May/June 2010
IP Litigator
Authored by Naresh Kilaru and Mark Sommers
On April 1, 2010, the U.S. Court of Appeals for the Second Circuit handed down a much-anticipated decision affirming the district court's ruling that eBay is not liable for contributory trademark infringement for the sale of counterfeit Tiffany products on eBay's Web site. The decision is the first by a U.S. Circuit Court of Appeals to squarely address contributory trademark infringement in the online marketplace. Although the Second Circuit remanded the case with respect to Tiffany's false advertising claim, the decision represents a significant victory for eBay and other online marketplace sites.
In 2008, the U.S. District Court for the Southern District of New York ruled in favor of eBay after a weeklong bench trial, holding that eBay was not liable for contributory trademark infringement despite its general knowledge that counterfeit Tiffany products were being sold on its site. The district court held that under the Supreme Court's decision in Inwood Laboratories, Inc. v. Ives Laboratories, Inc., [456 U.S. 844 (1982)] the operator of an online marketplace can be held liable for contributory trademark infringement only if it has specific knowledge of particular infringing acts and allows that infringing activity to continue. Because the district court found that eBay promptly removed every infringing listing of which it had specific notice (and cancelled any fees it earned from such listings), the court concluded eBay's existing anti-counterfeiting measures were adequate to avoid contributory liability.
The Second Circuit largely agreed with the district court's analysis of the contributory trademark infringement claim. Under Inwood, the test was whether eBay continued to allow sellers of counterfeit Tiffany products to operate on its site despite "knowing or having reason to know" they were offering counterfeit products. On appeal, Tiffany argued that eBay clearly knew that counterfeit Tiffany goods were being sold ubiquitously on its site. Indeed, the district court had found that "a significant portion" of the Tiffany sterling silver jewelry listed on eBay was counterfeit, and that eBay knew that "some portion" of the Tiffany goods sold on its Web site might be counterfeit. Nonetheless, the Second Circuit agreed with the district court that such generalized knowledge was insufficient to provide a basis for contributory liability. To be liable for contributory trademark infringement, the proprietor of an online marketplace must have "more than a general knowledge" that its service is being used to sell counterfeit goods. Knowledge of specific instances of infringement is necessary.
As a policy matter, Tiffany argued that holding eBay liable only when specific instances of infringement are brought to its attention would effectively require retailers to police eBay (and other online marketplace sites) "24 hours a day, 365 days a year"—a burden most trademark owners would not be able to afford. In the Court's opinion, however, private market forces provide "a strong incentive" for online marketplace sites to minimize sales of counterfeit products so as to not alienate users. The Court added that to the extent owners of online marketplace sites have reason to suspect that counterfeit products are being sold on their sites and intentionally shield themselves from discovering such activity, such inaction would amount to willful blindness and could give rise to contributory liability. The Court noted that willful blindness is tantamount to actual knowledge under the Lanham Act.
In addition to contributory trademark infringement, Tiffany alleged that various eBay advertisements marketing the availability of Tiffany products on eBay's site constituted false advertising, because eBay knew a significant proportion of the Tiffany products offered for sale on its site were not genuine. The record showed that eBay advertised the availability of Tiffany products at low prices on its site to drive demand for its jewelry & watches category. For instance, one hyperlink on eBay's site read "Tiffany & Co. under $50." eBay also purchased sponsored link advertisements on various search engines. For instance, the evidence showed that a search for "tiffany" on the Yahoo! search engine produced a sponsored link that read "Tiffany on eBay. Find tiffany items at low prices."
The Second Circuit held that such advertisements could constitute false advertising to the extent (1) they implied the genuineness of all Tiffany goods on eBay's site, and (2) consumers were likely to be misled by such advertisements. An advertisement is unlawful, noted the Court, when it implies that all of the goods advertised for sale are genuine when in fact, as here, "a sizeable proportion of them are not."
In considering Tiffany's false advertising claim, the Court looked to whether Tiffany had put forward any empirical evidence showing that consumers were likely to be misled by eBay's advertisements. Because the district court's opinion did not reflect whether Tiffany had submitted such evidence, the Court remanded Tiffany's false advertising claim for further consideration based on the record evidence.
In its defense, eBay argued that prohibiting such advertisements would create a deterrent effect against online advertisers because they would be required to confirm the authenticity of each product they advertise for sale. The Court rejected this argument, noting that a simple disclaimer might be sufficient to avoid liability.
The Second Circuit's decision represents a significant victory for eBay and other online marketplace Web sites. It appears that so long as such Web sites have reasonable anti-counterfeiting measures in place and take action with regard to specific instances of infringement brought to their attention, courts will not hold such sites liable for contributory trademark infringement.
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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