’s Anti-Counterfeiting Efforts Blessed by California Appellate Court (Forbes Cross-Post)

By Eric Goldman

A California appellate court has blessed’s ($AMZN) efforts to police counterfeit goods sold by its third party merchants.  This is especially good news for Amazon because the leading precedent on the topic had blessed eBay’s ($EBAY) more aggressive anti-counterfeiting efforts, so it wasn’t clear Amazon would be equally protected even if it had less aggressive practices.  Nevertheless, the news is not all good for Amazon.  The opinion indicates that Amazon is having some difficulty keeping counterfeits off its site.  If Amazon can’t fix that, it could face both continued legal hassles and a consumer backlash.

The opinion tells a poignant story about a manufacturer’s problems with counterfeiting.  The manufacturer, Tre Milano, makes the “InStyler Rotating Hot Iron Hair Straightener.”  Tre Milano claims that the item has been a marketplace success, and that it’s a popular item to counterfeit.  Putting aside the lost revenues to Tre Milano, counterfeit versions of the InStyler can create other problems: they pose significant safety hazards to consumers, and unwitting buyers of the defective or poorly constructed counterfeit items are unfairly panning InStyler in consumer reviews.

Tre Milano has an active anti-counterfeiting program that includes buying goods to check if they are counterfeit and sending takedown notices to eBay and Amazon.  It had an ongoing dialogue with Amazon.  For example, the court says “From May 1, 2010 to April 28, 2011, Tre Milano sent 311 NOCI’s to Amazon.”  (NOCIs are “notices of claimed infringement,” a type of takedown notice).  To Tre Milano’s chagrin, Amazon sometimes didn’t honor its takedown notices when Tre Milano didn’t confirm that it had done a test buy.

In this sense, Tre Milano and Amazon reached a typical impasse.  Tre Milano has incentives to send takedown notices when sellers are setting low prices–maybe because they are counterfeiters, or maybe because they are overly aggressive discounters of legitimate goods or selling legitimate used goods.  Either way, Tre Milano is fine with kicking those legitimate sellers out of the market as a collateral consequence of chasing counterfeiters.  Meanwhile, Amazon doesn’t want to kick legitimate merchants off its network simply based on self-interested allegations of bad behavior; this would sour its merchant relations and cost Amazon its cut of their sales.  So Tre Milano doesn’t care too much if its takedown notices are accurate, while Amazon cares a lot about the notice’s accuracy.

The legal rules matter a lot to who bears the risk of errors in Tre Milano’s takedown notices.  If the law says Amazon has to assume Tre Milano’s takedown notices are accurate (or bear liability for getting that wrong), then Tre Milano can send notices freely and Amazon will toss a lot of legitimate3 merchants overboard.  In contrast, if the law says that Tre Milano has to verify the counterfeiting allegations before Amazon has to honor its takedown notices, then Tre Milano has to do more prep work and some counterfeit sellers will avoid the ax.

The court concludes that Amazon can ignore Tre Milano’s unverified takedown notices because Amazon is a “transactional intermediary,” not the actual seller of counterfeit goods.  The court applies the same legal standards set by the Second Circuit in Tiffany v. eBay, even though (1) Amazon may have done less to police against counterfeits than eBay’s practices endorsed by the Second Circuit, (2) Amazon acted as the payment service provider for its merchant sales, a service eBay didn’t provide, and (3) Amazon didn’t always remove items in response to takedown notices (in contrast, eBay always acted on Tiffany’s takedown notices; the lawsuit was over Tiffany’s demand that eBay should be even more proactive).

Obviously this ruling is good news for Amazon, but I think it’s also good news for other e-commerce websites enabling third-party merchants to sell to consumers.  Manufacturers routinely make unreasonable demands on e-commerce websites to do more to police against counterfeits.  Here, the court rejected Tre Milano’s demands on Amazon, and those demands were not nearly as unreasonable as many other demands that manufacturers make.  Thus, this opinion sends a strong signal to manufacturers that they should tone down their anti-counterfeiting demands on e-commerce websites; and it gives some encouragement to e-commerce websites to stand up to overly aggressive manufacturer demands.

Even so, e-commerce websites can’t simply ignore counterfeit sales on their websites, even if made by third party sellers.  Doing too little anti-counterfeiting work can result in low judicial sympathy if challenged in court, and worse, it can undermine buyers’ trust in the e-commerce site.  In some cases, buyers are completely OK with counterfeit goods (such as luxury branded goods, where consumers may like the design or status and don’t need an authentic good to achieve that goal), but buyers are not likely to be OK with counterfeit electronic goods like the InStyler due to the safety and quality issues.  Even though Amazon may have dodged the legal bullet here, it’s hardly comforting for Amazon consumers to know that Amazon hasn’t figured out a reliable way to screen out sales of counterfeit InStylers.

Case cite: Tre Milano, LLC v., Inc., 2012 WL 3594380 (Cal. App. Ct. August 22, 2012).  Like so many California appellate court opinions, this was designed “not published” for no good reason, so it is not citable or binding precedent.  For legal geeks: this opinion never explains why the lawsuit remained in state court despite Tre Milano’s allegations of a Lanham Act violation.