In the Courts: Legal Pioneering at the Online Auction Frontier

By Catherine Levalet

Online auction sites are being challenged by trademark owners on diverse grounds in courts around the world. The cases raise many questions and court decisions have gone both ways, for and against the trademark holders. Here, French and European trademark and design attorney, partner at Cabinet Lavoix, Paris, Catherine Levalet analyzes the 2008 decisions of the French Court in the LVMH vs eBay cases.

On June 30, 2008, the American company eBay Inc – owner of the world’s largest and best-known online auction site – and its subsidiary eBay International AG were jointly ordered by the Commercial Court of Paris to pay companies of the luxury group Moët Hennessy Louis Vuitton SA (LVMH Group) almost €40 million for failing to prevent the sale of counterfeit goods and for violating a selective distribution channel on their website. The cases raise questions concerning jurisdiction and Internet hosting, and involve a new way of calculating damages, making for an interesting case study.

The Commercial Court of Paris gave three decisions in favor of LVMH in three separate cases. The first two cases were brought, respectively, by Louis Vuitton Malletier, the handbag and luggage section of the LVMH Group, and Christian Dior Couture, one of the Group’s haute couture fashion houses. They alleged negligence on the part of eBay for not having taken steps to stop the sale of illegal copies of their trademarked goods on its website. The third case concerned the LVMH Group’s perfume brands – namely Dior^TM, Guerlain^TM, Kenzo^TM and Givenchy^TM – and alleged negligence by eBay in not having taken steps to prevent the sale of perfumes outside of the Group’s selective distribution channel. Due to the similarity of the legal issues raised, this article analyzes the cases together.

French jurisdiction

EBay Inc., which is headquartered in the U.S., and eBay International AG, which is located in Switzerland, challenged the French court’s jurisdiction, as the offending announcements were displayed on the U.S. website – eBay.com – and the French public was not the target of the advertisements. Additionally, it was argued that the servers which host the company’s business are located in the U.S., limiting jurisdiction to that country.

The Court rejected the arguments put forward by eBay. It noted that under the Lugano Convention of 1988 it had jurisdiction over eBay International AG, the Swiss-based subsidiary of eBay Inc. The finding was based on Article 5-3, which provides that “A person domiciled in a Contracting State may, in another Contracting State, be sued: in matters relating to tort…in the courts for the place where the harmful event occurred”.¹ The Court, looking at European Union jurisprudence, indicated that “place” takes in both where the harm occurred as well as where a causal event could be established.² It further noted that as Internet sites are accessible to the French public (even where not directed to that public), under the jurisprudence of the Cour de Cassation (French Court of Last Resort), French courts have jurisdiction to hear claims for damages caused in France. All together, the Court here found it had jurisdiction over eBay International AG.

In the matter of eBay Inc., the Court noted that the offences were the same as those alleged for eBay International AG. Although it was noted that there was no agreement between France and the U.S. regarding jurisdictional conflicts, it took into account the extension of domestic jurisdiction to international matters by the Cour de Cassation as well as article 46 of the French Civil Procedure Code, which provides that a plaintiff may bring an action in tort before the Court of a country where contentious acts took place or damage was suffered.³

Status of eBay

Internet hosts benefit from an exemption from liability provided for by the E-Commerce European Directive of June 8, 2000, and the French Law for Confidence in the Digital Economy. Article 6-1 of the French Law defines an Internet host as an entity that ensures “storage of signals, written data, images, sounds or messages of any nature, provided by the service’s addressees”. The European Directive states that Internet hosts are not liable for the information stored at their users’ request, provided they have no actual knowledge of illegal activity and, as regards claims for damages, are not aware of facts or circumstances surrounding any illegal activity or that, upon becoming or being made aware of such facts, they immediately remove or disable access to that information.

EBay claimed Internet host status in order to benefit from exemption from liability. However, the Court ruled that eBay not only ensures storage but also acts as a broker, promoting transactions and collecting commissions on each sale. Given that eBay’s storage and brokerage activities are indissociable and that the eBay platform provides storage services for announcements solely in connection with its brokerage activity, the Court held that eBay companies are brokers and may not invoke special Internet host status.

The nature of the offenses

In each of the three cases, the Court found against eBay on grounds of common tort as provided for under articles 1382 and 1383 of the French Civil Code. In the cases of Louis Vuitton Malletier and Christian Dior Couture, the Court suggested that activities undertaken by various sites fostered and amplified the marketing of illicit goods and, by allowing this, eBay had defaulted on its obligation to trademark owners. Ebay was therefore held to be negligent for failing to take steps to remove or prevent illegal goods being sold through their brokerage activities. It was clearly demonstrated in both cases that eBay had allowed the sale of fake goods, which were easily identifiable as such either because of their low price or the mention “fake or counterfeit.”

The third case involved the selling of genuine perfumes in violation of the selective distribution channel; here the Court reproached eBay for not having verified that the sellers using their Internet platform were duly registered with the French company and authorized to sell their products. Many of the perfumes carried labels stating that “this article must only be sold by an authorized retailer”. Ebay was ordered to stop selling or allowing the sales of the claimants brands.

The Court further noted that eBay had refused to enforce effective measures to combat counterfeiting, such as requiring the seller to produce a certificate of authenticity or an invoice for the relevant goods. The Court found that, under French Law of Civil Liability, eBay had committed acts of negligence, abstention – in that they took no action to prevent infringement – and parasitism as they unduly profited from the fame of these well-known marks.

Assessment of damages

In the three decisions, the judges accepted the plaintiffs’ allegations of illegal trademark exploitation, tarnishing of their image and moral damage. However, although the decisions were based on the law of tort, the judges did not assess damages according to losses suffered or loss of expected income. Instead, the Court used a new method of assessment, introduced by the Law Relating to the Fight Against Counterfeiting of October 29, 2007, that consists of determining a lump sum.

Considering the counterfeiter as a licensee, the judges set the damages at an amount corresponding to the royalties that would have been owed had the infringer requested permission to use the mark. The use of this method in what were not infringement cases per se was a surprising departure from previous practice. It appears likely that, in the future, French judges may extend the use of the lump sum method to cases whose scope goes beyond counterfeiting matters.

Conclusion

The Court’s decisions are in line with a later (December 19, 2008) decision issued by the Paris Court of Appeal in the case of L’Oréal vs eBay and its ruling on the French courts’ jurisdiction. The decisions also support eBay’s being described as a “broker” in the earlier (June 4, 2008) decision of the Troyes Court of First Instance in the case of Hermes vs eBay.

The Court’s stance on the nature of eBay’s offenses is innovative and awaits the final decision of the French Court of Appeal to which eBay has appealed all three decisions. The decisions stand in stark contrast to that taken two weeks later by a Federal Court in New York in the case of Tiffany vs. eBay. The Court there dismissed the charges against eBay, considering that it had taken sufficient measures to prevent infringement and noting that the obligation is on rights holders to police their mark. Tiffany has appealed that decision.

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