French ruling on counterfeit goods could have far-reaching effects for eBay

If decision upheld, company would have to spend millions more on anticounterfeit methods, change business processes

If a French court ruling against eBay Inc. for allowing the sale of counterfeit goods on its Web site is upheld, it could have far-reaching effects for the way the online auction company does business.

Last week, the Tribunal de Commerce in Paris fined eBay $61 million for allowing the sale of Louis Vuitton Malletier and Christian Dior Couture counterfeit goods on its Web site. The court also ordered eBay to stop allowing the sale of perfume manufactured by Christian Dior, Guerlain, Givenchy and Kenzo, which can be sold only through an agreed-upon network of distributors.

EBay, which said it will fight the decision, said it was an attempt by LVMH, the parent company of Louis Vuitton Malletier and Christian Dior Couture, to protect uncompetitive commercial practices at the expense of consumer choice and the livelihood of law-abiding sellers.

Jorge Espinosa, an intellectual property attorney at Miami-based Espinosa Trueba PL, said that if the decision stands, it would make it harder for Internet companies such as eBay to allow the sale, or resale, of brand-name products.

"As a result, brand owners will ... be able to extend their control over products beyond the first sale, effectively making themselves gatekeepers for litigation-shy online auction houses," Espinosa said in his blog. In addition, the ruling will either cause eBay to shut down its French Web site or spend millions of dollars to implement methods to take down auctions for counterfeit goods that appear on its sites worldwide, legal experts said.

"EBay might believe it has to set up custom implementations on a country-by-country basis to better reflect local law, but the consequence is that it imposes some significant costs," said Eric Goldman, assistant professor and director of the High Tech Law Institute at the Santa Clara University School of Law. "EBay has the capital to do it, but they don't want to because it's expensive to build the technology differently. They also think it would result in a poor consumer experience, and it would reduce consumer choice, which is exactly what they don't want to do."

EBay agreed that it would most likely have to change its business model.

"If we have to change our business in relation to this ruling, it will be a massive undertaking," said eBay spokeswoman Nichola Sharpe. "We don't view it as just affecting eBay France, but affecting all eBay sites globally."

The legal experts also said that other luxury goods makers are waiting to see the outcome of eBay's appeal to determine whether they will also go after eBay for allowing the sale of counterfeit goods.

"A hot issue in copyright law right now is an Internet site's responsibility for what users post and whether it is responsible for the misuse of the intellectual property of others," said Carole Handler, an intellectual property lawyer at Chicago-based Wildman, Harrold, Allen & Dixon LLP, in an e-mail. "With this decision, the responsibility of online retailers for the sale of counterfeit merchandise has now come under scrutiny in the same context."

Handler said the underlying issue is whether the online retailer is liable and what steps it must take to prevent the sale of counterfeit merchandise.

"While Louis Vuitton argued [that] eBay and its fellow sites are not merely passive hosts, eBay contended that it already takes [such] steps and it cannot monitor such uses itself," she said. "The French court obviously sided with Louis Vuitton, and this ruling is likely to spark American litigation on this issue."

The decision in favor of LVMH comes on the heels of a similar decision by another French court that ordered eBay to pay $31,000 to Hermes International for selling fake Hermes handbags. And in 2004, Tiffany & Co. sued eBay in federal court in New York, claiming that the company didn't do enough to keep counterfeit goods off its Web site.

But the eBay spokeswoman said the company has taken step to stop the sale of counterfeit goods with its Verified Rights Owners (VeRO) Program, which provides tools to help companies look for fake goods on the site. If a company determines that a user is selling counterfeit merchandise, it notifies eBay, which immediately takes down the auction, she said.

Sharpe said the company spends $20 million annually on technology and manpower and has 2,000 employees worldwide who work on identifying and removing counterfeit property from its site.

"There are over 18,000 rights owners, like Nike and Coach, involved in the program, and in 2007 alone, we removed 2.2 million potentially counterfeit listings," she said.

Sharpe said eBay has also suspended 50,000 sellers who were selling fake goods and has made it harder for other sellers to offer counterfeit goods for sale.

However, in its complaint, Tiffany, which is a member of the VeRO program, said that eBay is forcing manufacturers to bear much of the cost of policing the auction site to look for counterfeit Tiffany goods being sold via eBay. A one-week trial was held in federal court in Manhattan late last year, and a decision on which company has to bear those expenses is still pending.

Espinosa said the LVMH decision could be bad sign for eBay in its fight with Tiffany.

Copyright © 2008 IDG Communications, Inc.

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