Proving Contributory Online Trademark Infringement

This article discusses contributory trademark infringement in general and recent actions by trademark owners against online service providers for contributory liability for the sales of counterfeit goods.

Contributory Infringement

Contributory trademark infringement is a judicially created doctrine that derives from the common law of torts. There are two ways in which a party may commit contributory infringement: First, if a provider “intentionally induces another to infringe a trademark,” and the second, more commonly plead theory, if a provider “continues to supply its [product or service] to one whom it knows or has reason to know is engaging in trademark infringement.” Inwood Labs. Inc. v. Ives Labs. Inc., 456 U.S. 844 (1982) (http://bit.ly/vZGtiM). On its face, the Inwood test applies to manufacturers and distributors of goods. However, courts have extended the test to service providers that exercise sufficient control over the means of the infringing conduct. Indeed, several circuit courts have determined that a plaintiff must establish that the service provider have “direct control and monitoring of the instrumentality used by a third party to infringe.”

Notice and Takedown

Ultimately, the contours of contributory trademark liability are fashioned by the courts. The Digital Millennium Copyright Act (DMCA) (http://1.usa.gov/ulUOz) safe harbors protect qualifying websites and online service providers from copyright liability, and essentially seek to offer strong incentives for service providers and copyright owners to cooperate and deal with online copyright infringement. While there is no similar statutory counterpart under trademark law, in recent years, trademark holders and online providers have borrowed the principles from the DMCA safe harbors in creating a de facto notice and takedown regime to combat the online sale of counterfeit or unauthorized goods. While not mandated by statute, recent court decisions have underscored the importance for online providers of instituting a program for responding to trademark-related takedown notices.

One of the most notable decisions that affirmed this idea was Tiffany (NJ) Inc. v. eBay Inc., 600 F.3d 93 (2nd Cir. 2010) (http://bit.ly/xYgUp7), in which an appeals court upheld the judgment in favor of the defendant on the plaintiff's trademark and dilution claims. In that case, the district court found, after a bench trial, that eBay had generalized knowledge that some portion of the Tiffany goods sold on its website might be counterfeit, but that such knowledge was insufficient to impose a duty upon eBay to remedy the problem. As such, the court found that eBay was not liable for contributory trademark infringement.

The court specifically held that eBay was not willfully blind, nor did it ignore the information it was given about counterfeit sales on its website. Rather, eBay spent millions of dollars to identify and remove counterfeit listings and consistently developed and improved its anti-fraud measures. The court rejected the plaintiff's argument that generalized notice that a percentage of the plaintiff's goods being sold on the defendant's site were counterfeit required the site to pre-emptively remedy the problem. See also, Sellify Inc. v. Amazon.com Inc., 2010 WL 4455830 (S.D.N.Y. Nov. 4, 2010) (contributory trademark infringement claims dismissed because there was no evidence that Amazon.com had particularized knowledge of, or direct control over, its affiliate's disparaging, keyword-triggered ads, and when Amazon gained knowledge of the ads, it acted promptly to disable the affiliate's account).

Liability for Service Providers

Websites selling counterfeit or knockoff goods can be elusive since they are often located abroad, can quickly reappear under a different domain name following a cease-and-desist letter or adverse judgment, and have no appreciable assets for a plaintiff to recover. As such, aggrieved trademark holders have begun to allege contributory infringement claims against various online providers that materially contribute to an online retailer's ability to make a profit from counterfeit goods. These parties enable U.S. consumers to access the infringing website, purchase content and products, and view advertisements; without the services provided by these entities, the financial incentive to run an infringing website is greatly diminished. In the past year, at least two notable online trademark disputes went to trial, with juries finding in favor of the trademark owner.

In Louis Vuitton Malletier SA v. Akanoc Solutions Inc., 658 F.3d 936 (9th Cir. 2011) (http://bit.ly/xu0c0W), the Ninth U.S. Circuit Court of Appeals affirmed a jury verdict of contributory trademark infringement against a Web host that ignored multiple takedown notices and knowingly enabled infringing conduct by leasing packages of server space, bandwidth and IP addresses to foreign-based websites that sold the plaintiff's knockoff goods. To prevail, the plaintiff had to establish that the defendant continued to supply its services to one who it knew or had reason to know was engaging in trademark infringement and that the defendant had direct control and monitoring over the “means of infringement.” The court rejected the defendant's argument that the servers and Internet services provided were not the “means of infringement,” rather that the websites themselves were the sole means of infringement. Instead, the appeals court stated that even though they exist in cyberspace, “websites are not ethereal” and would not exist without physical roots in servers and Internet services and that defendants had direct control over the “master switch” that kept the websites online.

In another dispute, a golf equipment company brought suit against, among others, the Web hosting company that participated in the design and support of the websites selling knockoff golf gear. While the defendant Web host denied any knowledge that its clients were selling counterfeit golf clubs, the plaintiff countered that beyond offering hosting services, the defendant provided extra coaching and counseling advice to the site operators on search engine optimization, website development, and locating preferred vendors, and otherwise should have known about the nature of the site given its domain name, www.copy catclubs.com, and its slogan as the “one stop shop for the best COPIED and ORIGINAL golf equipment on the [I]nternet.” At trial, a jury found the Web host liable for willful secondary trademark infringement and awarded the plaintiff over $770,000 in damages. See, Roger Cleveland Golf Co. Inc. v. Prince, No. 09-02119 (D. S.C. Judgment entered March 14, 2011).

Another dispute involving trademark holders was resolved after the threat that a contributory infringement claim might proceed to trial. In Gucci America Inc. v. Frontline Processing Corp., 721 F. Supp. 2d 228 (S.D.N.Y. 2010) (http://bit.ly/Ak5AKM), the court found that a national retailer could proceed with contributory infringement claims against various credit card processors based upon allegations that the providers exerted sufficient control over the infringing transactions and knowingly provided its services to an Internet merchant that sold “replica” products. The court denied the defendants' motion to dismiss, concluding that the defendants facilitated the replica website's ability to efficiently transact sales for counterfeit products by enabling customers to use personal credit cards to pay for purchases.

The court found that the plaintiff made substantial allegations that the defendants knew that the replica site traded in counterfeit products, or were willfully blind to that fact, including: one defendant charged a higher transaction fee for processing credit cards for high-risk replica goods merchants; and another helped the counterfeit goods website set up a system to avoid chargebacks, requiring customers to check a box that said “I understand these are replicas” and otherwise assisted in refund requests from customers that necessitated an investigation of products sold.

Notably, the Gucci court distinguished the case from Perfect 10 Inc. v. Visa International Service Assn., 494 F.3d 788 (9th Cir. 2007) (http://bit.ly/yY4K0l), where the Ninth Circuit declined to hold a credit card processor liable for contributory trademark and copyright infringement for the unauthorized reproduction and display of Perfect 10's images by certain websites and users. The court pointed out that in the Perfect 10 dispute, the plaintiff failed to allege that the credit card service provider had the “power to remove infringing material” because the infringement occurred on the third-party websites and a credit card transaction was not needed for the websites to continue posting infringing photographs. In the Gucci case, however, the court stated that the plaintiff's allegations were concerned primarily with the sale of tangible counterfeit goods to customers, which allegedly could not be accomplished without the defendants' ability to process the credit card-based purchases.

Beyond payment processors and website design and management providers, at least one court has considered the secondary liability (in the copyright context) of an online advertising network company that placed third-party advertisements on an allegedly infringing website and shared the proceeds with the website owner. In Elsevier Ltd. v. Chitika Inc., 2011 WL 6008975 (D. Mass. Dec. 2, 2011), the court found that an online advertising provider that was not familiar with the content of an allegedly infringing free download site and had not received any notice of infringing activity from the plaintiff was not liable for contributory copyright infringement. The court also noted, in dicta, that the defendant did not “materially contribute to the infringement” merely because the shared advertising revenue made it easier for the website owner's infringement to be profitable.

'Rogue Website' Legislation

Recent court decisions have given trademark holders some ammunition in seeking recovery for infringement against responsible service providers. Regardless, rights holders maintain that they still possess a limited number of effective remedies to fight online purveyors of infringing goods, particularly legal tools that would hamper websites located abroad from continuing to sell infringing goods on the Internet.

Congress had legislation in the works in the form of the Stop Online Piracy Act (SOPA) (H.R. 3261) and the Protect IP Act (S. 968), that would give the Department of Justice and content owners an expedited process for cracking down on U.S.-directed foreign rogue websites that traffic in pirated or counterfeit goods or digital entertainment. However, tech industry and public outcry caused those Acts to be shelved (see, “SOPA and PIPA Put on Hold,” in this issue). Some form of legislation will likely be passed to stem online infringement from rogue online retailers, but with SOPA and Protect IP off the table, it is unclear what form it will take and when it may arrive.

The ubiquity of the Web on computers, mobile phones and tablets offers businesses the opportunity to connect with consumers throughout the world in ways they never could before. Unfortunately, along with the success of legitimate online commerce, the distribution and sale of counterfeit products through professional-looking websites has also increased dramatically, particularly in the clothing, consumer electronics, pharmaceutical and footwear industries.

While estimates of the harm differ greatly among analysts, the sale of counterfeit and knockoff goods has been reported to cost American creators and producers billions of dollars per year. Online infringement harms many facets of the economy: Trademark owners suffer lost sales and lost brand value; consumers receive inauthentic products, or, at worst, dangerous goods; and federal and state governments lose tax revenues and incur law enforcement costs. In many cases, consumers are not fully aware of the nature of a transaction, since such virtual stores have legitimate-sounding domain names, often accept payment through major credit card companies, and run online advertisements from trusted providers ' all portraying the appearance of legitimacy.

As part of the task of policing their marks, many trademark owners maintain a close watch on counterfeit goods on the Internet and take an aggressive stance against unauthorized uses and sales, including bringing suit against sellers of knockoff goods. However, many so-called rogue Web sellers are located abroad and rely solely on digital means to communicate, making it especially difficult to locate and permanently shut them down. As a result, trademark owners have begun to seek recovery from a number of third-party online entities, including Internet service providers, payment processors and online ad network providers, all of whom may play some role (knowingly or unknowingly) in enabling consumers to access an infringing website, purchase content and products, and view advertisements.

This article discusses contributory trademark infringement in general and recent actions by trademark owners against online service providers for contributory liability for the sales of counterfeit goods.

Contributory Infringement

Contributory trademark infringement is a judicially created doctrine that derives from the common law of torts. There are two ways in which a party may commit contributory infringement: First, if a provider “intentionally induces another to infringe a trademark,” and the second, more commonly plead theory, if a provider “continues to supply its [product or service] to one whom it knows or has reason to know is engaging in trademark infringement.” Inwood Labs. Inc. v. Ives Labs. Inc. , 456 U.S. 844 (1982) ( http://bit.ly/vZGtiM ). On its face, the Inwood test applies to manufacturers and distributors of goods. However, courts have extended the test to service providers that exercise sufficient control over the means of the infringing conduct. Indeed, several circuit courts have determined that a plaintiff must establish that the service provider have “direct control and monitoring of the instrumentality used by a third party to infringe.”

Notice and Takedown

Ultimately, the contours of contributory trademark liability are fashioned by the courts. The Digital Millennium Copyright Act (DMCA) (http://1.usa.gov/ulUOz) safe harbors protect qualifying websites and online service providers from copyright liability, and essentially seek to offer strong incentives for service providers and copyright owners to cooperate and deal with online copyright infringement. While there is no similar statutory counterpart under trademark law, in recent years, trademark holders and online providers have borrowed the principles from the DMCA safe harbors in creating a de facto notice and takedown regime to combat the online sale of counterfeit or unauthorized goods. While not mandated by statute, recent court decisions have underscored the importance for online providers of instituting a program for responding to trademark-related takedown notices.

One of the most notable decisions that affirmed this idea was Tiffany (NJ) Inc. v. eBay Inc., 600 F.3d 93 (2nd Cir. 2010) (http://bit.ly/xYgUp7), in which an appeals court upheld the judgment in favor of the defendant on the plaintiff's trademark and dilution claims. In that case, the district court found, after a bench trial, that eBay had generalized knowledge that some portion of the Tiffany goods sold on its website might be counterfeit, but that such knowledge was insufficient to impose a duty upon eBay to remedy the problem. As such, the court found that eBay was not liable for contributory trademark infringement.

The court specifically held that eBay was not willfully blind, nor did it ignore the information it was given about counterfeit sales on its website. Rather, eBay spent millions of dollars to identify and remove counterfeit listings and consistently developed and improved its anti-fraud measures. The court rejected the plaintiff's argument that generalized notice that a percentage of the plaintiff's goods being sold on the defendant's site were counterfeit required the site to pre-emptively remedy the problem. See also, Sellify Inc. v. Amazon.com Inc., 2010 WL 4455830 (S.D.N.Y. Nov. 4, 2010) (contributory trademark infringement claims dismissed because there was no evidence that Amazon.com had particularized knowledge of, or direct control over, its affiliate's disparaging, keyword-triggered ads, and when Amazon gained knowledge of the ads, it acted promptly to disable the affiliate's account).

Liability for Service Providers

Websites selling counterfeit or knockoff goods can be elusive since they are often located abroad, can quickly reappear under a different domain name following a cease-and-desist letter or adverse judgment, and have no appreciable assets for a plaintiff to recover. As such, aggrieved trademark holders have begun to allege contributory infringement claims against various online providers that materially contribute to an online retailer's ability to make a profit from counterfeit goods. These parties enable U.S. consumers to access the infringing website, purchase content and products, and view advertisements; without the services provided by these entities, the financial incentive to run an infringing website is greatly diminished. In the past year, at least two notable online trademark disputes went to trial, with juries finding in favor of the trademark owner.

In Louis Vuitton Malletier SA v. Akanoc Solutions Inc. , 658 F.3d 936 (9th Cir. 2011) ( http://bit.ly/xu0c0W ), the Ninth U.S. Circuit Court of Appeals affirmed a jury verdict of contributory trademark infringement against a Web host that ignored multiple takedown notices and knowingly enabled infringing conduct by leasing packages of server space, bandwidth and IP addresses to foreign-based websites that sold the plaintiff's knockoff goods. To prevail, the plaintiff had to establish that the defendant continued to supply its services to one who it knew or had reason to know was engaging in trademark infringement and that the defendant had direct control and monitoring over the “means of infringement.” The court rejected the defendant's argument that the servers and Internet services provided were not the “means of infringement,” rather that the websites themselves were the sole means of infringement. Instead, the appeals court stated that even though they exist in cyberspace, “websites are not ethereal” and would not exist without physical roots in servers and Internet services and that defendants had direct control over the “master switch” that kept the websites online.

In another dispute, a golf equipment company brought suit against, among others, the Web hosting company that participated in the design and support of the websites selling knockoff golf gear. While the defendant Web host denied any knowledge that its clients were selling counterfeit golf clubs, the plaintiff countered that beyond offering hosting services, the defendant provided extra coaching and counseling advice to the site operators on search engine optimization, website development, and locating preferred vendors, and otherwise should have known about the nature of the site given its domain name, www.copy catclubs.com, and its slogan as the “one stop shop for the best COPIED and ORIGINAL golf equipment on the [I]nternet.” At trial, a jury found the Web host liable for willful secondary trademark infringement and awarded the plaintiff over $770,000 in damages. See, Roger Cleveland Golf Co. Inc. v. Prince, No. 09-02119 (D. S.C. Judgment entered March 14, 2011).

Another dispute involving trademark holders was resolved after the threat that a contributory infringement claim might proceed to trial. In Gucci America Inc. v. Frontline Processing Corp. , 721 F. Supp. 2d 228 (S.D.N.Y. 2010) ( http://bit.ly/Ak5AKM ), the court found that a national retailer could proceed with contributory infringement claims against various credit card processors based upon allegations that the providers exerted sufficient control over the infringing transactions and knowingly provided its services to an Internet merchant that sold “replica” products. The court denied the defendants' motion to dismiss, concluding that the defendants facilitated the replica website's ability to efficiently transact sales for counterfeit products by enabling customers to use personal credit cards to pay for purchases.

The court found that the plaintiff made substantial allegations that the defendants knew that the replica site traded in counterfeit products, or were willfully blind to that fact, including: one defendant charged a higher transaction fee for processing credit cards for high-risk replica goods merchants; and another helped the counterfeit goods website set up a system to avoid chargebacks, requiring customers to check a box that said “I understand these are replicas” and otherwise assisted in refund requests from customers that necessitated an investigation of products sold.

Notably, the Gucci court distinguished the case from Perfect 10 Inc. v. Visa International Service Assn. , 494 F.3d 788 (9th Cir. 2007) ( http://bit.ly/yY4K0l ), where the Ninth Circuit declined to hold a credit card processor liable for contributory trademark and copyright infringement for the unauthorized reproduction and display of Perfect 10's images by certain websites and users. The court pointed out that in the Perfect 10 dispute, the plaintiff failed to allege that the credit card service provider had the “power to remove infringing material” because the infringement occurred on the third-party websites and a credit card transaction was not needed for the websites to continue posting infringing photographs. In the Gucci case, however, the court stated that the plaintiff's allegations were concerned primarily with the sale of tangible counterfeit goods to customers, which allegedly could not be accomplished without the defendants' ability to process the credit card-based purchases.

Beyond payment processors and website design and management providers, at least one court has considered the secondary liability (in the copyright context) of an online advertising network company that placed third-party advertisements on an allegedly infringing website and shared the proceeds with the website owner. In Elsevier Ltd. v. Chitika Inc., 2011 WL 6008975 (D. Mass. Dec. 2, 2011), the court found that an online advertising provider that was not familiar with the content of an allegedly infringing free download site and had not received any notice of infringing activity from the plaintiff was not liable for contributory copyright infringement. The court also noted, in dicta, that the defendant did not “materially contribute to the infringement” merely because the shared advertising revenue made it easier for the website owner's infringement to be profitable.

'Rogue Website' Legislation

Recent court decisions have given trademark holders some ammunition in seeking recovery for infringement against responsible service providers. Regardless, rights holders maintain that they still possess a limited number of effective remedies to fight online purveyors of infringing goods, particularly legal tools that would hamper websites located abroad from continuing to sell infringing goods on the Internet.

Congress had legislation in the works in the form of the Stop Online Piracy Act (SOPA) (H.R. 3261) and the Protect IP Act (S. 968), that would give the Department of Justice and content owners an expedited process for cracking down on U.S.-directed foreign rogue websites that traffic in pirated or counterfeit goods or digital entertainment. However, tech industry and public outcry caused those Acts to be shelved (see, “SOPA and PIPA Put on Hold,” in this issue). Some form of legislation will likely be passed to stem online infringement from rogue online retailers, but with SOPA and Protect IP off the table, it is unclear what form it will take and when it may arrive.