Thursday, August 23, 2012

Amazon doesn't have to replicate eBay policies to avoid TM liability

Tre Milano, LLC v., Inc., 2012 WL 3594380 (Cal. App. 2 Dist.)

One question on many minds after Tiffany v. eBay was whether eBay's anticounterfeiting policies were necessary to the result, or whether an intermediary could be less TM-owner-friendly and still escape liability.  Though this is an intermediate state court ruling, it is also the most extensive description of an alternative policy--one with some apparent communication delays--that I've seen, and thus may be a useful signal of what courts are likely to do with entities they perceive as acting in good faith.

Tre Milano appealed from an order denying a preliminary injunction against Amazon, and the court affirmed.  Tre Milano sells the InStyler Rotating Hot Iron Hair Straightener; Amazon offers InStylers on its website, some that are from third parties and are counterfeit.  Tre Milano sued Amazon and some third party sellers, seeking damages and an injunction barring Amazon from selling any “purported” InStyler products in California or, in the alternative, from selling “counterfeit” InStylers.  InStyler is popular enough to counterfeit, and Tre Milano has in-house and outside personnel looking for counterfeiters, along with a manual, “How to Tell It's Counterfeit.”  But a typical consumer, without the manual or a side-by-side comparison, couldn’t identify a counterfeit product.

Amazon sells from its own inventory, from third parties “fulfilled by Amazon” and shipped from its warehouses, and from the Amazon Marketplace; the last category is sold and shipped by third party sellers.  Amazon identifies which is going on for each particular sale, though the sales process is the same regardless, including payment made through Amazon.

Amazon takes anti-counterfeiting measures in order to protect the buyer experience and avoid claims and chargebacks.  Among other things, it bans “Replicas of trademarked items.   The sale of unauthorized replicas, or pirated, counterfeit, and knockoff merchandise is not permitted.”  It employs over 100 people in “risk investigation,” which includes identifying counterfeits.  Over the last 2 1/2 years, Amazon blocked about 5900 sellers for suspected infringing content, about 75% from Amazon’s own work and the remainder after a Notice of Claimed Infringement (NOCI), a Digital Millennium Copyright Act (DMCA) notice or a customer complaint.   “In the last year, Amazon has canceled over 4 million seller listings.”

When Amazon identifies a problem or receives a NOCI, its team follows set procedures.  If the team decides that a listing is for an infringing product, Amazon may block the listing or block the seller; the latter also means a bar on opening a new account.  “However, if an infringing seller has a good relationship with Amazon and positive customer feedback, Amazon may just block the listing and issue a warning.”  Amazon tries to act within 24 hours of a NOCI, and generally does so within 48 hours.  “If there is no supporting evidence, Amazon will review the seller's profile to determine whether there is a probability the NOCI is accurate.   If there is a probability of accuracy, Amazon will block the seller or remove the listing and warn the seller.   If there is little probability of accuracy, Amazon will ask the sender of the NOCI for evidence to substantiate its claims.”

Amazon also screens applicants to become third-party sellers.  It monitors their monthly sales; if they reach a certain “sales velocity,” Amazon reviews the seller to make sure it’s shipping on time and complying with Amazon’s policies.  In addition, Amazon has a database that tracks high risk items—those likely to be counterfeit.  Computer programs monitor third party offers, flag potentially counterfeit or high risk listings, and scan feedback for keywords such as “counterfeit,” “fake,” or “open box” to flag sellers for review.

In November 2009, Tre Milano’s attorney bought an InStyler directly from Amazon, and determined that it was counterfeit.  She contacted Amazon’s legal department with a C&D.  A legal representative “acknowledged that Amazon was having trouble with its inventory being mixed with that of third parties in its facilities.”  At Amazon’s request, the lawyer sent an InStyler reference guide to the legal department.   In December 2009, the lawyer bought two more InStylers from DAB Nutrition, fulfilled by Amazon, and again found them to be counterfeits.  Amazon’s associate general counsel stated that Amazon did not maintain its own inventory of InStylers but sold products from the inventories of third parties who maintained inventories at Amazon facilities, that Amazon did not control the supply chains of these third parties, and that Amazon had no definitive ways of determining whether their InStylers were authentic or counterfeit.  Tre Milano’s attorney sent numerous NOCIs from November 2009-February 2010.

Tre Milano also used software to scan various internet sites, including Amazon, for counterfeits.  Its compliance coordinator reviewed the flagged items and sent infringement notices when they appeared to be counterfeit.  From May 2010 through April 2011, Tre Milano sent 311 NOCIs to Amazon, 226 for first-time listings and 85 following up on listings not removed after a previous NOCI.  This included duplicate NOCIs when Amazon failed to respond. 

In March 2011, Tre Milano sent a NOCI identifying 11 listings, including one from Success Store.  Shortly thereafter, Pete Day purchased an InStyler from Success Store using Amazon.  In April, Day’s wife was using the product and it exploded at the point where the electrical cord entered the product; she was injured.  Tre Milano identifed the product as a counterfeit based on its serial number.  Tre Milano also bought from several other sellers it had sent NOCIs for and identified their products as counterfeits; it sued some of them.  One defendant also sold under different names on Amazon.  For another, Tre Milano sent a NOCI in March, bought a counterfeit in May, and still saw the seller offering InStylers on Amazon in June.  “In the course of this litigation, Tre Milano sought contact information for Amazon Marketplace sellers whom Tre Milano believed were selling counterfeit InStylers.   Much of the information provided by Amazon was inaccurate.”

Amazon described its response to NOCIs.  Its Copyright Compliance Officer, reviews NOCIs, and if a NOCI “appears sufficient and legitimate,” he forwards it to Amazon's investigators to remove the listing and determine what action to take against the seller.  If a NOCI does not provide sufficient information, Amazon asks the sender for specific information, including “[p]roof of the violation,” which includes an “ Order ID of a test buy that confirms the violation.”  He stated that “[w]hile a handful of [Tre Milano’s] notices have contained evidence or some explanation of why Tre Milano claimed that a listing was for a counterfeit item, the vast majority have contained nothing but a statement like ‘the item is a counterfeit product that infringes the trademark owner's rights' ... or ‘the item is an unlawful replica of a product made by the trademark owner’....   As I have explained to Tre Milano, needs more evidence regarding the alleged infringement before it can assist Tre Milano in carrying out our common goal of preventing the sale of counterfeits.”  Without a test buy, he believed, Tre Milano’s notices were based only on the offering price, and Amazon is reluctant to accuse sellers of counterfeiting on the basis of price alone without other “objective indicators” of infringement.  He also stated that Tre Milano had sent numerous erroneous NOCIs and recanted many of them.  During June 2010-April 2011, Amazon received 159 NOCIs, but in 41% of the cases Amazon had already taken down the listing before the NOCI was processed.  (This doesn’t seem like the same thing as an erroneous NOCI to me, but perhaps the court is just recording two separate facts.)  Amazon didn’t have any InStylers in inventory, but had still “issued specific instructions that any future inventory of InStylers belonging to is to be kept segregated from any inventory belonging to third-party sellers for Fulfillment By Amazon.”

The court then turned to differences between Amazon and eBay: Amazon sells its own products along with third parties’; it may provide a single generic product photo; products may be shipped from Amazon; Amazon handles all payments, instead of having payment arranged between buyer and seller (though given PayPal, I don’t know how much of a difference that really is).  Tre Milano participates in eBay’s VeRO, which allows allegedly infringing listings to be taken down almost immediately and allows Tre Milano to get seller information on request.  Amazon, by contrast, doesn’t have an API by which rightsholders can claim infringement, but instead allegedly takes 1-2 weeks to respond to Tre Milano’s NOCIs, and sometimes that stretches to months.

Among the harm Tre Milano suffered, it claimed was “a large number of negative reviews from Amazon customers who purchase counterfeit InStylers® and then give ‘1-star’ reviews on the product page as if they were reviews of the genuine InStyler®.”  These reviews stem from the poor quality of the counterfeits—which also pose risks of injury to consumers.  Along with the incident detailed above, there was a negative video review of the InStyler from AOL, but it showed a counterfeit; Tre Milano contacted AOL, which removed the review, stating: “Unfortunately, we bought our product from a reseller on Amazon that we have now learned may be selling counterfeit goods.   While that reseller was rated highly on Amazon at the time that we purchased the InStyler, that reseller has since shut down.   Apparently, there are a number of other sellers still engaging in this practice and we want to pass along this word of caution about fake InStylers.”

Typical of the negative reviews was one that said that the seller “sent me a thing that looked like an InStyler, it was the exact thing but BOOTLEG!!!!     [I]t was a fake.   It was much fatter and a lot of plastic and it made a pop sound on the first try an[d] didn't work.   I thought it was a real instyler [sic ] until I actually purchased one from ULTA. I noticed it wasn't.   It was a rip off.”  Eric Goldman will like this: In response, another reviewer wrote:  “There is another place for you to review the seller.   This is not it.   This is for reporting on the quality of the INSTYLER.”   A third wrote:  “I agree this makes the ratings of the real product go down.   Why not rate it based on the one you bought at ULTA?”

So, was Amazon liable as a direct infringer under the Lanham Act?  (There’s an interesting side note here about Amazon’s decision not to remove.  Especially if I got a sense that the state judge assigned to the case was decent, I too might have decided not to find out which station the Ninth Circuit’s ticket went to for my case.)

The trial court ruled that Tre Milano had failed to show that Amazon was under a duty to affirmatively police counterfeit sales on its site; Amazon was not selling the goods itself but only facilitating their sale.  It relied on Tiffany v. eBay.  The court of appeals recounted eBay’s extensive anticounterfeiting efforts in detail, then explained that the Second Circuit found eBay not liable for direct or secondary infringement.  (Following on my earlier aside, I understand why the California judges preferred to use somebody else’s—anybody else’s—secondary liability standards.)

Tre Milano argued that Amazon was a direct infringer because it used the InStyler mark “in connection with” the sale of counterfeit products, and that was enough regardless of whether the use was part of the sale, the advertising, or the distribution.  Except that Tiffany held that a service provider’s use of a mark to describe a product was protected by nominative fair use.  At least as to the InStyler, Amazon was the service provider, not the seller; all InStylers it currently sold belonged to third parties.  It wasn’t a direct seller even though it provided the product description and handled the payments.  (A slightly odd way to describe the role of nominative fair use,  but ok!  If they’re actually InStylers, anyone—including but not limited to a mere service provider—is free to describe them as such; the real point is that Amazon lacks sufficient connection to the sales to be deemed a direct seller.)  This also disposed of Tre Milano’s argument that it was infringing to use the mark on the InStyler product page: eBay took similar action in using Tiffany’s mark on its website and in sponsored links.  Put simply, Amazon was not a retailer, but rather a “transactional intermediary,” and was not directly liable.

Contributory infringement requires that Amazon continued to supply its services to one who it knew or had reason to know was engaging in trademark infringement, and that it had direct control and monitoring of the instrumentality used by a third party to infringe.  Willful blindness will suffice for knowledge.  Generalized knowledge of counterfeit sales on the site, however, is insufficient.

The evidence showed that Amazon continued listings of suspected counterfeit InStylers after receiving NOCIs identifying specific sources of suspected counterfeit InStylers.  But the majority of NOCIs simply claimed that the listing was counterfeit with no supporting evidence.  And such NOCIs were not themselves proof of infringement.  Just as it was ok for eBay to remove a single listing and not (as Tiffany requested) permanently suspend a seller whose listing received a NOCI, it was ok to have an investigation policy rather than an automatic removal policy in response to a NOCI.  Thus, “substantial evidence” supported the trial court’s determination that Tre Milano failed to show that it was likely to prevail on the merits.  When Amazon received evidence of infringement, it acted to remove infringing listings.

What about the harm to Tre Milano, which had to be balanced against likely success?  It was clear that Tre Milano was harmed by counterfeit sales.  But its own evidence also showed that Amazon customers were able to ID the products as counterfeits and pass the information along to other customers.  Denial of preliminary injunction affirmed.

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