Originally published in IP Litigator, Counterfeit Corner column, June/July 2001
Internet auction sites have become a preferred venue for sales of counterfeit goods. Since they were first introduced, these enormously popular sites have provided a virtual flea market to purchase or sell any good or service, no matter how unique. The vast majority of goods and services offered through these sites are legitimate, yet there is a growing number that are not.
The increase of counterfeits offered through auction sites damage intellectual property owners by diverting sales, causing confusion and frustrating consumers. Counterfeits distributed through auction sites fail to meet the quality standards of the genuine articles, are not covered by the warranties offered by the manufacturer, and cannot be returned to the manufacturer for a refund or repair. Consumers purchasing these illegitimate goods, not surprisingly, are often unable to locate the seller to seek redress if a product fails to fulfill its intended purpose or injures someone. As such, combating the sale of counterfeits on auction sites has become a top priority for intellectual property owners and federal and state law enforcement officials, many of whom have grown impatient by the perceived lax attitude of some auction-site owners.
Most auction sites prescribe terms and conditions for sellers on their sites, including prohibiting the sale of counterfeit goods. Many will investigate a complaint lodged by an intellectual property owner and remove the offering if they determine that the allegation has merit. Some also have buyer-feedback bulletin boards where duped consumers may post complaints about purchases. Even so, auction sites generally do not monitor sales to ensure that sellers are complying with the obligations set forth under the site's terms and conditions.
Auction sites offer two basic reasons justifying less aggressive procedures. First, they do not want to interfere in the seller's First Amendment right, and second, they simply cannot monitor every sale.
Enforcement Measures Against Counterfeit Goods
As a result, intellectual property owners and law-enforcement officials have sought not only to fill the enforcement void left by the auction-site owners, but also to test whether they might be able to shift some liability for losses sustained through sales on these sites to the site owners themselves. In July 1999, the Department of Justice (DOJ), the Federal Bureau of Investigation and the US Customs Service established a joint law-enforcement initiative to combat the piracy and counterfeiting of intellectual property. In January 2001, the DOJ issued an enforcement manual to guide its US Attorneys in bringing and prosecuting intellectual property crimes, including those perpetrated online. The DOJ manual can be obtained online at www.cybercrime.gov/ipmanual.htm.
On another front, the Federal Trade Commission (FTC) launched Project Safebid this year, intended to train local, state, and federal law enforcement in investigating and prosecuting Internet auction fraud, and to educate auction site owners and participants in recognizing and preventing fraud. As part of Project Safebid, the FTC published Internet Auctions: A Guide for Buyers and Sellers, available at www.ftc.gov/bcp/conline/pubs/online/auctions.htm. The guide explains how auctions function, identifies some pitfalls, and encourages buyers and sellers to get to know the product, the seller and the auction site.
Intellectual property owners also have launched initiatives for combating auction-site fraud.
Individually and collectively, and in cooperation with law enforcement, they have established consumer-education programs, such as the Business Software Alliance's Operation Bidder Beware, to educate auction participants about the inherent risks in online bidding. They also have stepped up worldwide enforcement efforts, bringing civil actions against counterfeiters and assisting in the investigation and prosecution of potential criminal actions. Still others have filed suit against auction-site owners, seeking to hold them vicariously liable for selling pirated goods.
Lawsuits Filed
An example of a lawsuit seeking vicarious liability was brought in March 2000 by Sega of America, Inc., Electronic Arts Inc., and Nintendo of America, Inc. in the US District Court for the Northern District of California against Yahoo!, alleging that Yahoo! knowingly aided the sale of counterfeit video games on its Web site. Also in California, a class action was filed in April 2000 against eBay in the Superior Court, County of San Diego. That suit alleges that eBay knowingly permitted the sale of counterfeit sports memorabilia on its site. To date, no decision holding an auction site vicariously liable for infringement has issued. Whether the courts ultimately will impose liability for the sale of counterfeit goods on auction-site operators is uncertain. Courts have, however, held that operators of flea markets and landlords can be vicariously liable for the sale of counterfeit goods, provided that they know or have reason to know of the infringement. [Hard Rock Cafe Licensing Corp. v. Concession Servs., Inc., 955 F.2d 1143 (7th Cir. 1992) (flea market operator); Fonovisa Inc. v. Cherry Auction Inc., 76 F.3d 259 (9th Cir. 1996) (flea market operator); Polo Ralph Lauren Corp. v. Chinatown Gift Shop, 855 F. Supp. 648 (S.D.N.Y. 1994) (landlord).] Other cases have held that Internet service providers (ISPs) can be vicariously liable for trademark and copyright infringement. [Gucci America, Inc. v. Hall & Assocs., No. 00-549 (S.D.N.Y. Mar. 14, 2001) (order denying motion to dismiss trademark infringement claims against ISP); Religious Technology Ctr. v. Net-Com Online Communication Servs., 907 F. Supp. 1361 (N.D. Cal. 1995) (a copyright infringement case).]
On the other hand, courts have determined that domain name registrars cannot be liable for vicarious infringement because their involvement is limited to registration of the domain name, not its use in commerce. [Lockheed Martin Corp. v. Network Solutions, Inc., 985 F. Supp. 949 (C.D. Cal. 1997), aff'd, 194 F.3d 980 (9th Cir. 1999).]
Based on the case law, courts may analogize that Internet auction site owners may be vicariously liable for trademark infringement if it is shown that by hosting the auction, the site has "used" the trademark and knew or had reason to know of the infringement. Imposing vicarious liability would certainly be a welcome and powerful tool for intellectual property owners enforcing their rights. By the same token, it may result in significant change to the model of Internet auction sites as we know them and, in fact, may impose too great of a duty for these sites to meaningfully and profitably operate.
Copyright © 2002 Finnegan, Henderson, Farabow, Garrett & Dunner, LLP. The information provided in this article is for informational purposes only and is not intended and should not be construed as legal advice. This memorandum may be considered advertising under applicable state laws.
