B. The Elements of Contributory Liability under Inwood: 1. The Requirement of Intentional Inducement
Although the majority of contributory liability cases have proceeded under the second prong of the Inwood standard – supplying a product – a few courts have addressed circumstances in which inducement formed the basis for liability. See Gucci America, Inc. v. Frontline Processing Corp., 2010 WL 2541367 (S.D.N.Y.); Transdermal Products, Inc. v. Performance Contract Packaging, Inc. 943 F.Supp. 551 (E.D. Pa. 1996), discussed infra. See also Bauer Lamp Co., Inc. v. Shaffer, 941 F.2d 1165, 1171 (11th Cir. 1991)(defendant sales representatives who asked lamp manufacturer to produce infringing lamps held liable for contributory trade dress infringement; fact that defendants did not themselves manufacture the infringing lamps did not matter for purposes of contributory liability). But see Sellify v. Amazon, 2010 WL 4455830 *4 (S.D.N.Y.) (defendant online sales company’s practice barring advertisers who infringe from linking to its website militated against finding inducement); Monotype Imaging, Inc. v. Bitstream Inc., 376 F.Supp.2d 877, 2005 WL 1653604, *8 (N.D. Ill. 2005)(rejecting contributory liability claim where plaintiff failed to show any relationship between the defendant and the direct infringer and therefore could not prove intentional inducement of that infringement); Information Exchange Systems, Inc., v. First Bank Nat’l. Ass’n., 994 F.2d 478 (8th Cir. 1993)(dismissing claims of inducement to infringe where plaintiff failed to cite to any evidence in the record). See further, Georgia Pacific Consumer Products, LP, v. Von Drehle Corp., 2010 WL 3155646 (4th Cir.)(where defendant sold to distributors its inferior paper towel product designed specifically for use in plaintiff’s branded dispenser, court found record sufficient for a reasonable jury to find that defendant both induced infringement and continued to supply its product to distributors knowing that infringement was taking place, thereby satisfying Inwood under either of its two prongs), discussed in Section II. B.3 (a); Google Inc. v. American Blind & Wallpaper Factory Inc., 2005 WL 832398 (N.D. Cal 2005)(defendant alleged search engine company had induced its competitors to purchase its marks as “keywords”), discussed in detail inf Section II.D.2 (c).
A company that served as a “middleman” by setting up credit card processing for an online retailer of counterfeit handbags was subject to a contributory liability claim based on inducement in Gucci America, Inc. v. Frontline Processing Corp., 2010 WL 2541367 at *12 (S.D.N.Y). In reaching its decision, the court applied the standard used by the Ninth Circuit in Perfect 10, Inc. v. Visa Int’l Service Ass’n, 494 F.3d 788, 800-801, where that court considered inducement in a contributory copyright infringement context. The company’s profile on it website, coupled with its business practices as set forth in the pleadings, were sufficient support for the plaintiff’s inducement theory. Gucci, supra at*12.
Gucci v. Frontline arose out of successful trademark infringement litigation brought by Gucci, the well-known manufacturer of luxury goods, against an online merchant operator of a website called “TheBagAddiction.com,” in which the owners admitted to liability for selling counterfeit Gucci products. Gucci , supra at *1. Thereafter, Gucci turned to the three companies that had helped the merchant obtain credit card services, alleging, inter alia, both vicarious and contributory liability for trademark infringement. Id. One of the three defendants, Durango Merchant Services (“Durango”) acted as a middleman, while the other two, Frontline Processing Corporation (“Frontline”) and Woodforest National Bank (“Woodforest”), provided credit card processing services to the merchant. Id.
In rejecting the defendants’ motion to dismiss, the court allowed the contributory liability claims to go forward as to all three defendants, but on different legal theories in accordance with their roles. As to Frontline and Woodforest, the court found the pleadings sufficient to allege contributory trademark infringement, based on their knowledge and control over the infringing activity on the website. This aspect of the case is discussed below in Section II. D. 3. As to the middleman, Durango, the court found the pleadings sufficient to allege contributory infringement based on an inducement theory.
In doing so, the Gucci v. Frontline court relied on the Ninth Circuit’s language when that court analyzed the contributory copyright infringement claims in Perfect 10, derived from the Supreme Court decision in Metro-Goldwyn-Mayer Studios, Inc. v. Grokster, Ltd., 545 U.S. 913 (2005). Namely, the court inquired into whether Gucci had alleged that Durango “communicated an inducing message to [its] …users[.]”Gucci, supra at *12. It looked further into whether Durango had allegedly created “advertisement[s] or solicitation[s] that broadcast a message designed to stimulate others to commit violations.” Id., citing Perfect 10, 494 F.3d at 801. Finally, the court considered whether Gucci’s allegations suggested Durango had taken “affirmative steps to foster infringement,” and “promoted their payment system as a means to infringe.”[sic] Id., citing Perfect 10, 494 F.3d at 800-801.
Durango’s internet marketing profile as well as its activities on behalf of the direct infringer prompted the court to find Gucci’s allegations of inducement sufficient. It likened Durango to companies that offer loans to customers with bad credit, noting that its “website reache[d] out to “high risk merchant accounts,” including those who sell “replica products.” Id. at *12. More specifically, Gucci had pointed to discussions in which one of Durango’s representatives acknowledged the merchant was having trouble obtaining credit card services because it sold “replica[s,]” a euphemism, according to Gucci, for counterfeits. Citing the Ninth Circuit, the Gucci court concluded that Durango “communicated an inducing message to [its] users,” and that “Gucci [had] pled sufficient facts to infer that Durango crafted “advertisement[s] or solicitation[s] that broadcast a message designed to stimulate others to commit violations.” Id. at *12, citing Perfec10, 494 F.3d at 801. Finally, the court found that Durango had helped the online merchant set up a system to avoid “chargebacks” by requiring customers to acknowledge in writing that they were purchasing “replicas.” This practice, the court concluded, indicated “affirmative steps taken to foster infringement” or “that Defendants promoted their payment system as a means to infringe.” [sic] Id., citing Perfect 10, 494 F.3d at 800-801.
Note that by contrast, the two other defendant companies in Gucci were not subject to a claim of inducement. Gucci, supra at *12. The court found that “[t]hough both companies allegedly advertised for high risk merchants, they did not bring [the direct infringer] to the table the way Durango allegedly did.” Id. The fact that they charged higher fees for processing high risk merchants and that Frontline was aware of customers’ written acknowledgement of purchasing “replicas” did not constitute “affirmative steps necessary to foster infringement.” Gucci, supra at *12. See also 1-800 Contacts v. Lens.com, where the court found the evidence insufficient to sustain a claim of contributory liability against an online contact lens retailer based on the theory that it had induced its affiliate to generate infringing advertisements. 755 F.Supp.2d 1151, 1185 (D. Utah 2010). The plaintiff “[a]t most … presented evidence that the defendant did not institute negative keywords [i.e. keywords designated not to trigger its link when searched] and that it knew of some of the keywords that a few affiliates were using in their advertising …” Id. But the mere use of a trademark as a keyword, the court held, did not trigger trademark liability, so none of the foregoing evidence demonstrated that the defendant intentionally induced its affiliates to infringe on the plaintiff’s trademark. Id. at 1185.
Transdermal Products, Inc. v. Performance Contract Packaging, Inc. presented an unusual factual paradigm, in that the direct infringer defendant sought to join another distributor as a contributory infringer, alleging it had induced infringement in its capacity as the defendant’s customer. 943 F.Supp. 551 (E.D. Pa. 1996). The plaintiff, Transdermal Products, was the manufacturer of transdermal patches, a skin patch containing a drug that delivers the drug into a patient when placed onto the skin. It began marketing the patch with the mark, LEPATCH, and contracted with the defendant, Performance Contract Packaging, Inc. (“PCP”), to package and ship LEPATCH to its customers. Among these customers was Laboratorio Maver, S.A. (“Maver”), a Chilean distributor. Transdermal alleged that PCP had begun manufacturing and distributing its own version of LEPATCH to Maver. It sued PCP, but not Maver, alleging, inter alia, trademark infringement under both the Lanham Act and state law. Transdermal Products, 943 F.Supp. 551, 554. Thereafter PCP sought to join Maver as a third-party defendant. At issue therefore was whether Maver could he held contributorily liable for the infringement and thereby be joined as a party under Rule 14 of the Federal Rules of Civil Procedure. See id.
The Transdermal Products court held that it could, applying Inwood to the somewhat atypical facts of this case. It noted at the outset that this case differed from the “vast majority of contributory infringement cases” insofar as the defendants in this case had alleged that Maver, the distributor, encouraged PCP, in its capacity as manufacturer, to violate Transdermal’s trademark. Transdermal Products, supra at 553. Nevertheless, the court discerned that the express language of Inwood subjects “manufacturers or distributors” to liability. Id. at 553. It noted that Maver distributed the allegedly infringing patches in Central and South America. Id. Furthermore, the defendants had claimed that Maver had “selected the mark in question and represented that it owned and had the authority to use the mark.” Id. at 552, 553.
Citing the first prong of Inwood, the court found that Maver could trigger contributory liability if it had “intentionally induce[d] … another to infringe a trademark.” Transdermal Products, supra at 553. The court further found that if “Maver selected the “LePatch” mark and encouraged PCP to copy the mark, knowing, as a Transdermal customer that it was Transdermal’s mark, a fair reading of [Inwood] would seem to impose liability on Maver.” Id. at 553-554.