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Errors in Tiffany v. eBay, Contributory Liability Is Not the Same as Vicarious Liability

Sandra Rierson, my colleague and co-author on Confronting the Genericism Conundrum, and I were emailing about the Tiffany v. eBay case the other day. She noted that the case furthers a mistake regarding contributory and vicarious liability. I asked her whether she’d like to write a special to Co-Op about the topic, and she agreed. So here is Sandy Rierson explaining an important difference in theories of liability.

Contributory Trademark Infringement in an On-line Marketplace
Sandra Rierson

The Second Circuit’s recent decision in Tiffany v. eBay addresses the issue of contributory trademark infringement in an on-line marketplace. Without even reading the case, you can probably figure out why the lawsuit was filed: fake Tiffany stuff being sold on eBay. The question is, whose problem is this? According to the Second Circuit, the answer is “not eBay’s.” Several people have provided excellent covered the details of the case. You can to Greg Lastowka’s, Rebecca Tushnet’s, or Eric Goldman’s respective blog posts about the case for the details and their thoughts.

To me, however, the most interesting aspect of this opinion is one that the parties did not even contest on appeal: whether the Inwood test for contributory liability should apply to on-line service providers at all. At trial, eBay argued that Inwood’s test for contributory liability should not apply to entities such as itself, which provide a service that is allegedly being used to infringe, rather than a product. eBay did not contest the applicability of the Inwood standard on appeal.

Even though the Second Circuit’s analysis of whether and when the Inwood standard should apply to service providers such as eBay is dicta in this opinion, it made me cringe nonetheless. In the eBay decision the Second Circuit adopts the standard set forth by the Ninth Circuit in Lockheed v. NSI for determining when Inwood applies to a service provider: “Direct control and monitoring of the instrumentality used by a third party to infringe the plaintiff’s mark” permits application of the Inwood test for contributory infringement to service providers. The Ninth Circuit was wrong when it articulated this standard, and it pains me to see the Second Circuit breathing life into it in this opinion.

The Ninth Circuit’s “direct control and monitoring” standard is incorrect as a matter of law and invites bad behavior as a matter of policy. By grounding applicability of the contributory trademark infringement doctrine on a determination of whether the defendant exercises “direct control” over the infringer, the Ninth Circuit (and now the Second Circuit) muddied and confused contributory and vicarious liability.

Vicarious liability, which does in fact turn on issues of control, is a form of strict liability that typically exists when there is a formal relationship – such as employer/employee – between the defendant and the tort feasor/infringer. If the defendant exercises sufficient control over the infringer and financially benefits from the infringement, then the plaintiff does not have to prove knowledge of infringement on defendant’s part to prove liability. Neither the plaintiff in Lockheed v. NSI nor eBay argued that the defendant was vicariously liable for trademark infringement.

Contributory liability, on the other hand, requires both knowledge (or intentional inducement) and enablement of infringement by the defendant. Inwood held that contributory liability exists when the defendant supplies a product to a distributor and intentionally induces that distributor to use that product to infringe, or has actual or constructive knowledge that the product is being used to infringe a trademark. Similarly, both the Ninth and the Seventh Circuit have held, in non-Internet contexts, that contributory liability for trademark infringement exists when the defendant “supplies the necessary marketplace” for infringing goods, with actual or constructive knowledge that they are fake. Moving the location of the marketplace from a swap meet at the Sports Arena to eBay’s on-line venue increases the volume of, but should not change the legal definition of, contributory infringement.

As a policy matter, tying contributory infringement to the extent of the defendant’s “control” over the infringer creates terrible incentives for the defendant. Basically, a rule that says defendants have no potential liability for contributory infringement if they exercise no control over the infringer encourages defendants to adopt a hands-off approach. Here, to eBay’s credit, eBay has not done so. It appears to have taken numerous steps to attempt to control counterfeiting/mark infringement on its website, at least when the fake goods are detected and identified by either the mark owner or the consumer. eBay has done so by contractually asserting control over the individuals who post goods on the eBay site. Ironically, those controls — which benefit the consumers who are being duped into buying counterfeit goods as well as mark holders — were used to demonstrate that eBay may be subject to contributory liability in this case.

Service providers like eBay should be subject to contributory liability for trademark infringement when they know that consumers are being ripped off by counterfeiters and yet they do nothing to stop it. The Second Circuit got it right, however, when it held that “knowledge” has to mean something more than being presented with a general study allegedly showing that a lot of fake stuff is being sold on the website. Consumers benefit from the secondary marketplace in legitimate resale goods (which Tiffany and other mark holders would probably prefer to eliminate), and therefore removing the marketplace altogether should not be the remedy here. eBay and others like it should have every incentive to address infringement and counterfeiting in the marketplace that they have created, but trademark holders also have to participate in policing their marks in the on-line world.