Important New Decision Establishes That Credit Card Processors May Be Held Liable as Contributory Trademark Infringers for Knowingly Servicing Merchants Who Sell Counterfeits

June 25, 2010

On June 23, 2010, U.S. District Judge Harold Baer, Jr. of the Southern District of New York issued his decision in Gucci America, Inc. v. Frontline Processing Corp., 09 Civ. 6925 (HB).  Judge Baer’s decision holds that credit card processing companies may be held liable for contributory trademark infringement under the test established in the United States Supreme Court’s decision Inwood Laboratories, Inc. v. Ives Laboratories, Inc., 46 U.S. 844 (1982) and its progeny.

Applying principles set forth in other recent contributory trademark infringement cases, Judge Baer found that companies that service websites which sell counterfeit goods may be subject to liability either:  (a) by holding themselves out as willing to accept "high risk" clients in order "to induce less savory businesses, like those who sell counterfeit ‘replicas’ of luxury goods" to use the company’s credit card services; or (b) by continuing to provide credit card processing services to a seller of counterfeits if the processor either knew that its clients "traded in counterfeit products, or [was] willfully blind to that fact."  Op. at 16-23.

Legal Background

Section 1114 of the Lanham Act creates liability for the unauthorized "use in commerce" of "any reproduction, counterfeit, copy, or colorable imitation of a registered mark in connection with the sale, offering for sale, distribution, or advertising of any goods or services on or in connection with which such use is likely to cause confusion, or to cause mistake, or to deceive."  15 U.S.C. § 1114.  To prevail on a claim for trademark infringement and counterfeiting, a plaintiff must establish that it:  1) has "a valid mark entitled to protection under the Lanham Act"; and 2) "Defendants used a similar mark in a way that would likely cause confusion among the relevant consuming public."  Burberry Limited v. Euro Moda, Inc., No. 08 Civ. 5781, 2009 WL 1675080, at *5 (S.D.N.Y. June 10, 2009). 

In Inwood Laboratories, Inc. v. Ives Laboratories, Inc., the Supreme Court extended this liability beyond the parties directly responsible for the manufacturing, marketing, and sale of infringing products: 

If 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 contributorily liable for any harm done as a result of the deceit.

46 U.S. 844, 854 (1982).  In the years since Inwood, courts have extended the logic of the decision to impose secondary liability to providers of "services" as well as "products."  See, e.g., R.F.M.A.S., Inc. v. Mimi So., 619 F. Supp. 2d 39, 84-85 (S.D.N.Y. 2009).

In Perfect 10, Inc. v. Visa Int’l Serv. Ass’n, 494 F.3d 788 (9th Cir. 2007), however, the Court of Appeals for the Ninth Circuit refused to extend contributory copyright and trademark infringement liability to a group of credit card companies (including Visa and MasterCard).  In particular, the Ninth Circuit found that the defendant credit card companies could not be found liable under Inwood‘s first, inducement prong where there was no evidence of  a "’clear expression’ or ‘affirmative acts’ with any specific intent to foster infringement."  In addition, the Ninth Circuit also found that there could be no liability under Inwood‘s second, "continues to supply its product" prong because "[t]he credit card companies cannot be said to materially contribute to the infringement in this case because they have no direct connection to . . . infringement [that] rests on the re-production, alteration, display and distribution of the [plaintiff’s] images over the Internet." 

Factual Background

In the Gucci case, Judge Baer wrote that Gucci "holds a variety of trademarks in its products and designs, and invests substantial capital in ensuring that the marks maintain a reputation for quality."  Op. at 1.  The Court noted that a number of Internet merchants seek "to capitalize on the popularity of Gucci products" by selling "’replica,’ counterfeit Gucci products that infringe Gucci marks at significantly lower prices and of lower quality."  Id.  The current case started after Gucci "concluded a [separate] successful litigation against one such merchant that operated a website called TheBagAddiction.com."  Id.  In that earlier case, the "owners of the website admitted that they sold counterfeit Gucci products to customers across the country through the website" by making use of the credit card processing services of the defendants in the current case.  Id.  Gucci then filed the second action based on evidence collected in the first action.

Opinion

In the Court’s decision, it reviewed the state of the law with respect to contributory trademark infringement and found that "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 16-17.

First, Judge Baer applied the "intentionally induced" test to one of the three named defendants, Durango Merchant Services.  "Durango’s business," the Court wrote, "is predicated on assisting merchants in setting up credit card processing services with institutions that provide credit card merchant accounts."  Id. at 3.  Judge Baer concluded that, unlike the defendants in Perfect 10, Gucci sufficiently alleged that Durango took "affirmative steps . . . to foster infringement" or "promoted [its] payment system as a means to infringe" because its "website reaches out to ‘high risk merchant accounts,’ including those who sell ‘replica products.’"  The Court observed that Durango boasts that it "specialize[s] in hard to acquire accounts."  Id. at 16-17.  Moreover, the court noted that one of Durango’s employees allegedly "helped the [admitted] Counterfeiters set up a system to avoid" having credit card orders contested by encouraging the website to require "customers to check a box that said ‘I understand these are replicas.’"  Id. at 17.  This, the Court concluded, suggests "affirmative steps taken to foster infringement" or "that Defendants promoted their payment system as a means to infringe."  Id. (quoting Perfect 10).

Second, Judge Baer applied the "knowingly supplied services" test to the other two defendants, Frontline Processing Corporation, and Woodforest National Bank.  Frontline and Woodforest are direct credit card processors and service both Internet and brick-and-mortar merchants.  Id. at 3.  Citing to precedent, Judge Baer noted that "[e]ven if a defendant does not seek out and intentionally induce a third-party to commit trademark infringement, it may still be held liable for the infringement if it supplied services with knowledge or by willfully shutting its eyes to the infringing conduct, while it had sufficient control over the instrumentality used to infringe."  Id. at 18.  The Court then held that Gucci had alleged facts sufficient to support liability against Frontline and Woodforest under both elements of this test.  Both companies allegedly had sufficient knowledge that they would be facilitating trademark infringement both because:  (a) the Durango employee that assisted replica merchants held himself out as an agent of both Frontline and Woodforest, and they therefore "may be charged with his knowledge, including his understanding of [the counterfeiters’] difficulty to obtain services for selling replicas"; and (b) both companies allegedly performed their own investigation into the goods offered by the counterfeit-selling merchants, both by reviewing the website used to make the sales, and investigating "chargebacks" caused by consumer complaints once consumers received the counterfeit products.  Id. at 18-20.

"The most significant dispute between the parties with regard to contributory liability," the Court held, "is whether any or all of the Defendants had sufficient control over [the counterfeit merchants] to render them liable for the web merchant’s counterfeiting practices."  Id. at 20.  The Court held that Gucci sufficiently alleged that Frontline and Woodforest exhibit such control because "Frontline and Woodforest’s credit card processing services are [allegedly] a necessary element for the transaction of counterfeit goods online, and were essential to sales" of counterfeit goods over the Internet.  Id. at 21.  Importantly, Judge Baer noted that "[a]lthough other methods of online payment exist, such as online escrow-type services like PayPal, generally speaking ‘credit cards serve as the primary engine of electronic commerce’" and approximately 99% of transactions at issue "were made using credit cards."  Id.  The Court continued that "[t]hough both Frontline and Woodforest insist they are middlemen with no ability to prevent a transaction, they do not dispute that they could have simply refused to do business with ‘replica’ internet merchants" and "the ability to literally shut down the website is not needed given the facts of this case."  Id.at 21-22.

Conclusion

In this important new case, Judge Baer made clear that credit card companies are not insulated from potential liability stemming from their processing of sales of counterfeit products where either of the following conditions are met:

(1) the company intentionally induced another to engage in infringement; or

(2) the company supplied credit card processing services with knowledge of the infringing conduct or by willfully shutting its eyes to such conduct, while it had sufficient control over the instrumentality used to infringe.  

This decision reinforces the incentives that most credit card companies have already perceived to avoid doing business with merchants engaged in unlawful activities, and it gives trademark and copyright owners a powerful new weapon in battling counterfeiters.  It demonstrates that third parties that knowingly provide material support to counterfeiters can be held accountable for the damage caused by the infringement.   

Gibson, Dunn & Crutcher LLP

This Alert was prepared by Robert L. Weigel and Howard S. Hogan, who represented Gucci America, Inc. and briefed and argued the motion on Gucci’s behalf with the support of Jennifer Halter, Anne Coyle, and other Gibson Dunn attorneys.  Gibson Dunn continues to represent Gucci in the case.  Any questions about this opinion or other counterfeiting issues may be directed to the Gibson Dunn lawyer with whom you work or any of the following:

Robert L. Weigel – New York (212-351-3845, rweigel@gibsondunn.com)
Howard S. Hogan – Washington, D.C. (202-887-3640; hhogan@gibsondunn.com)

Intellectual Property Group
Denis R. Salmon – Palo Alto (650-849-5301, dsalmon@gibsondunn.com)
Wayne Barsky – Century City (310-557-8183, wbarsky@gibsondunn.com)
Mark Reiter – Dallas (214-698-3360, mreiter@gibsondunn.com)
Josh Krevitt – New York (212-351-2490, jkrevitt@gibsondunn.com)

Fashion, Apparel and Consumer Products Group
Lois F. Herzeca – New York (212-351-2688, lherzeca@gibsondunn.com)
David M. Wilf  – New York (212-351-4027, dwilf@gibsondunn.com)

 © 2010 Gibson, Dunn & Crutcher LLP

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