D. Expansion of Inwood Standard to “Non-Product” Cases: The “Direct Control and Monitoring” Test: 3. Credit Card Companies and Related Services
The essential role played by credit card companies in online trademark infringement was recognized in Gucci America, Inc. v. Frontline Processing Corp., 2010 WL 2541367 (S.D.N.Y.). In that case, the court allowed contributory liability claims to go forward against companies that had established credit card processing for an online counterfeit merchant. The payment for the counterfeit goods sold on its website was part of the infringing process, the court reasoned, drawing on Judge Kozinski’s dissent in Perfect 10, Inc. v. Visa Intern. Serv. Ass’n, 494 F.3d 788 (9th Cir. 2007), and most of the infringing sales – of which the companies allegedly knew or should have known — were allegedly consummated using credit cards.
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,” the owners of which admitted to selling counterfeit Gucci products. Gucci America, Inc. v. Frontline Processing Corp., 2010 WL 2541367, *1 (S.D.N.Y.) Gucci then pursued 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. Id. (The vicarious liability claims were rejected and are discussed below in Section III.)
In rejecting the defendants’ motion to dismiss, the court allowed the contributory liability claims to proceed as to all three defendants, but on different legal theories in accordance with their roles. As to the middleman, Durango, the court found the pleadings sufficient to allege contributory infringement based on an inducement theory. This aspect of the case is discussed in detail in Section II.B.1, above.
As to Frontline and Woodforest, the court also found the pleadings stated a claim for contributory trademark infringement, based on the defendants’ knowledge and control over the infringing activity on the website. Citing eBay and Perfect 10, the Gucci court reiterated the direct control and monitoring test, stating 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.
Gucci, 2010 WL 2541367 (S.D.N.Y.) at *13, citing Tiffany v. eBay, 576 F.Supp.2d at 505-506 (S.D.N.Y.2008), affirmed in part and remanded in part, 600 F.3d 93 (2d Cir. 2010), cert denied, 131 S.Ct. 647 (2010); Perfect 10, 494 F.3d at 807.
Moreover, an allegation of the defendants’ general knowledge that infringement is taking place is not sufficient. “[A] service provider must have more than a general knowledge or reason to know that its service is being used to sell counterfeit goods ” the court emphasized, citing further language in Tiffany v. eBay that ““[s]ome contemporary knowledge of which particular listings are infringing or will infringe in the future is necessary,”” Gucci, supra at *13 citing Tiffany, supra, 600 F.3d at 107.
Both credit card processing companies either knew or should have known that they were servicing an infringing site, under the facts alleged, the court concluded. Gucci, supra at *13-*14. In both cases, a Durango agent had a dual role as both an employee of his company and a sales representative for the two credit card companies, and the court consequently accepted the allegations charging the companies with his knowledge, discussed in further detail in Section II.B.1. Thus, regarding Frontline, Gucci alleged that that company was aware of customers’ written acknowledgement of purchasing “replicas” as directed by the Durango agent. As to Woodforest, the court noted that its application for credit card services indicated a Chinese manufacturer, rather than Gucci, for the website’s designer handbags. Id. at *14. Moreover, both companies allegedly performed a level of review of the infringing website that should have alerted them to its obvious sale of counterfeit Gucci products. Id. at *13 -*14. Finally, both companies were involved in reviewing consumer complaints and “chargebacks” which would have alerted them to the sale of counterfeit Gucci items on the website. Id.
As to the element of control, “the only relevant inquiry is the “extent of control … over the third party’s means of infringement,” the court reiterated, citing Tiffany v. eBay, 576 F.Supp.2d at 505, affirmed in part and remanded in part, 600 F.3d 93 (2d Cir. 2010), cert denied, 131 S.Ct. 647 (2010), and Lockheed Martin, 194 F.3d at 984. In this case, the infringing website was, allegedly, “functionally dependent” on the credit card servicing companies, and this dependence was sufficient control to allow the contributory liability claims to proceed against it. Gucci, supra at *17.
Specifically, the “credit card processing services [were] a necessary element for the transaction of counterfeit goods online, and were essential to sales from TheBagAddiction.com[,]” Gucci alleged. Id. at*15. Moreover, both companies earned “significant revenue” from each sale. Quoting directly Judge Kozinski’s dissent in Perfect 10, the court explained, ““[t]hey knowingly provide a financial bridge between buyers and sellers of [counterfeit products], enabling them to consummate infringing transactions, while making a profit on every sale.” Id., citing Perfect 10, 494 F.3d at 810-811 (Kozinski, J. dissenting).
The court did not require Gucci to allege “the ability to literally shut down the [infringing] website,” as the defendants would have had it. Id. at *16. Likening the two companies to “the flea market purveyor who refuses to provide a booth to a counterfeiter[,]” the court noted that both companies could have “simply refused to do business” with infringing internet merchants. Id. at *15.
The Gucci court distinguished its relatively clear-cut facts from those in Perfect 10, discussed below, which involved both copyright and trademark infringement claims arising out the distribution of infringing images available on the actual website. It reasoned that in Perfect 10, the plaintiff “failed or perhaps was unable to allege that the credit card service providers had the power to remove the infringing material” or “directly stop their distribution” because the infringement occurred on the website itself and a credit card transaction was not needed for the website to continue to infringe.” Gucci, supra at *16, citing Perfect 10, 494 F.3d at 807. In Gucci, by contrast, the infringement occurred through the sale of the counterfeit Gucci products, and payment for those products, the court reasoned, again relying on Judge Kozinski’s dissent, is “part of the infringement process.” Id., citing Perfect 10, 494 F.3d at 814.
The hand-in-hand relationship between the infringing website and the defendants, without whose credit card processing services sales could not be transacted, was ultimately what mattered to the court in Gucci. The defendants allegedly supplied an “essential factor,” the court reasoned, similar to the common carrier that delivered unbranded gasoline to a station “it knew would resell the gas under the Getty brand name.”Gucci, supra, citing Getty Petroleum Corp. v. Aris Getty, Inc., 55 F.3d 718, 719 (1st Cir. 1995), discussed in detail in Section II.D.4. The website was thus allegedly “functionally dependent” on the defendants, and this dependence was sufficient to demonstrate the control needed for contributory liability. Gucci, supra at *16.
Credit card companies successfully defended against a claim of contributory liability for trademark infringement in Perfect 10, Inc. v. Visa Int’l Service Ass’n, 494 F.3d 788, 807-808 (9th Cir. 2007). In that case, the plaintiff’s business provided adult entertainment services, including a magazine and website featuring nude models. Perfect 10, supra at 792. The plaintiff owned copyrights and trademarks associated with the images as well as the trademarked term PERFECT 10. A group of websites, not parties to the litigation, published material that violated Perfect 10’s copyrights and trademarks. Id. The plaintiff sent letters to Visa and Mastercard, the credit card companies that serviced the websites, informing them of the infringement and demanding that they stop processing credit card payments to those websites. Id. The companies refused, and Perfect 10 consequently sued them for, among other claims, third-party copyright and trademark infringement. Id. The court dismissed both claims, focusing its analysis on the copyright liability and relying heavily on its reasoning there for its rejection of the trademark claims. See Perfect 10, supra at 807.
Ironically – the initial complaint had been dismissed for failure to properly plead the secondary trademark infringement separately from the secondary copyright infringement, see discussion supra – the court suggested, while acknowledging the standards are “somewhat different,” that because the plaintiff’s secondary copyright infringement claims failed, a fortiori, so too must the secondary trademark claims fail. See Perfect 10, 494 F.3d. 788, 806. (9th Cir. 2007). Its failure taken as a foregone conclusion, the contributory liability claim was given a cursory treatment by the court. See Perfect 10, supra at 806-807. In a brief discussion reciting the Lockheed Martin standard for secondary liability where the defendant has supplied a service rather than a product, the court rejected Perfect 10’s pleadings for failure to show “[d]irect control and monitoring of the instrumentality” used by the infringing websites to infringe their mark. Id. at 807.
Without reference to legal precedent, the court drew a distinction between the appearance of the infringing images on the offending websites and the infringing sales of those images. In the court’s view, the “infringement occur[red] without any involvement of Defendants and their payment systems.” Perfect 10, 494 F.3d 788, 807. Elaborating further, the court observed that “Perfect 10 ha[d] not alleged that Defendants ha[d] the power to remove infringing material from these websites or directly stop their distribution over the Internet.” It declined to address the fact that the “distribution over the Internet” occurred through such sales, and it offered no particular reason why these sales themselves, over which the credit card companies exercised control, were not enough to substantiate third-party liability.
The court’s contributory trademark liability analysis also failed to take into account what has become an emerging issue on the Internet: the credit card companies’ established policies permitting them to “require member merchants to cease illegal activity … as a condition to their continuing right to receive credit card payments.” Perfect 10, 494 F.3d 788, 807. See also the discussion above of the “notice-and-takedown” polices at eBay as regards infringing listings at that online sales site. On the one hand, the court acknowledged that the “Defendants can choose to stop processing payments to these websites, and that refusal might have [had] the practical effect of stopping or reducing the infringing activity.” Perfect 10, supra at 807. On the other, it dismissed this veto power over the sales, concluding that “without more [it] d[id] not constitute “direct control.” Id.
Arguably, the credit card companies are joint parties to the infringing sales alongside the infringers themselves, and therefore their liability might be better pleaded as vicarious, applying the joint tortfeasor liability doctrine enunciated in Hard Rock Café, infra. These claims were rejected too, however, as discussed below in Section III.
In Gucci America, Inc. v. Frontline Processing Corp., 2010 WL 2541367, *15 (S.D.N.Y.), the facts alleged were insufficient to demonstrate control on the part of the defendant party that served as a middleman between the infringer and the credit card service companies. In that case, the plaintiffs had not alleged that the middleman was in a position to prevent the sale of counterfeit products once it had procured the services of the credit card processing agencies. The contributory liability claim against the middleman was nevertheless allowed to go forward on a theory of inducement, as discussed supra in Section II.B. 1.