Official Journal of the International Trademark Association

Revisiting Initial Interest Confusion on the Internet By Daniel C. Glazer and Dev R. Dhamija

The Internet Auction House and Secondary Liability— Will eBay have to Answer to Grokster?

By Deborah J. Peckham Bubbles and Squeaks: “Irrational Exuberance” and

Its Impact (or Lack Thereof) on Damages Under the Lanham Act in the Dot.Com Era

By Robert Morrill, Cate Elsten and Kevin Arst Establishing Geographic Rights in Trademarks Based on Internet Use

By W. Scott Creasman Free Speech and “Sucking”—

When Is the Use of a Trademark in a Domain Name Fair? By W. Scott Creasman

The Anticybersquatting Consumer Protection Act: Developments Through Its First Six Years

By Joseph J. Weissman Amicus Brief of the International Trademark Association in

Contessa Premium Foods, Inc. v. Berdex Seafood, Inc. Amicus Letter of the International Trademark Association in

Tungsway Food & Beverage Holdings, Pte. Ltd. v. Pt Istana Pualam Kristal

Vol. 95 September-October, 2005 No. 5

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Vol. 95 TMR 951

EDITOR’S NOTE

The Trademark Reporter published its first volume devoted to the Internet in 1997, with articles focused on legal issues then in their infancy, such as domain name infringements, the use of hyperlinks and metatags, and how the sale of goods and services on the Internet affected the traditional “minimum contacts” analysis for personal jurisdiction. Two years later, the TMR published an extensive update of Internet-related issues, again focused primarily on what was by then commonly known as cybersquatting, along with further coverage of the issues of linking, framing and metatags.

Since 1999, the TMR has regularly published articles on various Internet-related issues, but the time seemed ripe for another issue devoted exclusively to trademark issues arising in the context of the Internet and other new technologies. The articles included in this volume show that some issues that were once “hot” in the late 1990s, such as cybersquatting and initial interest confusion, have cooled down considerably, while other issues have become more controversial. Undoubtedly, as new business models of electronic commerce emerge, different and unanticipated trademark issues will come to the forefront, and the TMR will do its best to cover these developments as well in the years to come.

Sandra Edelman Editor-in-Chief

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Vol. 95 TMR 977

THE INTERNET AUCTION HOUSE AND SECONDARY LIABILITY—

WILL eBAY HAVE TO ANSWER TO GROKSTER?

By Deborah J. Peckham∗

I. INTRODUCTION: THE RISE OF FRAUD ON THE INTERNET

AND THE PROBLEMS CAUSED BY AUCTION SITES By all accounts, fraud on the Internet is at an all time high.

The popular press is filled with stories about Internet-based scams, and it is obvious that the web has provided an attractive new medium of exchange for counterfeiters.1 One area of particular concern, perhaps because of its growing popularity as a means of creating personal income, is the rise of use of online auction sites to sell both legitimate and bogus or counterfeit goods.2 While the major online auction sites—eBay, Amazon and Yahoo!—each have taken steps intended to eliminate fraud and counterfeiting via their services, mark owners and consumers alike often find themselves without effective recourse against online counterfeiters.3 ∗ Partner in the Intellectual Property Department at Kirkpatrick & Lockhart Nicholson Graham LLP in Boston, MA, Associate Member of the International Trademark Association. The author gratefully acknowledges the assistance of Elizabeth A. Walker in researching and writing this article. Ms. Walker is an associate in the Intellectual Property Department at Kirkpatrick & Lockhart Nicholson Graham LLP in Boston, MA. 1. See Top Ten Scams, Internet Scams Fraud Trends 2004, published at http://www.fraud.org/2004-internet%zoscams.pdf by the National Consumers League estimating that in 2003 the average victim of online fraud lost $895 (up from $527 in 2003) and noting that a full 51% of all reported fraud could be traced back to phony online auction activities. 2. See generally The Hazards of Online Auctions, Ten Tips To Avoid Being Scammed, published at http://www.lawsguide.com/mylawyer/guideview.asp?layer=3&article=401 (citing, among other examples of online auction fraud, the counterfeit sales of Ty’s BEANIE BABIES. See also, Going, Going, Gone . . . When Online Auction Users Lose Out to Phony Payment and Escrow Services, FTC Consumer Feature, Bureau of Consumer Affairs, April 2003 (stating that the FTC has received increasing complaints from users of online auctions complaining of fraud, in part because the goods delivered were not the quality stated in the auction); and Internet Auctions: A Guide for Buyers and Sellers, Federal Trade Commission booklet, available at www.ftc.gov/bcp/conline/pubs/online/auctions.htm. Regarding the rise of counterfeiting generally, see Facts on Fakes, International Anticounterfeiting Coalition (IACC) available at www.iacc.org. 3. For information on Yahoo’s terms of service relating to auctioning see: http:// docs.yahoo.com/info/terms/; http://user.auctions.yahoo.com/html/guidelines.html; http:// auctions. yahoo.com/phtml/auc/us/legal/additionaltos.html. For eBay see: http://pages.ebay.com/help/ policies/user-agreement.html; http://pages.ebay.com/help/confidence/ vero-rights-owner.html. For

978 Vol. 95 TMR

To combat the threat to intellectual property rights posed by online counterfeiting the more popular auction sites have promulgated policies to address illegal behavior, and at least one of the major auction sites has published detailed procedures to address infringement claims.4 Of course, no program provides complete insurance against counterfeit sales. Moreover, as with all forms of Internet-related illegal activity, finding the actual wrongdoer is often a losing battle. Auctions are often over before a comprehensive investigation can even commence, and motivated counterfeiters are able to unload goods or disappear before eBay or others can take action.

While counterfeiters are busy exploiting new ways to profit from their wrongdoing, brand owners and service providers are left pointing to each other, suggesting that each is to blame for the problem.5 Who should be responsible for stopping online counterfeiting? Is it a burden that only the brand holders should bear? Or should there be liability for auction sites that host the counterfeiters—and if so, under what theory? 6

At the same time that trademark owners are pondering this dilemma, producers of so-called “peer-to-peer” (“P2P”) technologies and the recording and motion picture industries have been duking it out to determine whether liability for pirating of music and motion pictures can be imposed on those providing online file sharing services.7 In fact, in one of the most momentous rulings on Amazon see: http://www.amazon.com/exec/obidos/tg/browse/-/508088/103-8694615-2321424; http://www.amazon.com/exec/obidos/tg/browse/-/508088/103-8694615-2321424#copyright. 4. See eBay’s Verified Rights Owner Program at http://pages.ebay.com/help/ confidence/vero-rights-owner.html; see also infra text at note 14. 5. Tiffany (NJ) Inc. and Tiffany and Co. have instituted a suit for contributory infringement against eBay in Federal District Court for the Southern District of New York. Tiffany (NJ) Inc. et al. v. eBay Inc. Civ. Doc. # 1:04-cv-04607-NRB (“Tiffany Complaint”). As of the date of completion of this article, the case was still pending with discovery set to close on November 4, 2005. In the Tiffany Complaint, Tiffany alleges, among other things, that eBay facilitates counterfeiting by encouraging sales of brand name goods, by promoting Tiffany-branded listings at the site, maintaining a large percentage of auction sites selling allegedly counterfeit Tiffany items, and by manipulating sponsored links from Yahoo! and Google in such a way that web surfers are directed to auctions on eBay selling counterfeit goods. See Tiffany Complaint at ¶¶ 24-30. 6. For a general discussion of secondary liability for trademark infringement occurring online see Walsh, Gregory J., Internet Service Provider Liability for Contributory Trademark Infringement After Gucci, 2002 Duke L. & Tech. Rev. 0025 (December 9, 2002); Easton, Eric B., Current Developments in Cyberspace, 9 U. Balt. Intell. Prop. L.J. 181 (Spring 2001); Janis, Daniel T., Internet Domain Names and the Lanham Act: Broadening Trademark Definitions and Their Implications for Speech on the Web, 25 Colum. J.L. & Arts 21 (Fall 2001). 7. According to Wikipedia, “A peer-to-peer (or P2P) computer network is a network that relies on the computing power and bandwidth of the participants in the network rather than concentrating it in a relatively few servers. . . . A pure peer-to-peer file transfer network does not have the notion of clients or servers, but only equal peer nodes that simultaneously function as both “clients” and “servers” to the other nodes on the network.

Vol. 95 TMR 979 intellectual property rights in the last several years, the U.S. Supreme Court issued its decision in Metro-Goldwyn Mayer Studios, Inc. et al. v. Grokster, Ltd. et al.8 on June 27, 2005. That case confirmed that manufacturers of products designed and promoted with intent that they be used to infringe copyrights could be held contributorily liable for the infringements of their users—even in the absence of actual knowledge of those infringements.

This article will investigate whether recent developments in the law of contributory liability are likely to help or hinder brand owners to establish viable secondary liability claims against auction houses that provide services to online counterfeiters. In so doing, this article will briefly summarize the anti-pirating policies of the most popular auction sites, and then review the development of contributory trademark law in the federal courts. It will also investigate recent developments in contributory liability law in the copyright context and suggest that those developments should be equally relevant to the trademark bar. This article concludes that while brand holders are not precluded from bringing successful contributory infringement claims against auction sites, the grounds for those claims are probably limited and may have become even more limited in the wake of the Grokster decision. Nevertheless, this summer’s Grokster opinion provided some important guidance that brand holders and service providers should review as they continue to combat counterfeiting on the web.

II. THE PRELIMINARIES— RESPONSIBILITIES OF THE ONLINE AUCTIONEER Direct responsibility for sales of bogus goods resides in the

first instance with the auctioneers or users themselves.9 Moreover, the online auction sites have taken steps to reinforce the notion that liability ought to be imposed exclusively on the subscriber by implementing terms of use and policies that strictly prohibit illegal behavior, including sales of counterfeit goods.10 In addition to adhering to these policies, sellers must “register” or otherwise sign up with the site and in most instances fees are charged either for This model of network arrangement differs from the client-server model where communication is usually to and from a central server. A typical example for a non peer-to-peer file transfer is an FTP server. One user uploads a file to the FTP server, then many others download it, with no need for the uploader and downloader to be connected at the same time.” See http://en.wikipedia.org/wiki/Peer-to-peer. 8. 125 S. Ct. 2764 (2005). A full discussion of this case can be found infra at the text accompanying notes 103-28. 9. See 15 U.S.C. § 1114(1)(a) et. seq.; 18 U.S.C.A. § 2320(a) et seq. 10. For relevant policies, see supra note 3.

980 Vol. 95 TMR participation in an auction or as a commission at the time of sale.11 In addition to payment of fees, auctioneers must abide by each site’s policies and procedures including terms for bidding and intellectual property violations.12 In particular, eBay’s policy prohibits the sale of counterfeits, unauthorized replicas and unauthorized copies. Amazon also forbids illegal activities generally, and Yahoo prohibits the listing or sale of “any item that infringes the rights of a third party, including items that violate copyrights, trademarks, publicity or privacy rights of third parties” and “any item that is counterfeit or stolen.” All three sites claim to cancel listings and/or account privileges for violations of their respective policies.13

In addition to forbidding trafficking in illegal fakes, eBay has what appears to be the most comprehensive set of procedures for attempting to avoid infringement. The Verified Rights Owner (VeRO) program allows intellectual property rights owners to request removal of listings that offer an item (or contain material) that allegedly infringes a claimant’s copyrights, trademarks, and other intellectual property rights. To report a listing to eBay, an intellectual property owner sets up a user account with eBay and completes and submits a “Notice of Claimed Infringement” form. By signing and returning the completed form, the intellectual property owner notifies eBay that it has a good faith belief that the identified listing infringes the notifier’s rights and that the information in the form is accurate. After receipt of the Notice, eBay removes the listing at issue and notifies the seller and bidders of the removal.14

Despite the existence of the VeRO program, allegations of infringement and counterfeiting continue.15 Indeed, web sales of

11. eBay’s fees vary depending on the starting and closing prices of the auction, but range from $0.25 to $4.80 for the “Insertion Fee,” and from $0.01 to over $1,000.01 for the “Final Value Fee.” In addition, eBay charges different fees for certain business and industrial categories, such as heavy equipment, and food service and retail. Also, sellers can add optional features to help increase their chances for a successful auction but these features come with additional fees. There are no such fees to sell on Yahoo! Auctions. However, Yahoo! Auctions requires that a credit card be provided for verification. 12. For relevant policies, see supra note 3. 13. Id. 14. See VeRO program http://pages.ebay.com/help/confidence/vero-rights-owner.html. Participants in the VeRO program also are encouraged to create “About Me” pages, which are designed to educate eBay sellers and buyers about the products and intellectual property rights of the owners. Despite eBay’s extensive published policies, the responsibility is still squarely on the intellectual property owners to enforce their rights. In fact, the VeRO policy itself emphasizes that intellectual property owners must do their own policing. See id. 15. See Lewis, Mark, Shabby Chic Settles IP Lawsuit with eBay Sellers, AuctionBytes.com, July 12, 2004. See also Tiffany (NJ) Inc.’s lawsuit against eBay supra note 5; and Bob Sullivan, EBay Fights Its Toughest Legal Battle: Tiffany Lawsuit Puts

Vol. 95 TMR 981 counterfeit and gray market goods seem to be increasing generally, with eBay apparently a frequent target of illegal activity.16 For its part, eBay contends that its commitment to VeRO is sufficient to insulate it from liability. In particular, it contends that its role is limited to that of a trading platform: it does not receive the goods nor control them, and hence it should not be held accountable for the illegal trades of its members.17 Hence, brand owners seeking to stamp out online auctioning of illegitimate goods must actively police the auction sites and cannot rely on the auction site owners to protect brands, unless the owners are notified of wrongdoing.

III. THE DEVELOPMENT OF CONTRIBUTORY TRADEMARK INFRINGEMENT DOCTRINE

To determine whether and under what circumstances an online auction site might be liable for the infringing activities of its users, a review of the law of contributory trademark liability is necessary. It is generally accepted that there are two types of secondary liability applicable to trademark claims—contributory liability and vicarious liability.18 While both have their roots in the common law of torts,19 the underlying theories are rather distinct. Contributory liability can be traced to concepts of joint tort doctrines.20 Vicarious liability, on the other hand, has origins in concepts of master/servant and respondeat superior.21 Although both theories have been applied in the trademark context, theories of contributory liability are more likely to be relevant to the question of liability for online providers who allegedly aid in the sale or trafficking of counterfeit goods.22 Therefore, this article will “Hands Off” Approach to the Test, MSNBC.com, September 21, 2004; Scalet, Sarah D., Auction Blocks, CSO Magazine, August 2005. 16. See Scalet, Auction Blocks, id. 17. See id. 18. See, e.g., Hard Rock Café Licensing Corp. v. Concession Services, Inc., 955 F.2d 1143, 1148-50 (7th Cir. 1992). 19. See, e.g., 4 J. Thomas McCarthy, McCarthy on Trademarks and Unfair Competition § 25:23 (4th ed. 2005) [hereinafter McCarthy]. 20. See generally Prosser and Keeton on Torts, 5th ed., 1988 § 46, 322-23 [hereinafter Prosser]. 21. See id. at § 69. 22. In part because it is based on doctrines like master/servant and respondeat superior, vicarious liability doctrine in the trademark context has rather narrow applications. The current generally accepted test for vicarious trademark infringement is whether the alleged secondary infringer: 1) was in a partnership with or had apparent authority to act on behalf of the direct infringer; and 2) benefited financially from the infringement. Viable claims for vicarious trademark infringement usually involve parent and subsidiary relationships or where there is a strong principal/agent relationship. See Buckman, Deborah F., Liability as Vicarious or Contributory Infringer Under Lanham Act—Modern Cases, 152 ALR Fed 573; American Telephone and Telegraph Co. v. Winback and

982 Vol. 95 TMR focus on contributory trademark theory as a possible option for a brand holder seeking recourse against online auction sites.

Contributory trademark infringement theory grew out of general tort doctrine. A “joint tortfeasor” is one who acts in concert to commit a crime and therefore is considered equally responsible for its commission, even though only one individual may actually have battered the victim while another one merely held him down.23 Prosser teaches that:

[a]ll those who, in pursuance of a common plan or design to commit a tortious act, actively take part in it, or further it by cooperation or request, or who lend aid or encouragement to the wrongdoer, or who ratify acts done for their benefit are equally liable.24

Significantly, mere knowledge of the activities of another tortfeasor generally is not sufficient to trigger liability. Rather, there has to be some greater evidence of acting in concert (though express agreement is not necessary).25 Furthermore, as Prosser notes, innocent acts by a party that happen to further the tortious purpose of another are insufficient to assign liability. Rather, there must be some manifestation of intent and/or concerted action.26 Hence, under basic joint tort doctrine deliberate encouragement of or support of the wrongful act of another creates equal liability for the aider, even when the assistance is rendered without express intent to commit a crime.

The application of common law tort theory to trademark infringement claims has a long history—dating at least as far back as 1924. Interestingly, over the course of the last 80 years, the articulated test for contributory trademark infringement has remained relatively static—though its application to various channels of trade, as well as its interpretation have evolved and adapted quite a bit.27 Still, its contours are not completely defined. As a general matter, in order to be contributorily liable for trademark infringement, one must have: 1) induced the direct infringement of another; or 2) continued to supply goods (or Conserve Program, Inc., 42 F.3d 1421 (3d Cir. 1994) (citing agency principles as basis for concluding that defendant could be liable for the infringements of resellers); but see Banff Ltd. v. Limited, Inc., 869 F. Supp. 1103 (S.D.N.Y 1994) (no vicarious liability of corporate parent) and Mini Maid Services Co. v. Maid Brigade Systems, Inc., 967 F.2d 1516 (11th Cir. 1992) (no vicarious liability for franchisor because of conduct of franchisee). 23. See 4 McCarthy, supra note 19, § 25:23; Prosser, supra note 20, § 46 at 322-23; David Berg & Co. v. Gatto Int’l Trading Co., 884 F.2d 306 (7th Cir. 1989). 24. Prosser, supra note 20, § 46 at 323 (footnotes omitted); see also 4 McCarthy, supra note 19, § 25:23; Berg v. Gatto, 884 F.2d at 311. 25. See generally Prosser, supra note 20, § 46. 26. Id. 27. See infra text accompany notes 32-88.

Vol. 95 TMR 983 facilities) to the infringer, knowing of the underlying direct infringement.28 As will be illustrated, “inducement” for purposes of trademark law traditionally has meant direct or implied suggestion to the direct infringer that the infringement occur.29 On the other hand, even if there is no evidence of inducement to infringe, one may still be held contributorily liable if, under the second “prong” of the test, there is continued distribution of a product or other facilitation of infringement with knowledge (or reason to know) of the infringing activities of others.30 While these tests may seem on their face to be rather facile, courts have struggled with their interpretation and their proper application. 31

A. The Mere Suggestion to Re-Label as Contributory Infringement

The seminal decision on contributory trademark infringement is the Supreme Court’s 1924 decision in Warner v. Eli Lilly.32 In Warner, the Court considered the appeal of the William Warner company of a holding of infringement of Lilly’s alleged rights in its COCO-QUININE mark arising from Warner’s sale of a similar concoction under the name QUIN-COCO. Lilly had accused Warner of unfair competition because its distributors had actively encouraged druggists to replace Lilly’s branded product with Warner’s when filling prescriptions for Lilly’s product. Specifically, Warner’s salesmen, during face-to-face meetings with pharmacists, had actively implied, if not directly suggested, that prescriptions for Lilly’s COCO-QUININE could be filled with Warner’s product and that druggists could pocket the excess profit since Lilly’s product was more expensive than Warner’s. The district court agreed with Lilly that such activities unfairly induced the palming

28. See, e.g., Inwood Laboratories, Inc. v. Ives Laboratories, Inc., 456 U.S. 844 (1982) 29. See Inwood, 456 U.S. 852-53. 30. See, e.g., Inwood, 456 U.S. at 854; Fonovisa, Inc. v. Cherry Auction, Inc. et al., 76 F.3d 259, 264 (9th Cir. 1996); Hard Rock Café Licensing Corp. v. Concession Services, Inc., 955 F.2d 1143, 1148 (7th Cir. 1992). 31. For a general discussion of secondary liability for trademark infringement, see Buckman, Deborah F., Liability as a Vicarious or Contributory Infringer Under Lanham Act—Modern Cases, 152 ALR Fed 573; and Cross, John T., Contributory Infringement and Related Theories of Secondary Liability for Trademark Infringement, 86 Iowa Law Rev. (Oct. 1994). 32. 265 U.S. 526 (1924).

984 Vol. 95 TMR off that was the subject of the litigation,33 but on appeal the Third Circuit Court of Appeals overturned that ruling.34

The Supreme Court agreed with the district court that Warner’s salespeople induced pharmacists, either explicitly or by suggestion, to palm off Warner’s goods for Lilly’s, and that such activity left Warner liable for the infringing acts of third party pharmacists.35 In so doing, the Court harkened to common law principles stating that “[t]he wrong was in designedly enabling the dealers to palm off the preparation as that of the respondent. One who induces another to commit a fraud and furnishes the means of consummating it is equally guilty and liable for the injury.”36

A full 58 years after Lilly, the Supreme Court considered Inwood Laboratories, Inc. v. Ives Laboratories, Inc.,37 yet another pharmaceutical case—this one dealing with generic drugs. The facts of Inwood were similar to those addressed by the court in Warner. Specifically, druggists were alleged to have re-labeled cheaper generic forms of certain look-alikes as the branded product and then pocketed the difference in price, all at the alleged behest, or acquiescence, of the defendant manufacturer of the generic.38 Inwood’s claims were premised on the claim that the generic apparently had been deliberately manufactured to look just like the previously patented original. This use of confusing trade dress combined with defendant’s promotion of the product that used catalog entries to compare the products “contributed” to the mislabeling by the druggists, according to the plaintiff.39 After a bench trial, the district court determined that there was insufficient evidence to suggest that the manufacturers intentionally had contributed to the wrongful mislabeling by the druggists.40 According to the lower court, defendant’s choice of 33. See Warner, 265 U.S. at 528. Interestingly, none of the courts agreed with Lilly on the pure trademark claim, finding that COCO-QUININE lacked trademark significance and therefore that Warner had not infringed. Id. This is an odd result because, in most instances, a finding of contributory or secondary infringement requires a finding of direct infringement. 34. See id. 35. Id. at 530. 36. Id. at 530-31. 37. 456 U.S. 844 (1982). 38. Inwood, 456 U.S. at 848-50. 39. Id. at 847-48. Specifically, the plaintiff had claimed that by selling the product as the “equivalent” of the original, the generic manufacturer was “placing an instrument of fraud” in the hands of pharmacists, thereby unfairly appropriating the business that would otherwise go to plaintiff. Ives Laboratories, Inc. v. Darby Drug Co., Inc., 455 F. Supp. 939, rev’d, Ives Laboratories, Inc. v. Darby Drug Co., 601 F.2d 631, (2d Cir. 1979), rev’d and remanded, Inwood Laboratories, Inc. v. Ives Laboratories, Inc., 456 U.S. 844 (1982). 40. Ives Laboratories, Inc. v. Darby Drug Co., Inc., 488 F. Supp. 394, 397 (E.D.N.Y. 1980).

Vol. 95 TMR 985 similar trade dress and promotional activities did not support a finding that the defendant suggested, “by implication” or otherwise, that pharmacists fill their bottles with the generic version of Inwood’s pharmaceutical product and sell it with plaintiff’s label.41

On appeal, the Second Circuit Court of Appeals overturned the district court’s ruling, suggesting that the district court had failed to accord the proper weight to the evidence of implied suggestion.42 The court emphasized:

[b]y using capsules of identical color, size and shape, together with a catalog describing their appearance and listing comparative prices of [the branded drug] and generic [drug], appellees could reasonably anticipate that their generic drug product would by a substantial number of druggists be substituted illegally for Ives’ trademarked [product name] or that bottles of their lower-priced product might be mislabeled. . . . This amounted to a suggestion, at least by implication, that the druggists take advantage of the opportunity to engage in such misconduct.43

The court also pointed out that there had been evidence showing a pattern of illegal substitution in New York and that, based on this evidence, manufacturers could have “reasonably anticipated” the infringing activities of druggists. Hence, at least according to the Second Circuit, contributory infringement under the first prong of the standard test (“inducement”) could be predicated on evidence consisting of the combination of: 1) promotional materials suggesting that the two drugs were interchangeable; and 2) the similarity of the alleged trade dress chosen for both products.44

The Supreme Court reversed the Second Circuit’s holding—but did so on the limited ground that the appeals court was not entitled to substitute its own judgment relating to the weight of the evidence for that of the trial judge.45 In reaching its conclusion, however, the Supreme Court was careful to emphasize that the overall test for contributory infringement articulated by the Second Circuit was correct.46 Specifically, the Court stated that contributory infringement could lie if there was a “suggestion, even by implication,” that retailers fill bottles with the generic form of a 41. Id. at 397. 42. Ives Laboratories, Inc. v. Darby Drug Co., 638 F.2d 538, 544 (2d Cir. 1981). 43. Id. at 543. 44. See id. at 544-45. 45. Inwood Laboratories, Inc. v. Ives Laboratories, Inc., 456 U.S. 844, 857-58 (1982). Professor McCarthy notes that the Supreme Court’s Inwood decision is open to interpretation. See 4 McCarthy, supra note 19, § 25:18, text at nn.18-19. 46. Id. at 853-54.

986 Vol. 95 TMR drug and label it with the proprietary mark of a competitor.47 But, by affirming the Second Circuit’s articulation of the test, the Supreme Court seemed to create an ambiguity in the law. Specifically, the Second Circuit opinion had suggested that inducement could be inferred from evidence indicating that the contributor could have reasonably anticipated illegal substitution based upon surrounding facts.48 Indeed, in Justice White’s concurring opinion, he noted with some concern that the majority opinion significantly altered the test of contributory trademark infringement.49 In particular, he feared that inducement evidenced by “suggestion or by mere implication” could now encompass merely anticipating possible misbehavior by third parties, rather than the more explicit encouragement that the concurring justices believed precedent required.50 This distinction may be critical because a standard of “reasonable anticipation” of infringing activity begins to suggest that actual knowledge of the underlying infringement is not necessary to a finding of contributory infringement.

B. Development of Contributory Liability for Trademark Infringement

From Drugs and Salespeople to Flea Markets, Landlords and Domain Name Registrars

In the years since Inwood, there have been several adjustments to the Inwood test, each of which lend greater support to the trademark owner—as the changes arguably expand the scope of who is liable for the direct infringements of third parties. By and large, the cases after Inwood concerned not so much the inducement part of the test, but rather the second prong relating to material contribution. These cases clarified and expanded the doctrine of contributory trademark infringement in two crucial ways. First, the post-Inwood cases expanded the definition of who might be a “contributor” under the traditional test from one who supplies the goods (allegedly) knowing they will be used to infringe, to defendants who also supply facilities or services used in connection with the infringing activities of others. Secondly, the development of the law post-Inwood clarified that one’s lack of actual knowledge of infringing activities will not insulate a contributor where there is evidence of “willful blindness.” Hence, 47. See id. at 851 (emphasis added). 48. Ives Laboratories, 638 F.2d at 543. 49. See Inwood Laboratories, 456 U.S. at 859-61 (J. White, concurring). 50. Id. at 861. The majority opinion seemed to address Justice White’s concern by affirming its view that the Second Circuit’s opinion was grounded in the traditional two prong test. Id. at 854.

Vol. 95 TMR 987 “don’t ask don’t tell” generally will not immunize a contributory infringer from liability.

In Hard Rock Café Licensing Corp. v. Concession Services, Inc.,51 the U.S. Court of Appeals for the Seventh Circuit considered the appeal of flea market operator, Concession Services, of a lower court’s finding of contributory infringement. Concession ran a flea market and had leased space to sellers of counterfeit goods.52 Affirming the district court’s decision on Concession’s liability, the Seventh Circuit looked to the traditional test for contributory infringement set out in Inwood.

It is well established that “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 contributorily responsible for any harm done as a result of the deceit.”53

The court noted that although the standard seemed clear, it was uncertain how it should be applied, if at all, in the context of a landlord/tenant relationship. The plaintiff’s claims of contributory infringement as to Concession were novel because the test for contributory infringement articulated by the Inwood and Warner courts had both been devised to address the contributory activities of a manufacturer of the item involved in the infringement.54 In the present case, however, the plaintiff was seeking extension of that test to someone who provides the place or facility of infringement. In analyzing this question, the court pointed out that under common law principles a landlord is responsible for the torts committed on its premises, provided that the landlord has knowledge of such tortious activity and fails to intervene to stop it.55 As such, Concession could be held liable if it knew about the counterfeiting activity but did not take steps to intervene.

Significantly, in Concession’s case, it was not at all clear that Concession had the requisite actual knowledge of counterfeiting under the second prong of the contributory infringement test that the articulated test seemed to require.56 The court avoided the knowledge issue, however, by pointing out that Concession could not avoid being contributorily liable simply by being “willfully blind” to the potential wrongdoing of Concession’s lessors. Such willful blindness to illegal activities could be tantamount to actual 51. 955 F.2d 1143 (7th Cir. 1992). 52. Id. at 1148. 53. Id., quoting Inwood Laboratories, 456 U.S. at 854. 54. Id. 55. Id. at 1149, citing Restatement (Second) of Torts § 877 & cmt. d (1979). 56. See Hard Rock, 955 F.2d at 1149.

988 Vol. 95 TMR knowledge of such activities for purposes of assigning contributory liability under the second prong of the contributory liability standard.57 Accordingly, the Seventh Circuit remanded the case to the district court for factual findings relating to the defendant’s state of mind, with instruction that if there was evidence that the operator either knew or had reason to know of the counterfeiting, then the defendant’s failure to investigate that knowledge (or suspicion) created liability.58 In ordering the remand, the Seventh Circuit noted that there seemed to be evidence supporting willful blindness because the defendant had observed the bogus goods in question “and had the opportunity to note that they had cut labels and were being sold cheap.”59 Hence, after Hard Rock, a landlord or lessor could be held liable for contributory infringement if it knew or had reason to know of the infringing activity taking place on its premises, or was willfully blind to that behavior, and failed to take action to address the infringement.

A few years after the Hard Rock decision, in 1996, the Ninth Circuit Court of Appeals considered a similar factual scenario in Fonovisa, Inc. v. Cherry Auction, Inc. et al. 60 Fonovisa concerned claims against a swap meet promoter who allegedly contributed to the counterfeiting activities of its vendors by failing to control the foreseeable infringement of those vendors.61 Specifically, defendant Cherry Auction had leased space to various vendors who had sold counterfeit musical recordings at auction. Similarly to Concession, Cherry argued that it was not supplying any product (but only leasing space) knowing that the recipient vendors would engage in infringement. Following the Hard Rock court’s reasoning, the Ninth Circuit ruled that Cherry Auction was contributorily liable for the counterfeit sales of its vendors and was not, as Cherry argued, simply an “absentee landlord.”62 In reaching its conclusion, the court emphasized that Cherry Auction had the right and ability to control the auction premises, terminate vendors and control access of customers.63 Given the amount of control exercised by Cherry Auction, the defendant could not argue it was merely a passive entity uninvolved in the infringing activity. Rather, according to the court, Cherry was supplying the necessary

57. Id. 58. Id. 59. Id. 60. 76 F.3d 259 (9th Cir. 1996). 61. Id. at 265-66. 62. Id. at 262. 63. Id.

Vol. 95 TMR 989 marketplace for infringing activities.64 Moreover, consistent with Hard Rock, the defendant had been willfully blind to the infringing activities of its vendors.65 Accordingly, the defendant had fulfilled the second prong of the Inwood test and materially contributed to known infringing activities.66

Hence, Hard Rock and Fonovisa introduced and confirmed two relatively novel expansions to the law of contributory trademark infringement. First, these cases suggested that willful blindness to facts that should alert a potentially liable party to infringing activities could be tantamount to “actual knowledge” of those activities for purposes of the test for contributory infringement. Second, the decisions confirmed that the theory of contributory infringement could be used to pursue claims against those entities that provided the facilities where infringement occurs in addition to the manufacturers of the infringing products who supply counterfeiters or infringers.67

C. Contributory Trademark Infringement on the Internet

The traditional bounds of contributory liability set out by Inwood and expanded by the Fonovisa and Hard Rock courts were further tested as commercial activities migrated to the Internet in the late 1990s. In particular, in a series of cases beginning in 1999, plaintiffs attempted to assign contributory trademark liability to domain name registrars as well as Internet service providers. However, while the invitation to expand the scope of potentially liable parties was repeatedly made, courts were reticent about extending the doctrines to service providers who could, at best, only be shown to be tangentially involved with the direct 64. See id. at 264-65. The Fonovisa decision was more concerned with contributory and vicarious copyright claims against Cherry Auction for the underlying infringement in the plaintiff’s copyrighted recordings. Hence, much of the court’s analysis was focused on those claims, rather than the trademark claims. 65. Id. at 265. 66. Id., quoting Inwood, 546 U.S. at 854-55. 67. These theories were not entirely novel before Hard Rock. In particular, contributory liability for copyright infringement had already expanded the scope of liability to cover dance hall operators and landlords who had knowledge of copyright infringements on their premises. See, e.g., Famous Music Corp. v. Bay State Harness Horse Racing & Breeding Assn., 554 F.2d 1213 (1st Cir. 1977) (racetrack retained infringer to supply music to paying customers); Dreamland Ballroom, Inc. v. Shapiro, Bernstein & Co., 36 F.2d 354 (7th Cir. 1929) (defendant leased record concession for its chain of retail stores to infringer and had strong financial incentive for it to succeed as well as authority to police concession for bootleg recordings); Gershwin Publishing Corp. v. Columbia Artists Management, Inc., 443 F.2d 1159 (2d Cir. 1971) (alleged contributory infringer had actual knowledge that artists were performing copyrighted songs, was in a position of control and had ability to police). In addition, the concept of willful blindness was introduced in Louis Vuitton S.A. v. Lee, 875 F.2d 584, 590 (7th Cir. 1989).

990 Vol. 95 TMR infringers. As the cases have unfolded, it has become increasingly clear that only those service providers who have continuing relationships with infringers such that they have knowledge of and/or control over infringing activities can be potential targets of contributory liability claims. Conversely, those entities that have only ephemeral contact with the infringing activity will not be liable. Of course, the challenge for service providers and potential plaintiffs is determining where involvement sufficient to give rise to liability begins and ends.

In 1999, the Ninth Circuit Court of Appeals considered whether Network Solutions, Inc. (NSI) should be held contributorily liable for the allegedly infringing registration of domain names that included plaintiff’s trademarks.68 In particular, Lockheed Corporation complained that NSI’s registration of Lockheed’s marks as portions of domain names for third parties rendered NSI liable for the infringing activities of the registrants. Considering Lockheed’s appeal of the district court’s dismissal of its claims, the court looked to Fonovisa’s teaching that a service provider could be liable for contributory infringement if it facilitated the infringing activities of others. The court concluded that when the alleged contribution involves services or facilities (rather than provision of the directly infringing product), the court requires a higher threshold of control—namely direct control and monitoring of the service allegedly used to infringe to support a conclusion of contributory infringement.69 Because NSI, acting merely as a registrar of domain names, did not have control over the actual allegedly infringing use of the domain names in question, it could not be held accountable for that infringement.70 The court emphasized:

Where domain names are used to infringe, the infringement . . . result[s] from the registrant’s use of the name on a web site or other Internet form of communication in connection with goods or services. . . . NSI’s involvement with the use of the domain names does not extend beyond the registration.71

In addition, because NSI was not in a position to control activities on the Internet at large it had no duty to police those downstream 68. Lockheed Martin Corp. v. Network Solutions, Inc., 194 F.3d 980 (9th Cir. 1999). 69. Id. at 984. 70. Id. at 984-85. 71. Id. at 985, quoting Lockheed Martin Corp. v. Network Solutions, Inc., 985 F. Supp. 949, 958 (C.D. Cal. 1995). See also Ford Motor Co. et al. v. Great Domains.com, Inc., 177 F. Supp. 2d 635 (E.D. Mich. 2001) (holding that the domain name registrar was not contributorily liable for alleged infringing activities of domain name registrants since Great Domains was not in a position to know of or police the activities of its registrants and because claims brought under the Anticybersquatting Consumer Protection Act (ACPA) required a higher level of intent and knowledge on the part of the direct infringer).

Vol. 95 TMR 991 activities of registrants that occurred after NSI’s involvement had ceased.72 Furthermore, the mere notice to NSI of alleged infringement did not trigger an obligation to investigate such claims, since NSI was in no position to know whether any particular use of a trademark might be fair or whether it might cause confusion in the marketplace.73

More recently, courts have begun to grapple with allegations that other online service providers—including those that may have more control over the activities of users—should be held contributorily liable for infringement. Specifically, cases have been brought against both Google and Netscape claiming that their sales of so-called “adwords” and “keywords” constitute contributory trademark infringement.74 Google, for example, sells adwords—including words that may contain proprietary brands—to the first bidder. Those words or terms are then used to generate specialized search results, called “sponsored links,” when Google users type in those adwords into its search engine.75 In Google Inc. v. American Blind and Wallpaper,76 American Blind challenged Google’s adword sales, contending that because these “sponsored links” (which arguably receive preferential or higher appearance on the search page) were likely to mislead consumers as to source, the sale of such adwords constituted active encouragement to infringe under the inducement prong of the contributory infringement test. The court declined to grant Google’s motion to dismiss those claims on the grounds that it required a fuller record to determine whether such activities could be infringing.77

In a similar case, Playboy Enterprises objected to Netscape’s sale of “keywords” to generate banner ads for competitors under the same theory posited by American Blind—namely that consumers would be confused by the misleading banner ads.78 The Ninth Circuit reversed the lower court’s summary judgment ruling in favor of Netscape, but did so without providing any reasoning relating to the potential basis for contributory infringement. Specifically, the court ruled that there were questions of fact as to whether the banner ads were confusing to customers and that, if 72. See Lockheed, 194 F.3d at 985; Lockheed, 985 F. Supp. at 967. 73. See Lockheed, 985 F. Supp. at 963. 74. Google, Inc. v. American Blind and Wallpaper, 74 U.S.P.Q.2d 1385 (N.D. Cal. 2005); Playboy Enterprises, Inc. v. Netscape Communications, Inc., 354 F.3d 1020 (9th Cir. 2004). 75. Hence, in theory, General Motors could acquire from Google the adword for “FORD” and when users search for FORD, GM’s website and/or links to its dealerships might be displayed under so-called “sponsored links.” 76. 2005 U.S. Dist. LEXIS 6228 (N.D. Cal. 2005). 77. Id. 78. Playboy Enterprises, Inc. v. Netscape Communications Corp., 354 F.3d 1020 (9th Cir. 2004).

992 Vol. 95 TMR they were, whether Netscape could be contributorily or directly liable.79

Although the Google and Playboy examples are both intriguing, unfortunately neither case has progressed far enough to be able to glean likely outcomes or impact on future cases. However, the Playboy decision in particular clarifies that at least some courts are willing to countenance theories of contributory liability for online providers of allegedly “manipulative” linking, listing or targeted advertising practices that have the cause and effect of confusing consumers.80 Ultimately, to be consistent with prior case law, a finding of liability against Netscape and Google would have to be based, in part, on each company’s alleged “inducing” behavior or on the defendants’ continuing relationship with the direct infringers and the right and ability to control the infringing conduct on its Internet “premises.”

In the wake of Lockheed, Google and Playboy, at least in some circuits, it would seem that online service providers may be held to be contributorily liable only under a limited number of circumstances. First, under the Inwood standard for inducement, a service provider could be liable if the evidence shows that the alleged contributor directly suggested to the infringer or actively promoted, even by mere implication, the use of their services for infringing purposes.81 Alternatively, under the second prong of the test for contributory infringement, a court could assign liability if there is evidence that a service provider, with knowledge of infringement, continued to provide the site, facilities, services or products used to infringe.82 However, based upon the standards articulated by the Lockheed court, liability would not generally attach unless there is a direct and continuing relationship between the service provided and the actual infringing activities.83 Hence, the provision of ancillary or temporary services that do not directly facilitate the infringement probably will not trigger contributory

79. Playboy, 354 F.3d at 1023. Not all courts have been willing to grant relief on claims similar to those posited in Netscape and Google. In fact, several jurisdictions have questioned whether the kind of use of the mark alleged in such cases is “use in commerce” for purposes of the Lanham Act. See 1-800 Contacts v. WhenU.com, Inc. et al., civ. Doc. Nos., 04-026-cv(L), 04-0446-cv(CON) (2d Cir. June 27, 2005) (reversing district court ruling and finding that using a trademark to trigger pop-up advertising was not use in commerce that would trigger liability). Hence, at a minimum, there is a split developing in the circuits regarding whether using a mark for keyed advertising or linking is “use in commerce” under the Lanham Act. Were a consensus to develop among the circuits that the use of adwords or keywords is not “use in commerce” for Lanham Act purposes, then neither purchaser of the adword/keyword, nor the seller could be liable under either a direct or contributory theory. 80. See id. 81. See supra text accompanying notes 37-50. 82. See supra text accompanying notes 51-67. 83. See supra text accompanying notes 68-73.

Vol. 95 TMR 993 liability claims. However, if a service provider is involved in a continuing relationship with the direct infringer, and provides services that directly facilitate or support that infringement, such providers may be at greater risk if it can be shown they knew or had reason to be aware of the infringing activity and took no action. Furthermore, providers generally cannot shield themselves from liability by being willfully blind to knowledge.84

Despite the development of the law in this area, there is still significant ambiguity regarding exactly what kinds of services may be contributing to infringement, and whether services provided by auction sites could be considered “inducing” and/or “materially contributing” to the counterfeiting activities of online sellers.

Under the inducement portion of the test, as articulated by Inwood, arguably any combination of evidence suggesting or implying ill intent on the part of the auction site is all that will be required to show inducement. To avoid liability for inducement to infringe, auction sites and other online providers need only ensure that they carefully design and promote their services to ensure that none of their outward behaviors suggest that users traffic in illegal goods. In fact, given that the auction sites seem to have robust non-infringement policies and procedures and are willing to disable allegedly infringing sales, at least under the Inwood standard it would seem that proving an auction site induced infringement would be an uphill battle.85 On the other hand, there is at least a credible argument to be made that the Inwood court may have, inadvertently or otherwise, slightly expanded the test for inducement by tacitly confirming the Second Circuit’s view that inducement might be shown if an alleged contributor had reason to anticipate potential infringement but failed to take steps to police it.86 Under this version of the Inwood test, a court might consider evidence that a site had an adequate collection of facts—possibly in the form of prior history of counterfeiting, or in the way of brands or goods commonly counterfeited—such that an auction house reasonably had a basis to know or anticipate additional infringement.87 However, given the lack of clear precedent, such an argument, without other evidence, would appear to be less than compelling.

The development of the case law under the second prong of the contributory trademark infringement test is similarly unclear in its application to online service providers and auction sites in 84. See Hard Rock Café Licensing Corp. v. Concession Services, Inc., 955 F.2d 1143, 1149 (7th Cir. 1992); Fonovisa, Inc. v. Cherry Auction, Inc. et al., 76 F.3d 259, 265 (9th Cir. 1996). 85. See discussion, supra at notes 37-50. 86. See discussion, supra at notes 45-50. 87. See id.

994 Vol. 95 TMR particular. Although after Lockheed it seems clear that an online service provider with more direct and ongoing control or interaction with infringing activities may be contributorily liable for such activity, as of yet no court has assigned such liability in the online context. Hence, we do not know for certain whether a court would assign liability to a service provider who, arguably like the landlord/operator(s) in Fonovisa and Hard Rock, knew or had a reason to know that infringing activities were occurring online but did not stop them. Moreover, because the auction sites appear to remove or disable sales of which they are notified, it seems dubious at best to assume a court would assign liability merely because other infringing sales could have been detected but were not policed by the auction house. Fonovisa teaches that evidence that one had reason to be suspicious (because the goods in question simply looked bad) might suffice to trigger a duty to investigate. However, because online providers have no independent actual exposure to the physical goods, a reason to be suspicious of any specific sale would have to come from another source. Moreover, because mere notice of alleged infringement given to a service provider does not trigger a duty to investigate after Lockheed, it would appear that brand owners may have a difficult road in attributing counterfeit sales to the auction sites unless notice of specific infringements was unheeded by the service provider.88

In sum, it is not clear from the development of the case law on contributory trademark infringement whether a service provider like an auction site has a duty to actively police activities of users over whom it arguably exercises some control just because it has reason to know that some of those activities are likely to be illegal but otherwise has no direct knowledge of specific infringing or counterfeiting sales of any particular user.

IV. CONTRIBUTORY LIABILITY FOR COPYRIGHT INFRINGEMENT:

MGM v. GROKSTER There are relevant parallels in the law of contributory

copyright liability that might help shed some light on the ambiguities present in the law of contributory trademark infringement. In considering these parallels, it is important to remember that copyright law grants more expansive protection than trademark rights. Hence, it stands to reason that the tests for contributory copyright liability or their application should be slightly different from their application in the trademark context, with the result that the copyright holder retains a somewhat 88. See discussion of Lockheed, supra notes 68-73.

Vol. 95 TMR 995 stronger or more expansive right as compared with the trademark owner. Hence, tests developed in the copyright context should provide broader protection for copyright holders and would at least provide a sort of “outer boundary” for the likely contours and application of similar tests in the trademark realm. Accordingly, the June 2005 decision by the Supreme Court in Metro-Goldwyn Mayer et al. v. Grokster, et al. bears careful review because its articulation of the standard for inducement to infringe copyrights does shed light on some of the ambiguities outlined above.

As a general matter, the scope of secondary trademark infringement liability is narrower than its cousin doctrine under copyright law.89 There have been several proposed reasons for this differential treatment, including the assertion that as a general matter the property right protected by trademark law is narrower than that protected by copyright and the fact that trademark law generally “tolerates a broad range of non-infringing uses of words that are identical or similar to trademarks.”90 The genesis of this assertion seems to be a footnote in the Supreme Court’s 1984 decision, Sony Corporation of America et al. v. Universal City Studios, Inc.,91 in which the court stated rather unequivocally:

. . .[g]iven the fundamental differences between copyright law and trademark law, in this copyright case we do not look at the standard for contributory infringement set forth in Inwood Laboratories, Inc. v. Ives Laboratories, Inc. . . ., which was crafted for the application of trademark cases. . . . If Inwood’s narrow standard for contributory trademark infringement governed here, respondents’ claim of contributory infringement would merit little discussion. Sony certainly does not “intentionally induc[e]” its customers to make infringing uses of respondents’ copyrights, nor does it supply its products to identified individuals known by it to be engaging in continuing infringement of respondents’ copyrights. . . .92 A brief synopsis of the context and reasoning of Sony will help

explain the Court’s footnote and provide guidance on what portions of the doctrine of contributory copyright liability might still be instructive on the proper standard to apply and quality of evidence to require in analyzing contributory trademark claims.93

89. See Sony Corporation of America et al. v. Universal City Studios, Inc., 464 U.S. 417, 438 n.19 (1984); Lockheed, 985 F. Supp. at 965. 90. Lockheed, 985 F. Supp. at 965. 91. 464 U.S. 417, 438 n.19 (1984). Interestingly, the scope of the Sony decision was also the genesis for the series of cases giving rise to Grokster. 92. Id. (citations omitted). 93. For a good general discussion of secondary copyright liability in the counterfeiting context see Kolsun, Barbara and Bayer, Jonathan, Indirect Infringement and

996 Vol. 95 TMR

In Sony the Supreme Court was asked to determine the circumstances under which the manufacturer of a device that could be used to infringe copyrights would be liable as a contributory infringer of the works infringed.94 The owners of copyrighted television programs brought suit against Sony, the developer of the BETAMAX machine, for the illicit copying being accomplished by the machines in people’s homes.95 In arguing that Sony should be responsible for the infringing activities of users of the BETAMAX machine, respondents pointed to a long line of well-developed cases addressing the liability of landlords and dance hall operators for the copyright infringements of orchestras and bands playing on their premises.96 Briefly, those cases laid out a standard for secondary copyright liability that, in essence, assigned liability if the landlord or dance hall operator knew or, by virtue of its ability to control the premises had reason to know, of an infringing activity—and took no steps to stop it.97 But the Supreme Court quickly rejected this standard as inappropriate to the fact pattern before it in Sony. Specifically, the Court noted that all of the foregoing precedents referred to cases where the contributor knew or had reason to know of the infringement at the time that the infringing activities occurred.98 Because Sony’s only contact with the direct infringers was at the moment of sale, it simply could not be said (according to the Supreme Court at the time) that there was any contribution that Sony made to the actual, downstream infringing activities of users.99 The Court emphasized:

Counterfeiting: Remedies Available Against Those Who Knowingly Rent to Counterfeiters, 16 Cardozo Arts & Ent. L.J., 383 (1998). 94. See generally, Sony, 464 U.S. at 419-21. 95. Notably, Sony was argued just six and half months after the Court had issued its decision in Inwood Labs.—a case that had, as the reader will recall, a vociferous concurrence issued by Justice White questioning whether the Court was acquiescing to a broad standard for contributory trademark infringement. See supra text accompanying notes 45-50. It is also worth noting that at the time Sony was decided, it lacked the precedent on the trademark side that came about in Fonovisa v. Cherry and other cases expanding contributory trademark infringement analysis to cover service providers. 96. Sony, 464 U.S. at 436-37 and n.18; see Famous Music Corp. v. Bay State Harness Horse Racing & Breeding Assn., Inc., 554 F.2d 1213 (1st Cir. 1977). 97. See, e.g., Famous Music Corp. v. Bay State Harness Horse Racing & Breeding Assn., Inc., 554 F.2d 1213 (1st Cir. 1977) (racetrack retained infringer to supply music to paying customers); Dreamland Ballroom, Inc. v. Shapiro, Bernstein & Co., 36 F.2d 354 (7th Cir. 1929) (defendant leased record concession for its chain of retail stores to infringer and had strong financial incentive for it to succeed as well as authority to police concession for bootleg recordings); Gershwin Publishing Corp. v. Columbia Artists Management, Inc., 443 F.2d 1159 (2d Cir. 1971) (alleged contributory infringer had actual knowledge that artists were performing copyrighted songs, was in a position of control and had ability to police). 98. Sony, 464 U.S. at 437-38. 99. Id. at 438.

Vol. 95 TMR 997

If vicarious liability is to be imposed on Sony in this case, it must be by reason of the fact that it sold equipment with constructive knowledge of the fact that its customers may use that equipment to make unauthorized copies of copyrighted materials. There is no precedent in the law of copyright for the imposition of vicarious liability on such a theory. The closest analogy is provided by the patent law cases to which it is appropriate to refer because of the historic kinship between patent law and copyright law.100

It was at this point in the decision that the Court rejected the Inwood test for contributory infringement (which it had considered and ruled on just six months earlier) as inapplicable because the scope of trademark law that was the substance of that decision provided a narrower set of rights as compared with copyright and hence the correct alternative analogy had to be found in the patent context.101 The Court went on to construct an apparently new doctrine for contributory liability for copyright infringement that would apply in cases similar to Sony where a manufactured device could be used for both infringing and non-infringing purposes. In essence, after Sony, if a technology could be shown to be capable of substantial non-infringing uses, manufacturers of such equipment would not be held to be contributorily liable for introducing such products to the market, provided the manufacturer “had no direct involvement with any infringing activity.” 102

Whether one agrees or disagrees that the trademark monopoly is fundamentally narrower than the copyright monopoly, one at least theoretical effect of Sony was to confer on copyright holders additional protection not shared by trademark owners. After Sony, copyright owners who could show that a device lacked substantial non-infringing uses could halt its production even in the absence of actual knowledge of the infringement. Trademark owners, as we have seen, have no such veto power. At least in theory, after Inwood and its progeny, to prevail on a claim of contributory infringement a trademark owner must be able to show inducement 100. Id. at 439. The Court’s use of the word “vicarious” is interesting at this juncture. The standard test for vicarious copyright infringement was distinct from that applied for contributory infringement. Specifically, vicarious copyright infringement could be found if the alleged infringer had the right and ability to supervise the infringing activities and a financial interest in the infringement. See Gershwin Publishing Corp. v. Columbia Artists Management, Inc., 443 F.2d 1159, 1162 (2d Cir. 1971); Shapiro, Bernstein & Co., Inc. et al. v. H.L. Green Company, Inc., 316 F.2d 304 (2d Cir. 1963); see also Famous Music, 554 F.2d at 1214-15. Vicarious liability did not require knowledge of infringement, only a vested interest in the outcome and the ability to control the illegal activity. Notwithstanding this difference, the Court’s word choice clearly articulates the accepted standard for contributory copyright infringement and not vicarious infringement. 101. Id. at 439 and n.19. 102. Id. at 446-47.

998 Vol. 95 TMR or material contribution with knowledge of infringement. It does not matter under the law of contributory trademark infringement whether or not a device that has been used to infringe trademarks has or lacks substantial non-infringing uses.

Even though the protection for copyrights became, at least theoretically, stronger or broader after Sony, that should not mean that the similar aspects of the two doctrines cannot inform our analysis of how future courts will or could apply contributory liability doctrine to trademark claims because the tests, at a minimum, are still quite similar, and the exception granted by Sony only goes to the scope—but not to the definition—of the test itself. Specifically, both under copyright and trademark law, the first prong of the test for infringement remains essentially the same. That is, if there is palpable evidence that one has induced another party to infringe, such behavior will give rise to liability. Because the inducement standards are so similar and because the Supreme Court’s Grokster decision clarified the standard for inducement in the copyright context, reviewing that decision should be helpful to trademark practitioners seeking to use inducement theory to enforce rights against auction sites.

V. RECENT CASES ON PEER-TO-PEER FILE SHARING AND THE DEVELOPMENT OF

CONTRIBUTORY LIABILITY FOR PROVIDERS OF THESE TECHNOLOGIES

One of the most hotly contested areas in the development of the law of contributory liability in the last several years has surrounded who should be liable for the infringement caused by online file sharing. Cases in both the Seventh and Ninth Circuits, attempting to follow Sony’s precedent, applied and developed the basic tests for contributory infringement in the context of peer-to-peer (“P2P”) file sharing, with the effect that the definitions of knowledge, willful blindness and inducement all have received further definition.103 These cases culminated in the Supreme Court’s June 27, 2005, decision in Metro-Goldwyn Mayer Studios, Inc. et al. v. Grokster Ltd. et al.104 That unanimous decision clarified that one may be contributorily liable for copyright infringement if one: 1) actively encourages or induces infringing behavior through specific acts or 2) distributes a product that

103. See Metro-Goldwyn Mayer Studios, Inc. et al. v. Grokster Ltd. et al., 380 F.3d 1154 (9th Cir. 2004); In re Aimster Copyright Litigation, Appeal of John Deep, 334 F.3d 643 (7th Cir. 2003); A&M Records, Inc. et al. v. Napster, Inc., 239 F.3d 1004 (9th Cir. 2001) 104. 125 S. Ct. 2764 (2005).

Vol. 95 TMR 999 distributees use to infringe copyrights, if the product is not capable of substantial non-infringing uses.105

Litigation over file-sharing first received attention with A&M Records’ suit against Napster in 1999.106 Napster’s service consisted of downloaded software and a central server controlled by Napster used to maintain indexes of searchable titles. In essence, users relied upon Napster’s servers and software to trade copyrighted files. In the Napster decision, the Court of Appeals for the Ninth Circuit concluded that Napster’s file sharing service had contributorily infringed A&M’s (as well as the other plaintiffs’) copyrights. The court predicated its decision on the fact that Napster provided a centralized indexing and searching service that, in turn, was used to locate and copy copyrighted works. In reaching its decision in Napster, the Ninth Circuit relied in part on its prior Fonovisa v. Cherry decision. The court emphasized that Napster’s service provided the “facilities” for infringement and that Napster possessed actual knowledge of infringement on its servers. Because Napster, like Cherry Auction, had the ability to police and control access to its servers (and presumably halt infringement), but apparently took no steps to stop the infringement, the court concluded that Napster was contributorily liable.107

The file sharing peer-to-peer wars climaxed with the Supreme Court’s 2005 decision in Grokster in which the Court was asked by dozens of amici variously to revisit, refine, clarify or overturn its momentous 1981 decision in the Sony case. Interestingly, the Court took the opportunity to do none of the above—and instead retreated to the traditional (and evolving) test for contributory infringement without upending Sony or its central tenets. Without ruling specifically on whether Grokster’s service was capable of substantial non-infringing uses under the Sony standard, the Supreme Court found Grokster’s service objectionable because it had, under traditional contributory liability theory, “induced” the infringing activities of users.108

Similar to Napster, the Grokster defendants each had distributed free software that facilitated the indexing, searching and exchange of files among computers connected to the

105. Slip op. at 1. 106. A&M Records, Inc. et al. v. Napster, Inc. et al., 239 F.3d 1004 (9th Cir. 2001). 107. Id. at 1021-22. See also In re Aimster Copyright Litigation, Appeal of John Deep, 334 F.3d 643 (7th Cir. 2003) (where infringement occurred on a semi-decentralized file sharing system and defendant deliberately avoided knowledge, court held that defendant was liable because of willful blindness to infringement). 108. See Grokster, slip op. at 1.

1000 Vol. 95 TMR Internet.109 However, unlike Napster, Grokster-owned servers were not used in aiding the actual trading or indexing of files. Rather, the software distributed by the Grokster defendants only facilitated the peer-to-peer networking connections among software users themselves. Before the case was heard by the Supreme Court, the Ninth Circuit Court of Appeals had absolved Grokster of liability because the configuration of Grokster’s service—decentralized and beyond the control of Grokster—meant that under the prevailing understanding of the Sony doctrine, the Grokster defendants did not have the requisite actionable knowledge of the infringing activities of its users.110 The Ninth Circuit interpreted Sony to apply to the “knowledge” portion of the material contribution test. In essence, according to the Ninth Circuit, if an alleged contributory infringer was unable to show that its device was capable of substantial non-infringing use, then the plaintiff need only show that the defendant had constructive knowledge of infringement. If, on the other hand, the defendant was able to show non-infringing uses, then the plaintiff had to show that the defendant had specific knowledge of infringements and failed to act on that knowledge.111 Because Grokster was able to demonstrate non-infringing use, the burden shifted to the copyright owners to demonstrate that the Grokster defendants had knowledge of specific acts of infringement.112 More specifically, any actual knowledge that Grokster acquired of infringement arose only after Grokster’s software was released to the direct infringers.113 This disjunction between the timing of infringement and defendants’ knowledge and ability to control it absolved the defendants of contributory liability according to the Ninth Circuit.114 Moreover, the Ninth Circuit interpreted the Sony doctrine to mean that, in light of the de-centralized, non-integrated nature of Grokster’s services, Grokster had not provided the “site and facilities” for known infringing behavior.115

Not surprisingly, the recording industry filed a Petition for Certiorari with the U.S. Supreme Court so that, once again, the Court could revisit the standards it had set out 24 years earlier in 109. The original suit initiated by recording industry representatives included several co-defendants who had independently developed various iterations of P2P technology. For procedural reasons, only the cases against Grokster, Ltd. and StreamCast Networks, Inc. progressed all the way to the Supreme Court. 110. Grokster, 380 F.3d 1154, 1162-64 (9th Cir. 2004). 111. Id. at 1161. 112. Id. at 1162. 113. Id. 114. Id. 115. Id. at 1163, citing Fonovisa, Inc. v. Cherry Auction, Inc., 76 F.3d 259, 261, 264 (9th Cir. 1996), see supra text accompanying notes 60-66.

Vol. 95 TMR 1001 Sony. Interestingly, however, although the majority of the briefs filed in the case concerned issues of material contribution, knowledge of infringement and the meaning of “capable of substantial non-infringing uses,” the Supreme Court took an entirely different tack, emphatically pronouncing that the Sony decision did nothing to eradicate traditional contributory liability theory:

Sony did not displace other theories of secondary liability. . . . [N]othing in Sony requires courts to ignore evidence of intent if there is such evidence, and the case was never meant to foreclose rules of fault-based liability derived from the common law.116

The Supreme Court thus reaffirmed the doctrine of inducement, pointing out that Grokster had intended that users infringe copyrights and that such intent could not be insulated from liability merely because the technology also might have had non-infringing uses. As such, even lacking the actual (and temporally relevant) knowledge of infringement under the second prong of the traditional test, Grokster could and should be held accountable—even if substantial non-infringing uses for its technology could be demonstrated.117

The Supreme Court described evidence of the Grokster defendants’ guilty behavior as follows:

• In the wake of Napster (and with knowledge of the Ninth Circuit’s pronouncements of the basis for Napster’s guilt), Grokster co-defendant StreamCast Networks designed and promoted Napster-compatible software—evidencing intent to benefit from Napster’s 50 million users.118

• Defendant StreamCast created promotion and press kits demonstrating its intent to be the alternative to Napster and urged Napster users to migrate to StreamCast’s system.119

• StreamCast published advertising to Napster users stating “‘Napster Inc has announced it will soon begin charging you a fee. That’s if the courts don’t order it shut down first. What can you do to get around it?’”120

116. Grokster, slip op. at 16-17. 117. Id. 118. Id. at 6. 119. Id. at 6-7. 120. Id. at 7.

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• Evidence that StreamCast’s Chief Technology Officer welcomed a lawsuit over the file-sharing activity since that would be great promotion too.121

• Company internal email from StreamCast demonstrating an intent to profit from Napster’s closing.122

With respect to Grokster, the Supreme Court noted the following evidence of intent to induce:

• Grokster inserted digital coding into its site that would help computer surfers searching for “Napster” or “‘[f]ree filesharing’” to be directed to Grokster’s site; and the Grokster name was a derivative of Napster.123

• Grokster sent users a newsletter promoting its ability to provide copyrighted materials.124

Finally, the Supreme Court pointed to evidence that both defendants:

• Based their business plans on the principal objective of using their software to download copyrighted works.125

• Relied on income generated by advertising that was driven by infringing use of the service.126

• Had failed to attempt to filter out copyrighted content, nor taken steps to ensure non-infringing use. The Court emphasized:

Although Grokster appears to have sent emails warning users about infringing content when it received threatening notice from copyright holders, it never blocked anyone from continuing to use its software to share copyrighted files.127

After reviewing the evidence of the defendants’ culpable intent, the Supreme Court then pointed out that the Ninth Circuit had misapplied the Sony doctrine by assuming that such evidence could be negated with evidence demonstrating that the product in question was capable of non-infringing use.

121. Id. 122. Id. 123. Id. 124. Id. at 8. 125. Id. 126. Id. 127. Id. The Court emphasized, however, that evidence of failure to implement such technology, standing alone, would not be enough to prove inducement. Id. at n.12

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Referring back to the history of the development of contributory infringement and the doctrine’s basis in common law tort theory, the Supreme Court quoted Black’s Law Dictionary:

The classic case of direct evidence of unlawful purpose occurs when one induces commission of infringement by another, or “entic[es] or persuad[es] another” to infringe . . . as by advertising.128 Thus, after Grokster, at least in the copyright context,

inducement to infringe can be shown by evidence in the way of words and deeds that supports an intent on the part of the defendant-induced infringement. Such evidence may include advertising or promotion that outwardly suggests infringement or an intent to lure known infringers to your product or evidence that your business plan or income are knowingly tied to infringing behaviors.

VI. CONCLUSION: THE VULNERABILITY OF AUCTION SITES

A. Material Contribution With Knowledge Auction sites, like any site that facilitates online activity, may

be vulnerable to claims of contributory trademark infringement under the second prong of the traditional test for contributory liability. An auction site’s ongoing relationships with vendors gives rise to the site’s ability to control the activities on its premises. Further, sellers generally have a form of contractual relationship with the auction site that gives the service control and the specific ability to terminate the vendor at any time. Hence, unlike some service providers who only provide ancillary or temporary services that are unrelated in time to the infringing activities, the function of the auction site is to facilitate the very sales that become the subject of illegal activity. Significantly, however, because these sites apparently abide by the reasonable demands of intellectual property owners to remove actual alleged instances of counterfeiting, getting a court to attribute liability to an auction site for other illegal sales about which the site has no actual knowledge—at least under the law as it has currently evolved—will be an uphill battle.

Nevertheless, potential plaintiffs do have a credible argument after Fonovisa and Hard Rock that if there is an adequate combination of evidence, such as a pattern of illegal activity for particular sellers, together with an auction site’s generalized knowledge that sales of counterfeits do occur online, then the 128. Id. at 17.

1004 Vol. 95 TMR auction site has an obligation to investigate such activity. Under such circumstances, failure to investigate could give rise to liability under the theory that the site “should have known” but failed to take action to stop counterfeiting activities. It remains to be seen whether any court will stretch Fonovisa and Hard Rock so far.

B. Inducement Theory: Is It Inwood or Grokster That Controls?

An online auction site also could be contributorily liable for counterfeiting under the “inducement” prong of the traditional test for contributory liability if, through its outward behavior, promotion or some combination of related activity, it could be shown that the site intended for users to infringe at its website. In addition, if one reads Inwood in the most liberal light, that evidence of inducement could be shown by a combination of promotion and product characteristics that enable the auction site to reasonably anticipate infringement by users. Such evidence could take the form of advertising, promotion and, for instance, other manipulative behavior that an auction site might engage in to induce sales. If the auction site functions in such a way to make it easier to sell counterfeit goods (in the way that creating a look-alike pill makes it easier to switch the generic for the branded item) and there is promotion that is highly suggestive of using the auction to facilitate illegal sales, then it may be possible to structure a successful case of contributory infringement under an inducement theory decided under Inwood.

If, however, a court were to look to Grokster to determine the type of evidence necessary to prove inducement, then the threshold for assigning liability under an inducement theory may have been raised as compared with the Inwood standard. In Grokster, the Supreme Court was very focused on the deliberate activities of P2P developers who designed an entire business model around encouraging infringing behavior. While it cannot be said categorically that the Supreme Court would require the level of guilty behavior described in Grokster in every instance, the decision is more direct in its description of what constitutes inducement than its Inwood predecessor and, as such, arguably sets a higher threshold for finding inducement. Specifically, under a Grokster-like standard, arguably one must produce evidence of outward culpable conduct directly inviting counterfeiting activities, or promotion, business plans or other evidence of intent that the site be used to infringe. In particular, both the Ninth Circuit in Netscape and the Supreme Court in Grokster noted that using keywords to direct or encourage a user to take part in

Vol. 95 TMR 1005 infringing activities can be evidence of inducement.129 Hence, for plaintiffs to succeed after Grokster, plaintiffs may need to do more than merely point to a combination of activities that suggest “even by implication” that the site be used to traffic in counterfeit goods.

Finally, there is good reason to believe that the Grokster standard for inducement is relevant to the trademark analysis. Sony and its progeny clarified that the law considers the rights of trademark owners to be narrower than those owned by copyright holders. This distinction supports a theory of contributory liability in the trademark context that would grant a comparatively narrower swath of protection than its cognate in the copyright context. In Grokster, the Supreme Court articulated a basis for finding inducement that appears to require strong evidence of intent in order to assign liability—at least under an inducement theory. Therefore, any standard, including perhaps Inwood’s “suggestion, even by mere implication” may be too weak (and too protective of trademarks) in comparison. Hence, it is reasonable to assume that a plaintiff in a claim against an auction site for contributory liability will have to adduce evidence of guilty intent or conduct—similar if not more powerful than that produced in Grokster—in order to prevail.

129. Note, however, that there is a big difference between encouraging someone to use your services to make infringing copies and encouraging someone using your site to make purchases that may or may not be counterfeit. Furthermore, unlike the users in Grokster, a user visiting an auction site and purchasing counterfeit goods is not himself committing the illegal act.