Online Counterfeiting––Imitation Is By No Means The Sincerest Form of Flattery

By John C. Rawls III

The problem of counterfeiting – the sale of imitations or replicas of branded products, such as handbags and watches – is often proportional to a brand’s success. The more popular the brand, the more likely unscrupulous individuals are to, in effect, steal the brand’s goodwill by offering imitations that are visually identical to the genuine article but that the consumer later discovers to be of inferior quality. The harm to the brand owner’s goodwill, and the loss of revenue from sales of the branded goods can be enormous. For trademark owners, this kind of imitation is anything but flattery.

The age old fight against counterfeiting has been greatly complicated by the Internet. Online marketplaces create venues in which counterfeiters can easily hide among thousands of legitimate resellers of a brand owner’s genuine goods. Moreover, even when a counterfeit offer has been gleaned from the vast Internet marketplace, it can be maddeningly difficult to find the individuals behind the scam. Without a traditional “brick and mortar” retail location, counterfeiters can strike from afar, taking orders using false names and addresses and otherwise hiding their identities and locations in ways never before possible. Thus, the Internet presents brand owners with the potential for a “death by a thousand cuts” – without a cost effective anti-counterfeiting strategy, the brand owner may find itself spending more to enforce its rights than it saves from stopping counterfeiting.

Trademark Owners, Put On Your Badges—You Are The Police

Counterfeiting is a crime, both in the U.S. and in nearly every other country. It is not, however, a top priority for law enforcement. Even in the best of times, it would be difficult to persuade the governments to devote more than a small fraction of their limited resources to fighting this type of crime. For the most part, brand owners have to take matters into their own hands, using civil remedies at their own expense.

Failure to take action can have far reaching consequences. In addition to the obvious – lost revenue resulting from diverted sales and diminished goodwill in the brand – trademark owners have a legal duty to “police” their marks, i.e., take steps to ensure that others are not using the mark in an unlawful manner. Failure to do so can diminish the strength of the mark, limiting the scope of the owner’s trademark rights.

In the process of policing a trademark, however, particularly in the context of counterfeit goods, trademark owners must be mindful of at least one competing interest recognized in the law – with few exceptions, anyone who legitimately acquires a branded product has the right to resell the goods without the brand owner’s consent. In the context of online transactions, it can be difficult for the purchasers of products, website operators, and even trademark owners, to discern which products are counterfeit and which products are the real deal. This inability to distinguish the good from the bad, among other things, makes policing difficult for trademark owners.

Who Is Subject to “Arrest” For Online Counterfeiting?

Almost anyone involved in the sale of counterfeit goods online may be civilly liable for trademark infringement and related claims. Accordingly, while trademark owners may pursue the seller, it is often more cost effective to take action against the operators of the website that facilitate the illegal sale of counterfeit goods.

Trademark infringement actions against website operators are typically brought under a legal doctrine called “contributory infringement.” This doctrine says that in order to hold a service provider, such as a website operator, liable for trademark infringement, the trademark owner needs to prove that the operator “intentionally induced another to infringe a trademark” or that the operator “‘continue[d] to supply its [service] to one whom it knows or has reason to know is engaging in trademark infringement…’” Tiffany, Inc. v. eBay, Inc., 600 F.3d 93, 104 (2d Cir. 2010).

The contributory infringement approach can cut brand enforcement costs tremendously, but the need to prove “knowing” participation by a website operator can limit its effectiveness. For example, the United States Court of Appeals for the Second Circuit recently decided a case in which eBay was accused of contributorily infringing Tiffany’s trademarks via the sale by third parties of counterfeit Tiffany products on eBay.com. Tiffany argued that eBay contributorily infringed by supplying its service to counterfeiters whom “it kn[ew] or ha[d] reason to know [were] engaging in trademark infringement.” Id. at 106. The Second Circuit disagreed, finding that although eBay may have had “generalized knowledge” that counterfeit Tiffany goods were being sold, this was not enough to meet the standard for liability under a contributory infringement theory. Rather, the court ruled that Tiffany needed to prove eBay had knowledge of specific acts of infringement and then continued to allow the counterfeiters to sell on the eBay site despite such knowledge. Because the evidence showed that eBay took action to terminate known infringing activity, eBay could not be held liable for contributory infringement. Id. at 109.

In rendering its decision in favor of eBay, the Second Circuit noted that “private market forces give eBay and those operating similar businesses a strong incentive to minimize the counterfeit goods sold on their websites. eBay received many complaints from users claiming to have been duped into buying counterfeit products sold on eBay. The risk of alienating these users gives eBay a reason to identify and remove counterfeit listings. Indeed, it ha[d] spent millions of dollars in that effort.” This statement holds true for most credible companies and makes it unlikely that a trademark owner will prevail against a website operator such as eBay that can show they are taking serious strides to combat counterfeiting.

Addressing a slightly different fact pattern, a federal court in Virginia recently found that Google was not contributorily liable merely because it allowed counterfeiters to open advertising accounts and bid on Rosetta Stone’s trademarks for use as “AdWords” (search terms entered into the Google search engine by a user and that result in advertisements on Google that link to the advertiser’s chosen website). Rosetta Stone, Ltd. v. Google, Inc., 2010 WL 3063152, *1, *13 (E.D. Va. 2010). The court reasoned that “the mere existence of a tool that assists advertisers in optimizing their advertisements does not, in itself, indicate intent to induce infringement.” The court also found that there was “no evidence that Google [wa]s supplying a service to those it kn[ew] or had reason to know [was] engaging in trademark infringement” because “Rosetta Stone fail[ed] to show that Google knew of the alleged infringing activity by its…advertisers.” Id. The court stated: “[t]here is little Google can do beyond expressly prohibiting advertisements for counterfeit goods, taking down those advertisements when it learns of their existence, and creating a team dedicated to fighting advertisements for counterfeit goods. Google has worked closely with law enforcement and brand owners to combat counterfeiting because it knows that those advertisements can create a bad experience for web users, who Google ultimately relies on for its business.”

The court also noted, that neither eBay nor Google had a mechanism to detect counterfeit goods, and that Rosetta Stone admitted it could not discern counterfeit from genuine goods offered online. This is a common problem in the Internet context and poses a problem for trademark owners—if they cannot discern counterfeit from genuine goods, they cannot credibly argue that the website operator should be able to make such a distinction and therefore on that basis alone, has the requisite knowledge to support contributory infringement.

Best “Policing” Practices for Trademark Owners

In light of the Tiffany v. eBay decision and cases that have followed it, the lesson for trademark owners is that the contributory infringement doctrine may be of little help when dealing with websites operated by credible companies; rather, it may be better to take a less confrontational approach and work with the site operators. eBay, and other online marketplaces, have well-established policies that trademark owners can use to complain about allegedly counterfeit goods offered for sale on their sites. Many brand owners report that use of these policies can be more effective than litigation and at much lower cost. It is far from a perfect solution, but in many cases it may be the best balance of cost and result.

On the other hand, when dealing with companies that do not have comprehensive mechanisms in place to combat counterfeiting, i.e., those that thrive off of the sale of counterfeit goods and/or willfully turn a blind eye to it, a different approach may be warranted. In such instances, it may be easier for a trademark owner to prove contributory infringement – particularly if the owner is proactive and sends notices to the website operator identifying specific infringement and demanding that the counterfeit products be removed. If the website operator fails to comply, the trademark owner’s case for contributory infringement is strengthened.