Hauling in the Middleman

The impact of contributory trademark infringement in the United States

Indirect liability for trademark infringement has expanded from its roots in tort law to include a growing spectrum of intermediaries and middlemen, particularly on the Internet. Celebrities and brand owners must enforce their rights against social networking websites such as Twitter and Facebook to reach the infringing conduct of end users. Famous brand owners like Tiffany and Louis Vuitton have pressed for greater accountability on the part of online auction houses like eBay to reach end users hawking counterfeited wares.

What remedies are available under U.S. law against middlemen, whose services contribute to the direct infringement by a distributor of counterfeit products? Examples of such middlemen are landlords, shipping companies, parties providing payment-processing services and ecommerce websites. This article outlines the circumstances under which such intermediaries can be held liable for trademark infringement and counterfeiting.

The two key theories of indirect trademark liability

The federal trademark statute, the Lanham Act, is generally silent on liability for indirect infringers, and few state laws contain explicit provisions on intermediary liability. In an effort to hold those middlemen accountable, courts have applied common-law theories of indirect tort liability to trademark infringement. Over time, two doctrines of indirect liability – contributory and vicarious liability – have evolved.

1. Contributory trademark infringement

This includes both (1) inducement of direct infringers and (2) knowing and material contribution to, or control over, the means of direct infringement. The “inducement” prong imposes liability where a middleman provides active encouragement to a direct infringer.

2. Vicarious trademark infringement

In direct contrast, tracing back to the doctrine of respond eat superior, this infringement imposes liability solely where a middleman and a direct infringer “have an apparent or actual partnership, have authority to bind one another in transactions with third parties or exercise joint ownership or control over [an] infringing product.” Hard Rock Cafe Licensing Corp. v. Concession Servs., Inc., 955 F.2d 1143, 1150 (7th Cir. 1992). In Inwood Labs, Inc. v. Ives Labs, Inc., 456 U.S. 844 (1982), the U.S. Supreme Court affirmed both the “inducement” and the “knowledge and control” prongs of contributory trademark liability. Inwood Labs sold look-alike drugs to pharmacists who mislabeled the generic drugs, using Ives Labs’ trademark. Noting that “liability for trademark infringement can extend beyond those who actually mislabel goods with the mark of another,” the Court concluded that “if a manufacturer or distributor intentionally induces another to infringe a trademark … the manufacturer or distributor is contributorially responsible for any harm done as a result of the deceit,” and that “if [a manufacturer or distributor] continues to supply its product to one whom it knows or has reason to know is engaging in trademark infringement … the manufacturer or distributor is contributorially responsible for any harm done as a result of the deceit.”

Landlords, fleamarket operators and shipping services

Until the early 1990s, theories of contributory and vicarious liability had not been widely asserted outside the manufacturer/distributor context. However, in Hard Rock Cafe, the Seventh Circuit applied the Inwood holding to a flea market operator. In Hard Rock Cafe, the owner of HARD ROCK trademarks for restaurant services and related merchandise sued the operator of “Swap-O-Rama” flea markets in Chicago for contributory and vicarious trademark infringement when its vendors began selling counterfeit HARD ROCK T-shirts. The court observed “it is not clear how the doctrine applies to people who do not actually manufacture or distribute the good that is ultimately palmed off as made by someone else.”

The court in Hard Rock Cafe looked to the Restatement of Torts for the rule that “[a landlord] is responsible for the torts of those it permits on its premises ‘knowing or having reason to know that the other is acting or will act tortiously.’” The court held that “willful blindness” may be the basis for a finding of infringement under the “knowledge and control” prong, stating that “[t]o be willfully blind, a person must suspect wrongdoing and deliberately fail to investigate.”

The court cited Louis Vuitton S.A. v. Lee, 875 F.2d 584 (7th Cir. 1989) (holding merchants who resold poorly crafted counterfeit luggage, which they had obtained at fire-sale prices, knowingly engaged in the sale of counterfeit luggage), but cautioned that willful blindness does not imply a duty for landlords to “seek out and prevent violations.” The case was remanded to the lower court to determine contributory liability under the standard announced by the appellate court.

In Fonovisa, Inc. v. Cherry Auction, Inc., 76 F.3d 259 (9th Cir. 1996), the Ninth Circuit adopted the rule of the Seventh Circuit in Hard Rock Cafe that “a swap meet can not disregard its vendors’ blatant trademark infringement with impunity.” Fonovisa, a California corporation owning trademarks for Latin music recordings, brought an action against Cherry Auction for contributory infringement based on its operation of a flea market where vendors sold counterfeit records. Applying the “knowledge and control” prong, the court held that Cherry Auction clearly knew of direct infringement by vendors due to raids and warnings by the sheriff’s department, which had resulted in the seizure of counterfeit products. Despite that knowledge, Cherry Auction continued to provide key instrumentalities to its vendors, including “space, utilities, parking, advertising, plumbing and customers.” Cherry Auction was held liable for the direct infringement of its vendors because it “actively strive[d] to provide the environment and market for counterfeit record sales to thrive.”

A recent brick-and-mortar case provides a good example of the extensive measures parties could be forced to take in order to prevent infringement. In Louis Vuitton Malletier v. Eisenhauer Road Flea Market, SA-11-CA-124 (W.D. Tex. 2012), an owner of a flea market was ordered to periodically inspect the areas leased by its tenants to determine if any counterfeit goods bearing the plaintiff’s trademark were being sold. If counterfeit goods were found, the lease was to be terminated immediately.

The court also ordered that all future lease agreements between the flea market and its tenants expressly prohibit the sale of counterfeit goods bearing the plaintiff’s trademark, that a sign be placed at the flea market entrance warning the public and tenants that vendors are not allowed to sell goods bearing the plaintiff’s mark, and that the plaintiff’s personnel are allowed to conduct random inspections at the flea market.

The defendant’s response to the ongoing counterfeiting played an important role in Omega SA v. 375 Canal, LLC, No.1:2012cv06979 (S.D.N.Y. 2013). In that case, a landlord was held liable for contributory trademark infringement even though it had no specific knowledge about which of his tenants were selling counterfeit merchandise. The landlord had only a few tenants, and no genuine products containing the trademark in question were being sold at the location. Therefore, it would not have been difficult for the landlord to stop sales of counterfeit products without also harming sales of genuine products.

In United States v. Frison (2016 WL 3184476), decided by the U.S. Court of Appeals for the Eighth Circuit on June 8, 2016, the court affirmed the conviction and two-year prison sentence of a Missouri flea market owner for intentionally aiding and abetting the trafficking of counterfeit and piratical products in his flea market. An appeal based on the civil and criminal statutes being unconstitutionally vague was rejected by the court. This decision follows prior landlord and flea market cases finding contributory liability for tenant sales of counterfeit and pirated goods and, by imposing a substantial prison sentence, may help to reduce the sale of such products by these intermediaries.

The theory of contributory trademark liability found in landlord-liability cases has also been applied to packaging and shipping services. In Cartier International B.V. v. Liu, 02-cv-7926 (S.D.N.Y. April 17, 2003), a shipping company that “arrange[d] for persons to ship items via United Postal Service” – and was located next door to a major counterfeiting operation – was held contributorially liable for having “knowingly handled the shipment of [the direct infringer’s] counterfeit merchandise to customers.” The court reasoned that the shipping company “was facilitating the marketing [of counterfeit goods] by arranging for shipment to customers.”

And in Hetronic International Inc. v. Hetronic Germany GmbH, No. 14-650-C, 2015 WL 6835428 (W.D. Okla. Nov. 6, 2015), the court held that the plaintiff’s contributory trademark infringement claim could stand because the court in Inwood “laid down no limiting principle that would require defendant to be a manufacturer or distributor” (quoting Fonovisa, 76 F.3d at 265). The defendants in Hetronic were a distributor and an assembler.

Internet service providers

Internet and domain-name registration services were seemingly immune to indirect trademark liability after the decision in Lockheed Martin Corp. v. Network Solutions, Inc., 194 F.3d 980 (9th Cir. 1999). There, the court analogized Network Solutions (NSI) – then the only accredited domain name registrar – to the United States Postal Service, stating, “NSI does not supply [a] domain-name combination any more than the Postal Service supplies a street address by performing the routine service of routing mail.” For liability to attach, the court held, there must be “[d]irect control and monitoring of the instrumentality used by a third party to infringe the plaintiff’s mark.” See also Scholz v. Goudreau, No. 13-cv-10951, 2015 WL 5554012 (D. Mass. Sept. 21, 2015) (applying “control and monitoring” test).

However, in recent years, federal courts have shifted gears, recognizing that domain-name registration authorities provide much more than mere “rote translation services.” In Transamerica Corp. v. Moniker Online Services, LLC, 672 F. Supp. 2d 1353 (S.D. Fla. 2009), the owner of the TRANSAMERICA trademark for financial services and insurance alleged that “Moniker intentionally or recklessly supplie[d] registration services to fictitious entities, knowing that these entities engage in trademark and service mark counterfeiting.” Moniker, an Internet registrar, moved to dismiss the complaint, arguing that the plaintiff failed to plead either “inducement” or “knowledge and control.” Denying the motion, the court pointed to the registrar’s continued provision of registration services to fictitious serial cybersquatters, “long after it would have been apparent to any registrar in Moniker’s position that its customer was using Moniker’s service to engage in trademark and service mark counterfeiting, and long after Moniker knew or should have known that its customer was a fictitious entity and/or anonymous individual.”

Theories of indirect trademark infringement have been applied unevenly to online payment processors and social-networking websites. In Perfect 10, Inc. v. Visa International Service Ass’n, 494 F.3d 788 (9th Cir. 2007), an online publisher brought an action against credit card companies for processing payments to websites that sold unauthorized digital photographs bearing the publisher’s trademark. The U.S. Court of Appeals for the Ninth Circuit held that the credit card payment networks were not instrumentalities of trademark infringement.

Similarly, in Anthony La Russa v. Twitter, Inc., 3:09-cv-02503-EMC (N.D. Cal. 2009), an American celebrity sued the social-networking website Twitter for contributory infringement when an anonymous user began making inflammatory and insulting comments under the celebrity’s trademark-protected personal name. And in Oneok, Inc. v. Twitter, Inc., 4:09-cv-00597-JTK (N.D. Okla. 2009), a natural gas distributor sued Twitter for contributory trademark infringement when an anonymous user released misleading information about the distributor under its ONEOK trademark. Ultimately, both cases were settled when Twitter removed the allegedly infringing content from its system.

To date, the leading cases on contributory liability on the Internet are Tiffany (NJ) Inc. v. eBay, Inc., 576 F. Supp. 2d 463 (S.D.N.Y. 2008) and Louis Vuitton Malletier S.A. v. Akanoc Solutions, Inc., 591 F. Supp. 2d 1098 (N.D. Cal. 2008), aff’d, 658 F.3d 936 (9th Cir. 2011).

In eBay, the court held that an online auction house was not contributorially liable for sales of counterfeit Tiffany jewelry on its website by end users. The court determined that eBay exercised sufficient control over its website to come within the “knowledge and control” threshold articulated in Fonovisa and Hard Rock Cafe, as it provided the software to set up auction listings, supplied the necessary marketplace for the sale of counterfeit goods, actively promoted the sale of Tiffany jewelry items, profited from the listing of items and successful completion of sales, and maintained significant control over the listings on its website by barring entire categories of products and implementing fraud-screening engines. The court concluded, however, that “general knowledge … does not require eBay to take action to discontinue supplying its service to those who might be engaging in counterfeiting.”

The evidence demonstrated that eBay had general notice that some portion of the Tiffany goods sold on its website were counterfeit due to thousands of infringement notice forms and numerous demand letters sent to eBay by Tiffany. Tiffany argued that eBay’s “generalized”  knowledge required eBay to preemptively remedy the problem at the very moment it knew or had reason to know the infringing conduct was occurring. The court, however, declined to extend contributory liability “where there is some uncertainty as to the extent or nature of infringement.” The court also noted that a substantial number of authentic Tiffany goods were sold on eBay. “Were Tiffany to prevail on its argument,” the court stated, its “rights in its mark would dramatically expand, potentially stifling legitimate sales of Tiffany goods on eBay.”

The court also found that eBay made significant efforts to protect its website from counterfeiters, promptly removed challenged listings from its website and invested millions of dollars in anti-counterfeiting initiatives. The court concluded, “the law does not impose a duty … to take steps in response to generalized knowledge of infringement.”

The significance of measures taken by the intermediary to prevent infringement was also emphasized by the court in Chloe SAS v. Sawabeh Information Services Co., 2:11-cv-04147 (C.D. Cal. 2013), holding an ecommerce platform liable for contributory trademark infringement, without mentioning the specific knowledge requirement as set out in eBay. However, the defendant in Chloe was willfully facilitating trademark infringement, whereas eBay was taking significant measures to combat it.

In Akanoc Solutions, the other leading case on contributory infringement liability for Internet activity, a California jury awarded $32.4 million to Louis Vuitton arising from a web host’s continued provision of services to websites peddling counterfeit goods. Akanoc provided servers that stored Internet content and allowed content to be accessed through the Internet to counterfeiters. Denying a motion to dismiss Louis Vuitton’s suit, the court focused on Akanoc’s knowledge of the direct infringement as evidenced by Louis Vuitton’s demand letters and internal Akanoc emails recognizing sales of counterfeit goods by end users. Citing Hard Rock Cafe and Fonovisa, the court found that Akanoc’s services were “the Internet equivalent of leasing real estate” and, when combined with Akanoc’s ability to remove infringing websites, entailed a level of involvement and control that prohibited Akanoc from remaining willfully blind to trademark infringement taking place on its servers.

Both eBay and Akanoc Solutions turned on the issues of knowledge and willful blindness. Neither court hesitated to find that the provision of Internet services qualified as an instrumentality of direct infringement. However, as in Omega SA, the focal point in both cases was the defendant’s response to notice of direct infringement and the precautions taken to prevent such infringement. In eBay, the online auction house made significant efforts to combat counterfeiting activity and promptly removed infringing content upon notice from trademark owners; in Akanoc Solutions, all of the Louis Vuitton products purchased from Akanoc’s customers were counterfeit.

The future of indirect liability

Indirect trademark liability has expanded to include middlemen and intermediaries such as landlords, shipping services and Internet service providers. The principal extension of the law has been from the contribution of an infringing product to the contribution of a service as the means of infringement.

Federal courts now grapple with the duty owed by Internet service providers to trademark owners. Clearly, an Internet service provider may not continue to provide its services to counterfeiters while remaining willfully blind to infringement. However, trademark owners will continue to try to have providers such as eBay and Twitter step up their preventive measures. In general, trademark infringement on the Internet is pervasive, but overly restrictive standards for indirect liability chill competition and innovation. For now, it seems federal courts will continue to apply and expand doctrines of indirect trademark infringement to maintain a precarious balance between fostering innovation and protecting trademark rights.

Note: This is an updated version of an article originally published in the Journal of Intellectual Property Law & Practice (Oxford University Press): “Hauling in the Middleman: Contributory Trade Mark Infringement in North America,” by James L. Bikoff, Keri A.F. Johnston, David K. Heasley, Phillip V. Marano, and Andrea Long (JIPLP (2010) 5 (5): 332-343).

Jim Bikoff is a partner in SGR’s Intellectual Property Practice. He specializes in worldwide trademark, copyright and anti-counterfeiting protection and enforcement. jbikoff@sgrlaw.com.