eBay and the Legal Problems with Online Marketplaces

By Larry Downes  |  Posted 08-13-2008 Print Email
eBay's recent court battles reflect the legal difficulties with online marketplaces--and show just how important CIOs and lawyers are for corporate strategy.

When is a department store not a department store? When it's a bulletin board.

Doesn't make sense, does it? Yet that's the takeaway from two recent decisions testing Internet giant eBay's liability for counterfeit or gray-market merchandise sold by its users. Courts in the United States and France reached opposite conclusions on nearly identical facts, demonstrating again just how fractured--and confused--the developing law of Internet commerce can be.

In the U.S. case, luxury jeweler Tiffany & Co. sued eBay for refusing to comply with its demands to eliminate the sale of fake Tiffany's merchandise. Citing eBay's multimillion dollar program to control the sale of fakes, as well as extensive tools provided to Tiffany and other brands to identify and report suspicious listings, the judge ruled in favor of eBay. "It is the trademark owner's burden," he concluded, "to police its mark."

A week earlier in France, the Paris Commercial Court reached the opposite conclusion, and ordered eBay to pay more than $60 million in damages to LVMH, which controls Louis Vuitton and other luxury brands. A particularly disturbing feature of the French case is that some of the merchandise wasn't alleged
to be counterfeit, but was simply being sold or resold without permission.

LVMH tightly limits the number and behavior of its distributors. Indeed, most of the plaintiffs in the French case were found in 2006 to have engaged in illegal price fixing.

So, in some sense, the case was less about controlling the brand and more about using the courts to limit how--or even whether--the Internet can be used as a secondary market, even if that stops consumers from disposing of products they bought and paid for from authorized retailers.

Both decisions are being appealed. eBay has lost similar cases in Europe to Hermes and Rolex, and an American software trade association has threatened to sue the Internet marketplace over listings for unauthorized or unlicensed software sales.

What's most worrisome about these cases is the palpable difficulty judges have understanding what an electronic marketplace is, and, more to the point, what it is not. The manufacturers claim that eBay is just like a brick-and-mortar retailer, even though the company never takes possession of the goods that are
sold through its Web site. At the same time, eBay's argument that it is simply a host for classified ads, like a newspaper, rings equally hollow. The truth is that electronic markets are something new, just as many of the products and services being developed for the Web are new.

The law does a very poor job of adapting to new things, especially when those things are evolving quickly. Even as courts grope to fit the technology of first-generation browsers into traditional legal categories, business is moving to Web 2.0 and beyond.

So your competitors and others with a vested interest in the status quo will continue to rely on conflicting legal systems and antique precedents to hold you back. You may not be able to avoid lawsuits, but most companies can do a much better job of anticipating them.

That's one more reason, by the way, that CIOs and company lawyers should be intimately involved in corporate strategy.

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