The Jewel and the Crowd: Tiffany v. EBay

What kind of company is eBay?

a) the kind of company you wish you had been offered stock in before it went public;

b) an online auction that's one alternative to avoiding the long lines at Macy's this holiday season; or

c) a virtual flea market in which eBay works with sellers to gin up sales, but turns a "blind eye" to rampant sales of counterfeit items, much in the same way that Napster connected millions of copyright infringers who traded music?

Tiffany & Co., the iconic purveyor of silver, jewelry and crystal bearing its trademark, is seeking to convince U.S. District Judge Richard Sullivan that the right answer is C.

Judge Sullivan is presiding over a trial on Tiffany's claims that eBay "is currently, and has been infested with many thousands of counterfeit Tiffany items."

Much of the jewelry sold on eBay using the Tiffany trademark—in fact, the "overwhelming majority"—is fake, the company asserts.

And because this is widely known, Tiffany asserts that eBay should be held liable for contributory infringement of its trademarks.

The suit, pending since 2004, and, should Tiffany's prevail, may require eBay to change its business model and take on the primary burden for pre-screening the millions of items on its site.

EBay, in turn, would like the judge to find eBay to be an online forum for "classified advertising" that puts sellers and buyers of items it never sees together. Indeed, eBay says that over the years it has made "enormous efforts" to root out counterfeiters --- but that the trademark owners, not eBay, bear the ultimate responsibility for protecting their rights.

The cornerstone of its efforts, known as the Verified Rights Owner Program, or VeRO, gives brand owners the opportunity to notify eBay of a suspected infringement. In many cases, eBay says, its process leads it to order sellers to remove offending items from its site.

Robert Chesnut, deputy general counsel at eBay, took the witness stand today to testify about eBay's Trust and Safety department.

A former federal prosecutor whose cases included the prosecution of Aldrich Ames, the C.I.A. official who spied for Russia, Chesnut was eBay's third lawyer when he joined the company in 2002.

Judge Sullivan, a master of efficiency who does not seem to require a midday meal, ordered the parties to submit direct testimony in writing.

In his direct, Chesnut notes:

"eBay, like any classified advertiser, does not sell ant merchandise and never take ownership, possession, custody and control of items sold by eBay users.

"As a natural consequence, eBay does not and cannot inspect, examine or authentic any of the many millions of items offered for sale on its site."

And while speed has improved in taking down items, from 24 hours to under 6 hours today, Chesnut put the responsibility squarely on brand owners such as Tiffany in his written statement:

"Through the VeRO program, rights owners, who are legally responsible for policing potential infringements of their rights and are most knowledgeable about the products they sell, can request that eBay remove listings."

When Tiffany's lawyer, H. Peter Haveles Jr. of Arnold & Porter, rose to cross-examine, he attacked the "legally responsible" language. But Chesnut, a fellow lawyer on the witness stand, easily parried: "I am not an intellectual property lawyer . . . I am not offering a legal opinion here."

About 225 of eBay's 16,000-person workforce are dedicated fulltime to rooting out counterfeit goods. About 70 work full-time referring cases to the police. Over the course of the lawsuit, Chestnut said, the company has spent from $7 million to $15 million a year on these efforts.

But Haveles asked a lot of questions that seemed to show eBay does not spend much effort tracking counterfeit items on its site, at least when it comes to problems with specific brands.

Nor could it say how many seller suspensions were tied to selling counterfeit brands, or whether the refunds it offers to customers in its buyer protection program were tied to complaints of counterfeit brand items.

"It's not tracked by brand," was Chesnut's answer time and again.

It's clear that Tiffany's ranked near the top among users of the VeRO program reporting violations, ranking No. 2 or No. 3 on the list since July 2003. But Chesnut also suggested other brand owners have been more aggressive in protecting their rights, by hiring third parties to monitor the eBay site, for example.

Between 2003 and 2006, Tiffany sent 284,000 notices of infringement to eBay, many of them involving thousands of items. On redirect, eBay's lawyer, R. Bruce Rich of Weil, Gotshal & Manges—over multiple objections from Haveles—tried to blunt that number, pointing out that there were only 40 emails in evidence showing Tiffany complaining of second, third or fourth violations.

There are 100 million listings on the eBay site at any given time, and the company receives 6 million to 7 million listings a day.

Chesnut said the company generally has a "three strikes" rule of indefinitely suspending a seller with three notices of counterfeit violations.

"It's a judgment call," he said, of deciding whether the seller is "a good person who can be rehabilitated and re-educated."

But the company also makes a "courtesy" phone call to the seller when one of its "PowerSellers" gets such a notice.

"Our VeRO program is quite unpopular with sellers. They have been highly critical of the fact that they don't get an opportunity to be heard or give evidence," he said.

On re-cross, Haveles sought to show how minuscule $10 million or $15 million is to eBay. What were eBay's annual revenues last year? Chestnut said he did not know, but the number is available in the company's public reports: $8 billion. Or four times as much as Tiffany's $2 billion.

The judge had asked to hear from Tiffany's chairman next Tuesday, but is mulling that request. Closing arguments will occur next Tuesday or Wednesday.

by Karen Donovan