New York Law Journal
May 18, 2010

By Stephen M. Kramarsky

Nine years ago, the U.S. Court of Appeals for the Ninth Circuit, upheld the shut-down of the Napster file-sharing service in an opinion that was a blow to college students everywhere, but not a particular surprise to intellectual property lawyers. The takeaway from that case: at least for purposes of contributory copyright infringement, Napster is a flea market.

The Ninth Circuit upheld the District Court’s reliance on Fonovisa Inc. v. Cherry Auction Inc.,¹ a case involving the sale of booth space at a flea market to sellers known to be selling infringing material. The lower court had found that Napster was essentially the same as the flea-market operator, in that it was knowingly providing a service used by infringers and so could be held liable for contributory infringement, and the Ninth Circuit agreed.²

Nine years later, in Tiffany (NJ) Inc. v. eBay Inc.,³ the Second Circuit also visited the flea market, this time in the context of trademark infringement, and reached a somewhat different conclusion. The different results can be attributed, in part, to differences between the laws of trademark and copyright infringement, but they may also reflect a fundamentally changed view of the roles and responsibilities of distributors (whether of content or hard goods) on the Internet.

In Tiffany v. eBay, Tiffany, the famous jewelry retailer, sued eBay for false advertising and various forms of direct and indirect trademark infringement arising out of the sale of counterfeit Tiffany goods by eBay sellers. eBay does not sell anything itself, it is solely an online marketplace for the sale of goods by others. It makes its money on sales commissions, listing fees and processing fees from its payment service, PayPal.

Tiffany argued that many of the listings for Tiffany goods are, in fact, for counterfeit goods rather than secondary sales of legitimate Tiffany merchandise and that eBay is well aware of this. Because eBay makes substantial revenue on those sales, and indeed advertises the availability of “Tiffany” goods, Tiffany argued that eBay’s use of its mark to describe goods (some of which it knew to be counterfeit) was improper.

eBay countered that it does not and cannot examine each of the items sold over its service, and that it was therefore not aware of any particular counterfeit Tiffany item being sold on the site. According to evidence introduced in discovery, eBay processes over 6 million new listings every day and has, at any given time, over 100 million active listings. It does not examine individual items, and even if it did it would not, in many cases, be able to identify counterfeit jewelry without substantial expertise. eBay provided evidence, however, of its substantial anti-fraud and anti-counterfeit measures: It uses sophisticated anti-fraud screening tools to ferret out likely scammers and identify likely fakes, it devotes a large team to working with law enforcement on anti-fraud efforts, it (sometimes) reimburses buyers for counterfeit sales and, perhaps most importantly, it has developed a “notice and takedown” procedure similar to that used in the copyright infringement context to permit rights-holders to have infringing listings removed from the site.

These measures apparently cost eBay about $20 million a year. Nonetheless, in surveys conducted by Tiffany in 2004 and 2005, Tiffany found that approximately 75 percent of the goods listed as “Tiffany” items on eBay were in fact counterfeits. The trial court found the survey to be methodologically flawed, but there can be no serious dispute that there are substantial numbers of listings on eBay using the word “Tiffany” that are not for legitimate goods.

After a bench trial, the District Court entered judgment for eBay on all claims, largely holding that it was up to Tiffany, not eBay, to police its mark and inform eBay of potential infringements. It wrote:

The rapid development of the Internet and websites like eBay have created new ways for sellers and buyers to connect to each other and to expand their businesses beyond geographical limits. These new markets have also, however, given counterfeiters new opportunities to expand their reach. …Nevertheless, 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.⁴

Tiffany appealed and the Second Circuit reversed in part, affirming the trial court’s decision on Tiffany’s claims of direct and indirect trademark infringement and dilution, but reversing and remanding on the issue of false advertising.

If not actually incompatible with recent file-sharing decisions in the copyright context, the eBay decision certainly reflects a more nuanced understanding of the role of service providers in a legitimate industry that may also harbor some unsavory players.

Direct Infringement

Tiffany’s first claim was that eBay’s use of the “Tiffany” mark in its Web and e-mail advertising (for example, Web ads and e-mails containing links to eBay listings marked “Tiffany Rings” or “Tiffany & Co. Under $50″) constituted direct infringement—an infringing use by eBay itself of Tiffany’s registered mark.

The District Court rejected this claim under a theory of “nominative fair use,” a doctrine that permits a defendant to use a plaintiff’s trademark to identify the plaintiff’s good as long as there is no likelihood of confusion about the source of the goods or the mark-holder’s sponsorship or affiliation. This doctrine originated in the Ninth Circuit⁵ and has since been adopted by various other courts and referred to, but not adopted, by the Second Circuit.

In eBay, the Second Circuit once again avoided adopting the doctrine, finding instead that eBay’s direct use of Tiffany’s mark was protected by the more general principle that a legitimate seller of genuine branded goods is generally permitted to use a protected mark to describe those goods, so long as that use does not imply sponsorship or affiliation with the mark-holder.⁶

eBay’s use described its sale of genuine Tiffany goods—there was no dispute that at least some of the listings on eBay were for genuine, secondary market sales of Tiffany goods—and did not imply any affiliation with Tiffany, so the direct infringement claim failed.

Tiffany also asserted a claim of indirect or contributory infringement. Indirect or contributory trademark infringement is a judicially created doctrine derived from the common law of torts.

There is no question that it exists, as the U.S. Supreme Court confirmed in Inwood Laboratories Inc. v. Ives Laboratories Inc.,⁷ but its precise scope is the subject of substantial debate. In Inwood, for example, plaintiff claimed that competing drug manufacturers had induced pharmacists to pass of defendant’s drugs as plaintiff’s. The Supreme Court held that, if a “manufacturer or distributor” deliberately induces another to infringe a trademark, or continues to supply product to one it knows is using that product in an infringing manner, it can be liable for contributory trademark infringement. Tiffany argued that the same standard should apply to eBay, which knew that at least some of its Tiffany listings were infringing.

Inwood, on its face, applies only to those who actually supply or distribute goods—not to those who merely provide a marketplace—so the first question for the court was whether eBay should be subject to the claim at all. Here, the circuit turned again to the flea markets.

The Seventh Circuit has expanded the Inwood logic to flea market owners in Hard Rock Café Licensing Corp. v. Concession Servs. Inc.,⁸ and the District Court found eBay sufficiently analogous to a flea market to make it subject to the Inwood test.

Because eBay did not dispute the finding, the circuit did not rule on the specific issue—whether online market providers can be subject to Inwood contributory trademark infringement claims—and simply assumed for purposes of the appeal that they can be under the right circumstances.

Under Inwood, a service provider can be contributorily liable for infringement if it (1) intentionally induces a third party to or (2) continues to supply services to a party it knows is infringing. Tiffany claimed eBay was liable under the second prong, since it had a general knowledge that some people were selling counterfeit merchandise and did not ban all sales of merchandise bearing the “Tiffany” mark.

The District Court rejected this argument and the Second Circuit agreed. Given the substantial procedures in place for mark-holders to complain about specific infringing conduct, the courts held that eBay cannot be charged with knowingly supplying services to any particular infringer, and the general knowledge that some infringing conduct is occurring—even wide-ranging infringing conduct—is not sufficient to support an Inwood claim of contributory trademark infringement.

False Advertising

Federal law provides a cause of action for the “dilution” of a famous mark, even in the absence of customer confusion, when the mark is used in connection with products not produced by the mark-holder (Kodak pianos or Buick aspirin, for example), or when the mark is used in a way that tends to harm the reputation of the mark-holder. These types of dilution are referred to respectively as “blurring” and “tarnishing.”

Dilution is different from typical trademark infringement because it does not require customer confusion—no one believes that the Kodak piano comes from the same Kodak as the cameras. Rather, marks that are sufficiently famous are considered to have value beyond their ability to identify the source of goods, and so are provided with this additional protection.

Tiffany is certainly a sufficiently famous mark to qualify for protection from dilution; however, both the District Court and the Second Circuit found that, because eBay does not actually sell any secondary product with which the Tiffany mark became associated, it could not be liable for dilution.

The circuit’s one point of disagreement with the lower court came in its assessment of Tiffany’s false advertising claim. While the circuit agreed that eBay’s advertising was not literally false (in that eBay did, in fact, sell some genuine Tiffany merchandise), it might be misleading—and known by eBay to be misleading—to the extent customers understood it to suggest that all of the goods sold as Tiffany goods on the site were genuine.

The District Court had found that, to the extent eBay’s advertising was misleading, that was the fault of the sellers, not eBay. The Second Circuit disagreed, holding that, while it is true eBay did not sell the counterfeit goods, it is possible that it misleadingly advertised them.

The Court therefore remanded the issue for further examination by the District Court, noting that, even if the advertising was misleading, a disclaimer might solve the problem.

How Far Have We Come?

The eBay decision is most interesting for its analysis of contributory infringement. The outcome is almost certainly correct as a matter of law and it is easy to understand as a matter of logic and economic efficiency: With millions of new listings a day, eBay cannot efficiently undertake an infringement analysis in each individual case, even where it has reason to believe as a general matter that infringement is taking place.

The rights-holder is by far the lower-cost provider of policing for its own mark, particularly when eBay offers low-cost avenues for enforcement once a potential infringement is discovered. But given the recent history of infringement jurisprudence (albeit primarily in the copyright context), it is not entirely expected.

In its analysis of the infringement issue, the Second Circuit briefly discussed the famous Betamax decision,⁹ in which the U.S. Supreme Court held that Sony could not be liable for contributory copyright infringement as the manufacturer of videotape recorders, essentially because its technology was capable of substantial non-infringing uses.

It is possible to read Napster and its progeny (including the Supreme Court’s decision in Grokster¹⁰) as a movement away from that analysis, no doubt because services like Napster and Grokster (in their applicable incarnations) were so blatantly havens for piracy and were essentially advertised as such.

The eBay decision goes a different way. Faced with a more traditionally commercial defendant, a more substantial non-infringing business model, and a more stringent standard for contributory infringement, the Second Circuit has produced a rare decision: One that appears both well supported by existing law and well aligned with the economics of the digital marketplace.

Stephen M. Kramarsky, a member of Dewey Pegno & Kramarsky, focuses on complex intellectual property litigation.

Endnotes:

1. 76 F.3d 259, 264 (9th Cir. 1996).

2. “The district court correctly applied the reasoning in Fonovisa, and properly found that Napster materially contributes to direct infringement.” A&M Records Inc. v. Napster Inc., 239 F.3d 1004, 1022 (9th Cir. 2001).

3. 600 F.3d 93 (2d Cir. 2010).

4. Tiffany (NJ) Inc. v. eBay Inc., 576 F.Supp.2d 463, 527 (S.D.N.Y. 2008).

5. See, New Kids on the Block v. News Am. Publ’g Inc., 971 F.2d 302 (9th Cir. 1992).

6. Tiffany, 600 F.3d at 103.

7. 456 U.S. 844 (1982).

8. 955 F.2d 1143, 1148 (7th Cir. 1992).

9. Sony Corp. of America v. Universal City Studios Inc., 464 U.S. 417 (1984).

10. Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd., 545 U.S. 913, 941 (2005).