• by Wendy Davis  @wendyndavis, April 1, 2010

Handing Tiffany a partial defeat in its long-running dispute with eBay, a federal appellate court has ruled that eBay didn't infringe on the jeweler's trademark by allowing users to advertise that they sold Tiffany pieces, even if some of the items were counterfeits.

"To impose liability because eBay cannot guarantee the genuineness of all of the purported Tiffany products offered on its website would unduly inhibit the lawful resale of genuine Tiffany goods," the 2nd Circuit Court of Appeals wrote in the case.

But the court also left the door open for Tiffany to pursue false advertising claims against eBay for allegedly allowing ads for fakes. "The law prohibits an advertisement that implies that all of the goods offered on a defendant's website are genuine when in fact, as here, a sizeable proportion of them are not," the court ruled. The Second Circuit said that a disclaimer by eBay might remedy any potential false advertising on the site.

Tiffany blasted the decision, saying that consumers would be hurt by the ruling. "eBay knew that counterfeit merchandise was being sold on its site -- and eBay took no effective steps to stop it," Chairman and CEO Michael J. Kowalski stated. He added that the company will consider appealing to the U.S. Supreme Court.

eBay general counsel Michael Jacobson praised the decision, calling it "a critically important victory for online consumers, who want the best prices for genuine products."

The appellate decision grew out of a lawsuit filed by Tiffany against eBay in 2004. Tiffany argued in court papers that eBay didn't go far enough to proactively police its service for fakes. Specifically, Tiffany wanted eBay to prohibit sellers from listing five or more Tiffany items.

eBay said that it immediately removed counterfeits once it had reason to know the pieces were fake, but argued that it need not prevent people from selling goods that could be legitimate.

In July of 2008, U.S. District Court Judge Richard Sullivan in New York ruled in eBay's favor after a trial.

Tiffany appealed that decision to the 2nd Circuit. The three-judge panel that ruled Thursday specifically rejected Tiffany's position that eBay was responsible for trademark infringement because it had reason to know its service was being used to market counterfeits. Instead, the court wrote, eBay would not be liable absent "some contemporary knowledge of which particular listings are infringing or will infringe in the future."

The high-profile appeal was seen by outside groups as a test of whether Web intermediaries could be held liable for users' trademark infringements. While the Digital Millennium Copyright Act protects Web sites from users' copyright infringements provided that the sites remove the material upon request, no comparable law clearly protects sites from liability for users' trademark infringements. For that reason, the case drew friend-of-the-court briefs from a variety of organizations, including the digital rights groups Electronic Frontier Foundation, Public Knowledge and Public Citizen, which weighed in on eBay's side. (Public Citizen is representing MediaPost in an unrelated matter.)

The EFF's Fred von Lohmann praised the ruling. "It's a great result, not just for eBay, but for the entire online industry," he said. He added that a decision in Tiffany's favor would have prevented sites like eBay from listing any goods without permission from the original manufacturer. "It would have created a world where the trademark owners would control not only the original market for their wares, but also would control the secondary market."

In the one portion of the ruling that went against eBay, the appellate court remanded the case to the trial judge with instructions to reconsider Tiffany's false advertising claim. But the jeweler could have a very difficult time in court proving its claim, says Rebecca Tushnet, a law professor at Georgetown and expert in false advertising law.

She adds that Tiffany would probably need expensive survey evidence showing that consumers were deceived by the ads. "That's going to require some serious spade work," she says.

A separate section of the ruling could potentially boost Google in its legal battles about alleged infringement on AdWords. The 2nd Circuit ruled that the use of Tiffany to trigger search ads that directed users to eBay didn't infringe on Tiffany's trademark. Google is currently embroiled in litigation about search ads with Rosetta Stone, which alleges that its trademark is infringed when used to trigger search ads that take people to retailers like Amazon.