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«Bernstein & Potenza: Why the Reasonable Anticipation Standard Is the Reasonable 1 Way to Assess Contributory Trademark Liability in the Online ...»

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Bernstein & Potenza: Why the Reasonable Anticipation Standard Is the Reasonable 1

Way to Assess Contributory Trademark Liability in the Online Marketplace

Stanford Technology Law Review

Why the Reasonable Anticipation Standard Is the

Reasonable Way to Assess Contributory Trademark

Liability in the Online Marketplace

DAVID H. BERNSTEIN & MICHAEL R. POTENZA ∗

CITE AS: 2011 STAN. TECH. L. REV. 9

http://stlr.stanford.edu/pdf/bernstein-reasonable-anticipation.pdf 1 Trafficking in counterfeit and trademark-infringing goods is a widespread and serious problem, particularly in online marketplaces that provide a forum where third parties, with relative anonymity and at limited cost, can ply their trade. Fortunately, the law has long provided a fair, balanced standard for determining when a party can be held liable for contributing to the infringing actions of another. In Inwood Laboratories, Inc. v. Ives Laboratories, Inc., the Supreme Court held that a party can be contributorily liable if it induced the infringement or continued to support conduct that it knew or had reason to know was infringing.1 2 In the nearly thirty years since then, that standard has been fairly applied in a variety of contexts, including with respect to the actions of flea markets,2 landlords,3 and credit card processors.4 In Tiffany (NJ) Inc. v. eBay Inc.,5 though, the U.S.

Court of Appeals for the Second Circuit took a different approach; it held that the operator of the online marketplace could be found liable only if it had “specific” knowledge of the infringement:

[A] service provider must have more than a general knowledge or reason to know that its service is being used to sell counterfeit goods. Some contemporary knowledge of which *  David H. Bernstein & Michael R. Potenza. David H. Bernstein is a partner with Debevoise & Plimpton LLP in New York, and an adjunct professor of law at New York University Law School and George Washington University Law School, where he teaches Advanced Trademark Law. He received an A.B. magna cum laude from Princeton University’s Woodrow Wilson School of Public and International Affairs in 1985, an M.Sc. from the London School of Economics and Political Science in 1986, and his J.D. from Yale Law School in 1989. Michael R. Potenza is counsel with Debevoise & Plimpton LLP. He graduated magna cum laude from Yale College in 1990 and magna cum laude from Harvard Law School, where he received a J.D. in 1995. He clerked for the Honorable William G. Bassler, United States District Court for the District of New Jersey and to the Honorable Samuel A. Alito,Jr., United States Court of Appeals for the Third Circuit. Mr. Bernstein and Mr. Potenza served as counsel for the International Anti-Counterfeiting Coalition in connection with its amicus curiae brief in the Second Circuit in Tiffany (NJ) Inc. v.

eBay, Inc., and for the International Trademark Association in connection with its amicus curiae brief in support of a petition for certiorari in that case to the Supreme Court. Jia Wang, an associate with Debevoise & Plimpton LLP, assisted with the preparation of this article.

1 456 U.S. 844, 854 (1982).

2 Fonovisa, Inc. v. Cherry Auction, Inc., 76 F.3d 259, 264-65 (9th Cir. 1996); Hard Rock Café Licensing Corp. v. Concession Servs., Inc., 955 F.2d 1143, 1148 (7th Cir. 1992).

3 Polo Ralph Lauren Corp. v. Chinatown Gift Shop, 855 F. Supp. 648, 650 (S.D.N.Y. 1994).

4 Gucci Am., Inc. v. Frontline Processing Corp., 721 F. Supp. 2d 228, 247-48 (S.D.N.Y. 2010).

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particular listings are infringing or will in the future is necessary.6 3 Prior to the Second Circuit’s decision in Tiffany, the inquiry in other contributory liability cases did not explicitly focus on a particular level of knowledge, either specific or general, that would trigger liability. Rather, courts considered the totality of the circumstances, including the prevalence of infringing activity in the marketplace, and then asked whether that should be sufficient to warrant the imposition of contributory liability. Under this approach, a level of knowledge much closer to generalized knowledge of widespread infringement, rather than specific knowledge of particular instances of infringement, has traditionally been sufficient to support a finding of contributory liability.

4 In this respect, Tiffany is difficult to square with the line of cases since Ives, in which courts have applied the contributory infringement doctrine in analogous “brick-and-mortar” contexts. In Fonovisa, for example, the Ninth Circuit found allegations of generalized knowledge of counterfeiting sufficient to state a claim.7 The Ninth Circuit upheld the sufficiency of a complaint alleging that the operator of a swap meet—the brick-and-mortar analogue of eBay.com—had knowledge of counterfeiting based on prior seizures followed by law enforcement letters noting continuing, unspecified acts of counterfeiting. On its face, the evidence in Fonovisa is the same type of “generalized” knowledge of illegal activity that the Second Circuit found insufficient in Tiffany, while purportedly applying the same contributory infringement test.

5 This article suggests that, by requiring knowledge of particular infringements, Tiffany introduced an artificial threshold into the standard for contributory trademark infringement liability that did not exist before. In doing so, Tiffany failed to take adequate account of the common law roots of contributory liability doctrine, which have always taken a more flexible approach and which recognize that “generalized” knowledge of prevalent tortious conduct by third parties, coupled with assistance to the third party, can, under the proper circumstances, be sufficient to trigger a duty to take “reasonable precautions” to prevent that conduct.8 The article further suggests that the duty to take reasonable precautions should, as it has in the offline context, be triggered in the online marketplace context when an operator of an online marketplace has sufficient “generalized” knowledge of infringement so that it can “reasonably anticipate” that such conduct will continue to occur in the future.9 “Reasonable anticipation,” this article contends, does not require that the online marketplace have knowledge of “which particular listings are infringing,” 10 but rather may be satisfied by demonstrating “generalized” knowledge that infringement is widespread in the marketplace.





6 This article further suggests that this more flexible standard is not only consistent with common law traditions, but also is supported by sound policy considerations. By requiring knowledge of specific infringing transactions, the standard espoused by the Second Circuit in Tiffany effectively: (a) eliminates the previously well-accepted standard that a party is contributorily liable if it has constructive knowledge of infringement and provides assistance to the infringer; and (b) reduces the test for contributory liability to an actual knowledge test. An actual knowledge requirement, in turn, reduces the incentives for online marketplace operators to ensure the legitimacy of transactions on their sites and results in a higher incidence of infringing and counterfeiting activity.

7 In fairness, counterfeit and infringing activity on online marketplaces does raise different issues than trademark violations in the brick-and-mortar context. Online marketplace providers have less knowledge about the identity of sellers, have no physical access to the goods, and process a significantly greater number of transactions. Those differences may well affect the way in which the

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8 See, e.g., RESTATEMENT (THIRD) OF UNFAIR COMPETITION § 27 cmt. c (1995).

9 RESTATEMENT (THIRD) OF UNFAIR COMPETITION § 27 (1995) (“[Contributory liability attaches when] the actor fails to take reasonable precautions against the occurrence of the third person’s infringing conduct in circumstances in which the infringing conduct can be reasonably anticipated.”).

10 Tiffany, 600 F.3d at 107.

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parties’ respective rights and obligations should be balanced, but it should not change the underlying test of how contributory liability is assessed. The common law standard is built upon the bedrock principle of reasonableness under all the circumstances. Placing a duty on online marketplaces to take “reasonable precautions” if infringement can be “reasonably anticipated” recognizes and embodies the real-world limitation on the ability of either online marketplaces or brand owners to tackle this issue alone. Rather, the centuries-old common law principles, applied in the modern, online context, envision a joint cooperative effort to ensure the legitimacy of online transactions for the benefit of all—online marketplaces, brand owners and consumers.

8 Part I of the article gives background on the growth of online marketplaces and the concomitant rise of counterfeiting and infringing activity. Part II discusses the current state of the law regarding contributory trademark infringement liability, with a particular focus on the Ives litigation and the Second Circuit’s application of Ives in Tiffany. Part III analyzes the common law roots of the contributory infringement doctrine. This analysis concludes that the “generalized” knowledge standard is consistent with the common law origins of contributory trademark liability doctrine. Part IV analyzes the “reasonable anticipation” standard in light of the underlying policies trademark law is designed to foster, and concludes that a “reasonable anticipation” standard, paired with a duty to take “reasonable precautions,” best furthers those policies.

I.

9 Since 1982, when the Supreme Court last addressed contributory trademark liability in Ives,11 an entirely new marketplace has arisen and grown enormously. For example, eBay, which was not even founded until 13 years after Ives was decided, reported sales of $57.2 billion in goods and services through its marketplace during 2009 alone.12 Reflective of this booming growth, the lexicon has even coined a new name for the Monday after Thanksgiving—Cyber Monday—and on November 29, 2010 (last year’s Cyber Monday), online sales hit a new one-day high of $1.028 billion, the first time online sales exceeded $1 billion in a single day.13 10 The growth of the Internet and the popularity of web sites like eBay.com have dramatically increased the prevalence of counterfeiting and trademark infringement. Counterfeiting has ballooned into a social and economic menace, creating severe public health and safety hazards, as well as substantial economic harm to legitimate businesses, on a national and global scale. According to estimates by the Federal Bureau of Investigation (“FBI”), in 2002 counterfeiting cost the United States economy more than $200 billion in lost sales.14 According to another estimate, counterfeiting accounts for an estimated $750 billion dollars in global trade each year.15 The FBI, Interpol, World Customs Organization and International Chamber of Commerce estimate that an astonishing seven to eight percent of world trade every year is in counterfeit goods.16 It even has been reported that sales of counterfeit goods support terrorist groups throughout the world.17 The growing scope of

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http://viewer.zmags.com/publication/f80680b9?page=1.

13 Allison Enright, E-retail’s First Billion Dollar Day, INTERNET RETAILER (Dec. 1, 2010), http://internetretailer.com/2010/12/01/e-retails-first-billion-dollar-day.

14 Press Release, U.S. Customs and Border Protection, U.S. Customs, FBI National Intellectual Property Rights Center Holds Industry Outreach Conference (July 17, 2002), available at http://www.cbp.gov/xp/cgov/newsroom/news_releases/archives /legacy/2002/72002/07172002_2.xml.

15 David S. Wall & Joanna Large, Jailhouse Frocks: Locating the Public Interest in Policing Counterfeit Luxury Fashion Goods, 50 BRIT.

J. CRIMINOLOGY1094, 1096 (2010). Indeed, according to United States government estimates, over 750,000 jobs have been lost due to counterfeiting. Press Release, U.S. Customs and Border Protection, U.S. Customs Announces International Counterfeit Case Involving Caterpillar Heavy Equipment (May 29, 2002), available at http://www.cbp.gov/xp/cgov/newsroom/news_releases/ archives/legacy/2002/52002/05292002.xml.

16 StopFakes.gov, Why Protect Intellectual Property?, http://www.stopfakes.gov/sf_why.asp (last visited June 14th, 2011).

17 ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT, THE ECONOMIC IMPACT OF COUNTERFEITING

AND PIRACY: EXECUTIVE SUMMARY 15 (2007), available at http://www.oecd.org/dataoecd/13/12/38707619.pdf; Press Release, Carratu Int’l, Rise in Counterfeit Market Linked to Terrorist Funding (May 2005), available at http://www.pressbox.co.uk/ Detailed/6073.html.

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