Some Lessons about Settlement from Tiffany v. eBay
By: Paul E. Thomas
August 2008
The recent decision in Tiffany v. eBay (No. 04 Civ. 4607 (SDNY July 14, 2008)) was a relief to providers of online marketplaces and auction houses because it strengthened the established standard for the level of specific knowledge of counterfeit sales activity that is required before a court will find such a provider liable for contributory trademark infringement, and it was a warning to all trademark owners that the burden of policing third-party use of a trademark lies squarely on the shoulders of the owner. Aside from these broad points, the opinion tells a story of frustration and exasperation which led Tiffany to spend millions litigating a losing case, and in the telling it provides some good reminders about how we should control those things that stand in our control and pursue a practical settlement to disputes as an economical means to avoid the high cost and high risk of litigation.
The basic facts. Because Tiffany has a famous trademark and produces precious items, its product list has for many years been a tempting target for counterfeiters, and Tiffany has had a long and vexing struggle to combat sellers of silver goods and jewelry that falsely bear the Tiffany trademark. The proliferation of internet marketplaces has created new venues for illicit sellers, and no internet marketplace or cyber auction house has been more popular or successful than eBay. After pursuing some six hundred enforcement actions against sellers of counterfeit goods on eBay, Tiffany contacted eBay in May of 2003 to pursue a more direct solution to its problem with counterfeiters. Tiffany wanted to try prevent the infringing activity before it occurred to avoid having to scurry after individual infringers once they had been identified. The subsequent dialogue between the companies led to a standoff when eBay refused to ban sellers of multiple Tiffany items (Tiffany had proposed a 5-or-more rule), and refused to take down listings that did not appear to be illegitimate. In essence, eBay resisted placing a prospective ban on sellers of Tiffany items. “What you have asked us to do,” said eBay, “is to consider listings apparently infringing simply because the seller is offering multiple items.” eBay was not prepared to accommodate Tiffany’s request for a prospective ban, and so Tiffany filed suit in federal court for trademark infringement, contributory trademark infringement, and related claims.
Reminder #1: Pursue a settlement that is reasonable, well justified, and practical. Tiffany’s CEO testified that “the principal issue” was that “eBay would not prospectively ban sellers of multiple Tiffany items, particularly when those items were sold in lots of five or more” because Tiffany wanted “to stop counterfeiting before the fact, not after the fact.” The Court had little sympathy for Tiffany’s five-or-more rule for several reasons. First, it was established at trial that legitimate sales of five or more items had occurred on eBay’s website, so there was little support for Tiffany’s allegation that single sales of five or more items were presumptively infringing. Second, Tiffany itself allows single sales of five or more items through its Corporate Sales Department and its international trade accounts. Third, Tiffany’s demand had a touch of disingenuousness because the Court found that Tiffany used the rule partly as an anti-diversion tool rather than an anti-infringement tool because it wanted to prevent the growth of a secondary market in genuine Tiffany goods. Fourth, Tiffany wavered in its insistence on the rule: sometimes Tiffany relaxed the rule and requested that it be applied only to new or identical items. And last, Tiffany’s CEO testified that the five-or-more rule was merely “our compromised effort” to force eBay to prevent sales of counterfeit merchandise on its site. In light of these findings, it appeared to the Court that there was little justification for the five-or-more rule as a practical settlement proposal.
Reminder #2: Make settlement attractive by pursuing terms that coincide with your opponent’s economic interests. Because eBay profits when transactions are finalized on its website, and because legitimate single sales of five or more Tiffany items were occurring on eBay’s website, Tiffany’s request for a prospective ban on single sales of five or more items went directly against eBay’s economic interests. Unfortunately, the opinion does not indicate what, if anything, Tiffany did to make the idea of a prospective ban on single sales of five or more items palatable to eBay. However, the Court found that between April of 2000 and June of 2004, eBay earned $4.1 million from sales of Tiffany merchandise (including both legitimate and counterfeit items) on its site, or generally about $1 million a year. Notably, Tiffany spent roughly $1 million a year between 2004 and 2008 in litigating this case against eBay. It does not appear from the opinion that Tiffany made a settlement offer that was economically attractive to eBay, though it would appear that Tiffany could perhaps have purchased eBay’s consent to some kind of workable prospective ban on sellers of multiple Tiffany items for the same amount it spent in trying to force eBay to implement such a ban.
Reminder #3: Control what you can control by exhausting your pre-litigation remedies before investing in litigation. The court took pains to say that it sympathized with Tiffany’s frustration in trying to deal with counterfeiters, but it also took pains to point out that Tiffany could have done more to stop counterfeiters on eBay. The Court found that Tiffany spent less than 0.05% of its net sales profits to fight counterfeiting in 2003, the year it filed suit against eBay. Further, between 2004 and 2006, Tiffany devoted no more than 1.6 full time employees per month to monitoring the eBay website. It was not until 2006 that Tiffany devoted one employee full-time to the specific daily monitoring of the eBay website. Of the $14 million that Tiffany budgeted to fight counterfeiters between 2003 and 2008, it spent more than 25% of that amount on the eBay litigation. eBay suggested that Tiffany use available technology, such as Ranger Online, to facilitate its reporting of suspected infringing listings on eBay, but Tiffany rejected this idea and did not attempt to develop its own software tools. In addition, Tiffany’s expert witness, who tried to convince the court that eBay could have done more to prevent the occurrence of counterfeit sales listings on its website by using a data mining algorithm, conceded that his algorithm was available to Tiffany itself, but that the company declined to implement it.
In contrast, eBay appeared to the Court to be doing more than Tiffany to fight counterfeiters. With $20 million a year budgeted to fight fraud in its online marketplace, eBay has 4000 employees in its “Trust and Safety” department, 200 customer service representatives who focus on fighting trademark infringement, 70 employees who work exclusively with law enforcement officers, a fraud search engine software tool on which eBay spends $5 million a year, a notice-and-takedown system called the Verified Rights Owner Program (“VeRO”) which allows trademark owners to request the removal of suspect listings, and an “About Me” webpage for sellers to discuss their products and post warnings about potentially counterfeit items. Ebay also took additional steps specifically in regard to Tiffany: it issued special warnings to sellers of Tiffany items, it regularly reviewed listings of Tiffany items, it devoted Trust and Safety department employees specifically to the Tiffany listings, and it put Tiffany-specific filters on its fraud search engine to find suspicious listings.
Another problem for Tiffany was that the Court found that it did not fully utilize eBay’s VeRO program to help stop counterfeit listings on eBay’s website. Under this program, when Tiffany found a suspect listing, it could file a Notice of Claimed Infringement (“NOCI”), which is in essence a good faith declaration that a particular listing of items for sale is illegitimate because the items are counterfeit and the use of Tiffany’s trademark is an infringement. The Court found that, at all times relevant to the case, eBay never refused to remove a suspected listing after receiving a NOCI from Tiffany, that eBay removed suspected listings within 24 hours of receiving a NOCI, that 70-80% of them were removed in 12 hours, that eBay removed more than 284,000 listings in response to NOCIs filed by Tiffany, and that few illicit sellers returned to eBay under new account names once their infringing listings had been removed. Although a Tiffany attorney who was a witness at the trial testified that Tiffany eventually stopped using VeRO because it thought the program was ineffective, Tiffany had made public statements that the program was indeed working, most notably in a 2004 article co-authored by the then vice president of worldwide security services for Tiffany and Co. The Court concluded that “the record reflects that Tiffany could have invested additional resources in monitoring the eBay website” and “had Tiffany done so, Tiffany could have captured more of the infringing listings.”
Takeaway
Litigation should always be viewed as a risky investment because, unless the issues are black and white (which is almost never the case), the cost can be high and the yield can be empty. For this reason, companies should avoid allocating high amounts to litigation to resolve a dispute when funds can be better allocated toward other more practical, more reliable, and more economical solutions. Tiffany v. eBay, while perhaps offering commentators plenty of opportunities for Monday-morning quarterbacking about what Tiffany could have done differently, also offers several reminders about pursuing imaginative settlement proposals and alternative methods for dealing with problems before resorting to the high-risk investment of litigation.