The opinion of the court was delivered by: Richard J. Sullivan, District Judge
OPINION AFTER BENCH TRIAL
Tiffany, the famous jeweler with the coveted blue boxes, brings this action against eBay, the prominent online marketplace, for the sale of counterfeit Tiffany silver jewelry on its website. Specifically, Tiffany alleges that hundreds of thousands of counterfeit silver jewelry items were offered for sale on eBay's website from 2003 to 2006. Tiffany seeks to hold eBay liable for direct and contributory trademark infringement, unfair competition, false advertising, and direct and contributory trademark dilution, on the grounds that eBay facilitated and allowed these counterfeit items to be sold on its website.
Tiffany acknowledges that individual sellers, rather than eBay, are responsible for listing and selling counterfeit Tiffany items. Nevertheless, Tiffany argues that eBay was on notice that a problem existed and accordingly, that eBay had the obligation to investigate and control the illegal activities of these sellers - specifically, by preemptively refusing to post any listing offering five or more Tiffany items and by immediately suspending sellers upon learning of Tiffany's belief that the seller had engaged in potentially infringing activity. In response, eBay contends that it is Tiffany's burden, not eBay's, to monitor the eBay website for counterfeits and to bring counterfeits to eBay's attention. eBay claims that in practice, when potentially infringing listings were reported to eBay, eBay immediately removed the offending listings. It is clear that Tiffany and eBay alike have an interest in eliminating counterfeit Tiffany merchandise from eBay - Tiffany to protect its famous brand name, and eBay to preserve the reputation of its website as a safe place to do business. Accordingly, the heart of this dispute is not whether counterfeit Tiffany jewelry should flourish on eBay, but rather, who should bear the burden of policing Tiffany's valuable trademarks in Internet commerce.
Having held a bench trial in this action, the Court issues the following Findings of Fact and Conclusions of Law, as required by Rule 52(a) of the Federal Rules of Civil Procedure. Specifically, after carefully considering the evidence introduced at trial, the arguments of counsel, and the law pertaining to this matter, the Court concludes that Tiffany has failed to carry its burden with respect to each claim alleged in the complaint. First, the Court finds that eBay's use of Tiffany's trademarks in its advertising, on its homepage, and in sponsored links purchased through Yahoo! and Google, is a protected, nominative fair use of the marks.
Second, the Court finds that eBay is not liable for contributory trademark infringement. In determining whether eBay is liable, the standard is not whether eBay could reasonably anticipate possible infringement, but rather whether eBay continued to supply its services to sellers when it knew or had reason to know of infringement by those sellers. See Inwood Labs., Inc. v. Ives Labs., Inc., 456 U.S. 844, 854 (1982). Indeed, the Supreme Court has specifically disavowed the reasonable anticipation standard as a "watered down" and incorrect standard. Id. at 854 n.13. Here, when Tiffany put eBay on notice of specific items that Tiffany believed to be infringing, eBay immediately removed those listings. eBay refused, however, to monitor its website and preemptively remove listings of Tiffany jewelry before the listings became public. The law does not impose liability for contributory trademark infringement on eBay for its refusal to take such preemptive steps in light of eBay's "reasonable anticipation" or generalized knowledge that counterfeit goods might be sold on its website. Quite simply, the law demands more specific knowledge as to which items are infringing and which seller is listing those items before requiring eBay to take action.
The result of the application of this legal standard is that Tiffany must ultimately bear the burden of protecting its trademark. Policymakers may yet decide that the law as it stands is inadequate to protect rights owners in light of the increasing scope of Internet commerce and the concomitant rise in potential trademark infringement. Nevertheless, under the law as it currently stands, it does not matter whether eBay or Tiffany could more efficiently bear the burden of policing the eBay website for Tiffany counterfeits - an open question left unresolved by this trial. Instead, the issue is whether eBay continued to provide its website to sellers when eBay knew or had reason to know that those sellers were using the website to traffic in counterfeit Tiffany jewelry. The Court finds that when eBay possessed the requisite knowledge, it took appropriate steps to remove listings and suspend service. Under these circumstances, the Court declines to impose liability for contributory trademark infringement.
Third, the Court finds that Tiffany has failed to meet its burden in proving its claims for unfair competition. Fourth, in regard to Tiffany's claim for false advertising, the Court concludes that eBay's use of the Tiffany trademarks in advertising is a protected, nominative fair use of the marks. Finally, the Court finds that Tiffany has failed to prove that eBay's use of the TIFFANY Marks is likely to cause dilution. Even assuming arguendo that Tiffany could be said to have made out a claim for trademark dilution, the Court finds that eBay's use of the marks is protected by the statutory defense of nominative fair use.
Accordingly, the Court hereby enters judgment for eBay. The Court's judgment is supported by the following Findings of Fact and Conclusions of Law.
Plaintiffs Tiffany (NJ) Inc. and Tiffany and Company*fn1 commenced this action on June 18, 2004.*fn2 The Amended Complaint, filed on July 15, 2004, alleges that defendant eBay, Inc. ("eBay") is liable, inter alia, for direct and contributory infringement of Tiffany's trademarks by virtue of the assistance that it provides to, and the profits it derives from, individuals who sell counterfeit Tiffany goods on eBay. Specifically, Tiffany's Amended Complaint asserts the following six causes of action: (1) direct and contributory trademark infringement of Tiffany's trademarks in violation of Sections 32(1), 15 U.S.C. § 1114(1), and 34(d), 15 U.S.C. § 1116(d), of the Lanham Act; (2) trademark infringement and the use of false descriptions and representations in violation of Sections 43(a)(1)(A) and (B) of the Lanham Act, 15 U.S.C. § 1125(a)(1)(A) and (B); (3) direct and contributory trademark infringement under common law; (4) direct and contributory unfair competition under common law; (5) trademark dilution in violation of Section 43(c) of the Lanham Act, 15 U.S.C. § 1125(c); and (6) trademark dilution in violation of New York General Business Law § 360-1.
In anticipation of trial, the parties filed a Joint Pretrial Order ("PTO") on October 6, 2006, including those facts to which both parties stipulated. In April 2007, the parties filed Proposed Findings of Fact and Law ("Pr. Findings") as well as Pretrial Memoranda ("Pretrial Mem.").*fn3
The case proceeded to trial on November 13, 2007. The trial was conducted without objection in accordance with the Court's Individual Rules for the conduct of non-jury proceedings. The parties submitted affidavits containing the direct testimony of their respective witnesses, as well as copies of all the exhibits and deposition testimony that they intended to offer as evidence in chief at trial. eBay chose to cross-examine only four of Tiffany's seventeen witnesses,*fn4 noting in opening arguments that the facts of the case were not complicated - and indeed, that many were not in dispute. (Trial Transcript ("Tr.") 28:18-29:7.) Tiffany cross-examined all three of eBay's witnesses. Closing arguments took place on November 20, 2007. The parties each submitted a post-trial memorandum ("Post-Trial Mem.") on December 7, 2007.
By letter dated July 3, 2008, Tiffany requested that the Court recognize a decision issued on June 30, 2008, by the Commercial Court of Paris, France, and give preclusive effect to factual determinations made therein. A conference regarding this request was held with the Court on July 8, 2008. Tiffany subsequently withdrew the request by letter dated July 9, 2008.
Plaintiff Tiffany and Company is a New York corporation with its principal place of business in New York, New York. (PTO at 7.) Plaintiff Tiffany (NJ) Inc. is a New Jersey corporation with its principal place of business in Parsippany, New Jersey. (Id.) Defendant eBay, Inc. is a Delaware corporation with its principal place of business in San Jose, California. (Id.)
B. Tiffany and Its Business
1. Tiffany's Famous Marks
Over its 170-year history, Tiffany has achieved great renown as a purveyor of highquality and luxury goods under the TIFFANY Marks (defined below), including jewelry, watches, and home items such as china, crystal, and clocks. (Id.; Kowalski Decl. ¶¶ 4, 7.) The TIFFANY Marks are indisputably famous, and are a valuable asset owned by Tiffany. (Naggiar Decl. ¶ 4.) The protection of the quality and integrity of the brand and the trademarks is critical to Tiffany's success as a retailer of luxury goods. (Kowalski Decl. ¶ 4.)
Tiffany is the exclusive licensee and user of the TIFFANY, TIFFANY & CO., and T & CO. trademarks, including those trademarks registered on the Principal Register of the United States Patent and Trademark Office bearing Registration Nos. 23,573, 133,063, 1,228,189, 1,228,409, and 1,669,335 for jewelry, watches and decorative art objects. (PTO at 7.) In addition, Tiffany & Co. is the exclusive licensee and user of trademarks for the design of jewelry, registered on the Principal Register of the United States Patent and Trademark Office bearing Registration Nos. 1,804,353 and 1,785,204. (PTO at 7.) The first of these two marks is registered for a kidney bean-shaped design, to be used for jewelry, namely, earrings, necklaces, bracelets, pendants, cufflinks, and rings. (Am. Compl. ¶ 12.) The second design mark is registered for a cross design, to be used for jewelry, namely, pins, pierced earrings, ear clips, bracelets, necklaces, rings, and brooches. (Id.) The foregoing marks are collectively referred to herein as the "TIFFANY Marks." (PTO at 7.)*fn6
2. Tiffany's Quality Control and Distribution
Because the issues disputed at trial included (1) the effectiveness of Tiffany's authentication and quality control procedures, and (2) the integrity of Tiffany's distribution channels, the Court makes the following factual findings with respect to these issues. The first issue is relevant to which party is best able to identify counterfeit jewelry. The second issue is arguably relevant to the availability of authentic Tiffany merchandise in secondary markets such as eBay.
In order to maintain its reputation for high-quality jewelry, Tiffany quality control personnel inspect Tiffany merchandise before it is released for distribution. (Callan Decl. ¶¶ 5, 8, 10.) Before a silver jewelry item can be released to Tiffany's channels of trade, the item must satisfy Tiffany's exacting standards for, inter alia, composition, quality, shape, and polish of the metal, as well as the quality and integrity of the TIFFANY Marks appearing on the item. (Id. at ¶¶ 8, 12.) To determine if an item is authentic Tiffany silver jewelry, Tiffany quality inspectors must be able to physically inspect each item.*fn7 (Tr. 32: 5-6; 64:18-23.) Tiffany closely protects its quality standards and does not make them available to the public or to other jewelry manufacturers. (Tr. 35:5-36:4.)
Tiffany closely controls the distribution of Tiffany-branded goods. (Kowalski Decl. ¶ 20; Zalewska Decl. ¶¶ 9-10.) Since 2000, all new Tiffany jewelry sold in the United States has been available only through Tiffany retail stores, Tiffany catalogs, the Tiffany website (www.tiffany.com), and through Tiffany's Corporate Sales Department.*fn8 (Kowalski Decl. ¶ 8; Cepek Decl. ¶ 10; Shibley Decl. ¶ 3.) Tiffany does not sell or authorize the sale of Tiffany merchandise on eBay or other online marketplaces. More generally, Tiffany does not use liquidators, sell overstock merchandise, or put its goods on sale at discounted prices. (Zalewska Decl. ¶¶ 8, 10.) In addition, Tiffany has a general policy of refusing to sell more than five of the same new items to any individual customer at any given time without the approval of the retail store manager. However, as noted below, the five-or-more policy has been sporadically applied on a case-by-case basis. (Tr. 134:17-18.)
There are only two ways in which Tiffany sells significant quantities of merchandise at discounted or wholesale prices. First, the Tiffany Corporate Sales Department sells certain Tiffany items to corporate accounts. (Shibley Decl. ¶ 4.) Second, Tiffany sells merchandise to its international trade accounts at wholesale prices. (Chen Decl. ¶¶ 3, 4.) The evidence does not show, however, that Tiffany's international trade accounts or corporate sales programs are responsible for the diversion of silver jewelry or for counterfeiting of any kind. (Cepek Decl. ¶ 15; Chen Decl. ¶¶ 13-16; Shibley Decl. ¶¶ 7-9.) Nor is there evidence that during the time at issue, from 2003 to 2006, the prices of Tiffany jewelry pieces sold in various locations have differed such that there would be incentives for purchasers to buy jewelry at a low price in one location and sell it in another country (or on eBay) for higher prices. (Zalewska Decl. ¶ 8; Chen Decl. ¶ 15.)
eBay does not seriously contest the fact that Tiffany's distribution chain is tightly controlled. Nor has eBay presented evidence of diversion of silver jewelry during the relevant time period, 2003 to 2006. Nevertheless, the relative merits of Tiffany's internal diversion controls are of marginal relevance to this litigation, as they provide little insight into the actual size and scope of the legitimate secondary market in authentic Tiffany silver jewelry. Indeed, the trial record contains virtually no testimony, expert or otherwise, on the crucial topic of the size of the legitimate secondary market in Tiffany goods. This deficiency is significant, since the law clearly protects such secondary markets in authentic goods. See Polymer Tech. Corp. v. Mimran, 975 F.2d 58, 61-62 (2d Cir. 1992) ("As a general rule, trademark law does not reach the sale of genuine goods bearing a true mark even though the sale is not authorized by the mark owner."). Thus, while rights holders such as Tiffany may have obvious economic incentives to curtail the sale of both counterfeit and authentic goods on the Internet - after all, every sale of Tiffany jewelry on eBay potentially represents a lost sales opportunity via Tiffany's own authorized distribution channels - the law provides protection only from the former, not the latter. Clearly, eBay and other online market websites may properly promote and facilitate the growth of legitimate secondary markets in brand-name goods. See Dow Jones & Co. v. Int'l Sec. Exch., Inc., 451 F.3d 295, 308 (2d Cir. N.Y. 2006) ("While a trademark conveys an exclusive right to the use of a mark in commerce in the area reserved, that right generally does not prevent one who trades a branded product from accurately describing it by its brand name, so long as the trader does not create confusion by implying an affiliation with the owner of the product."). Unfortunately, the trial record offers little basis from which to discern the actual availability of authentic Tiffany silver jewelry in the secondary market.*fn9
1. eBay's Listings, Buyers, and Sellers
eBay is a well-known online marketplace, located at www.ebay.com, that allows eBay sellers to sell goods directly to eBay buyers. (PTO at 7.) The listings are created and posted by third-party users, who register with eBay and agree to abide by a User Agreement. (Id.) While users often go by descriptive user names instead of their real names, users are required to supply identifying information to eBay when registering. (Briggs Decl. ¶ 13.) Sellers can also use multiple user names. (Tr. 671:18-672:2.)
To conduct a transaction on eBay, registered sellers choose the appropriate category for their listed item, including, for example, Jewelry and Watches, Toys and Hobbies, Collectibles, or Health and Beauty. (Briggs Decl. ¶ 15.) Sellers then create a listing for the item that they wish to sell. (Id. at ¶¶ 10, 12.) A listing can include either a single item or several items (also known as a "Dutch auction"). (Id. at ¶ 16; Zalewska Decl. ¶ 27.) In addition, sellers can post multiple listings at any given time, including multiple listings for the same type of item or one listing with multiple quantities of the same item. (Def.'s Ex. 77 at 3; Zalewska Decl. ¶ 80.)
While eBay is perhaps best known for auction-style listings, sellers can also choose to sell their goods through fixed price or "Buy It Now" listings.*fn10 (Briggs Decl. ¶¶ 9, 15.) Sellers are responsible for setting the parameters and conditions of the sale, including the minimum acceptable bid, the Buy It Now price (if applicable), and the duration of the listing. Sellers are also responsible for the content of the listings, including the titles and descriptions of the items. (Def.'s Ex. 77; Briggs Decl. ¶ 12.)
Separately, eBay offers a classified ad service, through which sellers can publish the availability of goods for sale. (Tr. 399:6 - 401:4.) This classified ad service is available only for certain categories and subcategories of goods, and is priced differently than eBay's ordinary listings. Unlike the previously described eBay listings, the classified ad service is a straightforward service analogous to the classified ad section of a local newspaper. (Id. at 401:2-4.)
Potential buyers can view listings on eBay in several ways. Buyers can click on keywords on the eBay home page, which bring them to pages of listings for products including those keywords. Buyers can also browse through eBay categories or use keywords to search through listing titles and descriptions. To bid on items, buyers, like sellers, must register with eBay. (Briggs Decl. ¶ 13.)
eBay's role is to connect buyers and sellers and to enable transactions, which are carried out directly between eBay members. When a buyer purchases an item, the buyer and seller contact each other to arrange for payment and shipment of the goods. (Id. at ¶ 19.) While eBay provides the venue for the sale and support for the transaction, it does not itself sell the items. (Id.) Indeed, items sold on eBay are never in eBay's physical possession. (PTO at 7; Chesnut Decl. ¶ 41; Briggs Decl. ¶¶ 10-11.) eBay generally does not know whether or when an item is delivered to the buyer. (Briggs Decl. ¶¶ 10-11.)
eBay has become very successful: more than six million new listings are posted on eBay daily, and at any given time, some 100 million listings appear on the website. (Id. ¶ 9.)
2. eBay's Business Model and Support to Sellers
eBay's business model is based on two components: first, the creation of listings, and second, the successful completion of sales between the seller and the buyer. For each posted listing, sellers pay an initial insertion fee, ranging from $0.20 to $4.80 depending on the starting price. If the item is successfully sold, sellers pay a final value fee based upon the final price for the item. Final value fees range from 5.25% to 10% of the final price of the item. (Briggs Decl. ¶ 20; Pl.'s Ex. 1151.) In addition, sellers who opt for various additional features to differentiate their listings, such as a border or bold-faced type, are charged additional fees. (Briggs Decl. ¶ 20.)
In this way, eBay's revenue is based on sellers using eBay to list their products and successfully completing sales through eBay. Gary Briggs, eBay's Chief Marketing Officer, testified that in 2006, approximately 33% of eBay North America's income was derived from listing fees and approximately 45% from final value fees. (Tr. 407:3-407:9.) eBay also profits from fees charged by PayPal, an eBay company, to process the transaction. (Id. at 393:4-393:16.) PayPal charges the eBay seller a fee ranging from 1.9% to 2.9% of the sale price, plus $0.30. (Pl.'s Ex. 1156.)
Because eBay's revenue and profit growth is dependent, in significant part, on the completion of sales between eBay sellers and eBay buyers, eBay works closely with sellers to foster the increase of their sales on eBay, including the sales of Tiffany jewelry. (Zeig Dep. Tr. 141:21-145:4; Tr. 406:18-407:25; Pl.'s Exs. 124, 129.) As Briggs testified, eBay "want[s] to have [its] sellers understand what buyers are interested in, and [it] feels that [it is] very much in the business of trying to help [its] sellers succeed." (Tr. 406:23 - 407:2.)
This assistance includes seminars and workshops to educate sellers on growing their business. (Id. at 403:11-403:14; Pl.'s Exs. 981, 989.) eBay also offers marketing advice about creating the "perfect" listing to attract buyers (Tr. 415:20-417:1; Pl.'s Ex. 1015), and offers an "Advanced Selling" program that provides its sellers with data and research to help them identify "hot sales opportunities" (Tr. 406:4-406:16; Pl.'s Ex. 987). In addition, eBay distributes marketing calendars so that its sellers can list goods to coincide with eBay promotions (Tr. 409:2-409:19; Pl.'s Ex. 985), as well as "expert" consultants, whom eBay sellers may call to receive advice on growing their business (Tr. 409:25-411:4; Pl.'s Ex. 990). eBay also has a "Main Street Program," which encourages sellers to lobby government officials regarding regulations and legislation that may affect their sales and eBay's business. (Tr. 413:7-413:22; Pl.'s Ex. 1024.)
Some users who regularly sell large quantities of merchandise through eBay are designated as "PowerSellers." eBay provides PowerSellers with more assistance and benefits. (Tr. 401:10-401:23.) As Briggs testified, the bigger the seller, the more support eBay provides. (Id.) During the relevant time period, eBay provided PowerSellers with dedicated account managers; special newsletters with further information on eBay promotions; advanced selling education; reimbursements of 25% of the cost of qualifying advertisements; and access to health care benefits, business liability insurance, and working lines of credit to finance their business. (Id. at 423:6 - 423:12, 423:17-424:4, 427:7-427:14, 438:19 - 439:20, 440:3-440:20; Pl.'s Exs. 52, 62, 129, 397, 406.)
3. eBay's Control Over Sales Made On Its Website
eBay is an electronic marketplace, not a retailer. Thus, eBay itself never takes physical possession of the goods sold through its website; instead, it facilitates a transaction between two independent parties. (Chesnut Decl. ¶ 41; Briggs Decl. ¶¶ 10-11.) Nevertheless, eBay exercises some limited control over those who trade on its website by requiring all users to register with eBay and sign eBay's User Agreement. (Briggs Decl. ¶ 13; Def.'s Ex. 77.) The User Agreement requires users to refrain from violating any laws, third party rights, including intellectual property rights, and eBay policies. If a user violates the terms or conditions of the User Agreement, eBay may take disciplinary action against the seller, including removing the seller's listings, issuing a warning, and/or suspending the user. (Briggs Decl. ¶ 14.)
In addition to exercising some control over users, eBay also restricts the types of items which can be listed on its website. For example, eBay maintains a list of prohibited items, e.g., drugs, firearms, and alcohol, for which it routinely screens in order to prevent such items from being offered for sale on eBay. (Pl.'s Ex. 4.)
4. eBay's Anti-Fraud Efforts
a. Trust and Safety Department
eBay has made substantial investments in anti-counterfeiting initiatives. (Tr. 686:14-15, 687:5-8.) eBay has invested as much as $20 million each year on tools to promote trust and safety on its website. (Id. at 687:21-25.) One quarter of eBay's workforce of roughly 16,000 employees is devoted to trust and safety. (Id. at 691:18-692:7.) Of these 4,000 individuals, approximately 2,000 serve as eBay Customer Service Representatives "(CSRs"). (Chesnut Decl. ¶ 20.) More than 200 of these individuals focus exclusively on combating infringement, at a significant cost to eBay. (Tr. at 597:24-580:8, 687:9-14.) eBay also employs 70 persons who work exclusively with law enforcement. (Id. at 599:1-2, 746:21-747:19; Chesnut Decl. ¶¶ 56 - 57.) In several instances, information that eBay has provided to law enforcement agencies has led to the arrest of counterfeiters. (Chesnut Decl. l. ¶¶ 56-57.)*fn11
Between December 2000 and May 2002, eBay manually searched for keywords in listings in an effort to identify blatant instances of potentially infringing or otherwise problematic activity. (Id. at ¶ 34.) In May 2002, eBay began using technology to perform that function. (Id.) These technological tools are known as the eBay fraud engine. (Id.) The fraud engine uses rules and complex models that automatically search for activity that violates eBay policies. (Id.) eBay spends over $5 million per year in maintaining and enhancing its fraud engine, which is principally dedicated to ferreting out illegal listings, including counterfeit listings. (Tr. 687:15-18.)
The fraud engine currently uses more than 13,000 different search rules, and was designed in part to capture listings that contain indicia of counterfeiting apparent on the face of the listings without requiring expertise in rights owners' brands or products. (Chesnut Decl. ¶ 35.) The fraud engine thus was developed to monitor the website and flag or remove listings that, among other things, explicitly offered counterfeit items, contained blatant disclaimers of genuineness, or included statements that the seller could not guarantee the authenticity of the items. For example, at all times relevant to this litigation, eBay monitored its website for and removed listings that expressly offered "knock-off," "counterfeit," "replica," or "pirated" merchandise, and listings in which the seller stated he "cannot guarantee the authenticity" of the items being offered. (Id.; Tr. 581:11 - 584:22; Def.'s Exs. 125, 135.) For obvious reasons, the fraud engine could not determine whether a listed item was actually counterfeit. (Chesnut Decl. ¶ 35.) However, the fraud engine also contained numerous other data elements designed to evaluate listings based on, for example, the seller's Internet protocol address, any issues associated with the seller's account on eBay, and the feedback the seller has received from other eBay users. (Id. at ¶ 36.) Between 2003 and the close of discovery in 2006, eBay modified and updated its fraud engine at least weekly. (Id.)
At all times relevant to this case, eBay's fraud engine flagged thousands of listings on a daily basis that contained obvious indicia of infringing or otherwise fraudulent activity. (Id. at ¶ 38.) Listings flagged by the fraud engine were sent to eBay's CSRs for review and possible further action. (Id.) In reviewing the flagged listings, CSRs examined multiple factors according to eBay guidelines in order to make a decision as to whether a violation of eBay policies had occurred, including the language and sophistication of the listing, the seller's history and feedback rating from past buyers, the seller's business model, and the seller's eBay registration information. (Id.)
Upon reviewing a potentially infringing, fraudulent, or problematic listing, the CSR would: (1) remove the listing from eBay; (2) send a warning to the seller; (3) place restrictions on the seller's account, such as a selling restriction, temporary suspension, or indefinite suspension; and/or (4) refer the matter to law enforcement. (Id. at ¶ 39.) eBay removed thousands of listings per month based on CSR reviews of listings captured by the fraud engine. (Chesnut Decl. ¶¶ 38-39; Def.'s Ex. 13.) At all times relevant to this litigation, CSRs' decisions were guided by standards and guidelines put in place by eBay lawyers and staff members, and the action taken was based upon the seriousness of the violation. (Id.) Nevertheless, eBay's ultimate ability to make determinations as to infringement was limited by virtue of the fact that eBay never saw or inspected the merchandise in the listings. While some items - such as guns - were completely prohibited and thus required no judgment to remove, listings that offered potentially infringing and/or counterfeit items required a more in-depth review. (Tr. 582:23-584:17.)
In addition to the fraud engine, eBay has, for nearly a decade, maintained a set of procedures, known as the Verified Rights Owner ("VeRO") Program, to address listings offering potentially infringing items posted on the eBay website. (Chesnut Decl. ¶ 15.) At all times relevant to this litigation, the VeRO Program was a "notice-and-takedown" system, whereby rights owners could report to eBay any listing offering potentially infringing items, so that eBay could remove such reported listings. (Id. at ¶ 16.) At the present time, more than 14,000 rights owners, including Tiffany, participate in the VeRO Program. (Id. at ¶ 17.)
At all times, eBay's VeRO Program rested on the responsibility of rights owners to police their own trademarks. Under the VeRO Program, a rights owner who saw a potentially infringing item listed on eBay could report the listing directly to eBay, by submitting a Notice of Claimed Infringement form or "NOCI". (Id. at ¶ 18; see Def.'s Exs. 29, 84.) A NOCI attested that the rights owner possessed a "good-faith belief" that the item infringed on a copyright or a trademark. (Chesnut Decl. ¶ 16.) NOCIs could be faxed to eBay, emailed to eBay, or reported to eBay via a software tool called the VeRO Reporting Tool. (Def.'s Ex. 94; Pl.'s Ex. 154; Chesnut Decl. ¶ 18.) As part of the VeRO Program, eBay offered rights owners tools to assist in efficiently identifying potentially infringing listings. These included the VeRO Reporting Tool as well as an automated search tool called "My Favorite Searches." (Chesnut Decl. ¶ 23.) These tools allowed rights owners to search automatically for particular listings every day, to save their favorite searches, and to email the search results directly to the rights owner for review on a daily basis. (Id.)
Upon receipt of such a notice, CSRs first verified that the NOCI contained all of the required information and had indicia of accuracy. (Id.) Thereafter, eBay promptly removed the challenged listing. Indeed, at all times relevant to this litigation, the Court finds that eBay's practice was to remove reported listings within 24 hours of receiving a NOCI. (Tr. 712:20-21; Chesnut Decl. ¶ 21; Def.'s Ex. 26.) Seventy to 80 percent of reported listings were removed within 12 hours of notification during the time period at issue in this litigation. (Tr. 713:1-3.) At present, three quarters of the listings are removed within four hours. (Id. at 712: 15 - 16.) eBay typically removed thousands of listings per week based on the submission of NOCIs by rights holders. (Chesnut Decl. ¶ 21.)
The Court finds that when eBay removed a listing, if bidding on the listed item had not ended, eBay notified the seller and any bidders that the listing had been removed and that all bids had been cancelled. eBay also advised the seller as to the reason for the removal and provided relevant educational information to prevent the seller from later committing the same violation. (Tr. 697:20 - 699:5; Def.'s Ex. 55.) If bidding had ended, eBay cancelled the transaction retroactively, removed the listing, and informed both the winning bidder and the seller that the listing had been removed and that the parties should not complete the transaction. (Tr. 703:17 - 704:5.) Every time eBay removed a listing, eBay refunded associated fees, including listing fees, feature fees, and final value fees. (Id. at 699:4-14, 703:17-704:5; Chesnut Decl. ¶ 22.) Under some circumstances, eBay also reimbursed the buyer for the cost of the purchased item under eBay's or PayPal's buyer protection programs. (Chesnut Decl. ¶ 59.) One of these conditions was that the buyer present evidence that the item was, in fact, counterfeit. (Pl.'s Ex. 1146.) eBay committed "tens of millions of dollars" annually to pay claims through its buyer protection program, "and a number of counterfeit claims [were] paid every year that certainly contribute[d] to a significant part of that expense." (Tr. 688:1-5.) The Court further finds that eBay also reviewed the seller's account and routinely took further remedial action, including suspending the seller. (Id. at 699:22-700:9.)
As an additional educational tool, eBay encouraged rights owners to create an "About Me" webpage on the eBay website to inform eBay users about their products, intellectual property rights, and legal positions. (Id. at ¶ 44.) Sellers who had listings removed from eBay were directed to the relevant rights owner's "About Me" webpage for information about why their listings were removed and how they could avoid posting listings for infringing items in the future. (Id.) Aside from monitoring for some limited content, such as profanity, eBay did not exercise any control over the content on a rights owner's "About Me" page. (Id.) Tiffany maintained an "About Me" page on eBay beginning in 2004. (Id.) Tiffany's "About Me" Page stated that "Most of the purported `TIFFANY & CO.' silver jewelry and packaging available on eBay is counterfeit." (Pl.'s Ex. 290.) The "About Me" page explained that genuine Tiffany merchandise is available only through stores, catalogs, and Tiffany's own website, and that the manufacture and sale of counterfeit Tiffany goods on eBay is a crime. (Id.) The page concluded by stating that "TIFFANY & CO. RIGOROUSLY PROTECTS ITS TRADEMARKS AND COPYRIGHTS." (Id.)
D. The Sale of Tiffany Goods on eBay
1. eBay's Brand Management and Attempts to Develop Jewelry Sales
At all times pertinent to this litigation, eBay management teams were responsible for overseeing the growth of products sold on eBay within each formal product category, such as Jewelry & Watches. (Tr. 417:9 - 420:19; Poletti Dep. Tr. 13:14-13:22.) The Jewelry & Watches team ran an account management program for its twenty top sellers. (Zeig Dep. Tr. 31:13-35:16, 35:5 - 37:8; Tr. 417:9-419:23.) That program provided eBay's sellers with information on business planning and auction strategy consultation. (Zeig Dep. Tr. 31:13-35:16; Pl.'s Ex. 200 at 16.) In addition, eBay conducted group conference calls with sellers, in which eBay shared information on such topics as eBay's marketing programs and topsearched keywords. (Pl.'s Exs. 184, 200 at 7; Zeig Dep. Tr. 117:18-118:11.) Plaintiff's Exhibit 184, a draft of an email to eBay sellers, shows that eBay provided its sellers with "the most effective keywords for [their] program," and highlighted the words that provided the best return on investments. eBay identified "Tiffany" as one of the topsearched keywords and provided it to top sellers during these calls. (Pl.'s Ex. 184.)
In order to "boost" the sellers' sales, eBay also advised its sellers to take advantage of the demand for Tiffany merchandise as part of a broader effort to grow the Jewelry & Watches category. (Pl.'s Exs. 129, 184, 995, 1018, 1026, 1038, 1064; Tr. 457:20-460:3.) In many cases, eBay's advice was simply based on the keywords that were frequently used in searching eBay's website. For instance, in 2004, a PowerSeller newsletter to jewelry sellers advised PowerSellers to "us[e] recommended keywords to boost sales." (Pl.'s Ex. 129.) "Tiffany & Co." was among the recommended keywords provided because it had "been used often" in recent eBay searches. (Id.) eBay encouraged its sellers to view the eBay Pulse webpage, which tracked buyer trends, "hot picks," "top searches," and "most watched items." (Pl.'s Ex. 1026; Tr. 461:4-464:19.) In September 2006, eBay told users that the terms "Tiffany" and "Tiffany & Co." were top search terms. (Pl.'s Exs. 1038, 1164.) eBay also reported demand for Tiffany items through documents such as the "Hot Categories Report," which summarized keywords for which there was significant buyer demand. (Pl.'s Ex. 995.)
eBay actively took steps to grow the sales of Tiffany items on its website. For example, eBay provided its users with a document called the "Holiday Hot List." (Pl.'s Ex. 1018.) As eBay acknowledged, the Holiday Hot List "suggested to our sellers the types of items that our buyers will have interest in during the holiday season." (Tr. 457:20-459:3.) The Holiday Hot List distributed in the "Seller Central" section of eBay's website in September 2006 stated: "to help [sellers] prepare, we have created a detailed list of products predicted to be in high demand and short supply this holiday season." (Pl.'s Ex. 1026.) eBay included "Tiffany" on the Holiday Hot List. (Pl.'s Ex. 1018.)
eBay recognized that its "buyers are very interested in brands." (Tr. 446:21-446:25.) In order to attract potential buyers to its website, eBay devoted a significant effort to assisting the growth of eBay sellers in the Jewelry & Watches category. (Id. at 418:11-419:23; Poletti Dep. Tr. 13:6-13:22.) Indeed, eBay considered itself to be a competitor of Tiffany and the principal source of "value" pricing of Tiffany jewelry. (Poletti Dep. Tr. 72:19-79:22, 74:16-75:13.) eBay regularly conducted promotions to increase bidding on auctions and to increase sales of fashionable and luxury brands, including Tiffany. (Zeig Dep. Tr. 49:15-50:15, 64:5-67:6; Pl.'s Ex. 61; Pl.'s Ex. 63.)
2. eBay Advertised Tiffany Goods
Prior to 2003, eBay actively advertised the availability of Tiffany merchandise on its website. (Pl.'s Exs. 392, 1064.) Additionally, as with many other brand names, eBay purchased sponsored link advertisements on Yahoo! and Google advertising the availability of Tiffany items on eBay. (Briggs Decl. ¶ 25; Pl.'s Exs. 491, 1065.) After Tiffany complained to eBay in May 2003, see infra at Section II.E.2, eBay advised Tiffany that it had ceased purchasing those links. (Briggs Decl. ¶¶ 25, 32.) Nevertheless, eBay continued to use a third party, Commission Junction, to run what was known as the "affiliate program." Through that program, sellers who registered as "affiliates" contracted with Commission Junction and then bought sponsored links on Google. (Tr. 469:1-470:20.) In some instances, affiliates were then reimbursed for some of their costs, depending on how much business they drove to the eBay website. (Id.) eBay provided a lump sum to Commission Junction, which then disbursed the payments to individual affiliates. (Id.) Although eBay never directed its affiliates to continue purchasing Tiffany sponsored links, it did not instruct Commission Junction to preclude its affiliates from using Tiffany as a sponsored link. (Tr. 472:2-472:19.) However, the technology available at the time did not allow either Commission Junction or eBay to suppress individual terms, like Tiffany, as a general rule. Rather, if eBay had sought to suppress the term "Tiffany," eBay would have needed to do so "pretty much on a manual basis." (Id. at 473:14.) Based on the evidence at trial, the Court finds that eBay did not fully discontinue the practice of advertising Tiffany goods on eBay through sponsored links.
3. eBay Generated Revenue From The Sale of Tiffany Items
During the relevant time period, eBay generated substantial revenue from the sale of "Tiffany" silver jewelry on its website. (Poletti Dep. Tr. 59:15-62:9.) Indeed, between April 2000 and August 2005, there were 456,551 sales of Tiffany jewelry in the Jewelry & Watches category.*fn12 (Pl.'s Ex. 394 at 1.) eBay's Jewelry & Watches category manager estimated that, between April 2000 and June 2004, eBay earned $4.1 million in revenue from completed listings with "Tiffany" in the listing title in the Jewelry & Watches category. (Poletti Dep. Tr. 59:15-62:9.)
E. Tiffany Identified eBay as a Major Source of Counterfeit Items
1. Tiffany Attempted to Stop Counterfeiting
In policing its valuable marks, Tiffany brought individual lawsuits against counterfeiters, including counterfeiters selling their items on eBay.*fn13 (Tr. 838:25-840:4; Kowalski Decl. ¶¶ 15-16.) In addition, Tiffany's CEO testified that Tiffany also pursued over 600 "enforcement actions," including customs seizures, working with domestic and international law enforcement agencies, and contacting individual eBay sellers and demanding that they cease and desist from selling counterfeit Tiffany items. (Tr. 801:2-801:21, 805:9-14.) Nevertheless, by 2003, Tiffany apparently determined that it would forego future legal action against individual sellers of counterfeit Tiffany merchandise on eBay (id. at 800:20-805:6), and, instead, address the problem with eBay directly. (Id. at 804:11-805:6, 816:23-817:17; Kowalski Decl. ¶ 22-23.)*fn14
2. Tiffany Sought Action from eBay
On May 14, 2003, Tiffany's outside counsel wrote to eBay to complain about the problem of counterfeit Tiffany jewelry on eBay, specifically noting the "deluge of counterfeit Tiffany merchandise, the vast majority of which has been sold through eBay." (Kowalski Decl. ¶ 17; Pl.'s Ex. 489.) In that letter, Tiffany advised eBay that there were no authorized third party vendors for Tiffany merchandise and that it should therefore "be apparent to eBay that any seller of a significant lot - i.e. five pieces or more - of purported `Tiffany' jewelry is almost certainly selling counterfeit merchandise." (Kowalski Decl. ¶¶ 17-18; Pl.'s Ex. 489.) In that May 14, 2003 letter, Tiffany made three specific demands: "that eBay immediately (i) remove listings for all Tiffany counterfeit merchandise currently on the eBay website; (ii) take appropriate and continuing measures to eliminate the sale of counterfeit merchandise through the eBay website in the future; and [(iii)] cease using any `Tiffany' identifier to label counterfeit goods." (Pl.'s Ex. 489.)
By a telephone conversation later confirmed in letters of June 12, 2003 (Pl.'s Ex. 490), and June 13, 2003 (Pl.'s Ex. 491), eBay responded by encouraging Tiffany to utilize the VeRO Program, as well as a third party program, Ranger Online, to expedite Tiffany's reporting of suspicious merchandise.*fn15 (Pl.'s Ex. 490, 15 491.) eBay also indicated to Tiffany that eBay monitored listings on its website and removed those that appeared, on their face, to be counterfeit. (Pl.'s Ex. 491.) Furthermore, eBay stated that if a seller had been previously warned about infringing listings, the seller's account would be suspended. (Id.) eBay also asked Tiffany to propose ways in which the two businesses could work together to help Tiffany protect its mark. (Id.) Finally, eBay noted that it would remove the sponsored link advertising for Tiffany items. (Id.)
However, eBay rejected Tiffany's request that eBay "remove listings that [did] not appear on their face to be offering counterfeit Tiffany items without notice from [Tiffany] that they [were] infringing." (Id.) In particular, eBay refused to prospectively ban listings in which the seller had listed multiple "Tiffany" items. (Id.; Tr. 233:15-22.) In eBay's June 13, 2003 letter to Tiffany, eBay wrote, "What you have asked us to do is to consider listings `apparently infringing' simply because the seller is offering multiple Tiffany items. That we are not prepared to do at this time." (Pl.'s Ex. 491.)
Almost one year later, on June 10, 2004, Tiffany once again wrote to eBay. (Pl.'s Ex. 492.) In that letter, Tiffany said that it had used the Ranger Online and VeRO Programs to report counterfeit goods. (Id.) Tiffany also stated that as a result of Tiffany's own survey (the "Buying Programs"), Tiffany had discovered that 73% of the sterling silver Tiffany merchandise on eBay was counterfeit, and that only 5% was genuine. (Id.) Tiffany concluded by demanding that eBay should "(i) ban any eBay seller from listing five (5) or more `Tiffany' jewelry items at any given time; (ii) ban the sale of silver `Tiffany' jewelry, the vast majority of which our analysis has shown to be counterfeit; (iii) ban the sale of any `Tiffany' item that is advertised as being counterfeit (as some currently are) or as being `inspired by Tiffany" (as is often the case now); (iv) not advertise the sale of `Tiffany' merchandise and (v) remove sponsored links to `Tiffany' on any search engine." (Id.) This litigation ensued.
At trial, Tiffany's CEO, Michael Kowalski, conceded that in "virtually all cases or certainly the majority of cases eBay would take down the listings for any auctions that were identified by Tiffany as suspect." (Tr. 814:18-22.) Kowalski also conceded that eBay had removed Tiffany advertising from its home pages and greeting pages, as well as its advertising on Google and Yahoo!. (Id. at 815:5-12.) He finally testified that the principal issue that Tiffany had with eBay was that eBay would not prospectively ban sellers of multiple Tiffany items, particularly when those items were sold in lots of five or more. (Id. at 815:13-817:11.) Kowalski stated that the crux of Tiffany's argument was that there must be a way "to stop the counterfeiting before the fact, not after the fact." (Id. at 817:9-10.)
F. Tiffany's Proposed "Five-or-More" Rule
Tiffany's principal unmet demand was for eBay to prospectively ban sellers of multiple Tiffany items by instituting a "five-or-more" rule. The Court finds that, as a factual matter, there is little support for Tiffany's allegation that a seller listing five or more pieces of Tiffany jewelry is presumptively trafficking in counterfeit goods. First, the precise contours of the "five-or-more" rule have shifted throughout litigation. For example, in Tiffany's pre-litigation demand letters, Tiffany asserted that all Tiffany items sold in lots of five or more are presumptively counterfeit. (Kowalski Decl. ¶¶ 18, 20.) At trial, the testimony was that, in reviewing infringing listings, Tiffany was concerned only with lots of five identical silver jewelry items. (Tr. 121:11-33.) At other times, Tiffany has suggested that the rule should be applied to all manner of Tiffany jewelry, new and old (Am. Compl. ¶ 34), while on other occasions Tiffany has asserted that the "five-or-more" rule should extend only to new silver Tiffany items. (Def.'s Ex. 284; Kowalski ¶ 20.)
Second, Tiffany's CEO, Michael Kowalski, testified that the "five-or-more" rule "was simply our compromised effort" to make eBay "do a better job of preventing the sale of Tiffany counterfeit merchandise through eBay." (Tr. 822:14-17.) The five-ormore rule "wasn't meant to exclusively specify the means" of enforcement, and was simply a "shorthand solution . . . that we felt was eminently reasonable from a business model consumer behavior perspective." (Id. at 822:17-23.)
Third, Tiffany's contention that the "five-or-more" rule is warranted in light of Tiffany's sales practices is unsupported by the record. In fact, the record shows that a practice of limiting retail sales of identical items in lots of five or more was instituted by Tiffany for a time, not as an anticounterfeiting tool, but instead, as an antidiversion tool - that is, to guard against the growth of a secondary market in authentic Tiffany goods. (See, e.g., Def.'s Exs. 169, 197; McGowan Dep. Tr. at 76:2-77:25.) The record further shows that since 2005, the retail sales limit has grown to 25 items per customer (Tr. 833:8-12; McGowan Dep. Tr. at 76:20-77:2) - and that even that limit is not regularly enforced. (Tr. 134:7-14 (Tiffany witness testified that "the five or more policy . . . is not applied consistently); id. at 833:3-12.) In addition, lots of more than five Tiffany silver jewelry items are available from Tiffany through its Corporate Sales Department and international trade accounts. (See generally Shibley Decl.; Chen Decl.)
Finally, the record shows that lots of five or more authentic Tiffany items, including silver jewelry, have been sold on eBay. (See, e.g., Def.'s Ex. 422; Tr. 135:16-21.)
G. Tiffany Participated in the VeRO Program
1. Tiffany Filed Increasing Numbers of NOCIs
The Court finds that Tiffany attempted to curtail the sale of counterfeit Tiffany items on eBay by participating in eBay's VeRO Program. (Zalewska Decl. ¶ 22.) Tiffany employees monitored eBay and submitted NOCIs to eBay for those listings that they had a good faith belief infringed on the TIFFANY Marks. (Id. at ¶ 35; Pl.'s Ex. 968.) Tiffany also requested that eBay provide Tiffany with contact information for the seller and that eBay suspend the seller for selling infringing items. (Cacucciolo Decl. ¶ 9.)
From the time of eBay's June 2003 letter through May 2004, Tiffany reported 46,252 listings for which Tiffany claimed a goodfaith belief that the items being sold were counterfeit.*fn16 (Pl.'s Ex. 1082.) In August 2003, Tiffany was the second-highest reporter of NOCIs in the VeRO Program. (Def.'s Ex. 81; Pl.'s Ex. 92.) In each year from 2003 through 2006, Tiffany reported substantially more listings than it did the year prior. (Pl.'s Ex. 1082.) Specifically, Tiffany reported 20,915 listings in 2003 (id.); 45,242 listings in 2004 (id.); 59,012 listings in 2005 (id.); and 134,779 listings in 2006 (id.; Tr. 97:20-99:18). As of September 30, 2007, shortly before trial, Tiffany had reported 24,201 listings for 2007. (Zalewska Decl. ¶ 79.) All told, Tiffany reported 284,149 listings through the VeRO Program. (Id. at ¶ 80; Tr. 195:1-195:8.) According to eBay's monthly records, of the 14,000 rights owners who participate in the VeRO Program, (Chesnut Decl. ¶ 17), Tiffany was among the top ten reporters in 21 of the 28 months between June 2003 and September 2005. (Pl.'s Ex. 253-283.) Thus, by any measure, it is clear that Tiffany was one of the most frequent reporters in the VeRO Program.
Notwithstanding the significance of the online counterfeiting problem, it is clear that Tiffany invested relatively modest resources to combat the problem. In fiscal year 2003, Tiffany budgeted approximately $763,000 to the issue, representing less than 0.05 percent of its net sales for that year. (Def.'s Ex. 200; Tr. 94:11-14.) Tiffany's CEO, Michael Kowalski, testified that over the past five years, Tiffany has budgeted $14 million to anti-counterfeiting efforts - of which approximately $3-5 million was spent in litigating the instant action. (Tr. 825:121-826:21.)
More specifically, Tiffany's time dedicated to monitoring the eBay website and preparing NOCIs was limited. Beginning in the summer of 2003, Ewa Zalewska, then a paralegal in Tiffany's legal department, devoted two days a week to reviewing the eBay website and answering emails from buyers and sellers involving removed listings. (Id. at 76:7-77:4.) John Pollard, then Tiffany's security manager, also devoted one day a week to monitoring and reporting on the eBay website. (Id. at 78:7-10.) Between 2004 and 2006, anywhere from 172 to 240 man-hours per month were devoted to monitoring and reporting on the eBay website, principally from paralegals, interns, Zalewska, Pollard, and a temporary employee. (Zalewska Decl. ¶ 67.) Translating these hours into a full-time equivalent employee, these hours reflected the equivalent of anywhere between 1.15 to 1.6 full-time employees per month dedicated to monitoring the eBay website. (Tr. 83:21-84:10.) In 2006, while the total number of hours dedicated to monitoring eBay did not change, Tiffany dedicated one full-time employee to patrolling eBay and reporting NOCIs through the VeRO Program. (Id. at 84:18-25; 188:1-3.) Moreover, in 2006, for the first time, Tiffany began to patrol eBay and report violations on a daily basis. (Id. at 188:1-3.)
While eBay suggested that Tiffany use technological tools, like Ranger Online, to facilitate reporting, Tiffany eventually rejected this technology. (Id. at 230:8-23; see supra at n.15.) Nor did Tiffany attempt to develop its own technology to expedite the process of monitoring and reporting on eBay. (Id. at 229:6-230:2.)
Given the limited technology and staff Tiffany chose to employ to pursue reporting through VeRO, the sheer volume of Tiffany items available on eBay made it difficult for Tiffany to comprehensively review all of the Tiffany listings on eBay. (Id. at 203:21-205:8.) On any given day, from early 2003 through 2006, a search for "Tiffany" and "silver" could return more than 1,000 results. (Zalewska Decl. ¶ 83.) With the limited resources that Tiffany was willing to devote to eBay review, Tiffany simply could not review every Tiffany listing. (Zalewska Decl. ¶ 83; Tr. 203:21-205:8.) In addition, when reviewing items on eBay, Tiffany's reviewers did not have the opportunity to see listings any earlier than a member of the general public. Accordingly, potentially counterfeit merchandise could be listed and sold before Tiffany had even had the opportunity to review the listing. (Cacucciolo Decl. ¶ 47; Pl.'s Exs. 1075, 1077, 1078.) This was particularly true for listings over the weekends, when ...