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EBay, Tiffany fight over fakes

A legal battle between titans of industry began Tuesday in New York, and the outcome may have serious implications for the future of Internet commerce. Tiffany & Co. is suing eBay for allegedly allowing sale of counterfeit merchandise on the auction site. Should Tiffany prevail, eBay and other e-commerce sites could have to change the way they do business.

It's no secret that eBay.com is a favorite haunt for counterfeiters. Four years ago, Tiffany officials purchased hundreds of items labeled as "Tiffany's" and determined that 73 percent were fakes, according to court documents.

The jewelry and design firm filed suit against eBay in 2004, alleging that because eBay must have known about the overwhelming amount of cheating on the site, it contributed to the fraudulent sales.

"EBay has disclaimed the responsibility for sale of counterfeit items on its site," Tiffany's lawyer James Swire, said Tuesday during his opening statement. “EBay simply turned a blind eye. ... Because of that, it is liable for contributory infringement."

EBay, for its part, says it quickly removes fraudulent items when notified by trademark holders.

"EBay's record in responding is exemplary," argued Bruce Rich, eBay's lawyer. “The mind-set of our client ... has been we want to work and find a way to fix it."

Should the judge side with Tiffany, eBay could face a costly new expense. It would have to take on the task of verifying authenticity of any trademarked item for sale on its site, said Geoffrey Potter, chairman of the anti-counterfeiting practice at the law firm of Kramer Levin Naftalis & Frankel. A Tiffany win also would likely bring a wave of new lawsuits, he said.

"Waiting in the wings are other owners of famous brand luxury merchandise," he said. "EBay would have to change its business model for auctions of trademarked goods."

The legal issue hinges on which entity is most responsible for enforcing trademark rights, Potter said. A judge will decide if eBay should proactively remove counterfeits or if the company is doing enough by simply responding to trademark holder requests, he said.

"It's going to turn on eBay's legal duties," Potter said.

Like a flea market

In Potter’s opinion, those duties have been clearly spelled out in lawsuits brought against flea market owners. Courts have found ignorance is no defense for flea market owners when counterfeit items are routinely sold by third parties at rented booths.

"EBay looks to a lot of people like a flea market," he said.

Generally, case law also places the burden on merchants to sell only legitimate goods, he said.

The Internet element adds a layer of complexity to the case. Courts have repeatedly ruled that Web sites are not generally liable for the behavior of third parties, such as messages left by readers on blogs like this one.

But the eBay case is different, Potter said, because it involves commercial activity rather than free speech.

"There's a real difference between speech protected by the First Amendment, and the notion of the marketplace of ideas -- and theft," he said. "And courts have drawn that distinction."

Opening arguments were heard in federal court at the Southern District of New York. As a bench trial, there is no jury. The trial will be complete in about a week, with a verdict expected in two to three months.

For more, read MSNBC.com's prior report on the lawsuit, "EBay fighting its toughest legal battle?"

Reuters contributed to this report.