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

from the third-party-liability dept

Tue, Jul 6th 2010 10:27pm — Mike Masnick

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.

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Filed Under: contributory infringement, merchant accounts, trademark

15 Comments

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Andrew F (profile), 6 Jul 2010 @ 11:39pm

Knowledge
If you're liable for knowing that the activity is illegal, a party that makes a half-hearted attempt to police infringement by third parties is more likely to be found liable that one that makes no effort whatsoever. Doesn't this just create a weird monkey-see-no-evil incentive? I think this was one of rationales for the Section 230 safe harbor in the first place.
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- Anonymous Coward, 7 Jul 2010 @ 5:38am
  
  Re: Knowledge
  you hit it exactly, something mike hates to address. instead of encouraging people to know what their business partners do (as would be normal) section 230 creates a bunch of people covering their ears and yelling 'lalalalalalala' so they dont know anything about what is going on.
  
  further, mike is sort of failing to accept the idea that a credit card processor is not just an innocent service. before you can get 'high risk' processing, these companies are suppose to look at what your business is (at least what is purports to be). they are not suppose to sign people up blindly. heck, they are required by visa rules to actually qualify and quantify what the business does, at minimum for statistical purposes. the level of risk changes if a company is in fact delivering goods via ups, example, which can require a signature at delivery. that would change the level of risk for the processor.
  
  in mikes world, everyone except the seller is suppose to work hard to be as ignorant as possible. in the real world, third parties are often not disconnected from the sitution, and rather are well informed co-conspirators. section 230 would reward them for being intentionally ignorant, which should never be the intent of the law.
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mike allen (profile), 7 Jul 2010 @ 1:33am

not sure of USA law but here in the UK after talkinng with the authorities (trading standards) it is not illegal to buy counterfiet goods only to sell.
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NullOp, 7 Jul 2010 @ 4:06am

Suit
Another pig at the trough! And our completely fupped up legal system allows it, encourages it! Gee, didn't see that coming.
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Tino (profile), 7 Jul 2010 @ 4:10am

Never a good idea to sue service providers that you yourself rely on. Gucci may find itself labelled a "high risk" provider for different reasons.

BTW, don't the guys that print our know that cash is used for (and in many cases regarded as the best choice for) these and other kinds of purchases? I would think they might be just a little bit more nervous today. Isn't the absence of having taken any steps to control the use cash, combined with knowledge of its illegal uses, sufficient to be "willfully shutting one's eyes"?
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abc gum, 7 Jul 2010 @ 4:33am

I suppose that FedEx and UPS are next on the hit list. They should know what they are shipping is infringing trademark. /s
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Anonymous Coward, 7 Jul 2010 @ 5:35am

Lunch at chinese buffet. Find out it was dog and not chicken. Sue credit card company that I used to purchase the meal? They should have known!
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Michial Thompson, 7 Jul 2010 @ 5:39am

Another missed point
All the commentors seem to have missed that all the providers being sued had procedures in place that would have made them aware of the actions.

The two merchants specifically eithre reviewed the websites or chargebacks. With these procedures in place at least SOMEONE was made aware that they were fake goods, either before approval of the account or during the normal day to day usage of the account.

The Middleman advertising that he works with High Risk Vendors is another subject, and he should pretty easily be able to get dismissed from the case once the industry standard definition is given to any reasonable judge.

I work with Jails, Sheriff's Offices and Police Departments, yet my Merchant account is labeled High Risk due to the size of my company, and the size and type of the charges.
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- btrussell (profile), 7 Jul 2010 @ 11:38am
  
  Re: Another missed point
  "...all the providers being sued had procedures in place that would have made them aware of the actions."
  So you agree that the hurt locker lawyers are just as guilty as the other downloaders since they are not issuing takedown notices.
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Citizen Caned, 7 Jul 2010 @ 7:06am

Regardless, card processors will NOT pay a dime...
...or suffer one bit of profit. It's YOU, the consumer, who will pay for any increase taxes, fines, or lawsuit judgements imposed upon any business by judge or government. It is ALWAYS, ALWAYS passed on to the consumer in the cost of good and services.
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AJ, 7 Jul 2010 @ 7:19am

Easy one...
All the credit card companies have to do is stop allowing online purchases accross the board. That way, they don't have to worry about which one is selling real goods. I bet that would change some minds in a hurry.......
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DCAA Timekeeping Software, 3 Aug 2010 @ 6:54am

Crazy
That's crazy. But it's Gucci's fault for trusting them. I wouldn't be surprised if they settle anyway.
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Web Timesheet Software, 6 Dec 2010 @ 11:34am

Good for Gucci
There are many replica sites now for luxury goodies, and it is very hard to stop them, but maybe this lawsuit will make merchant company more cautious and alternatively slow down those replica's sites.
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Time Clock, 12 Jun 2012 @ 12:07pm

I believe, atleast after this such websites and business will be stopped and penalized.
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