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eBay wins counterfeit-sales suit filed by Tiffany

Federal judge says he's sympathetic to problems that Tiffany faces in identifying counterfeit products on auction sites, but trademark law can't be used to compel eBay to police listings.

eBay cannot be forced to police its auction listings to identify counterfeit Tiffany & Co. products, a federal judge ruled on Monday in a lawsuit brought by the iconic 171-year-old jewelry company.

In what could become a landmark case for auction Web sites, the court said trademark law cannot be used to force eBay to shoulder the burden of examining individual auction listings for possible counterfeits.

"The court is not unsympathetic to Tiffany and other rights holders who have invested enormous resources in developing their brands, only to see them illicitly and efficiently exploited by others on the Internet," wrote U.S. District Judge Richard Sullivan. "Nevertheless, the law is clear: it is the trademark owner's burden to police its mark."

Tiffany attorney James Swire, a partner at Arnold & Porter, said he would be surprised if his client did not appeal. Swire said "the purpose of trademark law is to prevent consumer confusion and to protect the trademark owner...and I don't believe that purpose was honored by the judge's ruling."

For now, though, the decision relieves eBay--and companies such as Amazon.com, Yahoo, and Google that provide auction listings or product search results--of what would have been a significant financial burden and legal uncertainty. In the last few years, French courts have ordered eBay and Google to pay fines for trademark breach; a decision last month led to a $61 million fine for eBay that went to fashion giant LVMH Moet Hennessy Louis Vuitton.

It's not an insignificant problem: the U.S. Department of Homeland Security says counterfeiting is an "economic pandemic" that costs the U.S. economy more than $200 billion a year. Counterfeit goods may be manufactured domestically or imported through fraudulent shipping documents.

The lawsuit, which was filed in the southern district of New York, is not about whether counterfeit goods will be permitted on eBay (they're not, and trafficking in counterfeit goods is even a criminal offense). Rather, the debate is about whether the product manufacturer or the auction site should bear the cost of policing eBay listings for fakes.

For its part, eBay says it spends $5 million a year in maintaining its fraud search engine, which has 13,000 rules that are designed to identify counterfeit listings based on words such as "replica" or "knock-off." Listings flagged by the search engine are manually reviewed by customer service representatives.

In addition, eBay offers a Verified Rights Owner ("VeRO") program that lets trademark owners report and remove infringing listings. Tiffany is one of more than 14,000 companies and individuals participating in the VeRO program.

Making matters tricky is that it's perfectly legal to resell noncounterfeit Tiffany jewelry, with or without the famous blue boxes. And because eBay doesn't review the actual merchandise, which is exchanged directly between buyer and seller, it may not be able to identify illicit merchandise based only on the information provided in the auction listing.

In 2003, Tiffany's lawyers contacted eBay and said that because their client uses no third-party vendors, "any seller" of "five pieces or more of purported 'Tiffany' jewelry is almost certainly selling counterfeit merchandise" and the listing should be automatically deleted. eBay replied: "What you have asked us to do is to consider listings 'apparently infringing' simply because the seller is offering multiple Tiffany items. That we are not prepared to do at this time." A year later, Tiffany asked eBay to ban the sale of all silver "Tiffany" jewelry; eBay refused.

On Monday, Judge Sullivan put an end to that argument: "As a factual matter, there is little support for Tiffany's allegation that a seller listing five or more pieces of Tiffany jewelry is presumptively trafficking in counterfeit goods." In addition, Sullivan concluded that eBay always removed listings promptly after receiving notification from Tiffany, and noted that eBay delayed listings of Tiffany products by 6 to 12 hours to provide time for a manual review.

"There is no dispute that eBay was generally aware that counterfeit Tiffany jewelry was being listed and sold on eBay even prior to Tiffany's initial demand letter," Sullivan wrote. But he said that because "eBay does not continue to supply its services to those whom it knows, or has reason to know, are infringing Tiffany's trademarks," generalized knowledge is not enough to make the auction site liable.

The debate over whether Web companies should be held liable for what their users post is hardly new: It's been at the heart of some of the most bitter legal battles in the last decade. Those involve recent free-speech cases involving FriendFinder, Craigslist, and Roommates.com. Viacom's pursuit of YouTube through the court system is in a slightly different category because it involves intellectual-property law and the Digital Millennium Copyright Act. The extent to which trademark law restricts auction listings has been, until now, somewhat unclear.

There is one irony in this hard-fought legal battle, which has involved top-tier law firms and has almost certainly cost both sides millions of dollars in fees. Tiffany filed suit four years ago, when the auction site remained primarily focused on small sellers and before its new deal with Buy.com that has angered the eBay faithful.

Because eBay is trying to compete with Amazon.com (with an enviable stock price performance over the last two years, compared to eBay), by working with larger sellers, it may not have taken precisely the same hard line, if those letters from Tiffany had arrived today.