In a highly anticipated decision, the Southern District of New York ruled in July that eBay Inc. was not liable for trademark infringement and related claims as a result of allegedly counterfeit Tiffany silver jewelry being offered for sale on eBay's website. The lawsuit had been closely watched since its filing by Tiffany & Co. and Tiffany (NJ) Inc. in June 2004. Following a five-day bench trial in front of Judge Richard J. Sullivan in November 2007, the court dismissed each of Tiffany's claims. See Tiffany (NJ) Inc. and Tiffany & Co. v. eBay Inc. , No. 04 Civ. 4607 (RJS), 2008 WL 2755787 (S.D.N.Y. July 14, 2008). Tiffany is represented in the litigation by Arnold & Porter LLP. eBay is represented by Weil, Gotshal & Manges LLP.
Who Bears The Burden Of Policing Tiffany's Trademarks In Internet Commerce?
Tiffany alleged that eBay should be liable for direct and contributory trademark infringement, direct and contributory dilution, unfair competition, and false advertising, on the grounds that eBay facilitated and allowed sales of counterfeit Tiffany silver jewelry on its website. While Tiffany acknowledged that individual users of the eBay website, rather than eBay itself, were responsible for listing and selling counterfeit Tiffany items, Tiffany argued that eBay was on notice that a problem nonetheless existed and that eBay had the obligation to investigate and control the activities of these sellers. Tiffany specifically demanded that eBay preemptively block sellers from listing five or more Tiffany items and immediately suspend sellers upon learning of Tiffany's belief that the seller had engaged in potentially infringing activity.
In response, eBay contended that it is ultimately Tiffany's burden to police its trademarks and to bring to eBay's attention listings offering potentially counterfeit merchandise, at which time eBay would remove from its site such listings. In addition, eBay argued, subject to the constraints of never possessing items offered for sale on its site and lacking expertise in determining the authenticity of those items, eBay takes numerous steps to proactively combat fraudulent activity on its website.
In its opinion, the court noted that while "Tiffany and eBay alike have an interest in eliminating counterfeit Tiffany merchandise from eBay," "the heart of this dispute is . . . who should bear the burden of policing Tiffany's valuable trademarks in Internet commerce." Responding to Tiffany's allegation that "eBay was able to screen out potentially counterfeit Tiffany listings more cheaply, quickly, and effectively than Tiffany" and hence should bear the burden of policing uses of the Tiffany trademark on its site, the court found that "the evidence adduced at trial failed to prove that eBay was a cheaper cost avoider than Tiffany with respect to policing its marks." Even had the evidence shown otherwise, the court continued, "that is not the law." Thus, the court concluded, "Tiffany must ultimately bear the burden of protecting its trademark."
Rejection Of Reasonable Anticipation Or Generalized Knowledge As Basis For Contributory Infringement
The principal claim in the litigation was for contributory trademark infringement, and the court examined whether such claims are governed by, as eBay urged, the Supreme Court's test in Inwood Labs., Inc. v. Ives Labs., Inc. , 456 U.S. 844 (1982), or, as Tiffany contended, the Restatement (Third) of Unfair Competition § 27. In Inwood , the Supreme Court held that "if a manufacturer or distributor intentionally induces another to infringe a trademark, or if it continues to supply its product to one whom it knows or has reason to know is engaging in trademark infringement, the manufacturer or distributor is contributorially responsible for any harm done as a result of the deceit." The Restatement, by contrast, postulates liability more broadly where "the actor fails to take reasonable precautions against the occurrence of the third person's infringing conduct in circumstances in which the infringing conduct can be reasonably anticipated."
The court rejected application of the Restatement test, concluding that "Tiffany's argument is foreclosed by Inwood itself," where the Supreme Court labeled the "reasonable anticipation" standard of the Restatement as "'watered down' and incorrect." Relying on Inwood , and consistent with prior and subsequent case law, the court thus concluded: "In determining whether eBay is liable, the standard is not whether eBay could reasonably anticipate possible infringement, but rather whether eBay continued to supply its services to sellers when it knew or had reason to know of infringement by those sellers."
Proceeding under this analysis, the court rejected Tiffany's contention that generalized knowledge on the part of eBay that some portion of the Tiffany goods sold on its site were counterfeit sufficed to shift the enforcement burden onto eBay's shoulders. Rather, the court determined that under Inwood , liability could be imposed only upon a showing of knowledge that specific items on eBay's website were counterfeit and that eBay failed to take action when in receipt of such knowledge. The court thus concluded that "neither precedent nor policy supports Tiffany's contention that generalized allegations of infringement provide defendants with knowledge or a reason to know of the infringement." This is particularly true, the court added, where not all of the relevant conduct is in fact infringing. In this regard, the court found that, in fact, "a substantial number of authentic Tiffany goods are sold on eBay, including both new and vintage silver jewelry, sometimes in lots of five or more," and that, "[w]ere Tiffany to prevail on its argument that generalized statements of infringement were sufficient to impute knowledge to eBay of any and all infringing acts, Tiffany's rights in its mark would dramatically expand, potentially stifling legitimate sales of Tiffany goods on eBay." The doctrine of contributory trademark infringement, the court continued, "cannot be used as a sword to cut off resale of authentic Tiffany items."
Tiffany's Proffered Evidence Of eBay's Knowledge And Responses Thereto
Applying these legal principles to the facts presented, the court concluded that the evidence failed to support a finding of contributory trademark infringement. Among the evidence of alleged infringement that the court rejected were demand letters Tiffany had sent to eBay asserting that counterfeiting was occurring on eBay's website and that any listing of five or more Tiffany items was presumptively counterfeit. Agreeing with prior authority that demand letters generally are insufficient to establish knowledge, the court further emphasized that whereas Tiffany's letters stated that a seller offering five or more Tiffany items was almost certainly offering counterfeit merchandise, "Tiffany's own CEO disavowed the importance of the five-or-more rule" when examined at trial. Also discredited by the court were the results of two "buying programs" that Tiffany had conducted in an attempt to determine the proportion of counterfeit Tiffany items listed on eBay. The court deemed the buying programs "of questionable value" because, among other reasons, they "did not even purport to reflect the number of potentially counterfeit Tiffany items available on a typical day, because Tiffany entirely suspended its normal policing procedures during the programs."
When eBay did obtain knowledge of specific listings offering potentially infringing merchandise, the court concluded that "eBay responded appropriately." The evidence demonstrated that when Tiffany filed a "Notice of Claimed Infringement" ("NOCI") through eBay's Verified Rights Owner ("VeRO") Program reporting a listing offering a potentially infringing item, eBay's practice was to promptly remove the listing from its website. eBay had established the VeRO Program to allow rights owners like Tiffany to monitor eBay's site and report to eBay listings offering items that they had a good-faith belief infringed on a trademark or copyright. Upon receipt of such reports, "[i]n addition to removing the listing, eBay also warned sellers and buyers, cancelled all fees associated with the listing, and directed buyers not to consummate the sale of the listed item." Against this evidence, the court concluded that "Tiffany's attempt to prove that eBay failed to remove listings after they were reported was unsupported" and that "Tiffany's assertions were further contradicted at trial by Tiffany's concessions that eBay always acted in good faith and never refused to remove a listing after a NOCI had been filed."
The court also rejected Tiffany's contention that eBay allowed repeat infringers to sell counterfeit items after Tiffany had filed an NOCI identifying that infringer. eBay's practices in suspending sellers were appropriate, the court found: "when eBay had knowledge that a seller was repeatedly engaging in counterfeit activity, eBay's pattern was to suspend that seller and then take further corrective action." The evidence in fact showed that eBay suspended hundreds of thousands of sellers each years, tens of thousands of whom were suspended for having engaged in infringing conduct.
Was eBay Willfully Blind To Infringing Activity On Its Site?
Tiffany additionally argued that, faced with Tiffany's demand letters and other evidence that a counterfeiting problem existed on its site eBay, eBay was obligated to investigate the extent of counterfeit Tiffany jewelry on its site and take further steps to address any such counterfeits. Tiffany contended that eBay's failure to do so constituted "willful blindness." Evidence of such willful blindness satisfies the knowledge prong of Inwood and requires that a defendant suspects wrongdoing and deliberately fails to investigate.
On the facts before it, the court held that eBay was not willfully blind. The court instead found, among other things, that eBay had committed as much as $20 million each year on tools to promote trust and safety on its site, that one quarter of eBay's workforce was devoted to trust and safety, and that eBay proactively searched listings on its site for indications of fraudulent activity. That eBay did not undertake additional measures requested by Tiffany, the court continued, was immaterial because, without knowledge or reason to know of specific infringing activity, the law did not impose on entities like eBay an affirmative duty to ferret out potential infringement. "Put simply," the court concluded, "it cannot be said that eBay purposefully contrived to avoid learning of counterfeiting on its website, or that eBay failed to investigate once it learned of such counterfeiting."
Tiffany's Remaining Claims
In addition to its principal claim of contributory trademark infringement, Tiffany alleged several other claims. First, as the basis for direct trademark infringement and false advertising claims, Tiffany challenged eBay's use of Tiffany's trademarks on its website and its purchases of "sponsored links" on Google and Yahoo! to advertise the availability of Tiffany jewelry and eBay. The court concluded that these practices were protected by the doctrine of "nominative fair use," pursuant to which "trademark owners cannot prevent others from making a descriptive use of their trademark." The doctrine, the court emphasized, "is essential because it is undisputed that trademark owners cannot use trademark law to prevent the resale of authentic, trademarked goods."
The court also rejected Tiffany's claims of direct and contributory trademark dilution under the Lanham Act and New York law. Among other conclusions, the court noted that the dilution claims "could hardly be extended to eBay, which . . . consistently removed such listings upon notice that Tiffany had a good faith belief that the listings might be infringing." Finally, with respect to Tiffany's Lanham Act unfair competition claim and state-law trademark infringement and unfair competition claims, the court concluded that the same legal analysis applied as applied to Tiffany's Lanham Act trademark infringement claims. These claims thus failed for the same reasons.
In sum, the court concluded, Tiffany failed to meet its burden in proving any of its claims against eBay. The court observed that, "given Tiffany's choice to sue eBay, rather than individual sellers, and this Court's conclusion that eBay does not continue to supply its services to those whom it knows or has reason to know are infringing Tiffany's trademarks, Tiffany's claims against eBay must fail." As the court put it, "the law is clear: 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."
The court's conclusion is consistent with that of a prior decision in a similar lawsuit brought by Robespierre Inc., the maker of "Nanette Lepore" apparel. In that lawsuit, Judge George B. Daniels of the Southern District of New York, denying Robespierre's motion for a preliminary injunction, ruled that eBay's procedures for dealing with counterfeit goods were "adequate" and "reasonable" under the law. See Robespierre, Inc. a/k/a/ "Nanette Lepore" v. eBay Inc. , 05 CV 10484 (GBD) (S.D.N.Y. Mar. 29, 2006). Overseas, eBay prevailed in August 2008 against claims brought by L'Oreal in a Belgian court that eBay allegedly failed to adequately address listings of counterfeit cosmetics on its site. That decision came on the heels of a June 2008 ruling of the Commercial Court of Paris against eBay and in favor of LVMH. eBay currently is appealing the French decision, and L'Orepal is expected to appeal the Belgian decision. Tiffany, meanwhile, has filed its notice of appeal to the Second Circuit Court of Appeals.
R. Bruce Rich is a Partner with Weil, Gotshal & Manges LLP and co-heads the Firm's Intellectual Property & Media practice group. Mark J. Fiore is an Associate in the Firm's Intellectual Property & Media practice group. Messrs. Rich and Fiore have represented eBay in numerous matters, including the Tiffany and Robespierre litigations.