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Client Alerts

Client Alert: Counterfeits and Contributory Liability: Credit Card Processors May Be Liable

July 15, 2010

Client Alerts

Client Alert: Counterfeits and Contributory Liability: Credit Card Processors May Be Liable

July 15, 2010

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A recent decision out of the Southern District of New York (SDNY) finds that credit card processing companies may be liable for contributory trademark infringement when they process credit card payments for websites that sell counterfeit merchandise.

 

Gucci sued the owner of TheBagAddiction.com for selling counterfeit handbags.  The owner consented to an entry of judgment admitting liability for counterfeiting.  Gucci next sued Durango Merchant Services, Frontline Processing Corp. and Woodforest National Bank, companies that had worked with TheBagAddiction.com.  Durango assisted TheBagAddiction.com with establishing credit card processing services with third-party institutions.  Frontline and Woodforest both provided credit card processing services for TheBagAddiction.com users.  Gucci’s complaint alleged four causes of action: federal trademark infringement, state trademark infringement, vicarious liability for trademark infringement and counterfeiting, and contributory liability for trademark infringement and counterfeiting.

 

On June 23, 2010, the Southern District of New York granted in part and denied in part the defendants’ motion to dismiss for failure to state a claim upon which relief can be granted, finding that Gucci had alleged sufficient facts to support its claim for contributory trademark infringement against each defendant.

 

With little discussion, the Court dismissed the claims Gucci brought for direct and vicarious liability.  The court found no evidence that the defendants had directly advertised or sold infringing goods.  The court also found no evidence to show that the defendants were vicariously liable, which would require the defendants and TheBagAddiction.com to “have an actual or apparent partnership, authority to bind one another in transactions with third parties or exercise joint ownership or control over the infringing product.”  See Gucci America Inc. at page 36.  The Court then turned to Gucci’s claim of contributory infringement.  The court applied a modified version of the test set forth by the Supreme Court in Inwood Lab., Inc. v. Ives Lab., Inc., 456 U.S. 844 (1982) and ultimately determined that there was sufficient evidence for Gucci to move forward on a claim of contributory liability.

 

The Court began its analysis by adopting the basic contributory liability framework from Inwood: “[I]f 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 contributorially responsible for any harm done as a result of the deceit.”  Id. at 853-54.  The SDNY Court then noted that because of the difficulties in applying the Inwood language to service providers, various circuit courts have crafted a modified Inwood test.  The Court in this instance determined that in order to prove that these service providers are liable for contributory trademark infringement, Gucci must show that they:

 

(1)    intentionally induced a website to infringe through the sale of counterfeit goods, OR

 

(2)    knowingly supplied services to a website and had sufficient control over infringing activity to merit liability.

 

Intentional Inducement

 

The Court determined that Gucci had alleged sufficient facts to show that at least one of the three defendants, Durango, had intentionally induced the TheBagAddiction.com website to infringe Gucci’s trademarks.  Durango, while not a credit card processing company itself, provides assistance to website owners in finding credit card processing service providers that will handle their online commerce.  Gucci supplied evidence that Durango advertises itself as a company that assists in “high risk merchant accounts,” including those that sell “replica” products, and that Durango specializes in hard-to-place accounts.  These examples were construed by the Court as evidence that Durango attempted to induce relationships with “less savory businesses such as those selling counterfeit goods.”  Other evidence showed that Durango had been told that the website owner, TheBagAddiction.com, specifically had trouble finding credit card processors because it sold replica merchandise.  Durango even helped TheBagAddiction.com create an interface on its website consisting of a check box for customers to acknowledge that they understood the goods sold at the website were replica goods.  The Court found these actions sufficient to infer that Durango broadcasts a message to consumers that it will “stimulate others to commit violations.”

 

Knowledge and Control

 

The Court did not find that the remaining two defendants, both credit card processing companies, had intentionally induced the website owner, TheBagAddiction.com, to commit trademark infringement.  The Court was not convinced that merely advertising their credit card processing services to “high risk” merchants was enough.  However, the Court did go on to find both credit card processing company defendants liable under the second “knowledge and control” prong of the test for contributory liability.

 

The Court cited the Second Circuit’s Tiffany v. eBay decision and held that in order to meet this prong of the test, a plaintiff must show that a defendant has supplied its services with knowledge of (or through willful blindness to) the infringing conduct while also having sufficient control over the instrumentality used to infringe.  In Tiffany v. eBay, the Second Circuit found that in order to be contributorily liable for trademark infringement, a service provider must have more than a “general” knowledge that its service is used to sell counterfeit goods.  See Tiffany v. eBay, 600 F.3d 93, 107 (2d Cir. 2010).

 

All three defendants, Durango and the two credit card processing companies, were found to have specific knowledge of the website owner’s infringing conduct.  Durango had been told by the website owner that it advertised and sold replica goods and that it had been unable to obtain credit card processing services in the past because it sold this type of merchandise.  Because a Durango employee held himself out as an agent of the credit card processing companies to the website owner, his knowledge was imputed to those two companies.  Additionally, the credit card companies were found to have conducted investigations of charge-back disputes related to the TheBagAddiction.com website and were aware that customers had complained about the quality of goods purchased from the website.  On these facts, the Court found that all three companies either knew or should have inferred that the website was selling counterfeit goods.

 

With respect to the defendants’ ability to control the instrumentality of infringement, the Court found that only the credit card processing defendants – and not Durango – had sufficient control.  The Court pointed out that the website’s infringement consisted of the sale and distribution of counterfeit goods, and that processing online credit card payments was a necessary part of the sale of the goods, thus these defendants’ control over the payment process was sufficient to support liability in this context.  The Court cited the dissent in the Ninth Circuit’s Perfect 10, Inc. v. Visa et al. case: “[I]t makes no difference that defendants control only the means of payment, not the mechanics of transferring the material…In a commercial environment, distribution and payment are…like love and marriage – you can’t have one without the other.  If cards don’t process payments, pirates don’t deliver the booty.” Perfect 10, Inc. v. Visa et al., 494 F.3d 788, 818 (9th Cir. 2007).

 

For more information, please contact:

 

Tashia Bunch Henderson
Associate
Boston office
tbunch@fr.com
617-956-5909                                                     

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