Posted April 20th, 2010

By James L. Bikoff, David K. Heasley and Phillip V. Marano.

Two recent decisions in the United States – LVM v. Akanoc Solutions from the United States District Court for the Northern District of California and Tiffany v. eBay from the United States Court of Appeals for the Second Circuit – highlight a stark contrast of Internet Service Provider conduct and help to solidify our jurisprudence on contributory trademark infringement.

The LVM v. Akanoc Solutions case involved three separate defendants – Akanoc Solutions, a company that provided web hosting services to online storefronts selling counterfeit Louis Vuitton merchandise; Managed Solutions Group, the company that owned the computer equipment used by Akanoc; and Steven Chen, the general manager and sole owner of Akanoc. Louis Vuitton filed its complaint alleging contributory trademark infringement, among other causes of action, after the Defendants essentially ignored Louis Vuitton’s letters requesting removal of offending websites from the Defendants’ servers. After trial late last year, a jury awarded Louis Vuitton statutory damages for contributory trademark infringement in the amount of $10.5 million per Defendant.

The Federal Rules of Civil Procedure provide a mechanism – called a Motion for Judgment as a Matter of Law – permitting a party to challenge a jury verdict where “a reasonable jury would not have [had] a legally sufficient evidentiary basis” for its finding. Most recently in LVM v. Akanoc Solutions, the Northern District of California addressed, among other issues raised in Defendant’s Motion for Judgment as a Matter of Law, the Defendants’ argument that the evidence adduced at trial was insufficient to establish that (1) Defendants knew of the direct trademark infringement; and (2) Defendants were in a position to control and monitor the directly infringing activity. No. C 07-03952 JW at * 17 (March 19, 2010).

On consideration of the Motion, the Northern District of California found that the evidence was insufficient with respect to Managed Solutions Group, which merely “owned servers that were operated by … Akanoc”, because “[t]here was no evidence that [it] sold domain names or operate[d] the servers.” Id. at * 10, 18. Accordingly, the jury verdict regarding Managed Solutions Group was overturned as a matter of law.

Conversely, the Northern District of California held that “the operator defendants [Akanoc and Steven Chen] knew of the direct infringement occurring on websites hosted on their servers” and “were in a position to directly control and monitor the instrumentality (the servers) used by third party direct infringers.” Id. at *18. Specifically, Akanoc and Chen had “numerous tools at their disposal for monitoring their servers and terminating abusive users” including “the ability to suspend a particular user, disable IP addresses used by a particular website or if necessary, unplug a server the contained the data for a particular website.” Id. Accordingly, the jury’s consideration of these Defendants’ “action or inaction after receiving notice of trademark infringement” was upheld. Id. at fn. 19.

In Tiffany v. eBay, the Second Circuit Court of Appeals affirmed the judgment of the United States District Court for the Southern District of New York with respect to Tiffany’s claims of direct and indirect trademark infringement. The Second Circuit also affirmed the trial court’s judgment with respect to Tiffany’s claim of trademark dilution, and remanded for further proceedings with respect to Tiffany’s claim of false advertising – though these developments are of less importance than the Second Circuit’s rulings on indirect trademark infringement.

The ruling upheld a finding that eBay could not be held liable for sales of counterfeit Tiffany products on its website unless it had “specific knowledge” that a product might be counterfeit and failed to remove the listed product from its auction website. Tiffany v. eBay, No. 08-3947-CV (April 1, 2010). In so ruling, the Second Circuit applied precedent from the United States Supreme Court to clarify that “there are two ways in which a defendant may become contributorially liable for the infringing conduct of another: first, if the service provider ‘intentionally induces another to infringe a trademark,’ and second, if the service provider ‘continues to supply its [service] to one whom it knows or has reason to know is engaging in trademark infringement.” Id. at * 25, citing Inwood Labs v. Ives Labs, 456 U.S. 844, 854 (1982).

Focusing on the second prong of contributory trademark liability, the Second Circuit turned to address Tiffany’s vigorous argument that “eBay knew, or at least had reason to know, that counterfeit Tiffany goods were being sold ubiquitously on its website.” Id. at 26. In support of its argument Tiffany pointed to (1) numerous demand letters Tiffany sent to eBay; (2) the results of Tiffany’s “Buying Program”, which studied the prevalence of counterfeit Tiffany items on eBay; (3) thousands of “Notices of Claimed Infringement” Tiffany filed with eBay; and (4) the various complaints eBay received from buyers claiming to have purchased one or more counterfeit Tiffany items through eBay’s website. Id. at 26-27.

The Second Circuit upheld the lower court’s distinction between generalized knowledge versus specific knowledge of infringement. Ultimately, “[f]or contributory trademark liability to lie, a service provider must have more than a general knowledge or reason to know that its service is being used to sell counterfeit goods. Some contemporary knowledge of which particular listings are infringing or will infringe in the future is necessary.” Id. at 29.

This ruling insulated eBay from contributory trademark liability in recognition of the many “anti-counterfeiting measures” it had taken over the years to accommodate intellectual property owners. For example, eBay (1) set up “buyer protection programs”, under which buyers would be reimbursed for the cost of counterfeit items it purchased on eBay; (2) established a “trust and safety department” focused on combating infringement; (3) implemented a “fraud engine” to ferret out illegal listings, including counterfeit items; (4) administered a “Verified Rights Owner Program” to provide a notice-and-takedown system for intellectual property owners; (5) allowed rights owners such as Tiffany to create an “About Me” webpage on eBay’s website to inform eBay users about their intellectual property rights and legal positions; and (6) used a “special warning message when a seller attempted to list a Tiffany item” instructing the seller to “make sure that the item was authentic Tiffany merchandise.” Id. at 7-13. Most importantly, eBay “never refused to remove a reported Tiffany listing, acted in good faith in responding to Tiffany’s [notices], and always provided Tiffany with the seller’s contact information.” Id. at 11.

In addition, in its discussion of any willful blindness on the part of eBay, the Second Circuit clarified that “contributory liability may arise where a defendant is (as was eBay here) made aware that there was infringement on its site but (unlike eBay here) ignored that fact.” Id. at 34, fn. 14. In other words, a defendant must do more than “reasonably anticipate” a third party’s infringing conduct. Id. citing Inwood, 456 U.S. at 854, fn. 13.

LVM v. Akanoc Solutions and Tiffany v. eBay addressed opposing factual scenarios. Akanoc continued to supply its webhosting services to known counterfeiters and was held liable for contributory trademark infringement, whereas eBay took steps to prevent known counterfeiters from using its online auction service and was shielded from contributory liability. However, both decisions followed a simple line of reasoning to reach those outcomes: Demand letters from trademark owners cannot be ignored by Internet Service Providers, who arguably owe a duty to take appropriate anti-counterfeiting measures or risk liability for contributory trademark infringement.

Although these cases are of vital importance, the final word on Internet Service Provider liability for contributory trademark infringement has not yet been uttered.  Akanoc Solutions may still appeal to the United States Court of Appeals for the Ninth Circuit and Tiffany may still petition for review by the United States Supreme Court.

Tags: , , , , , ,
Posted in Enforcement by