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L’Oreal SA, et al. v. eBay International, et al.

UK High Court holds that eBay is not liable for trademark infringement by its users

On May 22, Arnold J handed down the much awaited judgment in L’Oreal v. eBay. At its heart is the question of who is liable for the sale of infringing or counterfeit products on the auction site – the individual sellers, eBay or both? eBay was found not to be liable, although the judge did comment that eBay could and should do more to prevent the sale of infringing goods on its site. The other major point in issue was whether eBay’s use of sponsored links to direct people to listings, in so far as those listings are for infringing products, amounts to trademark infringement. However, Arnold J felt unable to decide this point without first seeking guidance from the European Court of Justice (ECJ).

This case serves as a reminder that establishing liability in the UK by common design is difficult. Profiting from the facilitation of infringing activity with knowledge is not sufficient to confer liability. L’Oreal’s failure to succeed on this point is likely to deter others from taking legal action against eBay and other online service providers which they claim facilitate infringing activity.

Although eBay was found not to be under any legal duty to prevent the infringement of third-party rights, the judge expressed sympathy with the view that eBay could and should do more to stop infringing activity on its site. eBay has repeatedly called for cooperation and dialogue, not litigation, to “collectively address the issues that concern eBay, rights owners and consumers” and this judicial sentiment may provide some traction for rights owners in this debate.

Unlike the issue of eBay’s primary liability for use of sponsored links, the law of accessory liability is largely a matter of national law. Consequently, this may be a point on which we continue to see different outcomes in different European courts.

L’Oreal brought proceedings against eBay and a number of its users for trademark infringement for the sale of infringing and counterfeit products on the auction site. Similar actions have been brought by L’Oreal and other brand owners in other jurisdictions, but this is the first case in the UK to consider the issues.

In essence, the case concerns two issues:

1) Is eBay liable as a joint tortfeasor for acts of trademark infringement, through the sale of infringing products by its users; and

2) Is eBay liable for trademark infringement as a result of its use of sponsored links on third-party search engines and its own site, in so far as they lead people to postings for infringing products?

It also raised issues of whether eBay has a defense under the E-Commerce Directive for hosting content and whether eBay may be prohibited nevertheless under the Enforcement Directive, even if there is no infringement by eBay.

In advancing its case on joint tortfeasorship, L’Oreal relied on the judgment of Mustill LJ in Unilever v. Gillette (1989) and alleged that eBay had participated in a common design to infringe its trademarks because they had combined with the individual defendants to secure the doing of acts which proved to be infringements.

In finding that eBay was not jointly liable with the primary individual infringers (i.e., the eBay users posting infringing products), the court held that eBay does facilitate the infringement of third-party trademarks; it knows that such infringements have occurred and are likely to continue to occur; and it profits from such infringements. However, that is not enough to make eBay liable as joint tortfeasor. eBay is not under any legal duty to prevent infringement of third-party trademarks (subject to such a duty arising for preventing future infringements as a result of Article 11 of the Enforcement Directive – see below).

L’Oreal came closest to winning on infringement by way of the sale of products originating from outside the European Economic Area (EEA) to UK consumers (i.e., where L’Oreal’s trademark rights are not exhausted). However, the court found that the eBay facilities that allow sellers from outside the EEA to target buyers in the UK are capable of being used by sellers for non-infringing purposes and so such facilities, in themselves, are not something that inherently leads to infringement.

Arnold J did express sympathy for the proposition that eBay could and should do more to deal with the problem of trademark infringement, for example by eBay accepting liability and insuring against it by means of a premium levied on sellers. In his mind, there was much to be said for the view that eBay (and its competitors) have created and profited from a new form of trading which carries with it a greater risk of abuse and so should be responsible for policing it.

The case on infringement by use of sponsored links was put in this way: the appearance of L’Oreal’s trademarks in (i) eBay’s sponsored links in the result pages on third-party search engines and (ii) links on eBay’s site to help users refine their searches constitute trademark infringement, but only to the extent that such use relates to infringing goods.

Arnold J considered that these questions turned on a number of questions of interpretation of the Trade Marks Directive. In particular, Arnold J considered it was not acte clair whether such activity is: (i) ‘use’ in the sense of Article 5(3)(d) of the Directive (using the sign on business paper and in advertising); (ii) ‘in relation to’ the infringing goods; and (iii) ‘infringing use’.

Arnold J also held that guidance was required from the ECJ on a related issue, namely whether eBay has a defense under the ‘hosting’ safe harbor provided for under Article 14 of the E-Commerce Directive.

L’Oreal complained of four different types of infringing products sold by eBay users: (i) counterfeits; (ii) samples and dramming products; (iii) unboxed products; and (iv) non-EEA products. However, on the issue of whether the sale of sample products provided to distributors free of charge and unboxed products could amount to trademark infringement, Arnold J considered that an ECJ reference would be required.

Prior to the hearing L’Oreal resolved its claims against the seven individual defendants (either by settlement or by entering judgment in default) alleged to be the primary infringers selling infringing products on eBay. Nevertheless, as the issue was relevant to eBay’s liability as joint tortfeasor, Arnold J considered the liability of the individual defendants and held that the acts relating to counterfeit products and products originating from outside the EEA amounted to infringements of L’Oreal’s trademarks. In light of this, the judge indicated that he had the power to grant an injunction against eBay to prevent further acts of infringement by those parties, even if eBay was not found jointly liable.

However, the scope of the injunctive relief which Article 11 of the Enforcement Directive requires courts to grant in such circumstances was unclear and again a point upon which guidance from the ECJ would be helpful.

This is the first major UK case to consider if an online service provider is legally liable for individual users selling infringing or counterfeit products. This is an issue of great concern to big brand owners who are seeking to prevent the massive increase in the sale of counterfeits across the internet which undermine both their retail outlets and online operations.

Against the backdrop of the music and film industries’ attempts to reach an agreement with online service providers to prevent file-sharing, once the ECJ rules, this case should shed light on whether online service providers have any responsibility for file-sharing by individual users or whether they can invoke immunity under the E-Commerce Directive “safe harbor” provisions. It may impact upon the UK Government pushing through legislation to oblige online service providers to monitor for infringing files and disconnect internet access to persistent offenders.

In similar proceedings in other jurisdictions the results have been mixed. In parallel proceedings eBay has notched up wins in France and Belgium, whilst L’Oreal triumphed in Germany and the result in Spain is awaited. In other cases, Rolex has been successful against eBay in Germany, and in France last year eBay was ordered to pay LVMH damages of £30m. In the US in 2008, Tiffany failed to establish eBay’s liability for trademark infringement for permitting the sale by individuals of fake jewelry on its platform.

Having different courts reach different outcomes when applying substantially the same law is clearly undesirable and to this extent the referral of questions to the ECJ is to be welcomed. However, obtaining guidance from the ECJ is likely to take some time, during which period there will remain uncertainty. There is already a raft of references on related issues before the ECJ which may provide some indication of how the ECJ is going to deal with issues relating to the use of trademarks by online service providers. The first in line is the case between Louis Vuitton and Google - as to whether Google is liable for trademark infringement as a provider of keyword advertising - in which the Advocate General’s Opinion is expected on June 4.

Summary prepared by Joel Smith and Duncan Ribbons of Herbert Smith LLP