France hits E-Bay with steep penalty for contributory trademark infringement

The Wall Street Journal just posted an article entitled EBay Loses Suit Over Luxury Fakes. Apparently, a French court sided with LVMH Moët Hennessy Louis Vuitton and sister company Christian Dior SA, which had accused eBay of not taking the necessary steps to ensure that the accessories sold on its Web site were not counterfeit (despite the fact that E-Bay has a facility where trademark holders can report potential fakes to E-Bay to have the reported auctions shutdown).

The French court ordered eBay Inc. to pay Louis Vuitton and other luxury-goods brands 40 million euros ($63.1 million) in damages for fake goods sold through the online retailer. Givenchy perfumes was also a party to this case, and though the perfumes sold on eBay were legitimate, LVMH strictly limits their distribution to authorized dealers such as perfume chains and department stores.

There are two troubling aspects of this case, aside from the high damages awarded against E-Bay. First, is the increasing willingness to require companies to monitor the activities of their customers, and second, as it relates to the Givenchy perfumes on E-Bay, to hold e-commerce companies to an almost impossible standard for monitoring the “legitimacy” of third-party transactions.

Let me explain: As it relates to US Copyright law, our system has long held a distinction between a publisher and a distributor. A publisher, arguably, reviews their work and is deemed responsible for the works that reach the public. A distributor, by comparison, doesn’t read a magazine or newspaper, and simply delivers it to store shelves. Therefore, if there’s a copyright issue, the distributor is deemed to have no knowledge of (nor the capability to review) material being distributed. This makes sense, if you think about it, because a distributor probably distributes hundreds of magazines, and doesn’t have any subject matter experience in what they deliver to the stores.

In the Internet context, this works well for an Internet service provider (ISP) or web hosting company, because they have potentially thousands or millions of customers, and have absolutely no subject matter or domain expertise regarding their customer’s websites. The mere thought of having your ISP review your Internet traffic inspires Orwellian notions in all of us. The same argument can be made for E-Bay. Millions of transactions occur every day on E-Bay, and I suspect E-Bay doesn’t have a clue about the subject matter of those auctions.

Unfortunately, this publisher/distributor distinction in copyright law hasn’t made its way into trademark law, and this is where many e-commerce companies run into trouble. Trademarks are a completely different aspect of intellectual property, and are treated completely different. The main objective of trademark law is to protect the consumer, not the owner of the mark, from improperly marked products and services. Therefore, a completely different set of laws and risks exist, and if an e-commerce company tries to manage its risk against contributory trademark infringement using the notions of the publisher/distributor distinction in copyright law, they are bound to eventually find themselves in serious trouble.

For example, the safe harbor provisions of the Digital Millennium Copyright Act (DMCA) don’t apply to trademarks, only to claims of copyright infringement. If you don’t have strong procedures and mechanisms to respond to, and deal with, contributory trademark infringement claims, you run the risk of loosing a serious lawsuit. Such claims put the unfortunate e-commerce company or ISP in the role of a judge, trying to ascertain the legitimacy of a claim against one of its customers. Unfortunately, the way the law is written, you should almost always conduct your business assuming the complaining party is correct. In trademark law, e-commerce companies and ISP’s are at risk from the plaintiff of a contributory trademark infringement claim, not the defendant (i.e. their customer).

This E-Bay case ratchets up the risk even further for e-commerce companies and ISP’s, by presupposing E-Bay is somehow able to ascertain which of its customers has the legal right to sell Givenchy perfumes. Note that E-Bay’s Seller’s Rules contains a long-list of what’s acceptable and what’s not, and that it requires sellers to adhere to the intellectual property requirements (i.e. trademark) and restrictions of the products they sell. Therefore, a seller is already violating E-Bay’s terms of use when selling Givenchy perfumes. Apparently, E-Bay is somehow supposed to evaluate the validity of each seller’s licensing arrangement with each of its carried brands, and ascertain who is legally entitled to sell what at what given time.

Obviously, this is an absurd position for E-Bay and any other e-commerce company or ISP. There are ways of handling this, such as banning Givenchy and any other product that claims a right to sue for contributory trademark infringement. Such a heavy-handed approach could seriously undermine E-Bay’s value to consumers (i.e. shouldn’t I be able to sell my bottle of Givenchy perfume, if I purchased it for my wife who turned out not to like it?).

There are two recommendations I have, give this case:

For e-commerce companies and ISP’s: Review your policies and procedures for trademark infringement claims. Are they fundamentally different from copyright claims? If not, you need to change them, and you must unfortunately place a heavy burden on the defendant (i.e. your customer).

For the legal system: Confer some rules and safe harbors for e-commerce companies and ISP’s, regarding actions for contributory trademark infringement, possibly expanding the publisher/distributor distinction to online trademark cases.

It’s all a matter of prioritization

Many businesses — including some I’ve been involved with — suffer from endless firefighting. What gets worked on (i.e. fixed) is what is the most urgent at the time, usually associated with some serious customer complaining, or financial or legal risk. Ultimately, the business becomes a team of heroes, burning everyone out and not really making serious headway in what is really important: growing the business and its revenue base. The “hero model” is very dangerous for a business, because there is so much reliance on individuals. If a key individual gets sick or leaves, it creates serious disruption to the business.

I’ve found, whether we’re talking about the business priorities as a whole, or managing a software development team or project, it helps to identify priorities and focus on the highest priority issues first. By focusing on what’s important, you move the business forward and you will naturally move away from the hero model. By staying focused on the key drivers of your business (assuming you know what they truly are), your processes and systems should become more robust, fault tolerant and less reliant on key individuals.

There are many ways to devise a priority schedule, but here’s one I’ve found that is simple, easy to use and quite effective. It’s a simple “sev system” or severity scale.

How many people or businesses do you know, that have a tendency to focus on SEV3’s or SEV4’s? We get caught up on how things look, versus how they perform or what they mean to our business, our customers or our employees.

My advice is to create, revise and maintain a list of your business tasks and priorities. Everything on the list has an assigned SEV code, and you devise a corporate policy such as “No SEV1’s will be on the list for more than a week” and “We won’t work on lower SEV issues, when higher SEV issues exist.” Devise a system of accountability, and assign your heroes to the important SEV tasks.

One other suggestion is to keep a corporate journal, wiki or help system that serves to document all your processes, functionality and systems. Make updating this system one of the components of every task. Make sure a different employee or department “tests” the functionality or issue, before its removed from the task list.

By objectively tracking the severity of the issues in your business, you will add accountability and ensure the most important and strategic issues are confronted and resolved in your business, thereby helping to maximize revenues and contain costs within your business.

The new gold-rush: Top Level Domains (TLDs)

ICANN, the overseer of the domain registry system and top-level domains (i.e. .com, .net, .info, .cc, .us, etc) has approved a plan to sell unlimited top-level domains (TLDs) on the open market.

Conceivably, anyone can purchase a new TLD, provided they are willing to shell out the reported $100,000 to $500,000 per TLD.

This number may seem like an astronomical amount, but when one considers the marketing potential for the right TLD, $500,000 could seem like chump change. For example, .com is frequently mistyped by people as .cm or .cmo. Obtaining those two TLD’s could give the potential owner a great deal of leverage to convert the typo into the appropriate .com, but turning themselves into a referral source.

Alternatively, a company could create some serious leverage with branding and trademarking, creating highly desirable TLDs that have a specific connotation, such as:

• .secure - Which is carefully controlled by the TLD owner, and guarantees any .secure website is audited and “scam proof.”
• .bank, .doctor, .law - Just about any market or industry niche could use its own TLD, and could become highly desirable for members of that market.
• .kids, .singles - Just about any market segment, such as “certified kid friendly”.
• .comcast, .ibm, .aol - Companies, especially ISP’s and hosting companies, would definitely want to get on this bandwagon and support customer accounts on its TLD’s.

Without a doubt, the new policy for TLDs will represent a tremendous gold-rush for those companies willing to get in early, make effective use of their new TLDs, and market it properly to create demand and market awareness.

E-Commerce can create interesting sales tax liabilities

The Wall Street Journal has an interesting article about Amazon today, entitled Will Amazon Get a Visit From the Tax Man?.

It appears that Amazon has a number of large distribution warehouses in some states, such as Texas, Pennsylvania and Indiana, but doesn’t pay sales taxes in those states. Amazon is trying to skirt the issue by saying the distribution warehouses are wholly owned subsidiaries of Amazon. Amazon’s theory is: The subsidiaries don’t sell products to consumers, so they don’t need to pay sales tax, and since Amazon itself doesn’t own the warehouses (it’s subsidiaries do), it doesn’t need to pay sales tax either.

The article does a good job talking about the issue regarding Amazon, but could go into better detail on the tax issues an e-commerce company must deal with. My standard disclaimer: Please consult with a CPA or tax attorney, as what I am about to discuss may be incomplete or inaccurate for your particular situation.

Note that many e-commerce businesses don’t fully understand The Internet Tax Freedom Act, which doesn’t prohibit all taxing, per se. What it does is prohibit taxing Internet access, imposing discriminatory Internet-only taxes and multiple taxes on electronic commerce. Contrary to popular belief, it does not prohibit state sales or use tax.

Sales taxes can be somewhat complex, depending on the subject matter. The easiest case is a typical product, like a book or DVD. If a business has a “sufficient nexus” within a state, it generally has to collect sales tax from the residents in that state. The “sufficient nexus” requirement is met by physical presence (i.e. the business has an office or warehouse in the state), but “sufficient nexus” can also be met without physical presence. And, this is one area where things can become tricky. The “sufficient nexus” requirement could be met, if a business has a “close relationship” with third-party contractors.

Things become murkier still, regarding some products or services. Let’s look at services for a moment: Instant Gift Certificates are becoming a popular way for service-based businesses to “sell” their services on the Internet. Some states, like New Mexico, charge a “gross receipts tax” (or GRT) on services. If a business in New Mexico sells a dollar-based gift certificate (i.e. a $100 gift certificate), there is no tax to charge until the gift certificate is redeemed. However, if the business sells a service-based gift certificate (i.e. “one Swedish massage”), the purchaser should be charged GRT upon the sale of the gift certificate.

Worse still, some states (like New Jersey) charge a tax on just some services. So, for example, massages are taxed but facials are not (both facials and massages are typically provided by the same business). So, a business selling a service-based gift certificate needs to keep track of what services are taxed and which are not, and make sure the tax is properly applied at the time of sale.

For products, things become murky, depending on the subject matter and location of the consumer. As it relates to location, some major cities have different sales tax rates than the overall state (i.e. Chicago or New York). So, if a business has “sufficient nexus” in the State of New York, it must keep track of all the tax schedules within that state, and know exactly which tax schedule to apply to which consumer in that state. As it relates to subject matter, all sorts of products will suffer various restrictions or tax exceptions. For example:

• Gift cards and gift certificates have various restrictions on maintenance fees, expiration dates (depending on where the consumer sits) and escheatment (depending on where the business sits).
• Wine and other alcoholic beverages have restrictions or varying tax implications, depending on the state, county or city in which the consumer sits.
• Chemicals, paints and industrial solutions have many restrictions, permit requirements and tax implications.

The problem for an e-commerce company, is that it’s sometimes difficult to identify all the tax laws and burdens, create the programming logic to identify which products or services have a sales tax burden to which customer, and then keep the tax schedules (and treatment) up-to-date.

The trick is, to be careful on which state you create a “sufficient nexus” for sales tax purposes, and to do your research BEFORE you start selling your product or service on the Internet, because your business could be liable for back-taxes going back many years.