By Jeff Pietsch
The lawsuit Tiffany & Co. brought against Ebay in 2004 for contributory trademark infringement is currently being heard in the U.S. District Court in Manhattan. The outcome of this trial, though likely to continue on appeal, will greatly affect internet auction websites. A victory by Tiffany will not only spawn hundreds of additional lawsuits against Ebay, it will cost the internet auctioneer millions of dollars in policing costs.
Since its inception in 1995, Ebay has seen unprecedented growth. In the first quarter of 2007, Ebay had 588 million new listings. Ebay claims to sell about $2,000 in goods every second. Their gross merchandise volume for all the goods sold on their website was over $52 billions dollars in the first quarter this year. Despite this success, some retailers are not so enthusiastic. These retailers, including Tiffany argue that Ebay does not appropriately police its website to prevent counterfeiters. Based on this claim, Tiffany sued Ebay claiming that Ebay aided violations of the jeweler’s trademarks by allowing counterfeit items to be sold on its website. Tiffany claims that 95% of all the items sold under the Tiffany trademark are fakes. Tiffany’s complaint argues that Ebay is contributing to this trademark infringement by knowingly facilitating the sales between its users. Ebay, on the other hand, has argued that it has created numerous protocols to prevent fraudulent sales of trademarked goods.
In 1982, the US Supreme Court discussed what type of activity or conduct would create liability under contributory trademark infringement. The Court in Inwood Laboratories v. Ives Laboratories stated that liability for trademark infringement can extend beyond those who actually mislabel goods with the mark of another. Even if a manufacturer does not directly control others in the chain of distribution, it can be held responsible for their infringing activities under certain circumstances. The key test in the Ives case was if the manufacturer suggested, even if by implication, that they use their goods to infringe, then the manufacturer was liable for trademark infringement.
In the 1990’s two cases used the Ives test to specifically hold owners of a flea market liable for trademark infringement for counterfeit goods sold at their flea market. Because Ebay is, in essence, an online flea market, the court will likely look to these decisions for guidance in deciding the present case. In both of these cases, a landlord operated a flea market where sellers sold counterfeit goods. In Hard Rock Café Licensing Corp. v. Concession Services, the Seventh Circuit held that “willful blindness” is sufficient for liability under contributory infringement. In Fonovisa v. Cherry Auction, the Ninth Circuit held that landlords of flea markets who do more than merely rent space, and effectively supplies all aspects necessary for a marketplace, can be liable if it knows of infringing activity on the premises. In addition, the landlord who knowingly fails to prevent such action will also be liable. Ebay argues that it has met these standards.
Since the beginning of this lawsuit, Ebay has argued that it is aware of the risks of users selling counterfeit goods. Trying to meet the standards set forth in the above cases, Ebay has established programs to prevent trademark infringement. One of these programs is the VeRO program. VeRO stands for Verified Rights Owner where owners of intellectual property can notify Ebay of suspicious items for sale. Ebay claims that it is very responsive to inquiries through this program and immediately removes any items that are suspicious. From 2003 to 2006, Tiffany sent Ebay 284,000 notices of infringement to Ebay.
Tiffany, however, claims that Ebay’s system is ineffective. They charge Ebay with the responsibility of policing its sites, especially after they have been put on notice that such rampant counterfeiting is taking place. Tiffany claims that Ebay’s methods are ineffective partially because Ebay is profiting off each item sold on Ebay, regardless if the goods are counterfeit or not. Tiffany has argued that as long as Ebay reasonably anticipates the sale of an infringing product, they should be held liable. This standard was mentioned in dicta in the Ives case, and Tiffany would like this stricter standard applied to Ebay.
The outcome of this case will have major implications for Ebay as well as trademark owners whose goods are sold through Ebay. If Ebay is held liable, they will have to systematically change there verification process for goods sold and actively police its site. This would cost Ebay millions to police such activity. The real threat, however, may come from the additional lawsuits that will be filed from trademark owners claiming trademark infringement.