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Tiffany and eBay are in court over a major question for Internet commerce: At what point does the online auction house bear responsibility for fake goods sold on its site? EBay is a flea market, art gallery and advertising publisher, among other things. Last year, its 95 million users bought and sold 971 million items from luxury cars to trinkets. It says it defends against fraud through its “feedback” system, whereby buyers and sellers rate one another publicly. And it allows companies to shut down sellers they say are violating their intellectual property rights. Eight-thousand companies have participated under the program, said an eBay spokesman. On its own, eBay also removes auction listings that are in obvious violation of intellectual property laws, he said. Despite these efforts, online auction fraud is at the top of the list of thousands of complaints received annually by the Federal Trade Commission. Tiffany and Co. is complaining, but not to the FTC. The luxury goods manufacturer has sued eBay in the Southern District of New York in Tiffany (NJ) Inc. v. eBay Inc., accusing it of trademark infringement by facilitating and promoting the sale of tens of thousands of pieces of counterfeit Tiffany jewelry. The fakery has eroded the reputation of the 150-year-old Tiffany brand, the company says. The “overwhelming majority” of jewelry items sold and offered on eBay’s Web site using the Tiffany name are counterfeit, the complaint says. Its research has found that 95 percent of the items are fakes. The issue comes down to whether eBay knew that the items offered for sale at its online auction house were forgeries and what it did to prevent fraudulent sales. The outcome of the case would have obvious major implications for eBay and the owners of well-known brands, if it is tried to a conclusion. An eBay spokesman said the parties “are in communication” but declined to elaborate. EBay’s answer to the complaint is due this month. Tiffany’s claims fall into two categories: direct and contributory trademark infringement. Direct infringement arises from advertising links that eBay purchased on the popular Internet search engines Google and Yahoo. When users search for “Tiffany” or “Tiffany’s” with these search engines, eBay’s links appears at the top of the pages. These links, Tiffany argues, lead to sellers that offer counterfeit goods on eBay’s site. By advertising them, eBay is violating Tiffany’s trademark, it argues. Contributory infringement is more tricky. “If someone is knowingly facilitating a counterfeiter, they can be sued as contributors,” said Thomas Morrison, a trademark expert at Patterson, Belknap, Webb & Tyler. Legally there seems to be no question that eBay must remove a known fake from its site. It regularly does so, acting on the word of the manufacturer of the goods in question. It also pursues recidivists, sometimes bringing court action. But it does not screen auctions for counterfeits, leaving that to manufacturers. Trademark law bans auctioneers, flea market organizers and others from knowingly facilitating the sale of counterfeits. But there is little case law that bears on the specific issue of who should monitor the goods sold on Internet auction sales to learn whether they are counterfeits: eBay or brand name manufacturers. Although Tiffany is apparently the only company to sue over the issue, it is not the only one that has had problems. The Callaway Golf Co., which makes high-end golf equipment, was plagued by counterfeit clubs sold on eBay. It worked with the auction company to bring criminal charges against a suspect. “We get excellent cooperation from eBay,” said a Callaway spokesman. Trademark owners like Callaway that find or suspect a forger contact eBay, which then shuts down the suspect listing. Callaway also receives the seller’s contact information if it wishes to file a lawsuit against the infringer. The process works almost perfectly, said the Callaway spokesman, with few sellers complaining they were wrongly shut down. Sometimes, it leads to a prosecution as was the case with a man found guilty for selling counterfeit Callaway golf clubs in upstate New York last September. On a typical day, Callaway receives reports from its investigators of three to six suspects operating on eBay. “We watch the Internet auction sites religiously,” said the spokesman. Tiffany has taken a different tack and says it has a considerably bigger problem. It monitors eBay regularly, using a system its officials declined to describe. In one five-month period it notified eBay of 19,000 efforts to sell suspected fake Tiffany goods, it said in its court complaint, about 125 a day. All were removed by eBay. Tiffany also bought 186 pieces of jewelry described as original Tiffany goods a few months ago and found that only 5 percent of the items were genuine, the complaint said. Tiffany essentially wants eBay to authenticate the sales, much like high-end auctioneers Christie’s and Sotheby’s do. In its complaint, Tiffany says eBay should remove all sellers offering more than five pieces of jewelry for sale. The market for used Tiffany jewelry is limited to a narrow group of traders, justifying this blanket approach, it said. This would change the enforcement equation, forcing eBay to remove a whole class of sellers rather than acting on outsiders’ information. “The basic proposition is whether [eBay] knew or had reason to know the goods were counterfeit,” said Louis Ederer, head of the intellectual property department at Torys New York office. “Tiffany is trying to take the law perhaps a little further than it’s gone before.” It has two facts in its favor, he said. If Tiffany’s contentions are true, then counterfeiting its jewels has proliferated immensely, far outdistancing Calloway golf clubs for example. And eBay, unlike a newspaper publishing classified advertisements, collects part of the sale price, so it might have some additional responsibility, said Ederer. “Tiffany is saying you can’t turn a complete blind eye” to mass counterfeiting he said. Tiffany’s lawyer, James Swire of Dorsey & Whitney, and eBay’s lawyer, R. Bruce Rich of Weil, Gotshal & Manges, declined to comment for this story. An eBay spokesman said the auctioneer’s own effort to protect intellectual property — called the Verified Rights Owner Program — can effectively address Tiffany’s complaints.

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