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Vol. 25 No. 8 — September 2008

However, any grieving that eBay executives did over that decision must have been short-lived when they found out in mid-July that they prevailed in a much-anticipated case brought by Tiffany & Co. before the U.S. District Court in the Southern District of New York on the same issue. That court held that eBay is not liable for trademark infringement. Why? Although eBay knew about substantial amounts of counterfeit products on its site, it did not know or have reason to know which specific listings or sellers were responsible for those counterfeits until Tiffany alerted them of the problem. As a result, eBay promptly removed the listings.

The Court Considers Steps Taken by eBay

Judge Richard Sullivan seemed impressed by the steps eBay took and the resources it spent to address the counterfeiting problems it acknowledged it had on its site. Sullivan lauded eBay for implementing the following measures:

• Verified Rights Owner (VeRO) program, which allows rights owners to use a Notice of Claim of Infringement (NOCI) to inform eBay of infringing listings and request that the listings be taken down

• Fraud engine, which eBay uses to search its site for blatant infringement by searching for such terms as “counterfeit” or “pirated” in the listing (as the head of the antipiracy department for the Software & Information Industry Association, it would make my job much easier if pirates included these terms)

• About Me pages, which let rights owners inform eBay users about their products, including ways to identify potentially infringing products

• The judge also commended eBay for taking steps to address the availability of Tiffany’s counterfeit jewelry on its site, including the following instances:

• When a seller attempted to sell a Tiffany item, eBay used special warning messages instructing the seller to make sure that the item was authentic, informing the seller of eBay’s anticounterfeiting policies, and providing a link to the Tiffany About Me page.

• eBay delayed the ability of buyers to view listings that used the Tiffany name for 6 to 12 hours so that eBay’s Customer Service Representatives (CSR) could first review them.

• eBay prohibited 1- and 3-day auctions of Tiffany items.

• eBay prohibited cross-border trading of Tiffany items so that only sellers located within the U.S. could sell Tiffany items on eBay’s U.S. site.

But the judge was most impressed with the VeRO program, highlighting the fact that “[s]eventy to 80 percent of the reported listings were removed within 12 hours” and reiterating several times how promptly and effectively eBay removes infringing listings after it is notified by the rights owner.

The judge also concluded that “eBay took appropriate steps to warn and then suspend sellers when eBay learned of potential trademark infringement under that seller’s account.” He also agreed with eBay’s decision not to “automatically or permanently suspend a seller after the filing of a first, or even a second, NOCI” under the VeRO program. He saw that “although a NOCI represents a good-faith belief that a listing was infringing, a NOCI did not constitute a definitive finding that the listed item was counterfeit.” As support, he noted that occasionally listings were reinstated that Tiffany requested be taken down.

He also argued that “suspension was a very serious matter, particularly to those sellers who relied on eBay for their livelihoods,” and it may be inappropriate “for those sellers who might have been innocent infringers, might have believed that the merchandise posted on their listings was authentic, or might have believed that posting counterfeit Tiffany items was not illegal.”

Questionable Reasoning

This reasoning is questionable. First, if a person is liable for copyright or trademark infringement, the person doesn’t need to know or understand what they are doing is wrong. Quite simply, innocent infringement is not a defense to infringement. A person should not be able to avoid suspension simply by saying “Gee, I didn’t know I did anything wrong.”

If sellers actually do not know that selling counterfeit items is illegal or against eBay’s policies, then eBay needs to do a better job of alerting them. (Weren’t the special warning messages that pop up when a seller attempts to sell Tiffany items intended to put these sellers on notice that they could get suspended?) And with all the recent publicity and education surrounding counterfeiting and piracy, is it possible to think it’s OK to sell pirated or counterfeited products?

And if so many people earn their livelihoods on eBay, then they should be dealing with trustworthy suppliers and taking responsibility for the goods they are selling. As with any brick-and-mortar business, they should ensure they are only selling legitimate products. But none of the reasons that eBay or the judge provided justify not suspending a seller. If a seller is caught selling infringing goods, he or she should be suspended. Anything less lets eBay continue to supply its services to facilitate infringement and should result in potential liability for eBay.

The judge also found that “approximately 33% of eBay North America’s income was derived from listing fees and approximately 45% from final value fees” and that “eBay also profits from fees charged by PayPal, an eBay company, to process the transaction.” In other words, eBay makes a significant amount of its money from merely posting an auction listing, regardless of whether the listing is consummated in a sale. But eBay does refund these listing fees if a listing is removed by eBay. So in theory, eBay doesn’t make any money from infringing listings.

But the theory doesn’t square with reality. There are so many listings on eBay and so many of them contain counterfeit and pirated products that it is not possible for a rightsholder to monitor them all 24/7. Even if such monitoring were possible, even the best monitoring may never snare infringements offered through “Buy-It-Now,” which can be posted and completed virtually instantaneously, well before a rightsholder can review the listing.

Assuming a rightsholder could review and get 50% of the infringing auctions on eBay removed, eBay still collects fees on the remaining 50%. So eBay makes a profit from infringing listings unless the rights owner is able to catch 100% of the infringing listings and get eBay to take them down. It’s actually in eBay’s economic interest to facilitate a system that is so populated with pirated and counterfeit products that no rights owner could keep up.

If eBay reduced the amount of pirated and counterfeit products listed on its site through proactive, preemptive means, eBay would make less money. It’s simply not in eBay’s interest to take such steps. Instead, eBay does the bare minimum by removing only the listings that rightsholders tell them are infringing or those that are blatantly infringing.

The Court Considers Steps Taken by Tiffany

As seemingly impressed as the judge was with the steps taken by eBay to
address piracy and counterfeiting, he was equally unimpressed with the steps taken by Tiffany and the money it spent to address its counterfeiting problem on eBay. The judge concluded “Tiffany invested relatively modest resources to combat the problem.”

Although Tiffany spent more than $14 million over a 5-year period to fight its eBay counterfeiting problem, the following holds true:

• Of the 14,000 rights owners who report infringements to eBay, Tiffany was consistently “among the top ten reporters”
  of counterfeiting to eBay.

• Tiffany pursued more than 600 enforcement actions against individual eBay sellers.

• Tiffany reported $250,000-plus worth of infringing auctions over a 4-year period.

When analyzing the resources and money that Tiffany spent, the judge only looked at the amount spent to combat counterfeiting on eBay instead of the amount Tiffany spent combating counterfeiting generally. But when analyzing the amount that eBay spent to address its counterfeiting and piracy problem, the judge looked at the entire amount eBay spent and did not consider how much eBay actually spent to address Tiffany’s counterfeiting problem. In essence, the judge compared apples to oranges.

A true comparison to determine whether eBay really is spending massive amounts addressing the Tiffany infringement problem on its site is to determine how much eBay spent per rightsholder affected by infringements on its site. The testimony showed that at least 14,000 rights owners participate in eBay’s VeRO program and that eBay spent “as much as $20 million a year on tools to promote trust and safety.” Assuming that 75% of the $20 million was spent on tools to address infringements (such as the VeRO program) as opposed to other “trust” or “safety” issues, then eBay spent roughly $1,000 per rights owner to prevent infringement of that rights owner’s products on eBay.

After addressing Tiffany’s failure to devote the necessary resources to the problem, the judge then quickly disposed of Tiffany’s survey showing that “73% of the sterling silver Tiffany merchandise on eBay was counterfeit, and that only 5% was genuine.” The judge said the survey was flawed because the search terms that identify auction listings for the survey included “‘sterling’ Tiffany, rather than ‘silver’ Tiffany that is at issue in this litigation” and because “Tiffany suspended its routine VeRO reporting efforts” when conducting the survey, among other things.

The judge also failed to explain why these two factors skewed the survey results in Tiffany’s favor. If Tiffany actually continued to send VeRO takedown requests, wouldn’t that have had the inverse effect of skewing the survey results in eBay’s favor by removing suspected infringing auctions from the sample size? He concluded that “a significant portion of ‘Tiffany’ sterling silver jewelry listed on the eBay website … was counterfeit” and that “eBay generated substantial revenue from the sale of ‘Tiffany’ silver jewelry on its website.”

The Court’s Legal Analysis of eBay’s Potential Liability

So does the fact that there is a significant amount of counterfeited product on eBay’s site and that eBay is making a substantial amount of money from it make eBay liable for trademark infringement?

According to the judge, it does not; he reached this conclusion by first finding that 1) Tiffany, not eBay, is responsible for policing infringements on the site; 2) under existing case law, “Tiffany’s generalized assertions of trademark infringement are insufficient to establish that eBay knew or had reason to know of the infringement at issue”; and 3) to the extent eBay knew about any specific infringement of Tiffany’s jewelry, it promptly removed the infringements from its site.

Ultimately, the issue in this case came down to application of the standard set forth by the Supreme Court in Inwood Laboratories v. Ives Laboratories, in which the court stated that a manufacturer or distributor is contributorily liable for a trademark infringement if “it continues to supply its product to one whom it knows or has reason to know is engaging in trademark infringement.” Tiffany proposed an alternative test under the Restatement (Third) of Unfair Competition, which uses a “reasonable anticipation” standard in lieu of Inwood’s “reason to know” standard, but that standard was rejected by Judge Sullivan on the basis that the “reasonable anticipation” was rejected by the Supreme Court in Inwood.

Providing a Service, Not a Product

eBay argued that although the Inwood standard was the correct one, it cannot be contributorily liable because the Inwood standard only makes those who supply products contributorily liable, and eBay provides a service, not a product. However, the court disagreed, holding that the Inwood standard extends beyond products to include services such as eBay.

The court concluded that the “relevant inquiry” is not whether the defendant is offering a product or service, but rather “the extent of control exercised by the defendant over the third party’s means of infringement.” The judge then found that although “eBay had limited control over the listings and advertisements on its website, and that individual sellers have a great deal of latitude in describing the products that are for sale … eBay retains significant control over the transactions conducted through eBay.” Accordingly, the judge concluded that the Inwood “reason to know” standard was correct to apply in this case.

In applying the Inwood “reason to know” standard, the judge acknowledged that “eBay had generalized notice that some portion of the Tiffany goods sold on its website might be counterfeit.” Tiffany argued that this generalized knowledge satisfied the “reason to know” standard and required eBay to take preemptive steps to remedy the problem. The judge disagreed, saying that “[g]iven the presence of authentic goods on eBay, it therefore cannot be said that generalized knowledge of counterfeiting is sufficient to impute knowledge to eBay of any specific acts of actual infringement.”

This rationale is troubling. In essence, the court is saying that all a service such as eBay needs to do is offer one or two legitimate products, establishing “the presence of authentic goods,” and it can avoid liability for what is otherwise rampant counterfeiting on the site. The judge apparently never attempts to draw a line to determine at what point there exist so many infringements on the site that the site operator’s generalized knowledge should amount to “reason to know.”

After dismissing eBay’s generalized knowledge as insufficient, the judge then addressed Tiffany’s claims that eBay was “willfully blind” to the infringement and should have taken additional steps to further investigate and understand the counterfeiting on its website. Proving willful blindness is another way for a rights owner to prove that the defendant had a “reason to know” of the infringements. The judge dismissed Tiffany’s arguments, explaining that “willful blindness requires more than mere ‘negligence or mistake’ and does not lie unless the defendant knew of a high probability of illegal conduct and purposely contrived to avoid learning of it, for example, by failing to inquire further out of fear of the result of the inquiry.” The court stated further that “[w]ere Tiffany to prevail in its argument that eBay was willfully blind, the ‘reason to know’ standard would be inflated into an affirmative duty to take precautions against potential counterfeiters, even when eBay had no specific knowledge of the individual counterfeiters.”

Where to Draw the Line?

Once again, the judge seemed to miss an opportunity to draw a line to determine when a certain level of generalized knowledge is so high as to meet the “reason to know” standard. Clearly, eBay “knew of a high probability of illegal conduct.” After all, why would it spend millions of dollars to remove infringing listings if it didn’t think or wasn’t aware of the problem.

Lastly, the judge considered whether eBay “continued to supply” its services to those who it knew or had reason to know were infringers. Tiffany showed that 1) many sellers whose accounts had been suspended by eBay based on a NOCI sent by Tiffany were able to continue to use eBay under different eBay seller IDs; and 2) many sellers were able to repost listings for counterfeit product after the original listing had been taken down by virtue of Tiffany’s NOCI. The judge did not find this to be an act of continuing to provide service to known infringers; he reasoned that the thousands of NOCIs that Tiffany sent to eBay does not provide evidence of actual infringements but rather of suspected infringement. This results in eBay having no knowledge of an infringement when it receives a NOCI and not thereby meeting the “continue to supply” requirement.

Let’s consider the willful blindness issue. Recall that the judge stated that willful blindness is proven if eBay “knew of a high probability of illegal conduct and purposely contrived to avoid learning of it.” If eBay receives a NOCI from a rights owner, even if that NOCI is only evidence of suspected infringement (and not actual infringement), the NOCI at least provides eBay with knowledge that there is “a high probability of illegal conduct” taking place on the site.

However, instead of conducting an investigation to learn more about what is taking place, eBay simply removes the listing. Although I am not suggesting that eBay keep the listing, I am suggesting that eBay should have conducted a follow-up investigation to learn more.

The judge seems to say that the only way eBay can have knowledge of infringements on its site with any degree of certainty is if Tiffany were to purchase the item off eBay and verify that it was in fact infringement. That seems like a high standard that is beyond the “reason to know” standard and one that eBay is likely to benefit from legally and economically.

I don’t disagree with the notion that rights owners may need to purchase items to verify that the item is in fact infringing. But to require this in all cases or even in most cases seems to be overkill. On one hand, eBay and the judge say that eBay lacks the expertise to determine when an item is infringing and that only the rights owner has the necessary expertise to make that determination. On the other, when the rights owner makes that determination and sends eBay a NOCI (which requires the rights owner to have a good faith belief that the items are infringing and to swear under penalty of perjury to that assessment), for some reason that same level of expertise is no longer sufficient to put eBay on notice. The court has placed the rights owner in a no-win situation.

So the district court concluded that “the law is clear; it is the trademark owner’s burden to police its mark, and companies such as eBay cannot be held liable for trademark infringement based solely on their generalized knowledge that trademark infringement might be occurring on their website.”

Implications on Trademark and Copyright Owners

While this case may have some bearing on any copyright infringement case brought by a copyright owner against eBay, the standards applied are likely to be different. Unlike trademark law, the copyright statute actually addresses this issue to some degree under the Digital Millennium Copyright Act (DMCA). The DMCA establishes explicit standards for ISPs to eliminate their potential liability for contributory and vicarious copyright liability that are quite different from the Inwood “reason to know” standard. The DMCA states that an ISP (such as eBay) may not be liable if it did not have “actual knowledge” of the infringing activity and was “not aware of facts or circumstances from which infringing activity is apparent.”

While the DMCA establishes standards for determining when an ISP cannot be liable for the infringements of its users, numerous cases exist on the books where the courts have affirmatively defined when a party can be held contributorily or vicariously liable for copyright infringements engaged in by another party. And recently, many courts have applied these standards in copyright infringement cases to determine the liability of online marketplaces, for instance cases such as A&M Records, Inc. v. Napster, Inc. and MGM v. Grokster. I mention them and the DMCA only to point out that if eBay were to face a similar suit in the context of copyright infringement claims, it’s likely the result (and certain that the analysis) would be significantly different.

This is certainly not the last word. Tiffany already announced its intention to appeal the case to the Second Circuit court. This is a big issue for rightsholders and online marketplaces such as eBay. And it’s not likely to go away anytime soon.