California Appellate Court Upholds Amazon’s Anti-Counterfeiting Measures

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On August 22, 2012, the California Court of Appeal validated Amazon.com, Inc.’s (“Amazon”) efforts to police counterfeit goods sold by third-parties on its website in Tre Milano, LLC v. Amazon.com, Inc., No. BC460511 (Cal. App.2d 2012). At issue was whether Amazon could be held liable under direct and contributory trademark infringement theories for counterfeit versions of Plaintiff Tre Milano LLC’s “InStyler Rotating Hot Iron Hair Straightener” (the “InStyler”) that were rampant on Amazon’s Marketplace website.

Tre Milano filed direct and contributory trademark infringement claims against Amazon in California state court and sought an injunction barring Amazon and third-party sellers from selling, offering for sale, or advertising any real or counterfeit InStyler products in California. Tre Milano alleged that apart from lost revenues, the sales of knock-off InStylers on Amazon’s website were harming its reputation because customers that purchased the poor quality counterfeit InStylers often posted negative product reviews. The trial court denied Tre Milano’s preliminary injunction and, relying on the United States Court of Appeals for the Second Circuit’s analysis in Tiffany (NJ) Inc. v. eBay, Inc., 600 F.3d 93 (2010), noted that a service provider’s generalized notice of counterfeit goods being sold on its website is insufficient to impose an affirmative duty to remedy the problem. The trial court also held that Tre Milano failed to show that Amazon had been “willfully blind” to counterfeit sales on its site.

On appeal, Tre Milano emphasized its own active anti-counterfeiting measures and Amazon’s allegedly insufficient responses to Tre Milano’s takedown measures. Tre Milano’s anti-counterfeiting measures include producing an InStyler anti-counterfeiting manual entitled “How to Tell It’s Counterfeit,” buying InStylers to determine if they are authentic, and sending Notices of Claimed Infringement (“NOCI”), a type of takedown letter, to Amazon and eBay regarding counterfeit InStyler listings. For instance, from May 2010 through April 2011, Tre Milano sent 311 NOCIs to Amazon, including 85 following up on listings not removed after Tre Milano sent a previous NOCI.

In response, Amazon emphasized its own extensive anti-counterfeiting measures, including employing a staff of 100 people dedicated to risk investigation activities such as weeding out counterfeit listings, blocking nearly 6,000 sellers suspected of selling infringing content over the last two-and-a-half years, cancelling over 4 million seller listings over the last year, screening third-party seller applications and monitoring their monthly sales, maintaining a database tracking high-risk items likely to be counterfeit to aid investigators, and utilizing two computer programs to monitor third-party offers, flag high-risk items, and scan buyer feedback for keywords such as “counterfeit” or “fake” to flag sellers for review.

Siding with Amazon, the California Court of Appeal affirmed the denial of the preliminary injunction and held that Amazon could not be directly or contributorily liable for the sale of counterfeit InStylers by third-parties. Addressing Tre Milano’s claim that Amazon was a direct trademark infringer because it used the InStyler mark “in connection with” the sale of counterfeit InStylers, the Court of Appeal held that Amazon was protected by the doctrine of “nominative fair use,” which allows a party to use a trademark to identify goods so long as there is no likelihood of confusion about the source of the product or trademark holder’s sponsorship or affiliation. The Court of Appeal noted that Amazon was the service provider and not the actual seller of the InStyler (even though it provided the product description and processed the payments).

Addressing the contributory infringement claim, the Court of Appeal stated that Amazon could only be liable if it knew or had reason to know it was engaging in trademark infringement, or that it had direct
control and monitoring of the instrumentality used by the third-parties to infringe. The Court of Appeal generally endorsed the trial court’s reliance on Tiffany, which held that eBay was not liable for contributory infringement arising out of the sale of counterfeit Tiffany jewelry by third parties on the eBay website. Tre Milano attempted to emphasize key differences between Amazon’s anti-counterfeiting policies and the eBay policies sanctioned by Second Circuit. For instance, Tre Milano noted that eBay takes down infringing listings almost immediately after receiving an NOCI, but that Amazon typically takes one to two weeks, and sometimes months, to respond to NOCIs.

However, the Court of Appeal found that the majority of Tre Milano’s NOCIs sent to Amazon did not contain any supporting evidence that the product was counterfeit. Amazon had previously advised that it required proof that a listing was counterfeit, and that without such proof it would not remove a listing until it had conducted its own investigation. The Court of Appeal held that nothing in the Second Circuit’s eBay decision supported a conclusion that a listing must be removed on notice that it is likely for a counterfeit product. Thus, because it was acceptable for eBay to remove a listing and not permanently suspend a seller whose listing received a NOCI, it was also ok for Amazon as a “transactional intermediary” to use an investigation policy in response to an NOCI. The Court of Appeal noted that when presented with evidence of infringement, Amazon promptly acted to remove the infringing listings.

The decision is notable given the dearth of case law addressing contributory trademark infringement by online service providers. The Court of Appeal’s decision suggests that courts may provide considerable leeway to online service providers that maintain active anti-counterfeiting policies (albeit less than eBay’s) and are acting in good faith.