In spite of opposing results, the district court and the French court were sympathetic to all parties affected by counterfeiting activities. Ultimately, the answer may lie in enhanced cooperation between rights holders and service providers.