The Gray Blog

The commercial court in Paris has awarded luxury bag maker LVMH Moet Hennessy Louis Vuitton (“LVMH”) and fashion house Christian Dior Couture (“Dior”) 38.6 million euro ($61 million) as damages against eBay for the sale of counterfeit and parallel market goods on its online auction site.  Amongst the court’s findings were statements that eBay was guilty of gross misconduct by failing to put into place appropriate measures to prevent the sale of counterfeit goods. This precedent setting decision obligates online auction services to prevent illegal activity.  Moreover, eBay is exposed to continuing penalties is accused products are not removed from the site.

This decision comes hot on the heels of a recent decision by another French court awarding Hermes International 20,000 euro, or $31,600, for failing to adequately supervise sales of allegedly counterfeit products.  By French standards the amount of the judgment in the LVMH decision is substantial.  Most commentators have suggested that it will embolden a rash of similar suits by other luxury brand owners.

eBay has responded to the decision by announcing it intent to appeal and by releasing public statements labeling the decision a major strike against the consumer and on-line resellers.  eBay insists that it take reasonable precautions against the sale of counterfeit goods.  However, eBay has previously taken the position that since it never takes physical possession of the goods traded on its site, it is unable to guarantee that counterfeit goods will be caught in every instance.  As recently as late 2006, eBay launched its latest anti-counterfeiting initiative .  This initiative included restrictions on the listing of brand name items and on cross border trade.

One troublesome aspect of the decision is the chilling effect that it is likely to have on the on-line resale of genuine branded goods.  The heightened risk of decisions such as this one, if not reversed, will make it difficult of on-line resellers to allow the sale of any branded products.  As a result, brand owners will effectively be able to extend their control over products beyond the first sale effectively making themselves gatekeepers for litigation shy online auction houses.

The decision by the commercial court of Paris could bode badly for eBay on this side of the pond where it faces a similar lawsuit filed by Tiffany and Co. in the United States.    The Tiffany case likewise accuses eBay of facilitating the sale of counterfeit goods and serving as an instrumentality of illegal activity.   A decision in the Tiffany case is expected soon.

The Second Circuit has published an opinion which was previously filed under seal in Zino Davidoff S.A. v. CVS Corp., 2007 WL 1933932 (S.D.N.Y. July 2, 2007). The court grant international fragrance manufacturer Davidoff & Cie, a Swiss company, preliminary injunctive relief against CVS Corp., the multi-state pharmacy operator, preventing the further sale of parallel market and counterfeit COOL WATER fragrances. The decision, although an interim order, is significant for furthering the position that decoding by removal of UPC codes constitutes a material alteration since “(i) it restricts Davidoff’s ability to identify and remove counterfeit goods; (ii) it undermines Davidoff’s ability to identify, inspect and, if necessary, recall defective product.” The Court found that these considerations were sufficient to establish a likelihood of confusion and stated that “Plaintiff’s witnesses persuasively testified that the decoded gray-market fragrances make detection of counterfeit products far more difficult, as counterfeiters have become more sophisticated in packaging fake COOL WATER products.”

The Court also rejected CVS’s argument that the UPC system should not be protected because there are superior alternatives, such as date stamping the products. The Court disagreed and ruled that the law does not require that Davidoff adopt the most effective quality control procedures possible, as courts are reluctant to inject themselves into such business judgments. It is not clear whether CVS offered its own track back scheme for these products.

The goods at issue involved allegedly commingled counterfeit and parallel-market bottles of COOL WATER fragrance. Pursuant to a TRO, beginning in January 2007, Davidoff conducted inspections of CVS’s inventory of COOL WATER products. In total, Davidoff’s inspectors examined 33,369 units of COOL WATER fragrances. Of these, 836 units were identified as counterfeit and 16,600 units were found to be decoded gray-market products.

From the brand owner’s perspective, this decision constitutes an important victory since it prevents decoding. Decoding is a key element in preventing the brand owner from retaliating against the original reseller who sold the goods into the parallel market.

From the parallel market perspective, this decision could effectively undermine distribution of genuine coded products in the parallel market. Moreover, by rejecting the availability of alternative product tracking schemes, the Court does not seem to allow much room for maneuvering.

We will continue to monitor.

Microsoft Corporation continued its aggressive campaign against parallel market importers and against companies that pre-installed unlicensed copies of their well known operating system and office packages by filing six nine new lawsuits in Florida:

MICROSOFT CORPORATION v. AMERICAN BEGONIA CORPORATION ET AL, 1:07-CV-21642
MICROSOFT CORPORATION v. COMPUTERS & LAPTOPS CENTER, INC. ET AL, 1:07-CV-21643
MICROSOFT CORPORATION v. COMPUGLOBE, INC. ET AL, 0:07-CV-60900
MICROSOFT CORPORATION v. KEN’S COMPUTERS INC. ET AL, 5:07-CV-00258
MICROSOFT CORPORATION v. PC TOUCH OF FLORIDA, CORP. ET AL, 1:07-CV-21644
MICROSOFT CORPORATION v. TAKE A BYTE COMPUTERS, INC. ET AL, 0:07-CV-60901
MICROSOFT CORPORATION v. CRUZ ET AL, 8:07-CV-01117
MICROSOFT CORPORATION v. GUNTHER, 3:07-CV-00596
MICROSOFT CORPORATION v. NETFX PRO, INC. ET AL, 3:07-CV-00597

The suits filed in the Middle and Southern Districts of Florida set forth claims of copyright and trademark infringement as well as state counts for unfair competition. This wave of lawsuits principally seems to focus on pre-installers of unlicensed software. Much of this software is purchased overseas and enters the country in through the parallel market. They add to the growing number of lawsuits recently filed in other parts of the country by Microsoft against parallel market software importers.

In one of the largest awards ever rendered against a parallel market importer in Europe, CD Wow has been ordered to pay more than 41 million pounds (approx. $80 million) to the British Phonographic Industry (BPI) . The award issued this past month after a five year battle by BPI against the Hong Kong based diverter. CD Wow purchased CD’s which sold at a lower price in the far east, and resold them to retailers in the United Kingdom. The case centered on a European Union law which prohibits the importation into the Union of goods bearing copyrighted works without the consent of the copyright owner. In 2004, CD Wow entered into a settlement agreement with BPI in which CD Wow agreed to cease future sales. The harsh ruling was based on the High Court’s decision that CD Wow violated the terms of this agreement.
The players can be found at:
http://www.bpi.co.uk/
http://www.cdwow.com/

Microsoft has filed or threatened dozens of lawsuits nationwide and internationally against parallel market resellers of diverted Microsoft software products. Relying principally on the U.S. Supreme Court’s decision in Lanza, Microsoft alleges in its pleadings that diverting software products, first sold abroad, and bringing them back into the U.S. for resale. Under the reasoning in Lanza, although genuine Microsoft products, the first sale rule may not apply since the product was first sold outside of the U.S. and the products may therefore be deemed infringing.