The United States Court of Appeals for the Second Circuit issued an opinion on April 1, 2010 that provides a compass for companies like eBay to navigate the murky waters of trademark infringement in the e-commerce marketplace. Tiffany & Co. v. eBay Inc., No. 08- 3947 (2d Cir. April 1, 2010)
eBay has repeatedly made headlines for strategic growth, changing the online sales landscape since its inception in 1995. Through combinations with PayPal, Skype and others, eBay has dominated a variety of online industries. In 2009, eBay had approximately 100 million listings, and goods sold every second on the website equaled about $2,000. Some of these goods include both authentic and counterfeit Tiffany jewelry and merchandise. eBay’s rampant success made eBay an international household name, but it also makes eBay a target for intellectual property lawsuits brought by manufacturers, like Tiffany, when counterfeits of their merchandise are sold on eBay.
Tiffany first brought suit against eBay in the District Court for the Southern District of New York, alleging direct and contributory trademark infringement, false advertising and trademark dilution. In 2008, the District Court held for eBay on all counts, placing the burden to police the individual infringers on Tiffany rather than placing the burden on the platform where the infringers sell their counterfeit goods. Tiffany appealed the District Court’s decision and has lost again on the major issues in the Court of Appeals’ recent decision.
The Court of Appeals, affirming two thirds of the claims decided in the District Court, issued an opinion holding that eBay did not infringe, either directly or by contribution, on Tiffany’s trademark rights even though at least some counterfeit Tiffany items were sold through the eBay website. Finding no direct infringement because eBay does not produce a competing “product,” the Court of Appeals looked to the Inwood Test (Inwood Lab., Inc. v. Ives Lab., 456 U.S. 844, 1982) for contributory trademark infringement. Although the Inwood Test applies primarily to merchants and producers of goods, providers of services are also subject to the Inwood Test if they directly “monitor and control” the instrumentality of infringement. See e.g., Hard Rock Café Licensing Corp. v. Concession Servs., Inc., 955 F.2d 1143 (7th Cir. 1992); Fonovisa, Inc. v. Cherry Auction, Inc., 76 F.3d 259 (9th Cir. 1996).
To prove contributory liability for trademark infringement, the defendant (i) must have actual or constructive knowledge of the alleged infringement and (ii) continue to provide services to the infringer despite such knowledge or reason to know of the infringing conduct. The Court of Appeals required a showing that a service provider have more than “a general knowledge or reason to know that its service is being used to sell counterfeit goods” to satisfy the first prong of the Inwood Test. In fact, the Court of Appeals required “some contemporary knowledge of which particular listings are infringing or will infringe in the future” and a subsequent failure to act on such knowledge constituting “willful blindness” to satisfy both elements of contributory trademark infringement.
In reaching its decision, the Court of Appeals emphasized eBay’s internal controls and formal procedures for detecting and eradicating fraud as well as the subsequent actions that eBay takes when counterfeit sales are suspected or discovered on the website. Specifically, the court noted that eBay claims to spend up to $20 million per year to detect and eradicate fraud and devotes an entire department of employees to fraud prevention. eBay has also enlisted trademark owners, including Tiffany, to assist in various efforts to detect and notify eBay of suspected counterfeiters.
When eBay detects or is alerted to signs of counterfeit goods on its site, eBay responds swiftly within 24 hours and suspends or takes down the suspect auction page. This is followed by a formal investigation and permanent page or seller cancellation in the event that actual fraud is detected. In some instances, eBay will refund a purchaser’s money if a counterfeit item was purchased on eBay. The Court of Appeals also recognized the internal incentive for eBay to minimize the counterfeit items sold on its website to maintain the confidence of eBay customers in the authenticity of the goods they are purchasing. As such, the Court of Appeals was satisfied that eBay did not have the specific knowledge of infringement required by the Inwood Test and that eBay’s efforts to fight fraud did not constitute willful ignorance. Tiffany believes the opinion allows eBay to profit from counterfeit sales of Tiffany merchandise and may consider an appeal to the U.S. Supreme Court.