Post Tiffany (NJ) Inc. v. eBay, Inc.
DEVELOPMENTS IN SCIENCE
AND TECHNOLOGY LAW
POST TIFFANY (NJ) INC. V. EBAY, INC.:
ESTABLISHING A CLEAR, LEGAL
STANDARD FOR ONLINE AUCTIONS
Justin Nicholas Redman[*]
ABSTRACT:Recent cases such as Tiffany (NJ) Inc. v. eBay, Inc. bring to light an escalating international commercial problem. While the Internet offers tremendous opportunities for increased commerce, it also facilitates the growth of counterfeit sales, global crime, and consumer confusion via online auction houses. With the advent of the Internet, trademark violations and counterfeiting are more difficult to police and, therefore, more frequent. Specifically, Internet auctions, or “virtual flea markets,” feature an endless array of trademarked goods from around the world. These auction sites serve as an intermediary between buyer and seller through which Internet sales of counterfeit goods have skyrocketed. Tiffany, a premier luxury jeweler and specialty retailer offering high quality goods, faced this very problem. Counterfeit jewelry advertised as Tiffany brand was being sold on eBay, an Internet auction house. Tiffany argued that eBay was contributorily liable for trademark infringement because it had knowledge that counterfeits were being sold and failed to take appropriate steps to address the issue. The court disagreed and reasoned that eBay had done enough, under current law, to discourage counterfeit sales, that eBay did not know any specific seller who was selling counterfeits, and that the ultimate burden of policing a trademark rests with the mark owner.
The court was correct in determining that eBay satisfied the current legal standard set out by the Supreme Court in Inwood Laboratories, Inc. v. Ives Laboratories, Inc. Inwood, however, was decided before the Internet was publicly available and goods could be exchanged across such a medium. Without an updated statute or act regarding contributory liability in trademark law, similar to the safe harbor policy set forth by Congress in the Digital Millennium Copyright Act (DMCA), the court ruled that the full burden to police trademarks lies with Tiffany, not eBay. Trademark law simply has not kept up with copyright statutes, bringing into question whether current statutes and case rulings are sufficient in the nearly limitless marketplace of the World Wide Web, where new sites are added daily and the cost to monitor is impossibly high. The Tiffany case exposes the problems and potential unfairness of placing the brunt of the burden of policing trademark infringement on trademark owners in an Internet world.
Interestingly, a predominant focus of the court’s ruling was eBay’s programs to combat infringement, despite the fact that the Inwood test does not require such steps. This note concludes that Tiffany should become the test, with a prescribed set of actions that e-commerce sites must take to thwart counterfeit sales and to remove offending merchandise if they receive notice from trademark owners of infringement. The note explains why Inwood alone is not sufficient for online commerce and further argues that updated statutes are needed to bring trademark law to the same level as copyright law in this area.
CITATION:Justin Nicholas Redman, Note, Post Tiffany (NJ) Inc. v. eBay, Inc.: Establishing a Clear, Legal Standard for Online Auctions, 49 Jurimetrics J. 467–490.
In Tiffany (NJ) Inc. v. eBay, Inc.,[1] Tiffany & Co., Inc., a luxury jeweler, asked the U.S. District Court for the Southern District of New York to determine whether eBay, Inc., an Internet auction house, should be held responsible for the sale of counterfeit Tiffany goods on eBay’s Web site.[2] Based on current but arguably outdated law, the court concluded that eBay was not responsible for policing Tiffany’s mark on eBay’s Web site.[3] Relying on the U.S. Supreme Court’s 1982 opinion in Inwood Laboratories, Inc. v. Ives Laboratories, Inc.,[4] the district court stated that the standard of liability “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.”[5]
The Inwood contributory infringement standard of knowing or having reason to know is core to the ruling.[6] It requires eBay to have specific knowledge of which items were counterfeit and which seller was listing those items.[7] This standard may have been relevant and appropriate in 1982 when most commerce involved physical brick-and-mortar transactions, and it was much simpler to determine the source of sales. In today’s technological world, however, that standard is flawed. In particular, Inwood’s knowledge requirement can too easily be avoided by Internet auction houses for two reasons: (1) it is much more difficult to monitor sales in a virtual, global marketplace; and (2) the auction house never has the burden to investigate anything beyond claims of suspected infringement.
Certainly it is dangerous, due to the vast number of users, sales, and the impossibility of policing these Web sites, to hold an Internet auction house liable simply because it was aware that counterfeiting on a general level was taking place. This is why in order for any e-commerce business to both survive and flourish, it must not be held accountable simply for general knowledge of infringement. Auction houses, however, must be held to a standard that clearly demonstrates that they are committed to preventing counterfeiting and taking specific actions to help prevent fraud. The burden of policing trademarks with respect to Internet auctions, therefore, must be shared by both the trademark owner and, to some greater degree than at present, the Internet auction house. This can be accomplished in two ways: (1) eBay’s anticounterfeiting programs can be used as a new test to further define what e-commerce companies and online auction houses must do to show they are not contributorily liable for generalized infringement; and (2) Congress can review trademark policy in light of the digital revolution and enact notice and safe harbor requirements similar to copyright regulations under the Digital Millennium Copyright Act (DMCA).[8]
Although the traditional policy objectives of trademark law continue to apply today, the laws themselves struggle to keep up with growing technology. During the Middle Ages and into the nineteenth century, most businesses were local in nature; consumers knew the merchants they traded with and their reputations.[9] The Industrial Revolution and the twentieth century, however, led to explosions of population, transportation, communications, and technology that distanced the consumer from the manufacturer.[10] Because the consumer no longer knew the manufacturer, he or she had to rely upon the mark of the good as reflecting and demonstrating its quality.[11] It, therefore, became imperative to assure the consumer that the origin of the goods could be relied upon for consistent quality.[12]
The Trademark Act of 1946, known as the Lanham Act,[13] included the following rationales for giving trademarks legal protection: generally, trademarks (1) designate the source or origin of a product or service; (2) represent that a good or service has a particular quality; (3) allow for a product or service to be distinguished from those of others; (4) motivate consumers to purchase a good or service by demonstrating goodwill of the mark owner; and (5) protect consumers from confusion or deception, insuring that they are able to purchase the products or services they want, while allowing the courts to establish an appropriate standard of business conduct.[14] But the drafters of the Lanham Act could not have anticipated the problem that faces mark owners, consumers, and courts today; namely, the proliferation of sales of counterfeit goods over the Internet. In the United States alone, the Federal Bureau of Investigation (FBI) reports that Internet auction fraud is the most reported offense to the InternetCrimeComplaintCenter, comprising 44.9% of complaints.[15] Although the Internet is a remarkable invention—a global network for the exchange of ideas and goods—the freedom offered by this invention enhances opportunities for fraud and deception. The Internet allows buying and selling between complete strangers and facilitates this process by permitting users to engage in transactions simply by clicking on Web pages.[16]Sale of counterfeit goods over the Internet amounts to more than $30 billionworldwide annually[17] and is likely to increase unless clearer standards are established and enforcement becomes more stringent.
Despite several amendments to the Lanham Act, and numerous court opinions addressing changing technology with respect to intellectual property, there is still considerable uncertainty about how to apply existing laws to Internet commerce. In fact, one court of appeals suggested that “attempting to apply established trademark law in the fast–developing world of the [I]nternet is somewhat like trying to board a moving bus . . . .”[18]The Lanham Act defines a counterfeit mark as “a spurious mark which is identical with, or substantially indistinguishable from, a registered mark.”[19] Counterfeiting consists of making goods appear similar, so they can be passed off as the goods of another and, thereby, steal the goodwill of that party.[20]Counterfeiting is not new; it has occurred throughout history, generating a broad and negative effect on commerce.[21] This includes harm to “companies that produce legitimate goods” and harm to consumers who unwittingly purchase counterfeit products thinking they are genuine.[22]
Consumers and trademark owners are directly impacted by counterfeit sales because “‘if [counterfeiters] steal enough of the brand, the value of the brand goes away.’”[23] Consumers do not benefit if they cannot distinguish between the real and the fake product and determine the quality. Correspondingly, trademark owners are unable to use the mark to successfully sell and market a product or service.
In struggling with the issue of counterfeiting by third parties, courts have created the doctrine of contributory liability.[24] Contributory liability holds third parties liable for trademark violations, even though they do not directly infringe on the mark, provided they materially assist the infringing activity with knowledge that it is in fact infringing.[25] But different scenarios have yielded different standards regarding the level of knowledge required to hold the third party liable. The most recent Supreme Court case addressing the knowledge requirement for contributory liability is Inwood Laboratories, Inc. v. Ives Laboratories, Inc.,[26]decided more than twenty-five years ago before the advent of online auctions. Inwood held that there is no liability for contributory infringement unless there is actual knowledge or reason to know of the infringement occurring.[27]
An Internet auction house, or as eBay refers to itself, an Internet “marketplace,”[28] almost never will be liable under the Inwood standard,[29] because on eBay’s Web site at any time, 135 million members are auctioning forty million items and posting around six million items a day.[30]Thus, the Tiffany opinion should be read to incorporate a new test, stipulating what Internet auction houses must do to help police trademarks to avoid contributory liability. It is arguably not in eBay’s interest to have counterfeit goods sold on its site, and eBay has in fact implemented numerous methods for addressing trademark infringement. Other Internet auction houses, however, may not be in the same position as eBay and likely would be immune from contributory liability under the Inwood standard. Therefore, Congress should reexamine trademark laws and create requirements similar to the DMCA.
Part I of this note describes the facts, reasoning, and holding of Tiffany discussing the Inwood analysis with respect to Tiffany’s contributory infringement claim. Part II argues that while the Tiffany court did apply Inwood correctly, courts should follow the reasoning of Tiffany and go further by requiring online businesses to demonstrate they are employing proactive programs to stifle online trademark infringement and help mark owners police their trademarks. Also, Congress should reexamine trademark laws to bring them up to today’s requirements, similar to the DMCA.
I. TIFFANY (NJ) INC. V. EBAY, INC.[31]
A. Facts of the Case
Since 1837, Tiffany has been regarded as one of the premier luxury jewelers and specialty retailers,[32] offering high quality goods under its Tiffany trademarks including fine jewelry, timepieces, and home items.[33] Tiffany is the exclusive licensee and user of TIFFANY, TIFFANY & CO., and T & CO. trademarks to represent its products, as well as those registered on the Principle Register of the United States Patent and Trademark Office for jewelry, watches, and artwork.[34] The district court accepted the undisputed evidence that these trademarks are recognizably famous, that they are valuable to Tiffany,[35] and that protecting the quality and integrity of the Tiffany brand is vital to Tiffany’s success as a premier luxury retailer.[36]
Also undisputed was the court’s determination that Tiffany strives to maintain its reputation for high-quality jewelry.[37] The court noted that before Tiffany merchandise is released for distribution, Tiffany quality control personnel physically inspect each item, ensuring that each meets Tiffany’s exacting standards for “composition, quality, shape, and polish of the metal, as well as quality and integrity of the TIFFANY marks appearing on the item.”[38] Furthermore, Tiffany closely controls the distribution of Tiffany-branded goods.[39] Since 2000, all new Tiffany jewelry sold in the United States has been available only from Tiffany, through Tiffany retail stores, catalogs, its Web site, and its Corporate Sales Department.[40] Tiffany discourages the sale of Tiffany goods on eBay or online marketplaces, and it also has a general policy of refusing to sell more than five of the same items to any individual customer at any given time without approval of the retail store manager.[41] This tightly controlled distribution chain exists to further ensure that Tiffany products maintain their high quality and excellent reputation, as well as to drive sales through Tiffany.[42] Since 2003, Tiffany has spent $14 million to help fight counterfeiting of its products.[43] In addition, since 2006, Tiffany has patrolled eBay’s Web site and reported possible counterfeiting violations to eBay daily.[44] EBay’s sheer size and volume, however, make it impossible for Tiffany to review every listing and investigate every seller.[45]
Legitimate secondary markets in brand-name goods, such as the ones Tiffany produces, do exist.[46] This creates an environment for Internet marketplaces like eBay to flourish.[47] EBay is a well-known online marketplace located at where users can create accounts and buy and sell goods with other users.[48] EBay is very successful—more than six million new listings are posted daily—and at any given time 100 million listings appear on eBay.[49] The listings are created and posted by third-party users, who register with eBay and agree to abide by a User Agreement.[50] Although users often go by descriptive usernames instead of their real names, users must supply identifying information to eBay when registering.[51] Sellers, however, can use multiple usernames.[52]
A transaction on eBay is conducted by registered sellers who choose the appropriate category for their listed items, such as “Jewelry and Watches” or “Toys and Hobbies.”[53] A listing can include single or multiple items.[54] Also, sellers can post multiple listings at the same time.[55] EBay offers an auction-style listing, where the highest bidder wins the good, or a “Buy It Now” feature, where sellers offer their goods based on a fixed price.[56] EBay also offers a classified advertisement service through which sellers can publish the availability of goods for sale.[57] Buyers can click on keywords on eBay’s home page to search for products that satisfy those keywords, or buyers can browse through eBay categories or search through listing titles or descriptions to find the products they desire.[58]
EBay provides the venue for selling and generates revenue from listings and sales, but it does not itself participate directly in transactions.[59] EBay’s role is to connect buyers with sellers and facilitate transactions, which are carried out directly between eBay members.[60] When a buyer purchases an item, the buyer and seller communicate to arrange for shipment and payment.[61] EBay generates revenue both by charging sellers a fee to list products and by charging sellers a fee when products are purchased by buyers.[62] EBay’s Chief Marketing Officer testified in 2006 that approximately 33% of eBay’s North America income was derived from listing fees and 45% from selling fees. The remaining income is derived from classified advertising on eBay’s site.[63]
Although eBay merely provides the venue for transactions, it does exercise some control over users and the items sold.[64] All users must sign a User Agreement requiring buyers and sellers to refrain from violating any intellectual property rights and eBay policies.[65] Upon violation of the User Agreement, eBay may take disciplinary action against the seller, including removing the listing, issuing a warning, or suspending the user.[66] Furthermore, eBay has invested $20 million each year to help promote safety and trust,[67] and more than 200 eBay employees are responsible specifically to combat intellectual property infringement.[68]