Judge Harold Baer of the U.S. District Court for the Southern District of New York (the “home court” for LIKELIHOOD OF CONFUSION®) has never been afraid to stick his neck out, at least a little bit. He’s done it this time in the battle of, or rather by, the brands against trademark counterfeiting. In a decision dated June 23rd, Judge Baer has bucked the trend against finding secondary trademark liability against hardly any party that profits from counterfeiting by denying a motion to dismiss claims of contributory trademark infringement brought by Gucci against a group of credit card processing companies in Gucci America Inc. v. Frontline Processing Corp., et al. (The decision is here.)
This is a favorite topic of mine, and obviously a still developing area of law. Three years ago almost to the day I wrote the following in these very pixels:
Reuters reports that in Perfect 10, Inc. v. Visa Intl. Serv. Assn., 494 F.3d 788, 793 (9th Cir. 2007) the Ninth Circuit has affirmed (opinion here), 2-1, a ruling that there is no third-party copyright or trademark liability for credit card companies such as Visa and MasterCard or the banks that process their transactions, arising from their central â€” essential, really â€” role in the sale of counterfeit merchandise (including, as in this case, unauthorized copies of dirty pictures) on the Internet:
Writing for the majority, Judge Milan Smith Jr. said credit card processors, unlike Web search providers, do not direct online traffic. â€œThey in no way assist or enable Internet users to locate infringing material, and they do not distribute it,â€ Smith wrote.â€œHere, the infringement rests on the reproduction, alteration, display and distribution of Perfect 10â€²s images over the Internet,â€ Smith wrote.
If you didnâ€™t guess from the title, I disagree with this. Why do judges keep missing this? The credit card companies are very much in the profit chain of infringing websites â€” websites that do nothing but sell counterfeit goods â€” and they make no serious effort, even when notified, to prevent this activity from occurring. . . . Iâ€™m not alone; not by a long shot. The dissenter? Only Alex Kozinski, who also recognizes that the majority errs â€” really, in my view, demonstrates real intellectual dishonesty â€” in that they
recognize, as they must, that helping consumers locate infringing content can constitute contributory infringement but they consign the means of payment to secondary status. â€¦ But why is locating infringing images more central to infringement than paying for them?
Here Judge Baer, considering the facts as alleged in the Gucci case, had no problem overcoming the high (too high, I’ve argued) standard set by the Second Circuit in Tiffany v. eBay for a finding of “willful blindness“:
Here, Gucci has made substantial factual allegations about the knowledge of all three defendants. These allegations at the very least provide a strong inference that each knew that Laurette traded in counterfeit products, or were willfully blind to that fact. As described previously, Durango allegedly held itself out to high risk replica merchants. Its sales agent, Counley, traded emails with the Laurette Counterfeiters who expressly told him that they were unable to get credit card services because they sold “replica” items. Counley later wrote back to say he had found a U.S. bank that “can do replica accounts now.” Surely, a connection between an inability to get the services needed to transact goods online and the sale of replicas should have attracted Durango’s attention.
Frontline likewise is alleged to have sufficient knowledge of trademark infringement by the Laurette counterfeiters. According to Gucci, Laurette completed an application to obtain Frontline’s services, and Nathan Counley, though a Durango employee, is listed as Frontline’s sales agent. Counley “acted as Frontline’s agent in soliciting and directing credit card processing business from replica merchants like the Laurette Counterfeiters” and therefore Frontline may be charged with his knowledge, including his understanding of Laurette’s difficulty to obtain services for selling replicas. Gucci alleges that the “replica acknowledgment” described above that was created for the Laurette website with Counley’s assistance was also reviewed by Frontline, who made suggestions as to where they should place this warning on the website. Even more significantly, Frontline allegedly performed its own investigation of products sold through TheBagAddiction.com as part of Frontline’s chargeback reviews. When faced with a chargeback, Gucci claims that Frontline received supporting documentation from Laurette that included information about the specific item ordered, including a description of the item purchased. Not only did Frontline allegedly review the specific item description, Plaintiff also claims that the relatively small price tag for the item, as well as specific complaints from customers who made chargebacks about not receiving what the website purported to sell, e.g. a product made of genuine leather, should have alerted Frontline that these were infringing products. These fact-specific claims are enough to at least infer that Frontline knew or consciously avoided knowing that the counterfeit products were sold on TheBagAddiction.com.
The Gucci opinion, just as LIKELIHOOD OF CONFUSION® did in the passage quoted above, approvingly cites Circuit Judge Kozinski’s dissent in Perfect 10, including gems such as:
It’s not possible to distribute by sale without receiving compensation, so payment is in fact part of the infringement process
They knowingly provide a financial bridge between buyers and sellers of [counterfeit products], enabling them to consummate infringing transactions, while making a profit on every sale.
In a commercial environment, distribution and payment are . . . like love and marriage — you can’t have one without the other. If cards don’t process payments, pirates don’t deliver booty.
I wasn’t alone in my criticism (see here, here, here and here). At the end of the day, however, Judge Baer wisely did not rule, as he could have, that because he sits in the Second Circuit he was not bound by the Ninth Circuit’s imperfect ruling in Perfect 10. Instead, he distinguished the cases as follows:
Defendants rely on the fact that, in Perfect 10, the Ninth Circuit declined to hold certain credit card processors liable for a website’s trademark infringement. There, however, the infringing conduct was the publication on the website of trademarked images of nude models, and the distribution occurred via individuals viewing and taking the image directly from the website. Plaintiff in that case failed or perhaps was unable to allege that the credit card service providers had the “power to remove infringing material” or “directly stop their distribution” because the infringement occurred on the website itself and a credit card transaction was not needed for the website to continue to infringe. This is not the case here.
Nope: Different case. Hurray for the Mother Court! And hat tip to Jane Coleman, she of the definitive online treatise Secondary Trademark Infringement, now being revised to reflect this year’s excitement and, it is hoped, to offer a hard copy to hard-pressed legal researchers, as well as the merely curious, some time this fall.