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INSIGHT: From Chanel and Tiffany Fakes to the Real Deal—Fighting Online Counterfeits

July 8, 2020, 8:00 AM

Anyone who has walked down Canal Street in New York City has seen the hordes of counterfeit goods designed to imitate those of luxury brands. But counterfeiting—which costs brand owners and the U.S. government billions of dollars in lost sales and tax revenues each year—is not limited to luxury goods.

Counterfeits of everyday items, such as medicines, cosmetics and electronics, are also common and can pose real health and safety risks to consumers. And today, many counterfeit goods are sold online—and, in particular, through online marketplaces that allow sellers to individually list and sell goods through a simple online platform.

Online Marketplaces Need to Assume More Responsibility

Traditionally, brand owners have borne much of the burden of policing for online sales of counterfeits. But recent case law and proposed legislation have looked to buck that trend and suggest that, moving forward, online marketplaces may need to assume more responsibility in the fight against counterfeiting.

One means of combating counterfeiting is through Lanham Act trademark infringement claims—specifically, claims based on the sale of goods bearing counterfeit marks. These claims can be for either direct infringement or contributory infringement, a form of liability that extends to parties that knowingly encourage or facilitate tortious activity.

In a 2010 decision that has been widely followed, the Second Circuit raised the bar for holding online platforms liable in Tiffany (NJ) Inc. v. eBay Inc. case. 600 F.3d 93 (2d Cir. 2010). The Court first found third parties’ sale of counterfeit Tiffany jewelry on eBay not sufficient to support eBay’s direct liability, reasoning that eBay would be unduly inhibited from lawfully reselling Tiffany’s jewelry if it were required to establish authenticity of each listing.

The court then held that, to establish contributory liability, generalized knowledge that counterfeit Tiffany’s listings existed was not enough; Tiffany’s had to show that eBay had knowledge of particular listings of counterfeit goods, which it could not do.

One practical implication of the Tiffany decision is that, under this rubric, many online marketplaces are unlikely to be liable for any kind of infringement.

Tiffany brushed aside claims of direct liability and found that to establish contributory liability, a plaintiff must show that an online marketplace had knowledge of specific counterfeit listings. This result almost provides an incentive for online marketplaces to remain ignorant of counterfeits and has problematically placed, under the law, almost all burden of policing for counterfeit goods on brand owners, who have financial and reputational interests in rooting out these imitation products.

While many online marketplaces like eBay have implemented reactive takedown programs to combat counterfeiting. most online marketplaces critically lack the proactive preventative measures needed to tackle this pervasive issue and further, lack incentive to create much needed anti-counterfeiting programs that would scan for and remove counterfeit listings without prompting based on reports received from brands.

Amazon is one exception, with its Project Zero program that includes using machine learning to proactively scan for and remove counterfeit products.

The Chanel Case Against The RealReal

With recent developments, the tides may be turning. The Southern District of New York’s Chanel Inc. v. TheRealReal Inc., 1:18-cv-10626 (S.D.N.Y. March 30, 2020) shows that, in at least some circumstances, online marketplaces may be held liable for direct infringement.

Chanel alleged that online luxury consignment retailer The RealReal was directly liable for the sale of counterfeit Chanel bags on its website. The RealReal moved to dismiss, pointing to the Tiffany court’s quick rejection of direct liability claims against eBay.

The court disagreed and refused to dismiss, distinguishing Tiffany because, unlike eBay, The RealReal specifically approves the products before they are listed, exercises control over pricing and marketing and takes physical possession and maintains an inventory of goods sold.

While the degree to which a given online platform is involved in the sale of goods will of course vary from case to case, this decision effectively limits Tiffany’s rejection of direct liability to platforms that play a more passive role in the sale, promotion and distribution of goods.

The SHOP SAFE ACT Signals Momentum

Separately, the SHOP SAFE Act, a bipartisan bill introduced to Congress in March, was drafted to combat counterfeit goods impacting health and safety—a broad category and one that has become particularly rampant during the Covid-19 pandemic.

The Act expressly looks to overrule Tiffany by requiring online marketplaces to adopt 10 measures to prevent counterfeits, including verification of seller identity, receipt of attestations of authenticity and adoption of a counterfeit-removal program, to avoid contributory liability for trademark infringement.

While the SHOP SAFE Act is likely to be revised prior to enactment, it signals significant momentum to shift at least some of the burden of policing for counterfeits from brand owners to online platforms.

The Chanel decision and the SHOP SAFE Act suggest that online marketplaces may need to step up and make even greater efforts to combat counterfeiting. While these recent legal developments appear to be a step in the right direction, it will be important to continuously and cautiously assess whether we are appropriately balancing promotion of e-commerce and protection of intellectual property.

What is clear is that online platforms must continue to introduce robust measures to protect against counterfeiting. Ultimately the fight against pervasive counterfeiting is one that will require cooperation amongst brand owners and online marketplaces alike.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Megan K. Bannigan is a litigation partner and member of the Litigation and Intellectual Property & Media Groups at Debevoise & Plimpton LLP in New York, focusing on trademarks, trade dress, copyrights, false advertising, design patents, rights of publicity, licensing and other contractual disputes and cyber/privacy. She represents clients across a range of industries, including consumer products, cosmetics, entertainment, fashion and luxury goods, financial services, food and beverage, pharmaceuticals, professional sports and technology.

Kathryn (“Kate”) Saba is an associate in the Litigation Department at Debevoise & Plimpton LLP in New York.

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