Take a scroll through the cosmetics section of an online auction market, and you’re likely to run across some questionable goods. Want a used tube of lipstick sans packaging? Counterfeit eye shadow? Loads of samples and testers labeled “not for resale”? You can probably find it.

Cosmetics and perfume giant L’Oréal wasn’t happy about these sales. It also was finding that some of its goods that were never intended to be sold in Europe were ending up there through eBay sales. Unhappy with eBay’s response to its concerns, in 2007 L’Oréal sued the online auction marketplace in Belgium, Britain, France, Germany and Spain, alleging trademark infringements.

The U.K. High Court of Justice found that eBay was not jointly liable through the acts of its users. But the court referred the case to the European Court of Justice (ECJ) for guidance on several points, including whether and to what extent eBay can invoke a safe harbor exemption from liability. The resulting July 12 decision has implications that go beyond the practices of online auction sites to affect brand owners, advertisers and online operators.

“This decision is incredibly broad, affecting any kind of online service provider offering services in the EU,” says Joel Smith, a partner at Herbert Smith in London. “It includes access service providers that may facilitate file-sharing software by their customers, operators offering keyword services, social networking sites, blog sites and many other types of online communities.”

Keyword Confusion

The ECJ’s decision touched on keyword advertising, an issue it has taken up several times in recent years in landmark cases such as Google France v. Louis Vuitton and Portakabin v. Primakabin, and an issue it is currently considering in Interflora v. Marks & Spencer. All three cases question whether an advertiser can use a competitor’s trademarked name to trigger an ad for the advertiser’s own goods or services.

In L’Oréal v. eBay, the ECJ confirmed its holding in Google France that using a trademark in such a way is “use in the course of trade,” even if the trademark doesn’t appear in the ad itself. A key issue was that searches for L’Oréal trademarks would trigger ads that linked to offers of sale of products by eBay’s users on eBay’s marketplace platform. The ECJ ruled that trademark owners are entitled to prevent such advertising in cases where it would confuse a reasonably well-informed user as to whether the advertiser has some economic link to the trademarked keyword or is a third party. It may be difficult for advertisers to escape liability on that basis absent an express disclaimer that they’re not connected to the trademark owner. Indradeep Bhattacharya, a lawyer at Latham & Watkins’ London office, says advertisers have to be very careful now.

“The reasoning of the ECJ seems to be they’re likely to present a rebuttable presumption that there’s some confusion in the minds of the consumer,” he says. “It’s quite a clear direction from the ECJ that they don’t like this practice of using someone else’s trademark as a keyword to bring up their competitors’ goods or services.”

Bottom Line

The heart of the ruling concerns the circumstances under which online operators such as eBay can rely on a liability exemption of Article 14 of the E-Commerce Directive, adopted by the European Commission in 2000. The ECJ said an online operator is exempt only if it maintains a neutral role, providing “merely technical and automatic processing of the data provided by its customers.” Once they take on an active role—“in particular, optimizing the presentation of the offers for sale in question or promoting those offers,” the court wrote—they are no longer exempt from liability.

“The line of what defines an active role may be quite low,” Bhattacharya says. “If you have a situation where an online auction site is assisting and working closely with an advertiser in optimizing their ads, and helping them with language and marketing, that’s unlikely to be a situation where you could say the online operator played a neutral role.”

The court imposed another condition as well: Even if online operators are found to be neutral, they still are not exempt from liability if they were somehow aware of infringements taking place, either through their own investigation or through notification, and failed to act to remove or disable access to the information. The court noted that receiving a notification will not automatically preclude an online operator from exemption, since some notifications “may turn out to be insufficiently precise or inadequately substantiated.”

“A lot of questions remain on the issue of awareness,” says Vivien Rörsch, an IP lawyer at De Brauw Blackstone Westbroek in Amsterdam. “For instance, is there an obligation for the online marketplace to do its own investigations? What is ‘sufficiently precise’ or ‘adequately substantiated’?”

To be on the safe side, Rörsch recommends that online operators remove any contested advertisements as soon as they receive a notification.

Tom Scourfield, a partner at CMS Cameron McKenna in London, says online operators might consider greater use of technical measures such as filters to counteract infringement, but he warns not to take this decision too far.

“Any suggestion as to active monitoring of users should be resisted, and would in any event be counterproductive as it would also result in further ‘awareness of facts and circumstances,’” he says.

Appropriate Relief

Finally, the ECJ held that regardless of liability, brand owners and content providers may seek urgent injunctive relief under Article 11 of the IP Enforcement Directive to stop current infringement and prevent future infringement. That arms brand owners with fairly broad powers for relief against online advertisers, online operators and even ISPs.

“This case provides the green light for brand owners and content providers to use Article 11 as a justification for seeking urgent injunctive relief to impose filtering or blocking measures upon online service providers that refuse to address issues of persistent infringement by users across their services,” Smith says. In addition, he says, there could be a conflict with Article 15 of the E-Commerce Directive, which provides that there is no obligation upon a service provider to monitor traffic.

The ECJ specified only that injunctive relief be effective, proportionate, and dissuasive, and that it must not create barriers to legitimate trade. It will be up to national courts of the EU member states to determine what forms of relief will be considered.

While the decision is a relatively positive result for brand owners, it stops short of creating a standard monitoring obligation on all online operators to prevent infringement by policing website contents.

“For the most part, brand owners will still have to take the lead role in identifying infringements and coordinating with online operators,” Bhattacharya says. “But the bar has been raised in terms of what all online operators need to do to [maintain a neutral role] or comply with orders to take down infringing content.”

Sidebar: Targeting Consumers

The ECJ in L’Oréal v. eBay also clarified a question of jurisdiction for online advertisers. It confirmed that if ads are targeted in part to consumers in the EU , EU trademark laws apply, even if the advertisers are located in other regions. It’s an important finding, considering the worldwide nature of the Internet, online business and jurisdiction-specific trademark laws. Where companies are advertising their goods on an international basis, they may be subject to EU rules of trademark infringement liability.

“This endorsement of the ‘targeting’ rules endorses the common usage of this concept by national courts across Europe, used, for example, by English courts to trap illegal imports of Sony PlayStation 3, to French courts using it to block reference to Nazi memorabilia on Yahoo!,” says Tom Scourfield, a partner at CMS Cameron McKenna in London. “In short, if consumers are targeted, the courts of that state are likely to have jurisdiction.”