Alibaba and the 40 reasons to sue

The Internet is the promised land for shoppers who do not care about quality or authenticity. It provides endless opportunities for those who merely want to see a certain brand printed on a product: 6,000 Calvin Klein boxer shorts for $2 per piece on www.alibaba.com; the latest Louis Vuitton jumpsuits in various sizes for £84 on www.ioffer.com; or Rolex watches for less than €200 on www.watchcopy.cc. This is a nightmare for brand owners. To tackle the problem effectively, they must go after the platform itself, not just the traders. However, this is easier said than done. Operators are often based overseas and make every effort to obscure their identity. Service providers tend to wheel out their standard defence – that they are not liable for infringing offers because they are only hosting them. However, contrary to widespread belief among rights holders, a lot can be done.

Notice and takedown: more give than take

At first glance, many online marketplaces are brand owners’ friends, with most providing a notice and takedown procedure. Rights holders can have their trademarks, designs or copyrights registered in order to simplify and standardise the reporting of listings which infringe their rights. Under a notice and takedown regime, the rights holder is responsible for monitoring and reporting infringing offers at its own cost and time, while platform owners profit from each counterfeit sold. Further, even if a specific offer is taken down, the same or a similar one can pop up the next day. Rights holders thus need to develop measures to prevent the same or similar infringing offers from reappearing on the marketplace. This leads to the question: under what conditions can a rights holder force operators of online marketplaces not only to take down specific infringing offers, but also to take preventative action against similar infringements reoccurring?

Operators’ obligations under German law

In a groundbreaking 2004 judgment concerning the (long-forgotten) online marketplace Ricardo, the German Federal Supreme Court found that rights holders need not be content with the mere takedown of infringing offers. The concept established by the Supreme Court was crystallised in a phrase which it has repeated in each applicable subsequent case: “As soon as the platform operator is notified of a clear infringement, it is obliged not only to remove the concrete offer without delay but to prevent suchlike infringements in future.”

The Supreme Court thus established two principles. First, a marketplace operator does not have to take action against an infringement unless it knows of an infringing offer. Second, once it does know of such an offer (most likely after being notified by the rights holder), it must take it down and also take preventative action against similar infringements in the future. The Supreme Court and the lower courts have specified in numerous cases following Ricardo the kind and scope of preventative action that can be required of marketplace operators. Many of these cases concern eBay. While there are still many open questions, a number of workable principles and guidelines have been developed.

In case of repeated infringements by one seller, the platform operator must close that seller’s account. This is according to the regional courts in Berlin and Stuttgart in recent cases brought by perfume producer Coty against marketplace giant Alibaba.

Preventative action should not be confined to offers from a seller with whose infringing offers the operator has become familiar. It is supposed to cover offers from other sellers, provided that these are comparable to the offers reported to the operator in the first place.

Platform operators must install software filters to detect obvious infringements. These must be used even if the results must then be checked manually by the operator’s staff. While detecting trademark infringements using a filter is not easy – listings can refer to both counterfeits and original products – counterfeits are expressly offered as such surprisingly often, described with terms such as ‘replica’ or ‘imitation’. This is especially true for anything-goes platforms, such as Alibaba, and means that it does not take the most talented programmer to find the proper filter keywords for listings of that kind.

It is obvious enough for a software filter if the sellers use language such as “products are all made in China, but the quality is just the same as the authentic” (the Regional Court of Berlin in a case involving Alibaba). However, there is a strong argument that operators should use image recognition software as well. This is the subject of a pending proceeding between Coty and Alibaba before the Regional Court of Stuttgart, which is due to hear a technical opinion as to whether Alibaba would be able to run filter software on pictures of counterfeit items. The court is likely to order the platform operator to use picture recognition software if the expert opinion confirms that it is available. Such a decision will certainly add to the debate.

Banks beware

Whereas major marketplaces provide the name and address of the responsible legal entity, independent sellers are mostly out of reach for brand owners because they remain anonymous. An online seller which is intentionally selling counterfeits on a large scale (eg, the operator of www.watchcopy.cc) will do whatever it can to hide its identity. However, even though the seller can send emails, letters or parcels with incomplete or false sender information, it still needs to make sure that the money reaches it. This brings financial institutions into play, as bank, credit card companies or payment service providers (eg, PayPal) are often the only parties that know the seller’s true identity. At the same time, the financial service provider makes a contribution to the online sale without which the counterfeit trader’s business would not function – there is no reason why the basic principles of liability described above should not apply. This means that if a bank continues to provide services to the trader in bad faith, the rights holder can apply for an injunction, as well as for an order to force the bank to disclose the seller’s identity.

European law should be on the rights holder’s side where a bank provides services that are used in infringing activities. In such case Article 8 of the EU Enforcement Directive provides that such a service provider must disclose the identity of whoever has instructed that service. In a case which is still pending, the Federal Supreme Court referred the following question to the European Court of Justice (ECJ): “Must Article 8(3)(e) of the Enforcement Directive be interpreted as precluding a national provision which, in a case such as in the main proceedings, allows a banking institution to refuse, by invoking banking secrecy, to provide information pursuant to Article 8(1)(c) of that Directive concerning the name and address of an account holder?” (ECJ C-580/13).

The directive was intended to provide a high level of protection for intellectual property in the European Union. Consequently, the Federal Supreme Court has taken the position that a bank which provides an account that is subsequently used for the sale of counterfeits must disclose the identity of the account’s owner. There are conflicting rights at stake – such as the bank’s duty of confidentiality, the bank’s and seller’s data processing rights and the seller’s personality rights. While the Supreme Court is of the opinion that the interests of the rights holders must prevail, the final decision is up to the ECJ.

Applicable law and jurisdiction

Online marketplaces often cross national borders, so the question of where to go to court and which law to apply is often tricky, unless the operator is based in the same jurisdiction as the rights holder.

Jurisdiction

If the platform operator is based outside the European Union, actions for Community trademark infringement can be brought in the courts of the member state in which the rights holder has its seat or a branch. This is of special interest for disputes with overseas platform operators, because EU rights holders can apply for a court order which is valid in the entire territory of the European Union in their own legal system and language. However, there is a cause of action only if a seller on the platform has offered infringing goods to customers within the European Union. Rights holders – in particular, business-to-business platforms such as Alibaba – have a strong interest in establishing such offers without making test purchases, as it is a financial and logistical strain to order 6,000 boxer shorts or 1,500 bottles of fake perfume on a regular basis.

The German courts and the ECJ have recognised this problem. According to German jurisprudence, listings for the sale of counterfeits on international online marketplaces constitute an act of infringement within a member state if the seller’s activities are directed at consumers in that member state. However, it is not always straightforward to assess whether this is the case. There is no doubt that a seller directs its activities to a certain member state if it expressly names these member states as places of delivery. Since sellers seldom expressly name the places where they deliver – for obvious reasons – the courts, including the ECJ, acknowledge that there can be other circumstantial evidence of a seller directing its activities to a certain member state. According to German case law, the following features can serve as evidence:

• The platform operator offers a translation feature;
• Prices are offered in euros;
• The seller offers free shipping to European countries; or
• The seller mentions an international clientele composed of customers domiciled in various member states.

Applicable law

There is no concept of liability for intermediaries such as trade platforms under European law. While the ECJ had the chance to establish such a concept in L’Oreal v eBay (on the basis of Article 9 of the EU Community Trademark Regulation), it chose to refer mostly to national law instead.

It is therefore in the context of national law that the conditions under which the liability of a marketplace operator arises must be sought. Therefore, whether the marketplace operator is required by the court to take preventative measures against future infringements depends mainly on where the court action is filed.

Action plan for brand owners

The battle against counterfeits on online platforms is a matter of strategy, documentation and the right choices. This calls for an action plan which includes the following measures:

• the use of notice and takedown procedures with comprehensive internal documentation of reported sellers and listings;
• documentation of typical counterfeit characteristics;
• the review of collected data for repeated infringers and repeated infringements;
• warning letters to platform operators with an explanation of how to recognise counterfeits;
• notification about counterfeit sales to all participating providers of financial services;
• requests to provide the names and addresses of especially important sellers; and
• the enforcement of cease and desist claims and/or claims for information by way of court actions.
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Lubberger Lehment

Meinekestr 4

10719 Berlin

Germany

Tel +49 30 8803 3520

Fax +49 30 8803 3533

Web www.lubbergerlehment.com

Martin Fiebig

Partner

[email protected]

 

Martin Fiebig is a partner in Lubberger Lehment’s Berlin office. He graduated from Humboldt University Berlin and his areas of particular experience include litigation and strategic advice with regard to counterfeits and parallel imports, with an emphasis on trade platforms.

Kai Schmidt-Hern

Partner

[email protected]

 

Kai Schmidt-Hern is a partner in Lubberger Lehment’s Berlin office. He graduated from Freiburg University and his areas of particular experience include trademark and copyright litigation in media and entertainment matters.