Issues of secondary liability clarified by Ninth Circuit

In Perfect 10 Inc v VISA International Services Association (Case 05-15170, July 3 2007), the US Court of Appeals for the Ninth Circuit has dismissed claims claiming secondary liability for trademark infringement brought against VISA International Services Association and other credit card processing companies.

The plaintiff, Perfect 10 Inc, provides adult entertainment services by publishing Perfect 10 magazine and by operating a subscription website featuring photographs of nude models. It owns copyrights in most of the images and brands them with its registered trademark, PERFECT 10. Perfect 10 alleged that a number of websites (collectively called the 'Stolen Content Websites' or 'SCW') have appropriated its branded images, altered them, and offered them for sale online thereby infringing Perfect 10's valuable copyrights and trademark rights. VISA, MasterCard, First Data Corporation and Humboldt Bank (collectively the 'defendants') routinely process the credit card payments for SCW.

Perfect 10 sent the defendants notices that their financial services were aiding SCW to infringe Perfect 10's IP rights. When the defendants took no action, Perfect 10 sued them in the Northern District of California alleging, among other things, trademark infringement. Perfect 10's theory was that by providing financial services to SCW the defendants were materially contributing to SCW's infringing activities. The district court dismissed Perfect 10's complaint and it appealed to the Ninth Circuit.

Perfect 10's trademark claims rested upon the concept of secondary liability. Secondary liability for trademark infringement may arise in limited situations. In Inwood Laboratories Inc v Ives Laboratories Inc (456 US 844, 102 S Ct 2183 (1982)), the Supreme Court articulated the standard for contributory trademark infringement. It said that when one intentionally induces another to infringe a trademark, or continues to supply its product to another with knowledge or with reason to know that the other is engaging in trademark infringement, then the supplier will also be responsible for any damage resulting from the infringement. The Ninth Circuit has extended liability to parties that supply services rather than a product to a direct infringer in its case law. Liability by a service supplier is contingent upon evidence that the supplier directly controls or monitors the infringing activity.

Here, in order to find contributory trademark infringement, the defendants must have either induced SCW to infringe Perfect 10's registered PERFECT 10 trademark or supplied a product or service to SCW with actual or constructive knowledge that the product or service would be used to infringe that mark. Perfect 10 contended that the defendants' economic influence and control over the infringers constituted contributory infringement because the defendants induced infringement by providing the means for payment for the infringing products.

The district court did not accept that argument and the Ninth Circuit agreed that the defendants were not inducing anyone to commit trademark infringement simply by processing credit card payments.

Next, Perfect 10 argued that the defendants had supplied services to SCW with knowledge that the services were being used to infringe Perfect 10's trademark rights. The Ninth Circuit looked to the extent of control exercised by the defendants over SCW's means of infringement to determine whether the defendants were liable. It upheld the district court's finding that while the defendants have the contractual right to terminate services to SCW upon violation of any term, condition, covenant or warranty of contractual provision for financial services, this does not constitute the "direct control of the instrumentalities used to infringe plaintiff's mark" required for liability. Since Perfect 10 did not aver that the defendants actually control the hardware and/or software that SCW uses allegedly to infringe plaintiff's PERFECT 10 trademark, the Ninth Circuit concluded that there was no contributory trademark infringement.

Vicarious trademark infringement in the United States is recognized under the law of agency. Bad acts of an employee are imputed onto the employer since the employer has a duty to monitor and control the actions of its employee.

The Ninth Circuit concluded that Perfect 10's vicarious trademark infringement claim also must fail. To be liable for vicarious trademark infringement, the defendants and SCW must have an apparent or actual partnership, have authority to bind one another in transactions with third parties or exercise joint ownership or control over the infringing service or product. Perfect 10 claimed that by processing financial payments the defendants bound SCW to provide the infringing products to SCW's users. The court disagreed, stating that Perfect 10 conflated the "ability" to bind with the "authority" to bind. Rather, SCW becomes bound to provide the infringing products only when they accept payment from patrons, not when the defendants process those payments. The defendants did not bind SCW to the users any more than the printing of legal tender by the US government binds parties to a cash transaction said the court. Therefore, it granted the defendants' motion to dismiss Perfect 10's first amended complaint in its entirety, with prejudice.

Brian E Banner and Thomas M Lyford, Rothwell Figg Ernst & Manbeck PC, Washington DC