In a 36-page complaint, luxury-brand company Tiffany & Co. (NYSE:TIF) launched a broadside at eBay (NASDAQ:EBAY) on Friday, claiming that the auction company failed to prevent fake Tiffany items from being offered online and is causing irreparable harm to the century-old company.
This is just another of what is a constant battle by Tiffany and the other luxury-brand companies -- including Gucci, LVMH, Hermes, Richemont, Coach (NYSE:COH), even Ralph Lauren (NYSE:RL), Oakley (NYSE:OO), and Nike (NYSE:NKE) -- to halt the tide of knockoff goods that carry their carefully guarded and cultivated brands. If you go to any major city, you'll find street vendors hawking fugazi by the truckload. This, of course, is illegal. It also costs the brand owners billions.
eBay, thus, is nearly custom-built for such a trade in counterfeit goods. eBay claims, with plenty of justification, that it is a platform to connect buyers and sellers. eBay never takes title to the goods, never sees them, and has little possibility of preventing a one-off fraud. The most likely way that eBay would become aware that a fraud has been committed would be based upon a customer complaint. But how many transactions take place in which the customer buys fake goods and is unaware?
Real? Don't bet on it
If a test that Tiffany undertook this year is representative, then eBay could have a big problem with counterfeiters. Tiffany stated that it anonymously purchased 186 items advertised as being Tiffany, or being advertised using the Tiffany name. Of these, 5% were real, 73% were fake, and the remaining 22% fell into a gray area where the sellers didn't claim that the items were Tiffany, but used the company's trademarks heavily in their descriptions. Tiffany, being only interested in its trademarks, focused on its own items. But what do you suppose the odds are that auctions of other luxury goods on eBay have similar breakdowns between real and fake? I'm guessing that Prada is not somehow immune from having its trademarks savaged in the anonymous world that is eBay.
The problem for the luxury-brand companies is multifold. First, and directly, someone who buys a fake Tiffany item on eBay is someone who is not likely to buy the same or a similar item from Tiffany itself, thus denying the company direct revenues. Second, brands are notoriously ephemeral assets. Tiffany's is worth billions, based upon a century's worth of care and cultivation. Each piece of counterfeit Tiffany product on the street dilutes that brand just a little bit. I'll give you an example. Tiffany never discounts its items. If they don't sell, Tiffany would rather eat the costs than cheapen its brand by blowing out inventory by holding sales. While Tiffany's short-term results certainly suffer as a result, over the long term, such actions have been central in creating an environment where Tiffany can charge premium prices for all of its wares.
Caveat trademark owner
Two parts of the Tiffany suit against eBay claim that its actions and failures to act against counterfeiters constitute a dilution of its brand, and that eBay has profited from sales of fake items, and has further advertised Tiffany goods knowing that its listed auctions were rife with counterfeits.
One of the ways that eBay attracts people interested in certain goods is by paying search companies like Google and Yahoo! (NASDAQ:YHOO) to provide links to its site based upon search topics. Type in "Tiffany" on Google, for example, and one or more sponsored links to eBay offering "new and used Tiffany for sale" or the like pops up in the sponsored (i.e., paid) link queue on the right side of the page. Click on the link, and it takes you to an eBay page listing all of the relevant "Tiffany" auctions. Tiffany claims that such actions by eBay constitute the suggestion that the goods offered are genuine Tiffany articles, even though eBay has been fully aware for some time that there is a substantial number of products being listed at any point that are not genuine. According to both companies, eBay has removed more than 19,000 auctions that Tiffany had identified as offering counterfeit goods.
That's right. Under eBay's Verified Rights Owner program, the company will remove counterfeit goods when notified by the owners of the trademarks. That means that each company will have to dedicate resources to policing eBay auctions. In Tiffany's case, according to its filing and statements by James Swire, an attorney with Dorsey & Whitney who represents the company, it allocated two employees full time to comb through eBay auctions to search for bogus products. That's an enormous cost to companies, and such a process takes some of the burden off of eBay to police itself.
Some 19,000 auctions were pulled down at the behest of Tiffany. eBay freely advertises "come save bucks on Tiffany," and must be aware that there's a problem with fugazi, based not only on the sheer number of auctions pulled down, but also on recent busts of rings passing counterfeit goods on the site. And much of the burden for policing the sales falls not on eBay -- which considers itself, again, a venue and not a merchant -- but on the trademark holders themselves. eBay collects transaction fees and claims plausible deniability.
Attorney Swire explained to me today that one of the components of the antidilutive statutes is that the defendant need not have acted purposefully to be culpable for damages. So even if eBay is simply found to have been neglectful of Tiffany's trademarks, it could still be on the hook. eBay has dodged several similar lawsuits in the past, including two by Rolex, another company that counterfeiters target on a massive scale. Though recently eBay noted that its liability in a Rolex suit filed in Germany may be revisited by the German Supreme Court.
At some point it seems likely to me that one of these suits is going to smack eBay in the mouth, leaving it vulnerable to similar actions by dozens of other similar counterfeiting targets. While the company may continue to rest on its "we're not responsible for the goods" defense, the fact that eBay advertises these goods strikes me as a tacit claim that it knows what it's offering. None of this threatens the eBay juggernaut, but its cost of policing should it lose one or more suits like this is sure to go up dramatically.
Of course, as with all things, some consumer education may also be prophylactic. Keep this in mind: If you're buying brand-name goods on eBay, Tiffany's test shows that you may be taking an enormous risk that you're actually buying a fake, worth a fraction of the cost. You want Tiffany, buy it from the company itself -- the added cost will be worth it.
Fool on!
Bill Mann (TMFOtter) owns none of the companies mentioned in this article. eBay is a past selection of Motley Fool Stock Advisor. The Motley Fool is investors writingfor investors.
