Auction Web Site Off the Hook

In Tiffany (NJ) Inc. v. eBay, Inc., No. 04 Civ. 4607 (RJS), 2008 U.S. Dist. LEXIS 53359 (S.D.N.Y. July 14, 2008), Judge Richard Sullivan of the U.S. District Court for the Southern District of New York held that eBay is neither directly nor contributorily liable for sales of counterfeit Tiffany silver jewelry on its Web site. This is in stark contrast to recent decisions by European courts finding eBay liable for similar activities. Rolex v. eBay, Inc., April 30, 2008 (German court found eBay must act to prevent recurrent sales of fake Rolex watches); LVMH v. eBay, Inc., June 30, 2008 (French court entered injunction and ordered eBay to pay more than $60 million due to sales of counterfeit goods on eBay) (discussed in article by Brad Stone, “Court Clears eBay in Suit Over Sale of Counterfeit Goods,” N.Y. Times, July 15, 2008). While the court in Tiffany found that eBay exercised enough control for contributory liability, eBay discharged its duty to stop supplying the means for infringement when it addressed specific claims of infringement. The decision thus defines the limits of eBay's responsibility, leaving brand owners like Tiffany to do the rest.

The dispute arose when a robust market for Tiffany jewelry ' most (but not all) of which Tiffany believed was counterfeit ' developed on eBay. For several years Tiffany used eBay's “verified rights owner“ (“VeRO”) program to complain about specific auctions. Tiffany, 2008 U.S. Dist. LEXIS 53359, at *46-47. eBay consistently cancelled those auctions in response to Tiffany's complaints. Tiffany also demanded that eBay stop using the TIFFANY mark in advertisements and ban all lots of five Tiffany jewelry items or more and any sales of Tiffany silver jewelry. eBay took steps regarding the keywords, but refused an outright, advance ban of certain Tiffany auctions. Id. at *39-43. Tiffany brought suit for, inter alia, direct and contributory trademark infringement, false advertising, and dilution. Tiffany, 2008 U.S. Dist. LEXIS 53359, at *6-7.

Direct Infringement

According to Tiffany, eBay directly infringed by using the word “Tiffany” in advertisements on its homepage and in sponsored links. Tiffany, 2008 U.S. Dist. LEXIS 53359, at *84, 93-94. After a bench trial, however, the court held that eBay was within its rights to advertise lawful resales of authentic trademarked goods. “'While a trademark conveys an exclusive right to the use of a mark in commerce in the area reserved, that right generally does not prevent one who trades a branded product from accurately describing it by its brand name, so long as the trader does not create confusion by implying an affiliation with the owner of the product.'” Tiffany, 2008 U.S. Dist. LEXIS 53359, at *85-86 and n.28 (quoting Dow Jones & Co. v. Int'l Sec. Exch., Inc., 451 F.3d 295, 308 (2d Cir. N.Y. 2006) and noting that the nominative fair use doctrine has been implicitly recognized by the Second Circuit). In a detailed analysis of the nominative fair use factors articulated by the Ninth Circuit in New Kids on the Block v. News Am. Publ'g, Inc., 971 F.2d 302 (9th Cir. 1992), the court concluded that eBay's use of the TIFFANY mark was protected because: 1) Tiffany silver jewelry was not readily identifiable without use of the TIFFANY mark; 2) eBay used only so much of the mark as reasonably necessary to identify the jewelry; and 3) eBay did nothing to suggest sponsorship or endorsement by the trademark holder. Tiffany, 2008 U.S. Dist. LEXIS 53359, at *88-92; see also Playboy Enters., Inc. v. Welles, 279 F.3d 796 (9th Cir. 2002) (finding no descriptive substitute for words “Playmate of the Year”); Century 21 Real Estate Corp. v. Lendingtree, Inc., 425 F.3d 211 (3d Cir. 2005).

Contributory Infringement

Tiffany's principal claim, the most prominent one, alleged that eBay was responsible for the third-party sellers' direct trademark infringement as a contributory infringer. The parties and the court all seemed to agree that the Supreme Court's standard for contributory infringement set forth in Inwood Laboratories, Inc. v. Ives Laboratories, Inc., 456 U.S. 844 (1982), applied here. Inwood held that a manufacturer or distributor is contributorily liable if it intentionally induces another to infringe, or continues to supply a product to one whom it knows or has reason to know is infringing.

As a threshold matter, a party charged under the “continues to supply” prong, such as a manufacturer of infringing goods, must exercise sufficient control over the means of infringement. The law evolved to apply these principles to suppliers of a service or venue that enables infringement. For example, in Hard Rock Cafe Licensing Corp. v. Concession Services, Inc., 955 F.2d 1143 (7th Cir. 1992), and Fonovisa, Inc. v. Cherry Auction, Inc., 76 F.3d 259 (9th Cir. 1996), the Seventh and Ninth Circuits both found claims existed for contributory liability against the mere conduit of the
infringing activity where the conduit (a flea market operator in Hard Rock and an operator of a swap meet in Fonovisa) had sufficient control and actual knowledge, or a reason to know of the infringing activity, and in each case did little or nothing to stop it. Judge Sullivan expressly found that eBay exercised sufficient control and monitoring over its Web site to fall “squarely within” this line of cases. Tiffany, 2008 U.S. Dist. LEXIS 53359, at *117. Indeed, it appears that eBay exercised more control than those defendants. eBay created the electronic marketplace for sales of counterfeit goods, supplied customers, i.e., registered buyers, and facilitated transactions. It even recommended that sellers use “Tiffany” as a keyword. eBay directly generated revenue both from listings and completed sales of Tiffany goods, unlike the flea market operator in Hard Rock who merely charged vendors fees that do not relate to their actual sales. Finally, eBay maintained control over both its listings and sellers, reserving the right to cancel auctions and remove vendors of counterfeits.

Nevertheless, the court found that eBay was not liable because it did not continue to supply a venue for illegal trade when it knew or should have known counterfeit goods were being sold. Under Inwood, and even under Hard Rock and Fonovisa, it is not enough that eBay could “reasonably anticipate” sales of counterfeit luxury goods on its Web site. Instead, eBay had to “know or have reason to know” that specific sellers were infringing. Having “generalized knowledge” that counterfeit sales were taking place did not require eBay to suspend all sellers who might be infringing. Id. at *132-33. Tiffany's theories for eBay's actual or constructive knowledge of infringement ' including that silver items or items in lots of five or more were presumptively fake ' were unsubstantiated, especially because the evidence showed that genuine Tiffany goods were sold on eBay in both of those categories. Id. at *128.

Thus, eBay could not be required to ban all sales of Tiffany silver jewelry or all lots of five or more pieces despite being aware generally that counterfeit Tiffany jewelry was being sold on its Web site. Instead, eBay's duty extended only to addressing specific suspected counterfeit goods, which it did by responding to Tiffany's complaints against particular sellers or auctions.

A strong undercurrent in the Tiffany court's decision was the relative efforts made by the parties to prevent sales of counterfeits. Even though eBay did not have a duty to act in response to generalized knowledge of infringement, it made diligent efforts to ferret out infringements on its Web site, devoting personnel and creating a “fraud engine” to identify illegal auctions. In contrast, Tiffany chose to deploy “limited” technology and staff resources on policing. Tiffany did not develop its own technology to police auctions, and devoted the equivalent of less than two full-time employees to monitoring eBay. Id. at *48-51.

Another undercurrent was the Tiffany court's recognition that U.S. jurisprudence does not place the burden of policing trademark infringement on third parties, even though they may play some role in facilitating the infringement. In Hard Rock, the plaintiff argued for the broader copyright standard which permits imposing vicarious liability if the third party has the “right and ability to supervise the infringing activity and also has a direct financial interest in such activities.” 955 F.2d at 1150. In rejecting this approach, the Seventh Circuit noted that the Supreme Court in Sony Corp. of America v. Universal City Studios, Inc. indicated that secondary liability should be more narrowly drawn in trademark cases than in copyright cases. 464 U.S. 417, 439 and n.19 (1984) (citing fundamental differences between copyright and trademark law). Similarly, the Tiffany court would not permit the brand owner to abdicate its responsibility to police its trademarks.

What Tiffany Means for Internet Businesses and Trademark Owners

The contrasting U.S. and European decisions leave Internet auction sites in a somewhat awkward position if they host sales of branded products worldwide. Reports indicate that eBay is appealing the European decisions, and while its chances look promising, the appeals may not be decided for some time. Also, Tiffany has appealed the New York court decision, leaving U.S. law less than clear. So while the U.S. market looks like a safe haven, global Internet auction and reseller sites should be mindful of these rulings and stay tuned for how they can proceed. At a minimum, Tiffany makes clear that Internet auction and similar sites need to have procedures in place to deal with infringement matters and need to be responsive to the specific complaints of trademark holders.

For trademark owners, Tiffany underscores what they already know ' they must police their marks and prosecute infringers if they wish to combat this illegal trade. No assumptions will be made that infringement abounds. This includes identifying suspected infringers and giving specifics to the online business owner. After Tiffany, at least in the United States, trademark owners should work with the “eBays” of the world on creative ways to stop counterfeiting. One option is a registration system for branded products, under which online auction sites could require sellers to provide a registration number to show authenticity. While not foolproof, this would add a layer of protection to online sales that both the brand owner and auction site can easily implement.

Marc A. Lieberstein is a partner in the Intellectual Property Practice Group of Day Pitney LLP. He can be reached at [email protected]. Catherine D. O'Connor is counsel in the Intellectual Property Practice Group of Day Pitney LLP. She can be reached at [email protected].

At one time or another, every trademark holder must deal with infringement on the Internet. After years of chasing individual infringers, many brand owners seek relief from those who provide the means for infringement. Yet these efforts have had limited success, at least in the United States. In some jurisdictions, search engines have avoided liability for sales of trademarks as keywords, under the doctrine of non-trademark use. Compare Merck & Co. v. Mediplan Health Consulting, Inc. , 425 F. Supp. 2d 402, 415 (S.D.N.Y. 2006) (internal use of trademark as keyword in search engine was not a trademark use) and Rescuecom Corp. v. Google, Inc. , 456 F. Supp. 2d 393, 400-01, 403 (N.D.N.Y. 2006) (same; appeal argued April 3, 2008 but no decision reported as of press time) with Hysitron Inc. v. MTS Sys. Corp., 2008 U.S. Dist. LEXIS 58378, *7-8 (D. Minn. Aug. 1, 2008) (use of trademark as keyword was “use in commerce” under the Lanham Act). ISPs and domain name registrars have successfully defended on similar grounds or statutory provisions. See Bird v. Parsons , 289 F.3d 865 (6th Cir. 2002) (domain name registrar did not “use” mark in the trademark sense); Lockheed Martin Corp. v. Network Solutions, Inc. , 141 F. Supp. 2d 648 (N.D. Tex. 2001) (domain name registrar not liable under Anticybersquatting Consumer Protection Act); see generally 15 U.S.C. '1114(2)(A)-(B) (limiting remedies, relating to paid advertisements, against printers, publishers, or distributors of electronic communications for others to injunctive relief, so long as they qualify as “innocent infringers”); 15 U.S.C. '1114(2)(D)(iii) (domain name registrars not liable for damages absent bad faith intent to profit from registration or maintenance of domain name containing trademark). And, in July, Internet auctioneer eBay was found not liable for sales of counterfeit Tiffany jewelry on its Web site, despite generating millions of dollars in revenue from such third-party transactions.

This article reviews the legal principles at issue in Tiffany, including the court's other, less-discussed holding of no direct infringement based on the nominative fair use doctrine, and considers practical implications for those doing business in e-commerce.

The Tiffany Decision

In Tiffany (NJ) Inc. v. eBay, Inc., No. 04 Civ. 4607 (RJS), 2008 U.S. Dist. LEXIS 53359 (S.D.N.Y. July 14, 2008), Judge Richard Sullivan of the U.S. District Court for the Southern District of New York held that eBay is neither directly nor contributorily liable for sales of counterfeit Tiffany silver jewelry on its Web site. This is in stark contrast to recent decisions by European courts finding eBay liable for similar activities. Rolex v. eBay, Inc., April 30, 2008 (German court found eBay must act to prevent recurrent sales of fake Rolex watches); LVMH v. eBay, Inc., June 30, 2008 (French court entered injunction and ordered eBay to pay more than $60 million due to sales of counterfeit goods on eBay) (discussed in article by Brad Stone, “Court Clears eBay in Suit Over Sale of Counterfeit Goods,” N.Y. Times, July 15, 2008). While the court in Tiffany found that eBay exercised enough control for contributory liability, eBay discharged its duty to stop supplying the means for infringement when it addressed specific claims of infringement. The decision thus defines the limits of eBay's responsibility, leaving brand owners like Tiffany to do the rest.

The dispute arose when a robust market for Tiffany jewelry ' most (but not all) of which Tiffany believed was counterfeit ' developed on eBay. For several years Tiffany used eBay's “verified rights owner“ (“VeRO”) program to complain about specific auctions. Tiffany, 2008 U.S. Dist. LEXIS 53359, at *46-47. eBay consistently cancelled those auctions in response to Tiffany's complaints. Tiffany also demanded that eBay stop using the TIFFANY mark in advertisements and ban all lots of five Tiffany jewelry items or more and any sales of Tiffany silver jewelry. eBay took steps regarding the keywords, but refused an outright, advance ban of certain Tiffany auctions. Id. at *39-43. Tiffany brought suit for, inter alia, direct and contributory trademark infringement, false advertising, and dilution. Tiffany, 2008 U.S. Dist. LEXIS 53359, at *6-7.

Direct Infringement

According to Tiffany, eBay directly infringed by using the word “Tiffany” in advertisements on its homepage and in sponsored links. Tiffany, 2008 U.S. Dist. LEXIS 53359, at *84, 93-94. After a bench trial, however, the court held that eBay was within its rights to advertise lawful resales of authentic trademarked goods. “'While a trademark conveys an exclusive right to the use of a mark in commerce in the area reserved, that right generally does not prevent one who trades a branded product from accurately describing it by its brand name, so long as the trader does not create confusion by implying an affiliation with the owner of the product.'” Tiffany, 2008 U.S. Dist. LEXIS 53359, at *85-86 and n.28 (quoting Dow Jones & Co. v. Int ' l Sec. Exch., Inc. , 451 F.3d 295, 308 (2d Cir. N.Y. 2006) and noting that the nominative fair use doctrine has been implicitly recognized by the Second Circuit). In a detailed analysis of the nominative fair use factors articulated by the Ninth Circuit in New Kids on the Block v. News Am. Publ ' g, Inc. , 971 F.2d 302 (9th Cir. 1992), the court concluded that eBay's use of the TIFFANY mark was protected because: 1) Tiffany silver jewelry was not readily identifiable without use of the TIFFANY mark; 2) eBay used only so much of the mark as reasonably necessary to identify the jewelry; and 3) eBay did nothing to suggest sponsorship or endorsement by the trademark holder. Tiffany, 2008 U.S. Dist. LEXIS 53359, at *88-92; see also Playboy Enters., Inc. v. Welles , 279 F.3d 796 (9th Cir. 2002) (finding no descriptive substitute for words “Playmate of the Year”); Century 21 Real Estate Corp. v. Lendingtree, Inc. , 425 F.3d 211 (3d Cir. 2005).

Contributory Infringement

Tiffany's principal claim, the most prominent one, alleged that eBay was responsible for the third-party sellers' direct trademark infringement as a contributory infringer. The parties and the court all seemed to agree that the Supreme Court's standard for contributory infringement set forth in Inwood Laboratories, Inc. v. Ives Laboratories, Inc. , 456 U.S. 844 (1982), applied here. Inwood held that a manufacturer or distributor is contributorily liable if it intentionally induces another to infringe, or continues to supply a product to one whom it knows or has reason to know is infringing.

As a threshold matter, a party charged under the “continues to supply” prong, such as a manufacturer of infringing goods, must exercise sufficient control over the means of infringement. The law evolved to apply these principles to suppliers of a service or venue that enables infringement. For example, in Hard Rock Cafe Licensing Corp. v. Concession Services, Inc. , 955 F.2d 1143 (7th Cir. 1992), and Fonovisa, Inc. v. Cherry Auction, Inc. , 76 F.3d 259 (9th Cir. 1996), the Seventh and Ninth Circuits both found claims existed for contributory liability against the mere conduit of the
infringing activity where the conduit (a flea market operator in Hard Rock and an operator of a swap meet in Fonovisa) had sufficient control and actual knowledge, or a reason to know of the infringing activity, and in each case did little or nothing to stop it. Judge Sullivan expressly found that eBay exercised sufficient control and monitoring over its Web site to fall “squarely within” this line of cases. Tiffany, 2008 U.S. Dist. LEXIS 53359, at *117. Indeed, it appears that eBay exercised more control than those defendants. eBay created the electronic marketplace for sales of counterfeit goods, supplied customers, i.e., registered buyers, and facilitated transactions. It even recommended that sellers use “Tiffany” as a keyword. eBay directly generated revenue both from listings and completed sales of Tiffany goods, unlike the flea market operator in Hard Rock who merely charged vendors fees that do not relate to their actual sales. Finally, eBay maintained control over both its listings and sellers, reserving the right to cancel auctions and remove vendors of counterfeits.

Nevertheless, the court found that eBay was not liable because it did not continue to supply a venue for illegal trade when it knew or should have known counterfeit goods were being sold. Under Inwood, and even under Hard Rock and Fonovisa, it is not enough that eBay could “reasonably anticipate” sales of counterfeit luxury goods on its Web site. Instead, eBay had to “know or have reason to know” that specific sellers were infringing. Having “generalized knowledge” that counterfeit sales were taking place did not require eBay to suspend all sellers who might be infringing. Id. at *132-33. Tiffany's theories for eBay's actual or constructive knowledge of infringement ' including that silver items or items in lots of five or more were presumptively fake ' were unsubstantiated, especially because the evidence showed that genuine Tiffany goods were sold on eBay in both of those categories. Id. at *128.

Thus, eBay could not be required to ban all sales of Tiffany silver jewelry or all lots of five or more pieces despite being aware generally that counterfeit Tiffany jewelry was being sold on its Web site. Instead, eBay's duty extended only to addressing specific suspected counterfeit goods, which it did by responding to Tiffany's complaints against particular sellers or auctions.

A strong undercurrent in the Tiffany court's decision was the relative efforts made by the parties to prevent sales of counterfeits. Even though eBay did not have a duty to act in response to generalized knowledge of infringement, it made diligent efforts to ferret out infringements on its Web site, devoting personnel and creating a “fraud engine” to identify illegal auctions. In contrast, Tiffany chose to deploy “limited” technology and staff resources on policing. Tiffany did not develop its own technology to police auctions, and devoted the equivalent of less than two full-time employees to monitoring eBay. Id. at *48-51.

Another undercurrent was the Tiffany court's recognition that U.S. jurisprudence does not place the burden of policing trademark infringement on third parties, even though they may play some role in facilitating the infringement. In Hard Rock, the plaintiff argued for the broader copyright standard which permits imposing vicarious liability if the third party has the “right and ability to supervise the infringing activity and also has a direct financial interest in such activities.” 955 F.2d at 1150. In rejecting this approach, the Seventh Circuit noted that the Supreme Court in Sony Corp. of America v. Universal City Studios, Inc. indicated that secondary liability should be more narrowly drawn in trademark cases than in copyright cases. 464 U.S. 417, 439 and n.19 (1984) (citing fundamental differences between copyright and trademark law). Similarly, the Tiffany court would not permit the brand owner to abdicate its responsibility to police its trademarks.

What Tiffany Means for Internet Businesses and Trademark Owners

The contrasting U.S. and European decisions leave Internet auction sites in a somewhat awkward position if they host sales of branded products worldwide. Reports indicate that eBay is appealing the European decisions, and while its chances look promising, the appeals may not be decided for some time. Also, Tiffany has appealed the New York court decision, leaving U.S. law less than clear. So while the U.S. market looks like a safe haven, global Internet auction and reseller sites should be mindful of these rulings and stay tuned for how they can proceed. At a minimum, Tiffany makes clear that Internet auction and similar sites need to have procedures in place to deal with infringement matters and need to be responsive to the specific complaints of trademark holders.

For trademark owners, Tiffany underscores what they already know ' they must police their marks and prosecute infringers if they wish to combat this illegal trade. No assumptions will be made that infringement abounds. This includes identifying suspected infringers and giving specifics to the online business owner. After Tiffany, at least in the United States, trademark owners should work with the “eBays” of the world on creative ways to stop counterfeiting. One option is a registration system for branded products, under which online auction sites could require sellers to provide a registration number to show authenticity. While not foolproof, this would add a layer of protection to online sales that both the brand owner and auction site can easily implement.

Marc A. Lieberstein is a partner in the Intellectual Property Practice Group of Day Pitney LLP. He can be reached at [email protected]. Catherine D. O'Connor is counsel in the Intellectual Property Practice Group of Day Pitney LLP. She can be reached at [email protected].