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Luxury brands have a new legal precedent to battle counterfeiters.
This story first appeared in the October 14, 2013 issue of WWD. Subscribe Today.
Compagnie Financière Richemont SA has scored a major victory against online counterfeiting and the Web sites where they conduct business. A California federal court awarded the luxury conglomerate a permanent injunction against a Pakistan-based business-to-business marketplace called Tradekey.com and its Saudi Arabia-based owner Sawabeh Information Services Co., for knowingly selling a host of counterfeit goods on its site.
The judgment marks a significant step toward holding an e-commerce site accountable for a crime, which seemed difficult since the Tiffany Inc. versus eBay Inc. decision in 2010.
In that case, Tiffany alleged that eBay should be held accountable for selling counterfeit wares on its site through a third party. Both the district court and the appeals court ruled in favor of eBay, deciding that the auction site could not be held accountable for another party’s infringing activities.
The decision meant that brands had to provide proof of counterfeits or infringement to a Web site before it took action, a cumbersome process. Web site operators and owners have shielded themselves behind that ruling ever since.
The business-to-business site Tradekey looked to the eBay ruling in rebutting Richemont’s claims, but Presiding Judge Gary Allen Feess found that based on the evidence provided by Richemont plaintiffs Chloé SAS, Alfred Dunhill Ltd., Montblanc-Simplo GmbH and Officine Panerai AG, Cartier International and Lange Uhren GmbH, the site could be held accountable.
The judge found that Tradekey had “actively promoted and facilitated the sale” of counterfeit goods. It accomplished this by selling memberships to the site, which provides new members with tips and advantageous tools on how to best market product.
Richemont unearthed more than 6,000 unauthorized sellers on Tradekey offering replicas of the plaintiffs’ wares, and it proved, through an investigator who became a member, that the company knowingly helps sellers unload large quantities of fakes.
The judge referenced an event in which the Richemont investigator blatantly asked Tradekey if it had a “problem” with selling counterfeit goods, to which a company employee replied “it did not” and added that Tradekey “relies” on the “replica industry” for a “whole lot of revenue.”
As a result, the judge held the defendants liable for contributory trademark infringement, and he enjoined the site from “permitting, allowing or facilitating customers, users or members of Tradekey.com” and its affiliate Web sites, to “post or display listings to buy, sell, manufacture or distribute products bearing the plaintiffs’ marks.”
Going even further, the judge also extended that injunction to search-engine queries that display any of the luxury group’s brands, and it stopped Tradekey from using the brand names as “key words, ad words or any other type of metadata.” Lastly, he said the defendants could not “allow or advise” any parties on “how to create or post listings for products” that include the infringing marks.
Tradekey must also “institute mechanisms” or “procedures to ensure compliance” with the injunction and provide written proof of that compliance, and it must police its own site for counterfeits.
“They cannot hide their head in the sand and wait to be tapped on the shoulder,” said Susan Kayser, a partner at Jones Day, who represented the plaintiffs. “Part of the reason that the six luxury brands here went after Tradekey is because they wanted to go to the center of the wheel and be able to shut down a source that was facilitating thousands upon thousands of counterfeits getting out there.”
Susan Scafidi, director of Fordham’s Fashion Law Institute, said, “Because Tradekey facilitates wholesale transactions, it’s higher on the counterfeit food chain than individual sellers on eBay or Taobao — Richemont has speared a shark rather than simply skimming plankton. The ruling is also a direct window into simplistic practices for attempting to avoid detection — don’t call the products ‘replicas’ — and into the geography of counterfeiting, since Tradekey’s offices are located in China, Pakistan, and Saudi Arabia.”
According to Kayser, who began the investigation in 2010 and filed the lawsuit a year later, the “goal of the lawsuit was to protect consumers worldwide.”
The lawyer noted that based on the extensive investigation, Richemont was able to win an earlier default judgment against 18 Tradekey members who were selling and buying counterfeits. Most of the members hailed from China, she said, adding that the court turned over their domain names.
But the recent order, which was delivered on Oct. 8, is the real crown jewel of the case, as it may have broader implications for brands and third-party Web sites such as Alibaba or eBay.
While Kayser drew a distinction between eBay, which sells directly to consumers, and Tradekey, which sells in bulk directly to businesses, she noted that the ruling “levels the playing field a bit” for brands seeking to rid the market of knockoffs.
“EBay is one of the gold standards out there. Nobody is doing anything perfectly, but they are doing a lot,” she said. “What’s so key about this is that Tradekey did essentially embrace the Tiffany versus eBay ruling. Tradekey said they weren’t going to give notice of what the [Richemont] brands can already be aware of, but the judge disagreed.”
Now with Tradekey — which is believed to be the second-largest business-to-business global marketplace e-commerce site after Alibaba — being held accountable for contributory infringement, the question becomes whether the ruling is a bellwether.
“Some of the trade boards encourage counterfeiting —whether it will change the landscape? I think something like this changes how counterfeiters operate,” said Roxanne Elings, a partner at Davis Wright Tremaine LLP, who specializes in trademark law and brand protection.
While the ruling may not signify a sea change in case law, it does show a “prevailing attitude,” she said, adding that marketplaces now “need to have a program in place” and “need to monitor” counterfeit claims.
In the Tradekey case, Elings underscored the importance of holding an international firm accountable.
“This ruling says that even if you are outside of the U.S., you have to abide by the rules,” she offered.
While all of this rings positive, actually enforcing the judge’s ruling may be tricky. Richemont will likely receive some monetary damages, but it’s real aim is for Tradekey to be responsive to the ruling when a seller tries to list replicas on its site.
For example, if Tradekey does not monitor its site and Richemont finds infringing goods, Kayser said the firm can send warning letters and seek to hold it in contempt. If Tradekey displays egregious behavior, the courts could theoretically shut down the site — as Tradekey’s servers are in the U.S. — or at the very least, stop the infringing listings from appearing online.
Tradekey could also subvert the ruling by changing its business model to or altering its domain name, Elings said, referring to the difficult nature of prosecuting foreign companies and individuals.
“Still, as frustrating as it is, it’s great to get a good win like this,” she said. “A win like this is really a win for all brand owners or IP [intellectual property] owners.”