The old maxim “buyer beware” is well-suited to internet shopping. This is particularly true on eBay, the world’s largest online auction site, where the buyer not only lacks the advantage of inspecting the goods, but must often deal with a seller identified only by his online screen name. Among the vast selection of goods available on eBay is the jewelry, silver and other fine goods of Tiffany & Co, sold largely by anonymous third-party sellers.

Tiffany itself sells goods only in its stores, websites and catalogs, choosing to forego such channels of sale as department stores, discount stores, or wholesale stores. To preserve the mystique of its products, Tiffany closely polices uses of its trademarks, including the hue of its packaging, so distinctive as to be known as Tiffany-blue.

In recent years, Tiffany has introduced programs that educate buyers to purchase genuine goods from retail stores. The programs were born of the discovery that many bidders for TIFFANY-brand goods on eBay are miffed when they realize they have bought counterfeit goods. As part of its trademark-policing efforts, Tiffany has bought goods passed off as genuine Tiffany on eBay and learned that about 75 percent were counterfeit.

eBay recognizes that non-genuine goods are sold through auctions on its site. It has taken the following measures to cut down on the sale of counterfeit goods:

• Spent $20 million a year on tools to promote trust and safety on its website
• Set up a buyer-protection program which reimbursed the buyer if it discovered that the items were not genuine
• Hired 200 employees who focus exclusively on combating infringement
• Implemented a “fraud engine” which applies complex rules and models to uncover auction listings that are likely to include counterfeit goods, factoring in the number of goods for sale, the IP address of the seller, and the previous feedback the seller has received
• Implemented “Tiffany-specific” filters which use 90 different keywords to try to distinguish between genuine and counterfeit products
• Conducted a notice-and-takedown system by which a trademark owner could request the de-listing of an auction if one of its trademarks was being used improperly
• Allowed rights owners such as Tiffany to create an “About Me” page to inform eBay users about their products, intellectual property rights and legal positions. (Tiffany took this opportunity on its page to claim that “Most of the purported Tiffany & Co. silver jewelry and packaging available on eBay is counterfeit.”).
• Included a special warning, when a seller attempted to list a Tiffany item, that eBay does not tolerate the listing of counterfeit goods, with a link to Tiffany’s “About Me” page.
• Suspended hundreds of thousands of sellers every year on suspicion of engaging in trademark infringement

Tiffany felt that the measures did not go far enough and demanded that eBay discontinue all Tiffany auctions on its site. eBay refused. Tiffany brought suit against eBay for trademark infringement, trademark dilution, and false advertising. In 2008, a federal judge in the Southern District of New York rejected Tiffany’s claims, finding, among other things, that eBay’s protective measures shielded it from liability.

On appeal, in Tiffany (NJ) and Tiffany & Co, v. eBay, Inc., the Second Circuit took a fresh look, starting with the claim that eBay’s use of TIFFANY and other marks in the auction listing was direct trademark infringement because consumers were likely to be confused as to the origin of the goods. The court stated the general rule that trademark law does not reach the sale of genuine goods bearing a true mark even though the mark owner does not authorize the sale.

Further, the court held that the defense of nominative fair use[1] applied when eBay used Tiffany’s mark on its website, and in sponsored link advertising, to refer to the Tiffany goods it had on sale and accurately describe them. Finally, the district court reminded Tiffany that it cannot control the “legitimate secondary market in authentic Tiffany silver jewelry.”

The court found more difficulty in determining whether eBay had committed “contributory trademark infringement,” a tort that entitles the victim to damages. A service provider such as eBay can be found liable for contributory infringement if it (1) exercises sufficient control over the infringing conduct, and (2) intentionally induces another to infringe a trademark or continues to supply its services to one who it knows or has reason to know is engaging in trademark infringement.

The appeals court found that eBay did exercise sufficient control over the means of the infringing conduct but that it did not intentionally induce infringement. The remaining issue was whether eBay continued to accommodate sellers of counterfeit goods who it had reason to know were auctioning counterfeit Tiffany goods.

On this point, Tiffany argued that eBay was liable because it continued to provide sellers the opportunity to auction counterfeit goods as TIFFANY. Tiffany urged that its demand letters to eBay, together with the results of its investigation (which it shared with eBay) and the hundreds of its take-down requests to eBay, were enough to alert eBay to the prevalence of counterfeit goods on its site.

eBay responded that Tiffany’s action gave mere “generalized notice” of infringement but did not identify specific sellers or auctions that offered counterfeit goods. The company added that it was doing everything it could to weed out known sellers of counterfeit goods or otherwise take down auctions at Tiffany’s request or based on the circumstances of certain auctions.

The appeals court sided with eBay. It found that only “contemporary knowledge” of particular auction listings that used Tiffany marks would be sufficient to show that eBay had reason to know of the infringement. Tiffany had only alerted eBay to general counterfeit activity but did not identify particular sellers of goods. Without such information, eBay could not be liable for contributory trademark infringement.

Undeterred, Tiffany argued that eBay was liable for infringement because it was willfully blind to the counterfeit auctions occurring on its site. Court precedent had held that, if an actor intentionally shields itself from discovering trademark infringement or the identity of infringing sellers, the actor could reasonably be charged with knowledge sufficient to be liable. But the appeals court concluded that eBay’s measures for protecting brand owners and complying with Tiffany’s take-down notices sufficed to show that eBay was not willfully blind.

The court was quick to dismiss Tiffany’s dilution claims[2] by finding that eBay was not using the TIFFANY marks to refer to its own products, only to items that it had no reason to believe were anything but genuine Tiffany. Even though the act of counterfeiting may dilute the value of Tiffany’s mark, the court found that, because eBay itself did not sell the goods, it did not engage in trademark dilution.

The court gave the nod to Tiffany only on its false advertising claims. Literally false advertising can support a claim if (1) the advertising tends to mislead or confuse consumers and (2) a statistically significant part of the commercial audience holds the false belief communicated by the advertisement. eBay had purchased advertising space on search engines stating “FIND TIFFANY ITEMS AT LOW PRICES.”

Because eBay knew that a number of Tiffany items offered on its site were not genuine, it could be accountable for misleading consumers. The court wrote, “an online advertiser such as eBay need not cease its advertisements for a kind of goods only because it knows that not all of those goods are authentic. A disclaimer may suffice.” However, the law “prohibits an advertisement that implies that all of the goods offered on a defendant’s website are genuine when in fact, as here, a sizeable proportion of them are not.”

The appeals court returned the case to the district court to consider whether the evidence was sufficient to show that a statistically significant part of the commercial audience held the false belief that genuine Tiffany items could be found at low prices.

eBay’s anti-counterfeit measures, though shown not to be tremendously effective in warding off the sale of counterfeit products, were effective in convincing the court that eBay was not willfully blind to the problem. Though the tort of contributory trademark infringement is alive and well, some specific knowledge of the infringement is required in order to impute liability to an auction holder like eBay.

[1] Nominative fair use is a defense to trademark infringement which allows use of another’s trademarks when referring to their goods and services. To be eligible for the defense, only as much of the trademark that is absolutely necessary may be used, and no affiliation between the two parties can be implied.[2] Tiffany claimed that eBay diluted the famous TIFFANY mark by blurring and by tarnishment. Dilution by blurring occurs when an actor uses another’s famous trademark to refer to his product in a different field of goods, such as KODAK pianos. Dilution by tarnishment occurs when the reputation of the famous mark is harmed due to the shoddy quality or unsavory context surrounding another’s use of a confusingly similar mark.