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SDNY Court Holds Credit Card Processors May Be Contributorily Liable for Trademark Infringement

Despite the fact that the word “contribute” or “contributory” appears nowhere in the Lanham Act (Trademark Act), as codified in Title 15 of the United States Code, U.S. District Judge Harold Baer, Jr. recently held in a twenty-four page decision, Gucci America, Inc. v. Frontline Processing Corp. et al., 09 Civ. 6925 (HB), 2010 WL 2541367 (S.D.N.Y. June 23, 2010), available at http://tinyurl.com/ILG-Gucci, that claims for contributory trademark infringement could proceed against three defending merchant credit card service providers who collectively arranged or handled credit card payments for a website selling counterfeit Gucci goods.

In denying the defendants’ 12(b)(6) motion to dismiss for failure to state a claim, the opinion has raised eyebrows in the IP community, leaving many providing services to websites fearful of the next round of expanded liability and uncertain about what steps to take now to protect themselves from potential liability. While the significance of Judge Baer’s opinion is notable, particularly if the case ultimately proceeds to final judgment and survives any appeal thereafter, eyebrows should be lowered at this time because Judge Baer’s decision is in of itself should come as no surprise.

Background

When it comes to trademark infringement victims, Gucci is a very sympathetic plaintiff whose non-stop whack-a-mole efforts at stemming the tide of counterfeit products must surely be both frustrating internally and oft times appear nearly ineffective externally – residents of Gucci’s New York city headquarters daily pass sidewalk vendors across Manhattan peddling merchandise of dubious legal provenance, including Gucci knock-offs. Likewise, the streets only blocks away from Judge Baer’s perch at 500 Pearl Street in downtown Manhattan are clogged on weekends with street vendors. But while years ago transactions in counterfeit and infringing merchandise were effectively limited to such street side or backroom vending, today the Internet era has dramatically ballooned the potential market, volume and total dollar amounts of infringing sales. Need proof? Type “counterfeit Gucci” into Google and 9,730,000 results will greet you.

While surprising at first blush, the recent Gucci America decision is merely the natural result of a steady thirty year-old expansion in trademark infringement liability that began in earnest with the Supreme Court’s decision of Inwood Laboratories, Inc. v. Ives Laboratories, Inc., 456 U.S. 844, 854 (1982), available at http://tinyurl.com/2b4yn2y, which held that “[e]ven if a manufacturer does not directly control others in the chain of distribution, it can be held responsible for their infringing activities under certain circumstances.” The Inwood opinion, affirming the tack taken by lower courts, revolved around a defendant who offered generic versions of drugs for sale identical in appearance to Inwood’s trademarked product. The Court further held that a manufacturer or distributor that “intentionally induces another to infringe a trademark, or [] continues to supply its product to one whom it knows or has reason to know is engaging in trademark infringement” will be “contributorily liable for any harm done as a result of the deceit.” Id. (emphasis added).

Given this clear invitation to swing for the fences, courts in the years since, bolstered in spirit by the deafening general silence from Congress on matters trademark, have stretched the Supreme Court’s Inwood logic far beyond manufacturers and distributors providing “products” to those providing services “a step down in the ‘food chain’”, as Judge Baer characterized the defendants in Gucci America. See, e.g., Polo Ralph Lauren Corp. v. Chinatown Gift Shop, 855 F. Supp. 648 (S.D.N.Y. 1994) (applying Inwood expansion followed in Hard Rock Cafe Licensing Corp. v. Concession Services, 955 F.2d 1143 (7th Cir. 1992) to hold once landlord gains knowledge tenant is infringing copyrights or trademarks, or develops good reason to believe tenant sells “knock-off” items, landlord’s further inaction may provide trademark or copyright owner with contributory infringement cause of action).

Although additional unknown “ABC Companies” and “John Does” are named plaintiffs in Gucci America, the three credit card servicer defendants are Durango Merchant Services, Frontline Processing Corporation and Woodforest National Bank. None are large companies. All are based outside of New York and were pursed by Gucci in 2009 the wake of an immediately prior successful action Gucci brought in 2008 against Laurette Co., Inc. (see, Gucci America, Inc. v. Laurette Co., Inc., 08 Civ. 5065 (LAK) (S.D.N.Y. June 3, 2008)), in connection with Laurette’s website at the now defunct URL http://www.TheBagAddiction.com where various counterfeit goods were offered for sale, including those using Gucci designs and marks without authorization.

In the instance action, Gucci’s complaint alleged Durango, Frontline and Woodforest aided and assisted Laurette with actual or constructive knowledge of Laurette’s infringing operations and because the credit card processing services established and conducted by the defendants were vital to Laurette’s ability to conduct infringing sales over the Internet and that therefore the defendants should be directly, vicariously and contributorily liable as a result. Slip Op. at 15. But as it was clear that none of the three defendants ever used Gucci’s marks themselves in commerce and neither advertised nor sold goods using Gucci’s marks, the court quickly dismissed direct infringement’s viability. Likewise, Judge Baer brushed Gucci aside as to claimed vicarious liability, noting “[t]he vague, puffery-like references to a ‘partnership’ between these companies and website merchants are not enough to support vicarious liability” and that “the facts alleged do not support an inference that they had the type of control over a company like Laurette as a whole … necessary for vicarious liability.” Id. at 15-16.

The Contributory Infringement Claim

With two possible basis for trademark infringement liability down, the court agree with Gucci’s final contributory theory – at least to the extent of denying defendants’ October 2009 motion to dismiss and allowing the action to continue.

Citing directly to Inwood Labs as his starting point, Judge Baer following the chain from Inwood to Hardrock Rock Cafe, first explored the “intentional inducement” branch of Inwood’s test for contributory infringement, observing that lowers courts have since “crafted a slightly different test for service providers,” id. at 16, with he modified test being that “a plaintiff must also show direct control and monitoring of the instrumentality used by a third party to infringe the plaintiff marks.” Id. (referencing Perfect 10 v. Visa Int’l Serv. Ass’n, 494 F.3d 788, 807 (9th Cir. 2007); Lockheed Martin Corp. v. Network Solutions, Inc., 194 F.3d 980, 984 (9th Cir. 1999)).

Clearly noting that the Second Circuit “has yet to directly contemplate the validity of this modified part of the Inwood test,” Judge Baer nonetheless concurred with the approach taken by other circuits and found them a “persuasive synthesis” stating:

“Gucci can proceed with its action against Defendants if it can show that they (1) intentionally induced the website to infringe through the sale of counterfeit goods or (2) knowingly supplied services to websites and had sufficient control over infringing activity to merit liability.” Id. at 17.

Intentional Inducement

As to whether plaintiff’s put forth sufficient evidence to support the claim that defendants had in fact intentionally induced Laurette’s infringement, Judge Baer recognized a wealth of such indications – at least to Durango’s conduct – observing that:

“[s]imilar to the companies that promise the extension of credit or loans to those who are rejected by traditional lending institutions for having bad credit, Gucci’s complaint suggests that Durango bills itself as a company that sets up a certain quality of business with credit card processing services that accept these ‘high risk’ clients. * * * Moreover, Gucci alleges that Durango’s sales represenative [sic], Nathan Counley, specifically discussed Laurette’s difficulty in finding a credit card processor because they were ‘replica’ merchants, which Gucci argues was synonymous on the internet for a counterfeiter.” Id. at 17.

Unlike in Perfect 10, where the Ninth Circuit declined to extend contributory trademark infringement liability to credit card companies in connection with infringing website commerce because the companies exhibited no “’clear expression’ or ‘affirmative acts’ with any specific intent to foster infringement” and as a result could not be liable under Inwood‘s inducement prong, here Judge Baer determined the facts as presented were adequate. The combination of Durango’s conduct, marketing efforts and communications to Laurette and others were sufficient, in the court’s view, to qualify as a “message designed to stimulate others to commit violations.” Id. (quotations and citations omitted). This said, however, the court found Gucci’s factual pleadings insufficient to hold that either of the other two defendants, Woodforest or Frontline, had intentionally induced Laurette’s sale of counterfeit products. While they, like Durango, charged higher processing fees for “high risk merchants” and Frontline had reviewed various of Durango’s actions concerning chargebacks, neither standing alone qualified as the “affirmative steps necessary to foster infringement.” Id. at 18.

Sufficient Knowledge of and Control Over Infringement

Regarding the issue of control, the court noted that “[t]he most significant dispute between the parties with regard to contributory liability is whether any or all of the Defendants had sufficient control over Laurette and TheBagAddiction to render them liable for the web merchant’s counterfeiting practices.”  Id. at 20.  Indeed, failing to successfully plead that Frontline and Woodforest intentionally induced infringement, Gucci was required to demonstrate that they exhibited control over the direct infringers with knowledge of ongoing infringement to prevent dismissal as to these defendants.

In response, the court found Gucci made “substantial factual allegations about the knowledge of all three defendants” providing “at the very least a strong inference that each knew that Laurette traded in counterfeit products, or were willfully blind to that fact.” Id. at 18. In this context, “knowledge” sufficient to trigger liability means that ‘service provider must have more than a general knowledge or reason to know that its service is being used to sell counterfeit goods … [s]ome contemporary knowledge of which particular listings are infringing or will infringe in the future is necessary.’” Id. at 18 (quoting Tiffany, Inc. v. eBay Inc., 600 F.3d 93, 107 (2d Cir. 2010)).

However, as to the control element necessary, Judge Baer acknowledged he was venturing into potential new ground, as “this Circuit has yet to directly consider the merits of contours of this modified form of the Inwood test” but that in his opinion “[t]he only relevant inquiry is the ‘extent of control … over the third party’s means of infringement.’” Id. at 20. The court noted sufficient control had been found to exist in auction house circumstances, shipping companies and ISP situations, and that here Gucci provided enough facts “to establish a claim that Woodforest and Frontline had some control over the directly infringing third-party, but fails to provide enough facts to show control on the part of Durango.” Id. at 21. Durango’s role was that of a quintessential “middleman” in the court’s opinion, such that there was “little indication that once Laurette received services from Frontline and Woodforest, Durango had any particular ability to stop or prohibit sales.” Id.

Conversely, the court viewed Frontline and Woodforest’s credit card processing services necessary to the online sale of goods and “essential to sales from [Laurette’s website] TheBagAddiction.com.” Id. While noting other online payment schemes such as Paypal exist, the court nonetheless essentially took judicial notice that credit cards are the main payment game in town and that Durango’s own website damagingly claimed “9 out of 10 people use a credit card for their online orders.” Id. Significantly, the court did not agree with defendants’ argument, based in part upon the holding in Perfect 10, that in order to be held contributory liable they needed “direct or complete control over the [infringing] website itself.” Id. at 22. Rather Judge Baer distinguished Perfect 10 and analogized the instant case to those “with defendants who helped consummate infringing transactions by delivering the counterfeit or infringing goods to the customer.” Id. at 23.

In summarizing, the court spelled out Gucci’s burden moving forward in order to hold Frontline and Woodforest as being required to show that “the Laurette website was functionally dependent upon Woodforest and Frontline’s credit card processing services to sell counterfeit Gucci products.” Granted the Gucci America decision is merely an early order and a response to defendants’ motion to dismiss, but the logic appears fully in-line with the approaches and trends firmly established to date in the area of contributory trademark infringement.

Conclusion

In opening the door to holding credit card processors potentially contributorily liable as a result of the infringing actions of clients selling counterfeit goods online, Judge Baer, Jr.’s decision issues a shot across the bow of companies providing services to online commerce sites that their actions could be construed as providing material support to counterfeiters. Whereas Gucci America’s holding appears limited at present to credit card processors/services who either:

(1) intentionally induce others to engage in infringement; or

(2) provide card processing services with actual knowledge of ongoing infringing conduct or in such fashion as to exhibit a willful blindness to such infringement in circumstances that the credit services exert sufficient de facto control over the website’s commerce as to be functionally necessary to the infringing activity;  

the logic of Judge Baer’s decision follows a nearly straight line progression out from the 1982 Inwood decision. Until such time as Congress addresses the limits of contributory and other theories of trademark liability developed by the courts in the 64 years since the Lanham Act’s enactment ISPs, website hosting services, shopping cart providers, website design companies, and other online “service” entities that could be deemed “necessary” to a party’s online commerce should take notice and be prepared to conduct a non-perfunctory level of examination as to their clients actual online commercial activities.

In addition, service contracts centering around the online world should, where applicable, clearly address such potential contributory liability above and beyond the commonly found representations speaking to infringement and associated indemnification provisions. While this decision is certainly not the last word, this case will be one worth following to conclusion and we’ll report back on notable developments as they occur as well as review potential contract language to address such contributory trademark infringement.

As for Gucci, their immediate next action upon receiving the Judge’s order was to move for sanctions against Durango. See, Gucci America docket as of July 1, 2010, available here.

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The Author

R Santalesa

(p) 203.292.0667 (e) rsantalesa@smartedgelawgroup.com Richard Santalesa is based in Fairfield, Connecticut and New York City.
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