July 15, 2008

Court Sides With Ebay On Sales Of Luxury Goods

A federal judge absolved eBay Inc. on Monday of any further action to oversee counterfeit Tiffany & Co. jewelry sold on its auction Web site. The ruling, seen as a significant legal victory for eBay, held that brand owners are ultimately responsible for their own trademark protections.

Tiffany had sued eBay in 2004, arguing that the majority of products listed for sale as genuine Tiffany items on eBay were fake. But U.S. District Judge Richard J. Sullivan in New York rejected all of Tiffany's trademark infringement claims against eBay, ruling that eBay is not liable for trademark infringement "based solely on their generalized knowledge that trademark infringement might be occurring on their Web sites."

The ruling is expected to be appealed.  

In its lawsuit, Tiffany & Co claimed that eBay had ignored the sale of counterfeit Tiffany silver jewelry on its Web site. But eBay said it was not in a position to determine which items were knock-offs, and that the prestigious New York jeweler did not adequately participate in eBay's fraud prevention programs.

In a 66-page decision that followed a non-jury trial last November in U.S. District Court in Manhattan, the judge said he was "not unsympathetic" to Tiffany & Co. and others, but that the law clearly came down on the side of eBay.

"It is the trademark owner's burden to police its mark and companies like eBay cannot be held liable for trademark infringement based solely on their generalized knowledge that trademark infringement might be occurring on their websites," Judge Sullivan wrote.

EBay said the ruling was a "victory for consumers", and that it "appropriately establishes that protecting brands and trademarks is the primary burden of rights owners."

Tiffany's vice president of investor relations, Mark Aaron, said the company was "shocked and deeply disappointed" by the decision, which "allows sellers of counterfeit goods on eBay to victimize consumers."

"All I can say to that is that I'd be surprised if Tiffany did not appeal this decision."

Jeffrey Lindsay, an Internet analyst with Bernstein Research, told Reuters the ruling had calmed some Wall Street concerns about a potential avalanche of lawsuits.  Indeed, Internet companies and makers of luxury items seeking to stop the online sale of counterfeit goods had kept a close eye on the case.

"Anything short of victory for eBay would probably have added to investor concerns that there would be a slew of lawsuits down the pike," Lindsay told Reuters.

In addition to monetary damages from eBay, Tiffany had sought to have eBay preemptively remove listings of five or more of its pieces and immediately suspend any sellers Tiffany suspected of fraud.  But Judge Sullivan rejected all of Tiffany's claims due to the company's choice to sue eBay rather than individual sellers, and because eBay removes deceptive listings when alerted to violations.

San Jose, California-based eBay has increased its investments in technology and people to curb the sale of fake goods on its site.   The company says it now removes more than 90 percent of counterfeit items from its site within four hours of their posting after being alerted by trademark holders.

U.S. courts have traditionally found the trademark owner responsible for determining which goods sold online are counterfeit.   From this position, eBay would only be liable when it fails to remove fraudulent items once alerted by the trademark owner.

However, case law has been inconsistent in the matter.  And European courts have often assumed a more protectionist view.    For example, a French court ordered eBay to pay $61 million to LVMH, parent of the Christian Dior and Louis Vuitton brands, earlier this month because of fake luxury handbags and perfumes sold on its site.   EBay is appealing the decision, arguing that a more open marketplace is critical for robust Internet commerce.

"This would have ended up foreclosing an entire category of eCommerce," Steve DelBianco, executive director of NetChoice Coalition, told Reuters, referring to the online sale of trademark items.

For its part, eBay maintains the issue of counterfeit goods is a red herring, and accuses luxury-brand firms of being more interested in controlling distribution of their goods than preventing fraud on eBay's Web site.

It's an issue brand experts say is far from over.

"This is only one round of a very long bout," Milton Pedraza, chief executive of ratings and research group Luxury Institute, told Reuters.   It will ultimately be consumers who will demand authentication of products sold online, he said.

On the Net: