Who Has the Burden to Police for Counterfeit Merchandise?

(IPRinfo 3/2008)

Michael Landau
Professor of Law and Director of the Intellectual Property, Media, and Technology Program
Georgia State University College of Law

On July 14, 2008, the United States District Court for the Southern District of New York came down with its much awaited opinion in Tiffany (NJ) Inc. v. eBay Inc.

The court held that “Trademark law does not impose liability for contributory trademark infringement for its refusal to take preemptive steps in light of its ‘reasonable anticipation’ or generalized knowledge that counterfeit goods might be sold on its website.”

While the doctrine is fairly sound in light of other contributory infringement decisions, the simple fact remains that the number of infringing Tiffany items goes far beyond a ‘reasonable expectation’ and crosses over to specific knowledge of infringement. The opinion is in sharp distinction to the decision from the Commercial Court of Paris on June 30, 2008, in which eBay was held liable.

Let us look at the facts of the Tiffany case.

Tiffany’s actions for a high status
Tiffany has a 170-year history in which its marks have achieved a high status. To phrase it another way, Tiffany is a “famous mark.” Tiffany restricts the primary sale of its merchandise in several ways. Tiffany has inspectors to insure that the silver jewelry satisfies its standards of quality, composition, shape, etc.

Tiffany has a “no more than five of an item” policy for its sterling silver jewelry to prevent reselling the merchandise. Unlike other luxury items, Tiffany only sells through its authorized stores, its website, or its catalogue. It does not offer its products for sale at discount outlets. Therefore, any items found being sold as “new” at any place other then a Tiffany store, or its related website or catalogue would be counterfeit.

Over 70 % were counterfeit
Tiffany originally pursued over 600 enforcement actions including seizure actions, working with international and domestic law enforcement actions, and contacting individual eBay sellers demanding that they cease and desist from selling counterfeit Tiffany items.

By 2003, the number of counterfeits became so high, that Tiffany decided to address eBay directly. Tiffany sent notice to eBay that there were no authorized third party vendors, and that it should be apparent to eBay that it was selling counterfeit merchandise.

During 2004, Tiffany purchased a sample of 186 items, and found that 73.1% were counterfeit, and only 5 % were genuine Tiffany goods. The 21.9 % remaining were potentially actionable, but it was not determined that they were counterfeit. Nonetheless, the vast majority of goods sold were counterfeit. In the spring of 2005, Tiffany purchased 139 items, 75.5% of them were counterfeit. Buyers also notified Tiffany, and eBay, that the goods they had purchased were counterfeit.

Beginning in 2003, Tiffany had a paralegal devote two days a week to reviewing the eBay website and to responding to e-mails from buyers and sellers involving counterfeiting. A security manager also devoted one day per week to monitoring and reporting on the eBay website.

Beginning in 2006, Tiffany dedicated one full-time employee to monitoring the eBay website, and reported violations on a daily basis. On any given day, a search for the terms “Tiffany” and “silver” would return more than 1 000 results. With the limited resources devoted to monitoring, searching for every counterfeit item was impossible. Many counterfeit items could be sold before Tiffany could catch them. Also, items that were sold through the “Buy It Now” program eluded Tiffany.

Notwithstanding the fact that Tiffany could not track all of the fake merchandise, Tiffany reported 20 915 listings in 2003; 45 242 listings in 2004; 59 012 listings in 2005; 134 779 listings in 2006; and in 2007 before trial 24 201 listings. All told, Tiffany notified eBay of 284 149 listings. There represented only the ones that Tiffany caught. Many others escaped recognition.

eBay’s money comes from the sales
As an initial matter, the court noted that unlike the usual contributory infringer, eBay never took control and possession of the goods. It was merely the facilitator of sales between someone who lists a product and someone who purchases it. This analysis would be acceptable, but for the fact that eBay makes a lot of money from its transactions.

In fact, eBay, unlike other Internet businesses, makes most of its money from the sales, not from the advertisements. With respect to revenue earned, eBay earned approximately 33 % of its North American revenue from listing fees (the fees just to place the notice that you are selling something). Approximately 45 % of its revenue was made from final value fees (the fees that were payable on a completed sale).

In addition, eBay owns PayPal, and generates an additional 1.5 – 3 % from all sales that are completed through PayPal. In the period between April 2000 and August 2005, there were 456 551 “Tiffany” items in the Jewelry & Watches. eBay made an astounding $4.1 million dollars between April 2000 and June 2004 from the sale of “Tiffany” branded merchandise. Of that, the majority was based upon sales of counterfeit merchandise.

eBay operated on a “Notice and Takedown” system
eBay did take some action to rectify the problem, but not enough. Through its Notice of Claimed Infringement (“NOCI”) and its Verified Rights Owner (“VeRO”) eBay would remove a substantial number of allegedly counterfeit listings.

eBay operated on a “Notice and Takedown” system. They waited for the aggrieved trademark owner to notify them, and then acted. eBay, in the aggregate, removed thousands of counterfeit items per week. It also paid “tens of millions of dollars” to its buyer protection program and a “number of counterfeit claims [were] paid every year that certainly contribute[d] to a significant part of that expense.” Those numbers are in the aggregate. The court did not give a figure devoted to “Tiffany” merchandise alone.

eBay had developed filtering software, and kept improving it as time went on. They searched for such terms as “counterfeit”, “replica”, etc., but they did not search for “Tiffany” because that search would catch both the counterfeit and the genuine article. eBay tried to get Tiffany to get more advanced software and have more people devote time to policing the site.

eBay a competitor of Tiffany for value pricing
eBay and its associates also engaged in a number of behaviors that promoted the “Tiffany” marks. eBay identified “Tiffany & Co.” one of the top searched keywords that provided and provided it to top sellers. eBay also advised clients to take advantage of the broad demand for “Tiffany” as part of an effort to grow the Jewelry and Watches category.

“Tiffany & Co.” was among the recommended keywords because it was used often. eBay also had a “Holiday Hot List” to spark consumer demand, and the mark was on that list. In fact, eBay considered itself to be a principle competitor of Tiffany for the value pricing of Tiffany merchandise.

In addition to actively advertising Tiffany merchandise on its website, eBay purchased “sponsored advertisements” from Google and Yahoo. After the lawsuit was filed, eBay ceased purchasing the keyword advertisements, but its affiliates continued to do so.

eBay’s contention that it is not a classified advertisement
The holding is interesting in many facets. eBay had argued that it was more like classified advertisements than like a flea market.

The court was faced with distinguishing Fonovisa, Inc. v. Cherry Auction (complaint reinstated and case remanded to trial court because landlord had knowledge that counterfeit sales were going on), Polo Ralph Lauren Corp. v. Chinatown Gift Shop (sustaining contributory liability for landlords who allowed trademark infringers to use their property), and Habeeba’s Dance of the Arts, Ltd. v. Knoblauch (liability for one who allowed counterfeits to be sold from a facility it rented) from the case at bar.

The court rejected eBay’s contention that it was like a classified advertisement and was therefore immune. So far, so good. But then, the court took a turn. It did not deal with the landlord/tenant contributory infringement cases that found liability.

A “generalized knowledge” not enough
It held that a “generalized knowledge” is insufficient to find liability. “One is liable when it continues to supply its product to one whom it knows or has reason to know is engaging in trademark infringement.”

The court continued, “trademark plaintiffs bear a high burden of establishing ‘knowledge’ of contributory infringement.” The judge held that eBay had only a “generalized knowledge” and not any specific knowledge of infringement. The district court followed the Supreme Court’s decision in Inwood Laboratories, Inc. v. Ives Laboratories, Inc.

Inwood is inapplicable because Inwood dealt with entirely different facts. It dealt with pharmacists who accidentally mislabeled generic drugs with the trademarked name. It did not deal with a company that continually makes money from the sale of counterfeit merchandise. It certainly does not deal with selling 3/4 of merchandise under a brand name that is counterfeit.

Regarding the holding that eBay used “Tiffany” on its website, the use was protected by “nominative fair use” because some of the merchandise was genuine. Regarding the holding that its affiliates used keywords and sponsored advertisements with “Tiffany” in them, the uses were protected by “nominative fair use” because some of the merchandise was genuine. To the extent that the advertising was false, it was not the fault of eBay, it was the responsibility of the third parties that placed the ads.

Door open for mass counterfeiting
Central holding is that trademark law does not impose liability for contributory trademark infringement for refusal to take preemptive steps in light of a ‘reasonable anticipation’ or generalized knowledge that counterfeit goods might be sold on its website, absent specific knowledge of infringement.

What does it take for knowledge of specific infringement instead of generalized knowledge? 95 % counterfeit merchandise? All counterfeit merchandise?

In most cases of counterfeiting, some amount of the merchandise will be genuine, and some will be counterfeit. Think of ROLEX watches or COACH leatherwear or HERMES bags and purses. The Tiffany v. eBay opinion leaves the door open for mass counterfeiting and places the burden for stopping it on trademark owners. It encourages “willful blindness.”

That might be a correct decision for a website that hosts sales of 2 % or 5 % counterfeit merchandise with the rest being genuine, but it certainly is not right when at least 75 % of the merchandise is counterfeit. Employing a cost/benefit analysis, when the majority of the goods are counterfeit, they should at first be filtered out, and then the burden should be on the seller of the goods. The burden should not be on the trademark owner.

The court held that there were two important interests to balance. 1) The reputation of the “Tiffany” mark for being a purveyor of luxury goods and 2) the reputation of eBay as being a safe place to do business. The court evidently upheld the latter over the former. You decide!

Tiffany (NJ) Inc. v. eBay Inc., 2008 WL 2755787, No. 04 Civ. 4607(RJS) (S.D.N.Y. 2008)
Fonovisa, Inc. v. Cherry Auction, 76 F.3d 259 (9th Cir. 1996)
Polo Ralph Lauren Corp. v. Chinatown Gift Shop, 855 F. Supp. 648 (S.D.N.Y. 1994)
Habeeba’s Dance of the Arts, Ltd. v. Knoblauch, 430 F. Supp.2d 709 (S.D.Ohio 2006)
Inwood Laboratories, Inc. v. Ives Laboratories, Inc, 546 U.S. 844 (1982)