Gucci America, Inc. v. Frontline Processing Corp.

Court denies defendants’ motion to dismiss in trademark infringement action against companies that allegedly established credit card processing services used to complete the online sales of fake Gucci items.

After concluding a successful litigation against an internet merchant that sold counterfeit Gucci products on a website called TheBagAddiction.com, plaintiff Gucci America filed suit for direct, contributory and vicarious trademark infringement, counterfeiting and unfair competition under state and federal law against three companies that allegedly established credit card processing services for TheBagAddiction.com and other similar websites. Defendants Frontline and Woodforest processed credit card transactions for TheBagAddiction.com, and defendant Durango acted like an agent by introducing Frontline and Woodforest to the owners of The BagAddiction.com.

The court held that Gucci failed to state a claim for direct or vicarious trademark infringement, but that the plaintiff sufficiently stated a claim for contributory trademark infringement, and denied the defendants’ motion to dismiss. Regarding direct infringement, the court held that Gucci failed to show that any of the defendants “used in commerce” Gucci trademarks. Citing Tiffany, Inc. v. eBay Inc., 600 F.3d 93 (2d Cir. 2010), the court stated “[k]nowledge alone of another party’s sale of counterfeit or infringing items is insufficient to support direct liability, and there are otherwise no factual allegations that Durango, Woodforest, or Frontline themselves advertised or sold infringing goods.” (citations omitted)

Vicarious trademark infringement, which the court said is a theory of liability that has been considered elsewhere but has not been the subject of a decision by the Second Circuit, requires a finding that the defendant and the infringer have an apparent or actual partnership, have authority to bind one another in transactions with third parties or exercise joint ownership or control over the infringing product. According to the court, while Gucci raised a number of factual allegations that indicate that the defendants’ services were crucial to a website like TheBagAddiction.com’s sale of infringing goods, “there is insufficient evidence to plausibly infer an actual or apparent partnership.”

The court turned to the issue of contributory trademark infringement. Under Inwood Lab., Inc. v. Ives Lab., Inc., 456 U.S. 844 (1982), if a manufacturer or distributor intentionally induces another to infringe a trademark, or if it continues to supply its product to one whom it knows or has reason to know is engaging in trademark infringement, the manufacturer or distributor is contributorially responsible for any harm done as a result of the deceit. However, the court noted that this test for contributory liability “is not as easily applied to service providers as it is to a manufacturer” and it adopted a modified Inwood test for service providers (noting that the Second Circuit has yet to directly contemplate this test): a plaintiff must show that the defendant (1) intentionally induced the website to infringe through the sale of counterfeit goods or (2) knowingly supplied services to the website and had sufficient control over infringing activity to merit liability.

Applying this test, the court held that Gucci’s factual allegations are sufficient to infer that Durango intentionally induced trademark infringement, and that Woodforest and Frontline exerted sufficient control over the infringing transactions and knowingly provided their services to a counterfeiter.

With respect to defendant Durango, the court held that Gucci’s factual allegations were sufficient to infer that Durango intentionally induced trademark infringement, because (1) Durango’s website reaches out to “high risk merchant accounts,” including those who sell “replica products,” and could be construed as an attempt to induce less savory businesses; (2) Durango crafted advertisements or solicitations that “broadcast[] a message designed to stimulate others to commit violations”; and (3) Durango helped TheBagAddiction.com to set up a system to avoid chargebacks, which required customers to check a box that said “I understand these are replicas,” suggesting “affirmative steps taken to foster infringement” or “that Defendants promoted their payment system as a means to infringe.”

The court went on to hold that Gucci alleged sufficient “knowledge” on the part of all three defendants to state a claim, but that Gucci only alleged sufficient “control” over the infringing entities on the parts of defendants Frontline and Woodforest. Regarding Frontline’s and Woodforest’s knowledge of the infringement, the court noted that both companies reviewed TheBagAddiction.com’s business and products, helped draft and/or reviewed the language that appeared on the sellers’ website in which customers had to acknowledge that they were purchasing replica products, and reviewed supporting documentation for chargebacks that described products, their low price, and customer complaints about the products. “These allegations at the very least provide a strong inference that each knew that [TheBagAddiction.com] traded in counterfeit products, or were willfully blind to that fact.”

Turning to the issue of defendants’ control over the infringing activity, the court said that the most significant dispute between the parties with regard to contributory liability is whether any or all of the defendants had sufficient control over TheBagAddiction.com and its owners to render them liable for the web merchant’s counterfeiting practices. According to the court, the only relevant inquiry is the “extent of control … over the third party’s means of infringement.” Here, the court held that Gucci’s complaint indicates that Frontline and Woodforest’s credit card processing services are a necessary element for the transaction of counterfeit goods online, and were essential to sales from TheBagAddiction.com. The court distinguished this case from the Ninth Circuit’s decision in Perfect 10, Inc. v. Visa Intern. Serv. Ass'n, 494 F.3d 788 (9th Cir. 2007), in which the Ninth Circuit declined to hold certain credit card processors liable for a website’s trademark infringement. According to the court, in Perfect 10, the infringing conduct was the publication on the website of trademarked images of nude models, while in this case the infringement is the sale and distribution of tangible infringing products. The court agreed with Gucci’s argument that the credit card services are instrumental to the infringement, and rejected defendants’ argument that they lacked direct or complete control over the website itself.

The court also dismissed defendants’ motion to dismiss for lack of personal jurisdiction.