Firms Serving Online Merchants Must Protect Themselves Legally

By Theodore F. Monroe, Bradley O. Cebeci, and Jonathan Dekel as seen in The Los Angeles Daily Journal, May 12, 2006.

E-commerce and direct marketing have revolutionized the way the world shops, and have further spurred the rapid growth of the credit card processing and electronic payment industries. As the Internet becomes a truly global marketplace and as technology continues to improve, so grows the convenience to consumers of shopping online and by direct response, which would seem to signal a bright future for these industries. Unfortunately, this ever increasing convenience to consumers is rivaled perhaps only by that to infringers, who rely on the broad reach and relative anonymity of the Internet to exploit the goodwill created by legitimate online marketers and trademark owners through costly research, development and marketing campaigns to promote and pass off their own infringing products.

While legitimate businesses and trademark owners may attempt to sue these direct infringers for injunctive relief and damages, such suits often engender little practical relief. Not surprisingly, the real perpetrators generally are hard to find and, even when they can be found, are even harder to touch due to their increasing sophistication in setting up their “businesses” in favorable jurisdictions offshore to avoid the long arm of the law, or being otherwise “judgment proof.” Thus, these aggrieved parties must with increasing frequency turn to those third-party companies whose services indirectly facilitate these illegal transactions, both to broaden the net of liability, and to deprive the infringers of the means, channels, and instruments of their unlawful conduct.

As a starting point, the United States Supreme Court has held that a party may be secondarily liable for contributory trademark infringement where that party (1) intentionally induces another to infringe on a trademark, or (2) continues to supply a product knowing or having reason to know that the recipient is using the product to engage in trademark infringement. Inwood Labs. v. Ives Labs, 456 U.S. 844 (1982). The extent of control exercised by such a defendant over the direct infringing party’s means of infringement is an important factor the court must consider in determining this second prong. Lockheed Martin Corp v. Network Solutions, Inc., 194 F.3d 980 (9th Cir. 1999).

While courts are still defining what this standard means in the context of Internet commerce, some recent decisions in other factual settings may shed some light on the potential ambit of contributory liability for trademark infringement in this arena. For example, the Seventh Circuit has held that a flea market operator may be liable for its vendor’s sales of infringing products by controlling the forum for the infringement, and remaining “willfully blind” to such conduct (i.e., having reason to suspect wrongdoing but failing to investigate). Hard Rock Café Licensing Corp. v. Concession Services, Inc., 955 F.2d 1143 (7th Cir. 1992). Similarly, the Ninth Circuit has held that a swap meet cannot disregard its vendor’s blatant acts of trademark infringement without incurring secondary liability. Fonovisa, Inc. v. Cherry Auction, Inc., 76 F.3d 259 (9th Cir. 1996). Likewise, the District Court for the Southern District of New York has held that an Internet Service Provider (ISP) who provides web hosting services to companies marketing infringing products may be secondarily liable to the trademark owner for enabling such acts of infringement by providing a platform for the infringing marketing. Gucci America, Inc. v. Hall & Associates, 135 F.Supp. 2d 409 (S.D.N.Y. 2001).

The Federal District Courts of California also have recently begun to confront the issue of secondary trademark liability in the Internet commerce context in a series of lawsuits by adult magazine publisher and subscription website operator, Perfect 10, Inc. (“Perfect 10”), against online Age Verification Service (AVS) providers, Internet Payment Service Providers (IPSPs), the Card Associations, and even Google, Inc., for their alleged roles in enabling the infringement of its adult-oriented entertainment products online.

In Perfect 10, Inc. v. Cybernet Ventures, Inc., 213 F. Supp. 2d 1146 (2002), Perfect 10 alleged that a certain AVS provider used by adult Websites should be held secondarily liable for acts of trademark infringement by their merchants, and won a preliminary injunction against them. The District Court reasoned that the AVS provider was akin to the swap meet in Fonovisa since it had the right to terminate webmasters at will, control consumer access, and promote its services, and therefore exercised the type of control that warranted imposition of liability for contributory trademark infringement. The case settled shortly thereafter, however, before the question of liability could be further litigated.

Perfect 10 next sued two IPSP companies, IBill and CCBill, on theories of indirect copyright and trademark infringement for their alleged role in processing payments for access to the infringing websites. See Perfect 10 v. CCBill, 340 F. Supp. 2d 1077 (D. Cal. 2004). Significantly, while the District Court granted the defendants’ motion for summary judgment on theories related to indirect copyright infringement, it denied defendants’ motions for summary judgment related to Perfect 10’s indirect trademark infringement claims. While this case, too, settled before the trial of these claims, the decision nonetheless suggests that an IPSP may bear secondary liability for its role in processing an infringing website’s purchase transactions. By contrast, when Perfect 10 filed a similar action against Visa and MasterCard, the District Court had little trouble concluding that the Card Associations’ role in processing credit card purchase transactions from the infringing websites was too remote from the actual infringing conduct to support such liability, and granted the Card Associations’ motion to dismiss. Perfect 10 v. Visa Int’l Serv. Ass’n, 2004 U.S. Dist. LEXIS 15895 (D. Cal. 2004). However, in a separate, still-pending lawsuit in the Central District of California, the District Court has yet to consider Perfect 10’s trademark infringement claims against Google, Inc. arising from its alleged role in facilitating access to the infringer’s websites through its search engine, though it recently granted in part and denied in part Perfect 10’s motion for preliminary injunction against Google on its contributory copyright infringement claims.

Thus, these cases provide some guidance as to the degree of control that should be required to establish a claim of contributory trademark infringement against those that indirectly facilitate such acts of infringement in the Internet commerce realm. On a continuum then, a fulfillment house would appear to exercise even more control than flea market owners, swap meets and ISPs in facilitating trademark infringement, and would appear to be a strong candidate for liability under appropriate circumstances. For example, while a flea market operator provides merchants with a venue to sell their goods, a fulfillment house often wields direct control over the merchandise based on its role in storing and distributing such goods. See, e.g., Fonovisa and Hard Rock, supra. Moreover, similar to the ISP in Gucci, which provided virtual storage and communications for the infringing material, a fulfillment house may provide actual storage and communication services for infringers by warehousing their goods and processing shipping orders to customers. Based on the Perfect 10 cases, IPSPs also would appear to be likely candidates for indirect trademark liability based on their ability to terminate merchants at will, as well as the control they exercise in allowing consumers to enter an infringing merchant’s site by processing payments for access or subscription; and, there is at least a fair argument for imposing secondary trademark liability on companies such as Google for their alleged role in facilitating access to infringing sites that consumers otherwise might not locate, particularly where infringers pay a fee for their sites to be included among the most relevant search results for given queries.

While it remains to be seen how the far the web of secondary liability for trademark infringement in the Internet commerce world will eventually be cast, one clear message that companies providing services to online merchants (and their lawyers) should take from all of this is the value of a little due-diligence before doing business to help avoid costly litigation down the road.