Gucci Allowed To Sue Credit Card Processors For Contributory Infringement Over Counterfeit Goods

from the third-party-liability dept

We’re always a little skeptical of third-party liability claims, because allowing those types of lawsuits can often create serious chilling effects on various services. It seems that any reasonable standard of liability would apply liability to the parties actually involved in breaking the law, rather than the service providers they use. Of course, supporters of third party liability point to cases where those third parties have to be aware of what’s being done, how it breaks the law… and then do nothing to stop it. The question is usually where do you draw the line. Michael Scott points us a recent court decision where the judge is allowing Gucci to sue three companies involved in processing credit cards for a website (which it already shut down through lawsuit) that was selling counterfeit Gucci products. No one denies that the website sold counterfeit Gucci products, the question is whether or not these three companies are liable (and also if the jurisdiction is proper, but we’ll skip that part of the lawsuit):

Decision Gucci v Frontline (Credit Card) In this case, the court found there was little evidence to support direct trademark infringement, but enough to support contributory liability for all three parties (though, for different reasons for some of them). The middleman who set up the merchant account actually advertised on its website that it worked with “high risk merchants” including those who sold “replicas.” The court finds that pretty compelling evidence of “inducement.” Separately, the two financial institutions that acted as the actual merchant accounts both had programs in place where they either reviewed the websites they worked with careful and/or demanded detailed reports on the chargebacks they got. The court found in this case, that both institutions should have had enough knowledge that the site was selling counterfeit goods, and thus should have stopped doing business with them to avoid secondary or contributory liability.

I can see how the court decided the way it did with the middleman who advertised itself as working with merchants who sell “replicas” (though “high risk merchants” could be borderline — since a brand new, but completely legitimate, merchant could be seen as “high risk.”) Even so, however, it seems weird to put liability on someone who is effectively a matchmaker for business done later. As for the argument against the financial institutions, it gets much trickier. Gucci will probably win the lawsuit, given what the judge says, but it does get a little worrisome when courts start effectively demanding that third parties have detailed knowledge and understanding of their partners’ business practices.

Eric Goldman notes numerous problems with the ruling, such as the fact that “the payment processor is charged with the knowledge of a third party entity’s salesperson.” That’s always the problem with third party liability rulings. They’re effectively claiming that a third party is somehow responsible for the actions of someone entirely different. Goldman’s conclusions:

This is a terrible ruling on both a doctrinal and normative level. On a doctrinal level, the court bypassed the main holdings of Tiffany v. eBay (binding on the court), Perfect 10 v. ccBill and Perfect 10 v. Visa. Instead, the court stitched together crappy dicta from the Tiffany v. eBay case with Kozinski’s dissent in Perfect 10 v. Visa to come up with an expansive secondary trademark liability rule applicable to vendors to counterfeit websites. I expect payment service providers to become the latest defendant-du-jour among trademark plaintiffs looking for deep pockets in web infringement cases. Something to look forward to.

Normatively, this ruling raises the specter that payment service providers will attempt to exercise even more business control over the businesses they service, effectively deputizing the payment service providers into cops on the Internet beat. As I mention in my notes about the OECD efforts on Internet intermediaries (which I will post soon), this deputization of private vendors into content cops has numerous disadvantages. I’m hoping this ruling gets fixed by the judge or on appeal so that we don’t suffer the logical consequences of this bad ruling.

Separately, I do want to make one point that struck me in reading this ruling (along with the recent eBay/Tiffany ruling. Trademark law is in this weird vortex where it does not have an official safe harbor protection for third parties, a la copyright (DMCA 512) and defamation/other things (CDA Section 230). Both Section 230 and the DMCA provide rules (though, some would argue, not very clear ones) for how a third party can avoid liability. There is no such safe harbor for trademark law. And yet, the courts have effectively created a very similar safe harbor just by looking at the facts of the cases: if you don’t have specific knowledge and agree to take stuff down when alerted to it (eBay ruling) then you avoid liability. That’s just like the DMCA — even if this particular case seems to stretch the understanding a bit.

This highlights the idea that the DMCA safe harbors aren’t some ridiculous extension beyond common sense, as some copyright maximalists contend. Instead, it shows that the DMCA safe harbors do, in fact, match up with basic common sense in making sure that liability is applied directly to those who actually have the most knowledge of the situation… not just those with the biggest bank accounts.

Filed Under: contributory infringement, merchant accounts, trademark