July 1, 2008 12:30 AM

French Court Orders eBay to Pay Luxury Goods Giant $63 million

Posted by Jonathan Thrope

A quick search on eBay of "Louis Vuitton" brings up 3052 items; type in "Christian Dior" and you'll get about 3205 options. The goods include dust bags and diamond encrusted watches with prices ranging from single digits to thousands of dollars. The online auction site offers consumers a seemingly endless market place for both luxury goods, and, according to a Paris court ruling, knock-offs.

The problem, according to a Monday ruling from the Tribunal de Commerce de Paris, is that eBay hasn't done enough to stop the flow of fake goods on the auctions it hosts. The decision was a victory for plaintiff LVMH Moët Hennessy Louis Vuitton SA; eBay must now pay LVMH $63 million in damages.

As reported in the Winter 2007 issue of Focus Europe, the action by the top luxury goods maker--LVMH's brands include Fendi apparel and leather goods, Louis Vuitton leather goods, Tag Heuer watches, and Dior perfumes--is one of a few filed in the French commercial court. The venue is an appealing one given France's tough anti-counterfeiting laws.

"I don’t think this decision will have a tremendous impact on eBay in U.S. litigation," says Joseph Berghammer a partner at Chicago-based intellectual property firm Banner & Witcoff, who is familiar with but not involved in the suit. "That being said, I think the decision is something of a shot heard round the world in regards to international commerce.”

Filed by LVMH in September 2007, the suit accused the largest online auctioner of failing to police the authenticity of item's sold on the site. Monday's ruling forbids eBay from selling LVMH brand perfumes. Additionally, the court has ordered eBay to report the verdict on its site in both French and English, and to print a report of the decision in three French or international newspapers.

"Today's ruling is not about our fight against counterfeit; today's ruling is about an attempt by LVMH to protect uncompetitive commerical practices at the expense of consumer choice and the livelihood of law-abiding sellers that eBay empowers everday," eBay said in a statement. The company has said it plans to appeal the ruling.

LVMH Moet Hennessy Louis Vuitton SA was represented in the matter by Didier Malka, a partner at Paris-based Jeantet Associés, appearing with counsel from Paris firm Campana Ravet et Associes, according to the court ruling. eBay turned to Alain Bensoussan, appearing with counsel from Paris firm Alterman Benezra Leclercq.

Berghammer, who also is an adjunct law professor at Northwestern law school, says the case can have broad implications for high volume, concentrated internet commerce sights like eBay. "If eBay loses on appeal, it definitely makes it less compelling for a concentrated source to do business in luxury goods." As a direct result of the case, Berghammer says he can see eBay simply prohibiting the sale of luxury goods in France.

The implications, however, might not be the same in the United States. According to the Focus Europe report,  LVMH had a bit of a home court advantage. Since World War II, France began implementing stringent anticounterfeiting penalties, due in part to a glut of luxury goods producers in the country. According to Matthew Schmidt, manager of communications for the International Trademark Association in New York, it is now illegal to purchase counterfeit goods in Paris (in all of France, in fact),  while the level of enforcement is not matched in New York City.

The true test for eBay's sale of luxury goods in the U.S. lies in the hands of Judge Richard Sullivan of the federal district court in Manhattan. Seven months ago, Arnold & Porter's James Swire argued on behalf of Tiffany & Co. in a simliar lawsuit filed against eBay. A decision is pending in the matter; eBay was represented by Weil, Gotshal & Manges partner R. Bruce Rich.

Filed in July 2004, Tiffany's complaint claims that thousands of Tiffany items are sold via eBay yearly with hundreds of thousands of dollars in connected fees. A 2004 internal investigation, in which Tiffany randomly purchased 186 pieces of jewelry with the company name as part of the auction title or description, found only 5% to be genuine.

"If eBay losses the Tiffany case it will have a profound impact on eBay and internet commerce in the United States," says Berghammer. "This decision [on LVMH] has something of an impact … but not as profound." If Tiffany wins, similar suits would likely follow, and eBay would have to reconsider its sale of luxury goods in its largest market.

According to Nichola Sharpe, a spokesperson for eBay, the sight has had a Verified Rights Owner (VeRO) Program in place since 1998. eBay has partnered with 18,000 brand owners, and will take down any item the partner-companies report as fake. In 2007, 2.2 million potentially counterfeit items were taken down, says Sharpe. Repeat offenders, she adds, can be suspended or blocked from the site entirely.

Berghammer says one possible outgrowth of today's decision, and ones like it, are authentication services. These are independent, or affiliated, services that could certify certain sellers as authentic, and then allow them to sell luxury goods.

The big question, says Berghammer, is how to limit the sale of counterfeited goods while keeping the market place for genuine goods open.

“The international internet marketplace can grow very quickly, and can have large volume very quickly, and figuring out how to regulate that marketplace is the struggle of this generation," says Bergmhammer. "I think the best minds would like to find a way to regulate it without eliminating it."

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