Legal: When Merchants Are Liable for Selling Counterfeit Brands

This is the first installment of a two-part series regarding protection against counterfeit products being sold on the Internet. The first part of the series, below, discusses how online retailers and auction houses can protect themselves from unwittingly selling counterfeit products. The second installment of the series, “Legal: Protect Your Brand from Counterfeiters,” discusses protecting your product or website brand from being counterfeited.

Holding Merchants Responsible

Trademark owners are in a constant battle to protect their brands on the Internet. They are required to enforce their trademark rights or they could lose those rights. Instead of the traditional approach of going directly after the company or individual that is counterfeiting products or otherwise using a trademark in an improper way, some companies have tried taking a different approach, which is to pursue the website retailer who is selling the counterfeit products directly to the customer or assisting the counterfeiter in selling the items to customers.

For example, Tiffany & Company was spending millions of dollars chasing down counterfeit jewelry and other items on the Internet. Large groups of offenders were listing counterfeit Tiffany items on eBay. Therefore, Tiffany decided to sue eBay for trademark infringement claiming that the online auction house facilitated the sale of the counterfeit items. The Federal District Court in Manhattan disagreed with Tiffany on all counts and in April of this year the Second Circuit Court of Appeals agreed.

Following eBay’s Example

According to the Court of Appeals, “a defendant may lawfully use a plaintiff’s trademark where doing so is necessary to describe the plaintiff’s product and does not imply a false affiliation or endorsement by the plaintiff of the defendant.” This is considered fair use. The Court stated that eBay was correctly using Tiffany’s name and not trying to affiliate itself with Tiffany. The Court also reviewed whether eBay could be charged with “secondary” liability. Secondary liability can be charged when a defendant knows or should have known about specific instances of infringement and does nothing about it.

The Court held that eBay was not liable for secondary liability because it had been taking significant steps to try to stop the use of counterfeit brands on its site. When eBay learned of counterfeit items on its site, eBay acted swiftly to remove the items from the website and took action against the seller. The Court found that eBay had hired more than 200 employees exclusively to combat infringement. eBay also set up a notice and takedown system to allow trademark owners to give notice of infringing sellers.

What does this mean for small retailers and online auctions? It is unclear whether small businesses need to go through such extensive measures to protect themselves from secondary liability for trademark infringement. The measures taken by eBay cost millions of dollars, which seems to be an unrealistic standard to require a start-up or small retailer to comply with. The decision by the Court requires online businesses to create a process to deal with counterfeit items posted on their website. At a minimum, small retailers should have “notice-and-takedown” policies and procedures to deal with such counterfeit products.

Summary

Counterfeit items may come from many sources. Therefore, all online retailers and wholesalers should be prepared with notice and takedown polices or other procedures to remove items from their website and inventory. Failure to do so will expose the business to secondary liability for trademark infringement as a result of assisting a counterfeiter in selling its counterfeit items by ignoring the infringement. The damages for such liability could be significant, particularly if intentional ignorance can be shown. All companies should take the eBay approach, which was to be prepared and take a proactive stance on counterfeit items. Proper use will allow a company to be able to successfully defend a trademark infringement lawsuit for secondary liability.