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 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 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.