In what it described as the first case to consider the application of the law of contributory trademark infringement to an online marketplace, the U.S. Court of Appeals for the Second Circuit has upheld the ruling of the U.S. District Court for the Southern District of New York that eBay did not engage in trademark infringement or trademark dilution based on the posting of counterfeit Tiffany goods on its website by third party sellers. The decision effectively endorsed the self-policing measures adopted by eBay as a legal defense against allegations of both direct and contributory trademark infringement even when the owners of the accused website have constructive knowledge of infringing behavior by third parties taking place on the website.
Tiffany (NJ) Inc. and Tiffany & Co. ("Tiffany") brought this action against eBay after conducting a study that suggested that as much as 75.5% of the items alleged to be Tiffany goods that were purchased on eBay were counterfeit. Although the district court questioned the veracity of Tiffany's study, the court nonetheless acknowledged that a "significant portion" of the purported Tiffany items listed on eBay were counterfeit. That notwithstanding, the district court found that eBay had taken sufficient measures to mitigate the sale of counterfeit goods on its website, including among other measures a "notice-and-takedown" system called the "Verified Rights Owner Program" ("VeRO"). Under VeRO, an owner of intellectual property rights with a good-faith belief that an eBay listing infringed a copyright or trademark could report the item to eBay, which would then remove the listing and, under certain circumstances, also reimburse the buyer of the item for the cost of the item if the buyer presented evidence that the purchased item was counterfeit.
First addressing direct trademark infringement, the Second Circuit agreed with the district court that any use of the Tiffany mark in advertising by eBay was lawful insofar as eBay used the mark to accurately describe the sale of authentic Tiffany goods on its website. Any supposed knowledge that eBay had of counterfeit sales on its website would not support a claim of direct trademark infringement and, regardless, the Second Circuit noted, eBay took prompt action to remove any counterfeit items known to eBay specifically.
On the related question of contributory trademark infringement, the Second Circuit first determined that the Supreme Court ruling in Inwood Laboratories, Inc. v. Ives Laboratories, Inc., 456 U.S. 844 (1982), applied to online service providers such as eBay who "exercise[] sufficient control over the means of the infringing conduct." Under Inwood, a service provider may be liable for the infringing conduct of another if either (1) the service provider intentionally induces another to infringe a trademark or (2) the service provider continues to supply its services to one whom it knows or has reason to know is engaging in trademark infringement. Tiffany argued the latter: that eBay had sufficient general knowledge of trademark infringement by third parties and thereby committed contributory infringement by failing to remove the listing of all counterfeit Tiffany goods. The Second Circuit upheld the district court in rejecting this argument.
Noting that eBay took prompt action to remove any counterfeit posting brought to its attention, the Second Circuit held that "generalized knowledge" of trademark infringement on its website "is insufficient under the Inwood test to impose upon eBay an affirmative duty to remedy the problem." Thus, in the absence of "some contemporary knowledge of which particular listings are infringing or will infringe in the future," an online service provider will not be liable for contributory trademark infringement based solely on "a general knowledge or reason to know that its service is being used" to infringe a trademark. (The Second Circuit did concede that if eBay had "intentionally shielded itself from discovering the offending listings or the identity of the sellers behind them," such "general knowledge" of suspected counterfeit sales might suffice to trigger liability under Inwood. However, the district court had found that eBay was not guilty of "willful blindness" to the infringement, and the court of appeals found no clear error in this finding.)
Turning to the question of trademark dilution, the Second Circuit again agreed with the district court that, because eBay did not itself sell Tiffany products but only used the Tiffany mark to advertise and identify the availability of authentic Tiffany merchandise on its website, eBay did not directly engage in the dilution of the Tiffany brand. Tiffany did not appeal a separate claim for contributory trademark dilution.
On the separate allegation of false advertising, the Second Circuit remanded the case to the district court. Although the district court had rejected Tiffany's claim on the basis that eBay lacked sufficient knowledge of counterfeit activity on its website, the Second Circuit responded that a claim of "false advertising" turns not on whether the defendant had knowledge of the falsity of the advertisement but rather whether extrinsic evidence indicates that the challenged advertisement is misleading or confusing to consumers. Because eBay advertisements at least implied that all Tiffany goods sold on its website were genuine when the facts showed that this was not the case, the court ruled that further inquiry was necessary to determine whether a statistically significant part of eBay's commercial audience held a false belief in the authenticity of the goods.
