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July 14, 2008 4:50 PM

Rough Cut for Tiffany & Co. As It Loses Claim Against eBay

Posted by Jonathan Thrope

What a difference 3,600 miles can make.

Two weeks ago, a Paris court ruled against online auctioner eBay for not doing enough to police the sale of counterfeit goods on its site, fining the company $60 million.

Today, Judge Richard Sullivan of the Southern District of New York, ruling in favor of eBay on every count in a similar action filed four years ago by Tiffany & Co., said eBay is doing plenty to combat the sale of counterfeit goods.

"The issue is whether eBay continued to provide its Web site to sellers when eBay knew or had reason to know that those sellers were using the Web site to traffic in counterfeit Tiffany jewelry," Sullivan wrote in the 66-page decision. "The court finds that when eBay possessed the requisite knowledge, it took appropriate steps to remove listings and suspend service."

eBay has had a  Verified Rights Owner (VeRO) Program in place since 1998 and has partnered with over 18,000 brand owners to take down any item the partner-companies report as fake. In 2007, 2.2 million potentially counterfeit items were taken down from the site.

James Swire of Arnold & Porter, who has represented Tiffany for the past 20 years, believes eBay can do much more. "[The decision] essentially says that eBay's only liability, or the only requirement eBay has to take action, is after it's been told of a specific infringer. But in fact after it's been told of the specific infringer or counterfeiter, the infringer or counterfeiter has already been free to sell goods," says Swire. "We think eBay clearly has the ability to analyze lots of data in advance and prevent a lot of the counterfeited goods from reaching the internet site."

Filed in July 2004, Tiffany's complaint claimed that thousands of counterfeit Tiffany items, representing hundreds of thousands of dollars in connected fees, are sold yearly via eBay, and that an "overwhelming majority" of the Tiffany jewelry sold through the Web site is purportedly counterfeit.

In a weeklong bench trial last November, Swire and his team argued that the site is a distribution network for counterfeiters. The company sought injunctive relief requiring eBay to alter its procedures to stem the flow of fakes online. Had the company won, trademark experts expected not only a flood of similar actions against this and other online auctioneers but also major changes for eBay, which would have been forced to alter its business model in order to police the sale of counterfeit goods.

"The company is at this stage kind of shocked and disappointed," says Swire. "The principal purpose of the law is to protect consumers from confusion and protect brand owners in maintaining the integrity of their trademarks, and there's really no discussion of that [in the decision]." Swire says he'd be surprised should Tiffany not pursue an appeal.

In addition to Swire, the Arnold & Porter team included partner H. Peter Haveles, Jr., and associates Eleanor Lackman and Erik Walsh.

eBay was represented by Weil Gotshal & Manges's Bruce Meyer, R. Bruce Rich, and Randi Singer, as well as associates Mark Fiore, Caroline Geiger, Sabrina Perelman, Lori Schiffer, and Cicilia Silver. Rich says this was the first case that Weil had engaged in with eBay. However, Rich says the relationship has since grown nicely. Weil also represented eBay against Robespierre, Inc. (Nanette Lepore) on a case very similar to the Tiffany suit, though it has been totally quiet for over two years, and Weil has also has done a significant amount of patent litigation for eBay out of its Silicon Valley office.

Ultimately, Judge Sullivan put the bulk of the onus on Tiffany to protect its own trademarks. "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 Web sites."

"The ruling appropriately establishes that protecting brands and trademarks is the primary burden of rights owners," eBay said in a statement. "While today's decision is a victory for consumer choice, it is a shame that so much effort has been wasted when Tiffany could have worked with eBay to more effectively fight counterfeits."

Until recently, a trend was emerging of third-party liability, according to Susan Scafidi, a professor at Fordham Law School and an expert on fashion law. "We've seen now perhaps a judicial halt placed on this trend toward expanding third-party liability." Scafidi also points to the Supreme Court's decision not to hear the Perfect Ten case, in which the pornography company alleged that certain credit card processors were benefiting from the piracy of its productions.

"The [counterfeit goods] numbers here are so large that I don't think LVMH and other luxury brands will be comfortable simply letting this ride," Scafidi says. "We won’t see cases immediately, but there are lawyers around the country looking for the mistakes that Tiffany might have made."

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