eBay's Win is a Matter of Economic Necessity

As the Wall Street Journal is already reporting, today eBay sustained an important win in its long-running dispute with Tiffany over counterfeit goods sold through its marketplace. (The full opinion is available here.)

I wrote about this case as my leading example of the legal problems that appear at the border between physical life and digital life, both in “The Laws of Disruption” and a 2008 article for CIO Insight.

To avoid burying the lede, here’s the key point: for an online marketplace to operate, the burden has to be on manufacturers to police their brands, not the market operator. Any other decision, regardless of what the law says or does not say, would effectively mean the end of eBay and sites like it.

Back to the beginning. Tiffany sued eBay over counterfeit Tiffany goods being sold by some eBay merchants. The luxury goods manufacturer claimed eBay was “contributorily” liable for trademark infringement—that is, for confusing consumers into thinking that non-Tiffany goods were in fact made by Tiffany.

The problem of counterfeit items has been a long-standing problem for electronic commerce, and as one of the largest and first online marketplaces it’s little surprise that eBay has found itself so often in the cross-hairs of unhappy manufacturers. While the company has generally won these lawsuits, it lost an important case in France at about the same time the trial court in the Tiffany case ruled it its favor in 2008.

(A related problem that was explicit in the French case is that luxury goods manufacturers are unhappy in general with secondary markets given the tight—sometimes illegal—control they exert over primary channels. Electronic commerce doesn’t respect local territories, fixed pricing and regulating discounting, perhaps the bigger headache for companies such as Tiffany’s.)

The struggle for courts is to apply traditional law to new forms of behavior. Many of the opinions in these cases tie themselves in knots trying to figure out just what eBay actually is—is it a department store, where a variety of goods from different manufacturers are sold? Is it a flea market, where merchants pay for space to sell whatever they want? Or is it a bulletin board at a local grocery store, where individuals offer products and services?

Of course eBay is none of these things. But courts must apply the law they have, and the case law for trademark infringement is based on these kinds of outdated classifications. In the “common law” tradition, judges decide cases by analogy to existing case laws. That means when there isn’t a good analogy to be found, the law is often thrown into confusion for a long period of time while new analogies get worked out. Disruptive technologies create such discontinuities in the law, particularly for common law.

For more, see "EBay Wins Important Victory Against Tiffany"on my site.