China’s Contributory Liability of Internet Service Provider for Online Counterfeit Goods

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(Author: ZHAO Lei; Source: Unitalen IP)

With the rise and rapid development of the Internet technology, the network shopping which is the most extensive and popular model of the electronic business grew significantly. Behind the hot network shopping, we also have found a large amount of counterfeit goods sold on these internet websites. Accordingly, trademark owners required these internet service providers hereinafter referred to as ISPs to protect their trademarks and prevent sales of counterfeit goods. At the same time, many countries including the United States took legislative action of safe harbor to protect ISPs from various liabilities. But even if ISPs help to take down the link of counterfeit goods on these websites after receiving notice from trademark owners, the infringement of counterfeit goods remains rampant.
Compared to cost, difficulty and uncertainty for trademark owners to police counterfeit goods on internet, a lot of famous trademark holders seek to hold ISPs liable for contributory trademark infringement around the world. In the United States, France, Belgium, Germany, and Britain, the international and famous luxury manufacturers LVMH, Hermes, Rolex, L ‘Oreal, and Tiffany filed trademark infringement litigation against the largest auction site eBay in succession.
From watching the judgment, courts in many countries take different views about contributory liability of ISPs. In the United States and Belgium, if ISPs do not specifically know infringements and they take enough measure to prevent infringement, basically they are not liable. And trademark owners bear the burden of policing their trademark on websites. And in Germany, courts held that if ISPs knowingly allow continued sales of counterfeit goods, they can be found liable for damages. However, some courts in France imposed full liability for willful trademark infringement by showing sales of counterfeit goods.
Specifically, this article would begin by an introduction of ISPs contributory liability. The second part reviews the different approaches in different countries. The third part discusses and analyzes issues to determine what kind of contributory liability ISPs should take better. The fourth part figures out our proposal to the problems under the present rules. Then finally we will draw our conclusion in fifth part.

I. Cases in different countries

A. LVMH v. eBay (2008, France)
LVMH is one of the largest luxury manufacturers in the world. It owns many famous brands like Lovis Vuitton, Christian Dior, Fendi and Guerlain, etc. In 2006, LVMH noticed there were counterfeit goods sold on eBay. They filed a lawsuit and claimed that 90% goods of Louis Vuitton bags and Dior perfume sold on eBay are counterfeit goods. On June 30, 2008, Commercial Court of Paris held eBay is not a negative network service provider but an active broker, in other words, as an intermediary between sellers and buyers. Moreover, eBay acknowledges counterfeit goods but still provides service for the seller and profits from transactions. Finally, because eBay had subjective fault of not taking effective and enough measures against infringement, eBay should compensate the LVMH value of $61 million loss.

B. Lancome v. eBay (2008, Belgium)
Lancome that is affiliated with L ‘Oreal group is a makeup and perfume manufacturer, the company found that counterfeit goods were sold on eBay as well. So they filed a lawsuit to a Belgian court. In 2008, the Brussels Commercial Court held that eBay is only a network platform that provides information release services of goods sales. As ISPs, eBay does not have obligation to monitor information released by its user and does not have obligation to actively search for illegal counterfeit information. Therefore, eBay does not have to undertake contributory liability for counterfeit goods unless it knew of facts or it had known but failing to take down.

C. Rolex v. eBay (2007 & 2009, Germany) 
World famous watch manufacturer Rolex found cheap and fake Rolex watches were sold on eBay. So they filed a lawsuit in Germany. In 2007, the German federal Supreme Court held that eBay should take the effective measure to prevent sales of counterfeit Rolex watches. So eBay was found liable for trademark infringement and compensated for the loss of the plaintiff. In a 2009 opinion, Dusseldorf court held after altered to the sale of counterfeit goods, eBay took sufficient measures.4

D. Tiffany v. eBay (2010, America)
Tiffany is a famous jewelry distributor that has over170 years of history. In order to protect the brand, Tiffany only sells products in their own stores or on their own website. Tiffany found their products were sold on eBay and sellers usually would pay eBay in proportion after transaction. So Tiffany sued eBay to the United States district court for the southern district of New York for trademark infringement. In July 2008, the court pointed out as follows:
First, consumers purchased counterfeit goods from eBay’s subscribers not eBay. So eBay is not seller of the transactions. Second, when Tiffany sent notice to eBay that some listings were selling counterfeit goods on its website, eBay immediately removed the challenged listing from its website. Third, eBay just possessed general knowledge about counterfeit goods on its website, not specific knowledge. Finally, supervision of trademark infringement is not eBay’s responsibility. No law required ISPs to adopt measures to prevent infringement. So, as eBay did not specifically know about the fact of infringement, eBay is not contributorially liable for trademark infringement. Tiffany filed appeal. And the United States Court of Appeals for Second Circuit affirmed.
All issues in these cases are cited as follows: Is legal identity of ISPs a broker or simple service providers? Should ISPs have obligation to monitor infringement trade? Should ISPs specifically know or generally know? Should ISPs have a duty of care?
III. Issues

A. Is legal identity of ISPs a broker or simple service providers?
About the legal status of internet service provider, basically there are the following four views: the first point is that ISPs are sellers or joint party. For example, in the Gentry v. eBay, Inc, plaintiff argued that eBay is a dealer of counterfeit goods. 6 The second view is that ISPs are lessors of counter. It is similar to a market on website. The relationship between ISPs and sellers is a cyberspace renting relationship. 7 The third point is that ISPs are trade intermediary. For example, French court in the foregoing LVMH v. eBay and German court in Rolex v. judgment case held that eBay is not only an internet service provider, but also a broker of the sale, taking responsibility of supervision counterfeit. The fourth point is that eBay is an internet services provider. For example, the Belgian court in the foregoing Lancome v. eBay case and the American court in the foregoing Tiffany v. eBay held that eBay is only internet service providers, not the broker.
The author thinks that the first three opinions are inappropriate. First of all, ISPs are not the seller of the goods on the website. Second, ISPs are also not a lessor of counter. They did not sign a space rental agreement with merchants. Its charge is service fees not commission from sales. Finally, ISPs also are not the internet trade intermediary. The reason is as follows: ISPs did not report trade information to both parties. Transaction information is released by the seller or buyer. And whether trade could be completed depends on will of both parties not ISPs. And in traditional intermediary services, intermediaries actively match trade between sellers and buyers and charge fee from the action by using their experience and knowledge. Unlike traditional intermediary, ISPs are very passive did not collect fees from the buyer during the whole transaction.
Therefore, the author agrees with the fourth view that ISPs are only network service provider. This is because ISPs only provide necessary services for concluding contracts between sellers and buyers, such as information release. So ISPs keep a passive role and they are only internet service providers but not content providers.

B. Should ISPs have obligation to monitor infringement trade?
The author thinks ISPs should not have obligation to monitor infringement trade. There are three reasons:
First, the nature of the trademark right is private right. As it is assets of trademark owners, so trademark owners should be responsible for management and protection of trademarks. It is reasonable and sensible that trademark owners should establish management system and risk evaluation system of trademark asset, pay attention to the use of the trademark, prevent happening of trademark infringement. Moreover, trademark owners gain maximum benefit in using trademark and suffer the biggest loss. So it is more reasonable for trademark owners to monitor and concern their own trademarks.
Second, some people think that online information of counterfeit goods could only be released through ISPs. So if sales of the infringing goods are found, transaction qualification of seller will be cancelled. And ISPs are entitled to take down and remove the list of the infringing goods after receiving notice sent by trademark owners. All these show that ISPs have ability of monitoring trademark infringement.
The author thinks the above opinion ignored characteristics of internet transactions. Unlike the traditional market, ISPs do not have ability of possessing goods, but only providing a platform in internet transaction. To ensure efficiency, ISPs do not check and know any details of transaction. In addition, huge internet transaction volume makes it impossible for ISPs to monitor every trademark infringement. Especially in recent years, network auction is very hot. For example, with nearly 100 million active users, eBay’s core marketplace site hosts millions of retail and wholesale transactions in some 30 countries every day.9Facing hundreds of millions of commodity list in internet, it is slow, arduous, costly, and impossible to require ISPs check one by one. If ISPs have monitoring obligation, it will greatly increase costs of internet transaction, reduce the efficiency of internet transaction, and eventually led to bankruptcy of some auction websites. Even if ISPs could arrange a lot of staffs to monitor for each goods, they can not accurately review whether each of them is original or fake as a trademark owners. So, there is no possibility to impose monitoring obligation only to ISPs.
Third, as internet auction has brought a lot of convenience, and save the transaction costs, it is widely welcome and popular for public. If only because of counterfeit goods sold in internet transaction, we shut down websites or terminate trade pattern, it will lead to destruction of a new industry. Furthermore, if we impose ISPs for monitoring obligation, it may strengthen the rights of trademark owners, interfere in free flow of goods, and then damage the interests of consumers. In practice, many trademark owners just sell products through their own stores or their own websites and tried to ban an auction website commodity sales action. If monitoring obligation is imposed to ISPs, buyer of luxury goods can not resell, buyer who hope to buy secondhand luxury also will lose opportunity to buy cheap goods from website. So this potential practice will strengthen monopoly position of trademark owners, violate first sale doctrine, and also harm the interests of consumers. Therefore, the law should not require ISPs bear monitoring obligation.

C. Should ISPs specifically know or generally know?
In Tiffany v. eBay, defendant contended that specific knowledge is required to take liability. And because defendant did not specifically know counterfeit goods sold on the website, so they do not bear responsibility. However, plaintiff argued that as long as defendant generalized knows infringement fact of counterfeit goods, defendant then has subjective fault and should be liable for compensation.
The author believed that generalized knowledge is not suitable for the factors to determine contributory liability. This is because generalized knowledge is a kind of abstract and fuzzy standard. First, if applying this standard, as long as someone sells counterfeit goods on the website, the law will presume ISPs should know all the fake sales. In fact, generalized knowledge is not equal to web site specific know all the fact of infringement. It will be too strict to impose contributory liability to ISPs when they do not specifically know. As a possible result, it will greatly restrict development of internet and ISPs. Second, applying this standard will lead to unpredictability and uncertainty of law. If only with generalized knowledge ISPs could be held legal responsibility, ISPs will not foresee risk and liability of internet auction website. Authority and credit of law will be lost, the website will be closed down.
The author agrees with standard of specific knowledge. In judicial practice, some court has adopted standard of specific knowledge. For example, in Universal City Studios, Inc. V. Sony Corporation of America, the United States Supreme Court held that SONY did not know exactly will be engaged in the infringement of the specific individuals, so the defendant should not take contributory liability. 10

D. Should ISPs have a duty of care?
The author thinks ISPs should undertake certain duty of care. In particular, the duty of care is mainly embodied in the following two aspects.
One is ISPs should have taken measures to prevent infringement. Some criminals often will use this platform for sales of counterfeit goods, ISPs usually can foresee these situations. Therefore, ISPs should take some preventive measures. For example eBay spent $20 million a year and take various measures to guard against fake sales. They bought an anti-counterfeiting engine system and a VeRO (Verified Bights Owner) system. If a trademark Owners or customers find someone in an auction website sold fake goods, they can notice eBay. After receiving the notice, eBay will delete reported commodity list in 24 hours, cancel transaction between buyers and sellers, and return cost to consumers.
Another is whether ISPs remove fake goods list in time after finding infringement. If ISPs find infringement through report or search of infringing goods, ISPs should be timely remove fake goods list. In Tiffany v. eBay, eBay deleted the list of counterfeit goods in 24 hours after they received notice from trademark holder, canceled the deal between buyer and seller. It shows that defendant took feasible measures to prevent infringement. So the court held that defendant carried out all obligations under the duty of care. Otherwise, if ISPs did not take enough measures after specifically knowing infringement, ISPs will constitute contributory liability.

IV. Proposal
Through the whole analysis we can see ISPs could get safe harbor if they take enough measure to prevent infringement, remove all the lists after receiving notice and do not specifically know infringement. To some extent the present rules adopted in the United States reduce counterfeit goods but not eliminate counterfeit goods. And we still find two problems. One is that trademark owners have to spend time and a lot of money on monitoring infringement. Another is that a lack of consumer protection for online consumers has become an increasingly pervasive problem. To solve these two problems we have followed proposal.
First, under the present rules, as internet transaction will absolutely increase in recent years, trademark owners will undertake large burden to police their own trademark. A new legislation of government interference in important fraud that can balance interests of trademark owners and ISPs seems to be more reasonable and sensible.
Second, trademark owners could pool their resource together to policy infringement. They may form a collective organization through which they could create and improve their own filtering software. ISPs also should share their experience and knowledge in filtering software. ISPs and trademark owners should enhance cooperation with each other. It will efficiently reduce their cost in combating online sales of counterfeit goods.
Third, congress should enact new legislation to require ISP keep and retain the IP address and personal information such as name, address, and telephone number of each user in order to register for eBay. Thus when some users sell counterfeit goods, it is easy for trademark owner to track these infringers.
Fourth, as generally consumers do not have ability to distinguish whether it is counterfeit goods, so ISPs also should establish an effective self-regulatory system to provide more protection for consumers.
Finally, government should supervise the model contract between ISPs and subscribers and contract between seller and buyer to ensure whether interests of consumers would be well protected.

V. Conclusion
In principle, ISPs only simply provide internet service. And through contracts with its subscribers so many ISPs also show that they are only service providers and are not related to specific transactions. Generally, ISPs are not liable for trademark infringement by its subscribers, unless they do not take any measure to prevent infringement and do not take down infringing goods lists after receiving notice. This is the trend of the legislation of all the countries in the world. We should not compound duty of ISPs or impose obligations that are difficult to realize.
Furthermore, we also hope that ISPs could help trademark owners as more as possible. To keep balance between ISPs and trademark owners, government may interfere in some important fraud cases on internet. To protect interests of consumers, government may supervise model contract provided by ISPs. Through these method, we may balance the interests between ISPs and trademark owners, ensure the interests of consumers, and protect the new technology.

(Courtesy: Unitalen, http://www.unitalen.com/)