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EBay fights its toughest legal battle

Tiffany lawsuit puts auction site's "hands off" approach to the test. By Bob Sullivan.

Artist Anna Conti says that one day this spring a friend spotted dozens of Conti's paintings for sale on eBay -- at around $50 apiece. They normally sell for $1,000 or more; these were obvious fakes.  Frustrated with eBay's efforts to thwart the frauds, Conti started a Web site called "eBay Art Fraud," devoted to outing the auction site's counterfeit problem. While frauds involving her work have now stopped, she says the site is still rampant with fake art, causing a real problem for those who rely on creativity for their living.

And in an odd kind of Internet-age alliance, Conti is now a fan of Tiffany & Co., which has filed a lawsuit against the Internet giant for much the same thing.

EBay fraud isn't just about eclectic collectors or Internet geeks any more. The site is causing trouble for big, well-heeled brands like Gucci, Prada, and the like -- all of which are closely watching the action in the Tiffany case.

For years, Tiffany has worked with eBay to remove fake items from the auction site, but the counterfeit sales persisted.  Earlier this year, the famous jeweler secretly purchased about 200 items from eBay and inspected them for authenticity. Three-quarters were obvious fakes, Tiffany said. That's an erosion of brand equity that Tiffany just couldn't stomach. The jeweler filed suit in June; eBay's response is due in October.

"I can't understand that they've let it go on and on and on," said frequent eBay user Ed Cadden, who as a hobby monitors Tiffany items for sale on the site.

Who's minding the store?
Neither side disputes that there's fraud on eBay; the dispute is over whose job it is to police the site.

Since its inception, eBay has stood by a hands-off approach to its auctions. Be it outright fraud, unfair bidding practices, or brand theft, eBay maintains that it simply provides a service, and it can't be asked to police the entire site. There's 3.5 million new auctions every day on it, and 1.25 billion each year, it says.

"We are a marketplace. We are not a retailer," said Hani Durzy, eBay spokesman. "We don't own any of these products. We don't take possession of them. We can work with trademark owners to give them easy and efficient ways to alert us to specific sales ... but there is no way we are to know whether something violates trademark or intellectual property rights unless we are informed by the rights owners."

This marketplace "service provider" defense has served the auction site well; in the landmark case Hendrickson v. Ebay, decided in September 2001, a federal court ruled eBay was protected from copyright claims by the Digital Millennium Copyright Act, as long as the site removed copyright-protected material once notified by the copyright holder.  Such notification is called a "takedown notice."

In the case of Tiffany, eBay says it complied with that standard. In fact, both sides agree the auction site has removed 19,000 auctions at Tiffany's request.

A higher standard
But Tiffany is now challenging that legal paradigm, suggesting eBay has responsibility to actively police its site. After all, the firm is profiting from the frauds, Tiffany says.

The stakes are high for eBay. Other firms are watching and legal experts predict a flood of similar copyright lawsuits if Tiffany prevails.  Others who are frustrated by eBay's hands-off approach - victims of con artists who never deliver items, for example -- are also watching.

"Everybody wants to see where this is going," said Lou Ederer, an intellectual property rights expert.  "How much longer can eBay hide behind their bigness? They are taking the position that they can't monitor thousands of auctions going on all at once. But where do you draw the line? Firearms, alcohol? There are certain industries where the line has to be drawn."

Auction advocate Rosalinda Baldwin expects eBay to settle the case rather than risk a precedent-setting verdict. "So far they've really been able to get away with not policing their site," Baldwin said.

Still, takedown notices are so common on the site that one firm has made an entire business out of them.  Boston-based GenuOne Inc. helps protect dozens of brand names on eBay. It uses proprietary technology -- and a special deal with the auction site -- to comb eBay's database for trademark problems.  Then, it automates delivery of takedown notices. Some 10,000 each month are now shuttled between firms and eBay, the firm says.  GenuOne founder Stephen Polinsky couldn't disclose the names of his clients, but said they were "names you would know, names you would see if you walked up and down Fifth Avenue."

Process to verified rights owners
EBay says its takedown procedure, called VeRO, or Verified Rights Owner program, is enough -- but Tiffany disagrees, and it has a novel legal argument to support its case. The famous jeweler isn't arguing against the Digitial Millenium Copyright Act (DCMA), and it's not claiming a copyright infringement. Rather, it's claiming trademark abuse. As a result, eBay can't hide behind the safe harbor provided by the DCMA takedown procedure.

Tiffany claims eBay is both directly and indirectly assisting the counterfeiters. Tiffany's attorney James Swire declined to comment for this story. But according to court papers, Tiffany claims eBay has elevated counterfeit items to its home page for spotlight treatment -- as potential Mother's Day gifts, for example.  The auction site also pushes special advertisements out to Yahoo and Google which hawk Tiffany items that ultimately prove to be fakes. That's directly promoting fraud, Tiffany says.

The lawsuit also claims an indirect trademark infringement, because at this point, the sheer volume of fake items proves it's obvious that counterfeiting is going on, the suit maintains.

Ederer called eBay's marketplace defense "willful ignorance," and he predicted courts might not agree.

"All Tiffany is really saying now is, 'You need to be responsible in advance," he said.  "You know this is going on, look at all the warning signs."

EBay, in a description of its VeRO program, says it does actively police the site, regularly conducting keyword searches for suspicious items. The company takes down obvious fake auctions and notifies rights holders of suspicious items, eBay says. But even if fraud or counterfeiting is rampant in a particular category -- such as Tiffany-branded items -- eBay is reluctant to begin blanket removals of such items.

"Just because an item happens to be listed, it doesn't mean it's fake because there have been similar items on the site that were," Durzy said. "We can't make that kind of assumption and maintain an open and free marketplace, and we won't."

But whatever eBay is doing clearly isn't working, Tiffany says.  Federer compared the case to a flea market where the owner knows fake merchandise is being sold at table's he's rented. In 1996, a federal appeals court held a flea market owner liable for trademark infringement because of fake Hard Rock Cafe merchandise he sold.  Other cases since seem to conflict with that ruling, however. 

Robert J. Kasunic, who teaches copyright and trademark law at American University, thinks a Tiffany victory would be a narrow one.

"The question is did they have reasonable notice of problems and are they not willing to do anything about it."