In Gucci America, Inc. v. Laurette Co. No. 1:2008cv05065 (S.D.N.Y.), the luxury goods manufacturer succeeded in shutting down a Web site called "TheBagAddiction.com" through which the defendants sold counterfeit Gucci handbags. In fact, the defendants consented to the entry of judgment and admitted liability for trademark infringement. In a subsequently filed action, Gucci America, Inc. v. Frontline Processing Corp., 1:2009cv06925 (S.D.N.Y.) the manufacturer sought to hold firms that provided credit card processing services to the operators of TheBagAddiction.com site liable for trademark infringement as well. On June 23, the court in Gucci v. Frontline refused to dismiss Gucci’s complaint, finding that the two firms that processed credit card payments for transactions consummated on the site, as well as the company that brought the Web site operator and the processing firms together, may be liable for contributory trademark infringement.

Central to the court’s ruling was the conclusion that Gucci had alleged sufficient facts from which it could be found that each of the defendants knew or should have known that counterfeit merchandise was being sold on the Web site, an essential finding for establishing contributory infringement.

Durango Merchant Services is a business that assists merchants in setting up credit card merchant accounts. Durango assisted the Web site operator in arranging such accounts with the two card processing services, Frontline Processing Corp. and Woodforest National Bank. In reviewing the allegations concerning the defendants’ knowledge of counterfeiting on the Web site, court noted allegations in Gucci’s complaint, which, if proved, could establish that the firms either knew, or deliberately shielded themselves from knowledge, concerning the nature of the items sold on the site. Among other things, Gucci alleged that:

  • Durango advertised itself as specializing in "high risk merchant accounts," including sellers of "replica products," a term synonymous (according to Gucci) with counterfeit products. Durango was aware that the Web site operator had experienced difficulty in obtaining card processing services from other firms because it was selling "replica" items.
  • Frontline charged higher fees for processing services for such high risk merchants.
  • Durango’s salesman suggested that a notice be put on the Web site stating that it sold replica items, in order to avoid credit card chargebacks from customers dissatisfied with the merchandise they ordered. The salesman’s action was attributed to Frontline because the salesman was listed on the application for services as the Web site operator’s agent, and because Frontline reviewed and approved the placement of the notice.
  • Both Frontline and Woodforest processed chargebacks from dissatisfied customers, in the course of which they obtained documentation concerning the disputed transactions, including item descriptions, the relatively small price of items and quality complaints that should have alerted them to the fact that the products sold were counterfeit.
  • Woodforest’s employee reviewed the Web site and made a sample purchase of an item prior to agreeing to provide card processing services.

The court ruled that in addition to establishing the defendants’ knowledge of the infringement, Gucci also had to show that the defendants either “(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.

The court concluded that while Durango’s liability could not predicated on control over the Web site’s activity, the fact that the company held itself out to “high risk merchant accounts” that sold “replica items” could establish the company’s attempt to induce “less savory businesses, like those who sell counterfeit ‘replicas’ of luxury goods.” Durango’s salesman’s suggestion that customers be required to check a box acknowledging that they were purchasing “replicas” suggested an “affirmative step taken to foster infringement” or that the payment system was promoted as a means to infringe.

But sufficient control over infringing activity had been established with respect to the processing firms, the court found, because the credit card processing services provided by them were "a necessary element for the transaction of counterfeit goods online, and were essential to sales" on the Web site. The firms “knowingly provided a "financial bridge between buyers and sellers" which enabled them to consummate transactions in infringing goods. The "ability to literally shut down the web site" is not necessary to establish control, the court found, only the ability to control and monitor the instrumentality used to infringe the plaintiff’s mark:

Based on Gucci’s claims, the instrumentality in this case is the combination of the website and the credit card network, since both are allegedly necessary elements for the infringing act – the sale and distribution of the counterfeit good. *** Gucci’s allegations indicate that they are concerned primarily with the sale of tangible counterfeit goods to customers around the country, which allegedly could not be accomplished without Woodforest and Frontline’s ability to process the credit card-based purchases. In the words of the Supreme Court, these defendants "furnish[ed] the means of consummating" the trademark infringement.

A point of interest in the opinion is Judge Baer’s citation of both the majority and dissenting opinions in Perfect 10, Inc. v. Visa International Service Association, 494 F.3d 788 (9th Cir. 2007). The majority in Perfect 10 v. Visa concluded that credit card companies could not be held secondarily liable for copyright and trademark infringement occurring on Web sites that hosted unauthorized copies of copyright photographs, finding, among other things, that the infringement could have occurred without the use of the companies’ payment processing services, therefore, the companies made no “material contribution” to the infringement.

Judge Baer distinguished Perfect 10 v. Visa on the ground that the infringement claimed in that case was the unauthorized display and copying of the photographs, which could have continued even if the firms withdrew their services, while in Gucci v. Frontline the claimed infringement arose from the sales that were made via the firms processing services. Judge Baer also cited Judge Kozinski’s dissenting opinion in Perfect 10 v. Visa, in which wrote he would have held the credit card companies secondarily liable on the ground (among others) that they were the “financial bridge” between the buyers and sellers of pirated works.

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Photo of Jeffrey Neuburger Jeffrey Neuburger

Jeffrey Neuburger is co-head of Proskauer’s Technology, Media & Telecommunications Group, head of the Firm’s Blockchain Group and a member of the Firm’s Privacy & Cybersecurity Group.

Jeff’s practice focuses on technology, media and intellectual property-related transactions, counseling and dispute resolution. That expertise…

Jeffrey Neuburger is co-head of Proskauer’s Technology, Media & Telecommunications Group, head of the Firm’s Blockchain Group and a member of the Firm’s Privacy & Cybersecurity Group.

Jeff’s practice focuses on technology, media and intellectual property-related transactions, counseling and dispute resolution. That expertise, combined with his professional experience at General Electric and academic experience in computer science, makes him a leader in the field.

As one of the architects of the technology law discipline, Jeff continues to lead on a range of business-critical transactions involving the use of emerging technology and distribution methods. For example, Jeff has become one of the foremost private practice lawyers in the country for the implementation of blockchain-based technology solutions, helping clients in a wide variety of industries capture the business opportunities presented by the rapid evolution of blockchain. He is a member of the New York State Bar Association’s Task Force on Emerging Digital Finance and Currency.

Jeff counsels on a variety of e-commerce, social media and advertising matters; represents many organizations in large infrastructure-related projects, such as outsourcing, technology acquisitions, cloud computing initiatives and related services agreements; advises on the implementation of biometric technology; and represents clients on a wide range of data aggregation, privacy and data security matters. In addition, Jeff assists clients on a wide range of issues related to intellectual property and publishing matters in the context of both technology-based applications and traditional media.