July 1, 2008

EBay Gets Buffeted in Europe

Doing business may get a lot harder for eBay (EBAY). A Parisian court has ordered the e-commerce giant to pay $61 million to luxury goods manufacturer LVMH (LVMH.PA), the firm behind the Louis Vuitton and Christian Dior brands, for failing to prevent the sale of counterfeit goods on eBay's French site. The decision, handed down June 30, is the third in the past two years from a European court rejecting eBay's argument that it shouldn't be held responsible for users selling illegal knockoffs. "This decision represents an important step in protecting brands and products against parasitic practices," LVMH said in a statement.

If the decision stands, it's likely to have far-reaching consequences for eBay's bottom line, forcing the company to spend millions of dollars more policing its site, and undermine eBay's effort to transform itself from an online flea market into a place for in-season, brand-name merchandise. LVMH's victory could also set a precedent that makes it easier for other brands to remove counterfeit items from eBay. "I am sure there are many discussions going on right now in the general counsels' offices of luxury brands," says Michael Huget, head of the intellectual-property group at law firm Butzel Long. "In a heartbeat, this [ruling] would be in my complaint."

Tiffany & Co. (TIF) sued eBay in a U.S. court in 2004, arguing the company must do more to keep faux merchandise off the site. Lawyers for Tiffany are likely weighing whether the European decision can have any bearing on their case, legal experts say.

"Totally Ridiculous" Decisions? EBay says it will appeal the French court's decision, which challenges a core tenet of its business -- namely, that sellers and buyers who use eBay are ultimately responsible for the transactions. "We are going to fight this decision because it is totally ridiculous," says Alexandre Menais, the attorney in charge of eBay's partnerships with rights owners. In the past, eBay has argued it should be treated similarly to other sites, such as Google's (GOOG) YouTube, that let users upload content. In the U.S., such sites are not legally bound to proactively screen for and remove illegally uploaded content, such as copyrighted material -- though they must take it down once alerted to its presence by the rights holder.

Menais is particularly peeved by an injunction preventing the sale of any LVMH perfume on eBay's European sites. EBay does not plan to remove any products until its appeal is heard, said Menais, even though it faces a 50,000 fine, about $78,000, for each day it does not comply. The company believes the French court's decision unfairly blocks the legitimate sale of perfumes, which it says could be offered on the site from resellers as well as people posting unwanted gifts or used merchandise. Other luxury brands could use the decision to bolster efforts to get even legitimate but discounted products removed from eBay, Menais says.

The decisions in the LVMH case, and in earlier rulings [BusinessWeek.com, 6/6/08] favoring Herms and Rolex, are based on the idea that eBay should be held responsible for illegal activity through its site because it directly profits from the sale, through fees charged when items are listed and sold. A legal expert draws a parallel with Napster, which in 2001 shut down after a court ordered it to prevent file-sharing through its site. "This case has a distinct analogy to the case that brought down Napster in the United States," says Thomas Hemnes, a Boston-based intellectual-property lawyer. "You can't escape the conclusion that they are not merely a passive host."

Restrictions Apply The prospect of more lawsuits is dangerous for eBay, which could see its costs for policing the site and fending off lawsuits rise. "They'll have greater costs and fewer sales, there's no way to escape that," says Hemnes. The decisions also undermine eBay's efforts to court higher-end, brand-name merchandise. The company signed a partnership in May with Buy.com [BusinessWeek.com, 6/3/08] to bring more of the online retailer's brand-name electronic merchandise and other items to its site.

In recent years it has also aggressively expanded its Verified Rights Owners [VeRO] Program, which provides tools enabling brands to search the site for counterfeit merchandise and request immediate removal. EBay has 18,000 companies involved in the program, including Apple (AAPL), Coach (COH), and Oakley. In November, eBay placed restrictions on sellers of items that are often counterfeited, including limiting the number of items that could be sold and requiring the item to be auctioned for seven days. Items could, however, be purchased outright with the "buy it now" option, effectively ending the auction early. Since applying the new restrictions, 2.2 million counterfeit listings were removed across all eBay sites and 50,000 sellers were suspended, according to the company.

But the lawsuit by Tiffany, which is a VeRO member, demonstrates that not all participants believe eBay is doing enough to combat fraud. And the June 30 French court decision could very well force eBay to do a lot more.