September/October 2011
IP Litigator
Authored by Naresh Kilaru and Mark Sommers
In July, Europe's highest court, the European Court of Justice (ECJ), issued a blow to eBay with an opinion indicating that online marketplaces such as eBay may potentially be liable for counterfeit goods sold on their Web sites. Cosmetics company L'Oreal SA brought an action against eBay after L'Oreal found counterfeit goods, free samples of genuine product, and various "gray market" goods for sale on the global auction site. The ECJ ruled: (1) certain products, such as free samples and products outside their original packaging may be considered infringing goods when sold commercially; and (2) an operator of an online marketplace may be liable for infringing sales, if prior information suggested that a sale was unlawful and the operator failed to act promptly in removing the items or blocking the sale. The ruling could have far-reaching implications for eBay and similar online marketplaces as brand owners seek to hold both individual merchants and online marketplaces liable for selling counterfeit and gray market goods online. For eBay, this setback comes after several favorable rulings on similar liability issues in both the United States and Belgium.
In May 2007, L'Oreal sent a letter to eBay concerning the sale of unauthorized L'Oreal cosmetic goods on eBay's UK Web site. Although eBay's Verified Rights Owner (VeRO) program offered rights owners a procedure for objecting to infringing sales, L'Oreal did not participate in the program on the ground it put too much of the enforcement burden on rights owners rather than eBay. Not satisfied with eBay's response to its demand letter, L'Oreal sued eBay in the England & Wales High Court and the courts of other Member States. In the High Court action, L'Oreal alleged that eBay and the individual eBay merchants were liable for selling seventeen items that infringed L'Oreal's trademark rights. Of those seventeen items, two were counterfeit products, while the rest were genuine samples distributed to authorized dealers, products sold out of their original packaging, or gray market goods (i.e., products intended for sale in North America rather than in the European Economic Area (EEA)).
L'Oreal either settled with or obtained default judgments against all of the individual sellers, but continued the action against eBay. Although eBay acknowledged that two of the products at issue were counterfeit, it argued L'Oreal could not prevent the resale of the samples, unboxed products, and gray market goods because L'Oreal had put them "on the market" in the EEA (a term of art under European Community regulations comparable to the first sale doctrine in the United States). eBay also asserted that it should not be held liable for the infringing sales under Article 14(1) of Directive 2000/31, which exempts intermediate service providers from liability unless the provider had knowledge of an infringing sale and did not take action to remove it. eBay argued that the filters it used to find counterfeit goods, along with its VeRO program, were adequate to remove infringing sales from its website. Additionally, eBay had a practice of suspending or permanently removing sellers reported for selling infringing goods. The High Court acknowledged these filters and anti-counterfeiting measures, but stated that eBay could do more by providing additional filters and ban users from selling goods originating outside of the EEA. The High Court, faced with several questions of first impression, referred the case to the ECJ to clarify how several EU Directives and Regulations applied to online marketplaces in these circumstances.
The ECJ started by addressing the exclusive rights held by trademark owners in various gray market products. Given that EEA consumers are generally able to purchase gray market products through the Internet, eBay argued that L'Oreal should not be able to prevent the sale of such products on its Website. The ECJ rejected this argument on the ground that merely offering products for sale online does not destroy a trademark owner's exclusive right to control the distribution of its product in various markets.
As to the product samples, the ECJ held that when such samples are clearly marked as "not for resale," they have not been put "on the market" under EU law and a trademark owner can stop their unauthorized resale. On the other hand, if samples are not clearly marked, they should be treated like any other product and can be resold by third parties. As to the unboxed products, the ECJ held that a trademark owner can stop their unauthorized resale if the box contains necessary identifying information or the sale of the unboxed product would otherwise cause harm to the mark.
Accordingly, the ECJ held that L'Oreal could potentially prevent the resale of all 17 items at issue. In addition to its other guidelines, the Court ruled that for L'Oreal to prevail, it had to show that the sale of the infringing goods amounted to "commercial activity." In other words, individual users selling a small volume of items privately are not to be held liable.
As to whether eBay qualified for the Article 14(1) exemption providing a safe harbor for neutral intermediate service providers, the Court recognized that while an online marketplace could function as an intermediate service provider, a distinction must be drawn between online marketplace operators that simply set up a passive application for buyers and sellers to use and online marketplace operators that actively engage in the process. The ECJ pointed specifically to the act of "optimizing the presentation of the offers for the sale in question or promoting those offers" as examples of an operator playing an active role. When an online marketplace operator plays an active role, it obtains either knowledge or control over the infringing sale and cannot claim exemption under Article 14(1).
Finally, the ECJ held that an intermediate service provider cannot claim exemption from liability if it was "aware" of the infringing activity and did not act to stop it. A provider is "aware" of the infringing activity if it finds an infringing sale through its own research or through notification from a third party. However, the Court emphasized that notification alone may not be sufficient to trigger liability, since notifications sometimes lack specificity or fail to provide proper proof of an actual infringing sale. The ECJ held that national courts should consider these notifications in the totality of the circumstances.
The ECJ opinion provides a broad framework for the courts of Member States to determine the liability of online marketplaces for infringing sales on their Web sites. Assuming a national court finds that eBay does not qualify for the Article 14(1) exemption, rights owners can potentially hold eBay liable not only for sales of counterfeit goods, but for sales of product samples, unboxed products, and gray market goods. The High Court will now consider the facts of the case in light of the ECJ opinion and issue a long-awaited decision on the merits.
Reprinted with permission from the IP Litigator, published by Aspen Law and Business. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm's clients.
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