Fake Goods and eBay

May 27, 2008

The phenomenon that is eBay is regarded by many as being little more than an online auction house. eBay, however, says this is not the case and states that it is in fact an ‘online marketplace’, which allows users to buy and sell goods either at a fixed price or by way of auction. While many users won’t care about the distinction when they first come to use the site, it has a fundamental impact on what liability eBay has when goods on the site turn out to be counterfeit.

The scale of the problem

With a global customer base of 233 million and approximately 25 million items for sale at any one time, it is unsurprising that a significant proportion of goods sold through eBay turn out to be counterfeit. Brand owners have been aware of this problem for some time but it remains to be resolved to brand owners’ (or consumers’) satisfaction; Davenport Lyons’ Counterfeiting Luxury Report 2007 established that eBay alone is now the third most prominent medium for buying fakes for UK consumers, with 29% of those asked admitting to buying a fake from the site. The marketplace/auction house distinction is key to the ongoing debate about the sales of fakes on eBay because, on eBay’s definition, they bear no responsibility for what is sold. They simply provide the space for the sale and therefore claim to have no liability when the goods sold turn out to be counterfeit.

Why counterfeiters sell on eBay

eBay is a counterfeiter’s paradise. Firstly, because it is far more difficult to tell the genuine and counterfeit goods apart when buying online from a picture or description. Secondly, sellers of counterfeit goods benefit from a high degree of anonymity by selling on eBay and therefore feel secure. It is often impossible to identify the seller or seize counterfeit goods once their activities have been discovered and the counterfeiters know this. The seller literally disappears into cyberspace, effectively taking his counterfeit stock with him. Thirdly, of course, the counterfeit seller can be based anywhere in the world and has potentially the whole world as his marketplace, which again makes this an attractive outlet and adds to the difficulty of catching them.

Fourth, despite the fact that users must register with eBay before they can list items for sale or purchase items from the site (although eBay does not have to perform any meaningful checks on the identities of its registered users), sellers can set up multiple accounts, which can make them hard to detect. Finally, sellers can also hide behind PayPal accounts (a payment system operated by eBay), which can represent yet a further layer for brand owners to attempt to break through.

The international problem

The internet undoubtedly reshaped the marketplace for counterfeit goods in the UK. Easy access increased demand and there is no shortage of supply from outside the UK. There are now a large number of websites where consumers can buy counterfeit goods direct from, for example, suppliers in Hong Kong and China, missing out the wholesaler, which makes detection more difficult. What is more, this facilitated the emergence of small cottage industries, where individuals have goods sent direct to their homes. Smaller consignments (as opposed to large cargo containers) prove more difficult for Customs to detect.

The international nature of the problem means that it is far more difficult for brand owners to shut the counterfeiters down. Take the example of a distributor of counterfeit goods based in Thailand who sells to a UK-based seller. Faced with this, does the brand owner go after the small scale seller in the UK or the Thai distributor? If the latter, there are considerable problems with having the counterfeiter shut down.

eBay’s revenue stream

eBay generates income by charging fees for listings on its website. It charges an initial fee for posting a listing, which is based on the opening value of the item. It then charges a further fee once the item is sold, which is based on the actual sale price. Therefore, eBay has a direct commercial interest in items achieving the highest possible final sale price, regardless of whether the goods are being sold legitimately. Clearly this model encourages eBay to maximize the number of listings – and therefore the revenue – regardless of whether the goods listed for sale are genuine or not. eBay has recently reported first quarter revenues of $2.19 billion; a 24 percent increase from the same period a year earlier.

As we have said above, eBay contends that it operates as a mere ‘marketplace’ (as opposed to an auction house which typically takes possession of goods being sold) and is not therefore able to, or responsible for, policing the sales of counterfeit goods on its website. By doing so, eBay attempts to distance itself from any unlawful activities of its users. In fact, its business model differs from that of a typical marketplace in a number of respects. In particular, a true marketplace will tend to charge a flat rate for the space it rents out, regardless of the value of goods being sold (for example local newspaper advertisements or local market stalls). This is in contrast to eBay’s policy of charging a fee in advance (like a traditional marketplace), plus a commission equal to a variable percentage of the sale price of the goods sold (rather more like an auction house) which, in the case of counterfeits, might be inflated due to the seller’s misrepresentation that the goods are genuine. That percentage varies depending on the nature of goods sold and the price achieved. Once sold, the appropriate percentage fee is usually taken directly by eBay from the seller’s eBay account. Accordingly, eBay’s position means that, while it is not responsible for policing the sale of counterfeit goods on its website, it shares in the proceeds of their sale.

eBay’s consumer protection programme

eBay’s website states on its community values page that ‘The eBay Community encourages open and honest communication among all its members’. One of its core values is that ‘people are basically good’. This approach is in line with eBay’s inherently reactionary approach to counterfeiters. In its efforts to assist brands (and other rights owners and consumers), eBay operates a reporting scheme by which rights owners can report the sale of counterfeit goods to eBay (called the ‘Verified Rights Owner (VeRO) Programme’), which is said to be part of eBay’s mission to help protect intellectual property rights.

VeRO places the onus on brand owners to identify counterfeit products offered for sale on eBay and in effect police the site. Upon notification by a rights holder, eBay will remove an alleged counterfeit listing from the website and notify the seller of the complaint (thereby effectively providing the seller with notice of the interest taken by the brand owner in his or her activities). This of course places the burden (and considerable cost) of consumer protection on the brand owners and takes no account of the fact that eBay is profiting directly through the sales of counterfeit goods. This policing takes a great deal of time and effort on the part of brand owners and many brand owners simply do not have the resources to continually sweep eBay for counterfeit goods.

eBay’s argument is that, as a practical matter, it is not in a position to prevent the sale of counterfeit goods due to the volume of transactions taking place; around 6 million new postings appear each day. eBay is concerned that a proactive approach would require increased staff and time costs and reduce the number of listings appearing on the site, thereby adversely affecting profits. eBay maintains that it is not obliged to take such drastic action because it does not take possession of the goods listed and does not control the form of listing that sellers use nor is it an expert in the brands that are listed. As such, it cannot determine whether a particular listing relates to a counterfeit or genuine article.

Furthermore, eBay contends that it takes the issue of counterfeit sales very seriously and does all that it can reasonably be expected to in order to prevent it. However, research has shown that over 50% of UK sales are conducted by 10% of listed sellers. Accordingly, eBay’s efforts could be focused on a relatively narrow spread of UK sellers. However, as things stand, the practical impact of eBay’s current practice is that the seller of counterfeit goods merely has his account suspended, following which suspended sellers can simply re-register under another name.

Actions against eBay

Given the scale of the problem, it is not surprising that a number of brand owners have brought actions against eBay in various jurisdictions across the globe, all of whom share the view that eBay does not do enough to combat the sale of counterfeit products on its website.

In New York, Tiffany (the jeweler) launched an action against eBay in 2004 for trade mark infringement, alleging that eBay failed to prevent the sale of counterfeit goods through its website. Tiffany claimed that, although eBay had knowledge that counterfeit products were being advertised and sold on its website, it did nothing to prevent sales of counterfeit branded products. In doing so, Tiffany allege that eBay continued to profit from this activity by way of fees paid on the illegal transactions. Tiffany further argued that eBay should be required to proactively police its site. The verdict in respect of this action is eagerly awaited in many quarters and it remains to be seen whether eBay will have to adopt a more pro-active approach.

Similarly, L’Oreal, the cosmetics giant, are suing eBay for trade mark infringement in the UK, Germany, France, Spain and Belgium. L’Oreal claims that eBay is profiting from the sale of fake products through its website and that it is not doing enough to combat the sale of counterfeits on the site. The French newspaper Liberation, reported that L’Oreal had estimated that the cost of the sale of counterfeit goods to it amounted to many millions of Euros.

eBay’s French site, eBay.fr, is facing legal action taken by the French Council of Sales, which regulates France’s auction market. The Council alleges that the website has failed to comply with French consumer protection laws and claims that the site should be held to the same standards as France’s auction houses. Whether eBay’s argument that it simply acts as a broker, enabling meetings between buyers and sellers to take place, and not as a public auction house, will stand up in court, remains to be seen. Also in France, luxury group, Hermes International commenced proceedings against eBay in October 2007, in relation to counterfeit sales of its products on eBay, following in the footsteps of other luxury brands, Christian Dior and LVMH.

In 2007, the UK Anti-Counterfeiting Group made a submission to the OFT relating to consumer protection issues arising out of the sales of counterfeits on Internet auction websites, including eBay. As a result, the OFT announced its intention to investigate how well such sites are addressing the issue of counterfeiting.

From a legal perspective, the question as to whether or not eBay is held accountable for counterfeit sales through its website will, to a great extent, depend on how its business is characterised. To auction or not to auction? That seems to be the question, and one to which very many rights owners are eagerly awaiting the answer.

Emily Barber is a Solicitor in the Contentious Rights and Dispute Resolution Department at Davenport Lyons and Nigel Gilroy is an Associate in that Department.