eBay pays a high price for fakes

The French courts have already dealt several financial blows to eBay. But an adverse ruling in its US case with Tiffany & Co could spell disaster, say lawyers Kate Withers and Kate Ellis.

Last month eBay was ordered to pay €38m to luxury goods manufacturer LVMH, for allowing online auctions of fake copies of the luxury goods.

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A French court decided eBay had committed "serious faults" by not doing enough to prevent counterfeit goods being sold on its site. This decision is good news for brand owners but has significant implications for online commerce.

eBay was also ordered to stop selling certain perfumes because it breached LVMH's selective distribution agreements - which are typically used to regulate how, where, and by whom, luxury goods are sold.

The decision is just the latest battle in a long dispute between the online auctioneer and luxury brand owners. For example, in 2007 L'Oréal started legal action against eBay in five European countries over the sale of counterfeit perfume and cosmetics.

Many of the cases against eBay have been brought by French groups that control much of the luxury brands industry. Other rulings, such as a case filed against eBay in the US by Tiffany & Co, are awaited.

eBay has already indicated it will appeal the judgment, which was handed down just a month after eBay was ordered by a French court to pay Hermès €20,000 over its sale of counterfeits.

eBay asserts that LVMH's pursuit of the litigation was a result of its "desire to protect commercial practices that exclude all competition" rather than the prevention of counterfeiting.

Implications for eBay

Before the decision by the French courts, eBay had already stepped up its efforts to fight counterfeiters through programmes such as its verified rights owner system, which is designed to block sales of counterfeit goods.

It also removed counterfeit products from its site if it was notified that counterfeit products were being offered for sale.

If eBay is unable to overturn the decision of the French courts and other courts follow suit, the implications are daunting. eBay's global popularity means it is an incredibly burdensome undertaking for it to have to proactively police the contents of its site to ensure that no counterfeit products are offered for auction.

In the LVMH dispute, evidence was submitted that a large proportion of LVMH's branded goods sold through eBay were, in fact, counterfeit. LVMH claimed that 90 per cent of the 300,000 Dior-branded products sold on eBay in the second quarter of 2006 were fakes.

The court's findings have very significant implications for online commerce and may require eBay to rethink its business model.

But while the French courts have generally taken a favourable approach to luxury brand owners, an equivalent ruling in the pending case filed by Tiffany & Co could spell disaster for eBay, since the US is responsible for about half of its business.

The implications of such a decision could have dramatic consequences for all online resellers by making them responsible for controlling and verifying the authenticity of goods sold.

This checking will be a costly undertaking for any reseller and is likely to result in a reduction of online resellers as they struggle to discharge the responsibility of policing their sites and taking action against counterfeiters.

Implications for brand owners and retailers

The decision is good news for brand owners, for whom eBay's business model is a huge challenge. eBay's online virtual marketplace is often used to facilitate the sale of counterfeit goods and there has been substantial debate about eBay's responsibility for the authenticity of products sold.

It is more attractive for brand owners to put the onus on eBay to control its sellers' activities - the alternative would be to pursue individual resellers and/or to police eBay itself.

Plainly, it is in the interests of brand owners for the burden of policing sites such as eBay for counterfeit products to be placed on the online seller.

Notwithstanding the French court's decision, brand owners are advised to continue to utilise eBay's verified rights owner system and to notify eBay of any suspicious sales until there is a clear outcome to the global litigation.

Kate Withers and Kate Ellis are associates in the Intellectual Property team at international law firm Eversheds.