Global luxury giant LVMH Mo?t Hennessy Louis Vuitton has long employed investigators and lawyers to fight counterfeiters who churn out fake Vuitton bags and Dior sunglasses. But now the Paris company's legal guns are aiming at more virtual prey. The group has filed a lawsuit in France accusing online marketplace giant eBay (EBAY) of listing counterfeit goods for sale on its site.
If the suit is successful, it could shake the foundations of eBay's longstanding practice of letting buyers and sellers make deals on its site with minimal supervision by the company. "You can imagine what a change that would be to their business model," says Louis S. Ederer, an intellectual-property expert at the law firm of Torys in New York.
EBay is already fighting a similar case filed by jewelry maker Tiffany in 2004 in New York's federal court. Both Tiffany and LVMH say their investigators made test purchases of brand-name items offered for sale on eBay and found the overwhelming majority were phony.
LVMH says in its lawsuit that of 300,000 Dior-branded items and 150,000 Vuitton bags offered on eBay during the first six months of this year, 90% were fakes. LVMH declined to comment on the eBay suit.
HURTS EVERYONE. EBay spokesman Hani Durzy replied that the company "is disappointed that it has come to this" and says the suit is "without merit." eBay clearly is aware of the problem and has set up a program called Vero (short for Verified Rights Owner) that lets owners of trademarks and other intellectual property report alleged abuses of their rights. The company strives to remove offending listings quickly and says it proactively monitors its site in search of counterfeit and other illegal goods.
Experts worry, though, that the potential damage to eBay goes beyond the specifics of this case. The perceived prevalence of fakes on the site is already hurting some sellers of legitimate goods, says a West Coast e-commerce analyst who requested anonymity. "Buyers also see it as a problem, and that makes them unwilling to pay high prices for anything on the site," the analyst says.
Some earlier trademark-related cases filed against eBay have foundered. In 2001, for example, a federal court ruled that eBay couldn't be held liable for copyright-protected material offered on its site, so long as it removed the material promptly when notified.
COOPERATIVE POLICING. LVMH employs investigators worldwide who troll auction sites for fakes, and it regularly alerts eBay when they're spotted. While eBay usually acts in such cases to remove the offending listings, LVMH contends that the ultimate responsibility rests with eBay to police its site.
Not surprisingly, eBay sees things differently. "We believe that a brand owner is the only one that can truly and effectively police its own brand," says Durzy, who characterizes the suit by LVMH as an "abdication of its responsibility." But he concedes that eBay should play a role. "Success in fighting counterfeits depends on the joint effort and cooperation between us, the rights owners, and law enforcement."
The French courts have already sided with LVMH in a recent counterfeiting-related case involving search engine Google (GOOG). In that case, a French appeals court in June upheld an earlier decision ordering Google to pay nearly $400,000 in damages to LVMH because the search engine had displayed advertising from merchants selling fake Vuitton goods.
THE REAL BAG. Google said after the ruling that it had implemented a policy barring advertisers from buying listings using trademarks held by others. A person with direct knowledge of that case says it encouraged LVMH to go forward with the lawsuit against eBay, in which LVMH is seeking damages of almost $50 million.
LVMH in recent years has become increasingly aggressive about fighting counterfeiting of its brands, which range from Vuitton and Christian Dior to Fendi leather goods and Guerlain perfumes. The company recently sued Wal-Mart (WMT) in the U.S., alleging that its Sams Club stores were selling fake Fendi bags. Wal-Mart has denied the allegation and says it can prove the bags were genuine.
One point for eBay is that French courts rarely make large damage awards in lawsuits, says Anne Cousin, a Paris-based intellectual property expert in the law firm of Denton Wilde Sapte. To prove that it suffered the tens of millions in damages claimed, LVMH would have to provide evidence on each sale involving a fake product, Cousin says.
AUCTION ACTIONS. Even the $400,000 awarded in the Google case was unusually large for a French court, she says. By contrast, U.S. courts can award what is known as "statutory damages" to aggrieved trademark owners without requiring them to document individual sales, U.S. lawyer Ederer says.
Yet even without a large monetary award to LVMH, the potential harm to eBay from a court victory could be huge. "If LVMH wins, eBay would be screwed," says the West Coast stock analyst. "It might have to take down whole categories." A bit extreme, perhaps. There's a long legal process still ahead. But a precedent finding eBay responsible for the actions of its users would be a major setback for online auctions.