(a) In General, 3. Knowledge, B. The Elements of Contributory Liability Under Inwood, II. Contributory Trademark Infringement Comments Open

B. The Elements of Contributory Liability under Inwood: 3. The Requirement of Actual or Constructive Knowledge: (a) In General — Part 2

By Jane Coleman

Generalized knowledge that trademark infringement has taken place has been held insufficient to sustain a claim of contributory liability. Tiffany v. eBay, 600 F.3d 93, 107, 109 (2d Cir. 2010) affirming in part and remanding in part, 576 F.Supp.2d 463, 470, 508-510 (S.D.N.Y. 2008); MetroPCS Wireless, Inc. v. Virgin Mobile USA, L.P., 2009 WL 3075205, *17 (N.D.Tex.). And see Rosetta Stone Ltd. v. Google Inc., 2010 WL 3063152, *13 – *14 (E.D. Va.)(comparing the search engine company Google to the online sales site eBay, finding it lacked the requisite specific knowledge to impose contributory liability). The courts in these cases have construed Inwood to require plaintiffs to demonstrate the defendants’ specific knowledge with regard to individual or particular acts of infringement.

Thus, in Tiffany v. eBay, generalized knowledge that counterfeit goods might be sold on its website was insufficient to support a claim of contributory trademark infringement against the online marketplace company eBay. 576 F.Supp.2d 463, 470, 508- 510 (S.D.N.Y 2008), affirmed in part and remanded in part, 600 F.3d 93 (2d Cir. 2010). The Tiffany court stated that the law required “more specific knowledge as to which items [were] infringing and which seller [was] listing those items before requiring eBay to take action.” Tiffany, supra at 470.

In Tiffany,  the luxury jeweler, Tiffany, sued eBay, the online marketplace, asserting contributory liability for trademark infringement arising out of the sale of counterfeit Tiffany silver jewelry on its website. Tiffany, supra at 469. Tiffany alleged that hundreds of thousands of counterfeit silver jewelry items had been offered for sale on eBay’s website, and that eBay “facilitated and allowed these items to be sold” there. Id.

Specifically, Tiffany argued that “eBay was on notice that a problem existed” and that it was therefore obligated to “investigate and control the illegal activities” of its sellers. As to the question of which sellers eBay should investigate and control, Tiffany asserted that eBay should “preemptively refus[e] to post any listing offering five or more Tiffany items and … immediately suspend[] sellers upon learning of Tiffany’s belief that the seller had engaged in potentially infringing activity. Id.

In response, eBay asserted that it was under no such obligation under the circumstances. Instead, the responsibility lay with Tiffany “to monitor the eBay website for counterfeits and to bring counterfeits to eBay’s attention.” Id. at 469.  Its generalized knowledge, eBay contended, was insufficient to impose contributory liability; the law demanded “more specific knowledge of individual instances of infringement and infringing sellers before imposing the burden on eBay to remedy the problem.” Id. at 508.

The court agreed, applying the Inwood “know or reason to know” standard. At issue was whether, under Inwood, “eBay continued to provide its website to sellers when eBay knew or had reason to know that those sellers were using the website to traffic in counterfeit Tiffany jewelry.” Tiffany, supra at 470.

In examining the evidence as to eBay’s knowledge, the court found that Tiffany’s actions to protect its trademark had put eBay on “generalized notice that some portion of the Tiffany goods sold on its website might be counterfeit.” Tiffany, supra at 507. These actions included (1) sending demand letters to eBay stating its belief that large quantities of counterfeit Tiffany jewelry items were being sold, and that offerings of five or more pieces of purported Tiffany jewelry were “almost certainly” counterfeit; (2) apprising eBay that it had found, as a result of its own “Buying Program” study, that 73.1% of the Tiffany items purchased during a given time period were counterfeit; and (3) filing thousands of “NOCIs” (notices of claimed infringement) under eBay’s VeRO (Verified Rights Owner) program, a “notice-and-takedown” system discussed below, stating a good faith belief that certain listings were counterfeit or otherwise infringing on Tiffany’s marks. Id. Moreover, the court found that eBay had received “numerous complaints” from buyers complaining that they had purchased fake Tiffany jewelry on its website. Id.

All the foregoing evidence demonstrated only that “eBay had general knowledge of infringement by sellers using its website.” Tiffany, supra at 511. “Such general knowledge,” the court held, did not require eBay to “discontinue supplying its service to all those who might be engaged in counterfeiting.” Id.

The court based its decision both on legal precedent and policy considerations. Citing Inwood, the court noted that the Supreme Court’s language in that case focused on individual infringers, supporting a requirement of specific rather than generalized knowledge. Tiffany, supra at 509-510.  It further noted language in Gucci describing the plaintiff’s “high” burden to demonstrate knowledge. Gucci, 135 F.Supp.2d at 420, and in Mini Maid describing the inquiry into knowledge as a “contextual and fact-specific test.” 967 F.2d at1522.  Moreover, the uncertainty as to the extent and nature of the direct infringement also militated against ascribing knowledge to eBay, the court found. See Tiffany, supra at 508-509 and cases cited therein.

The presence of authentic Tiffany items for sale on eBay was a key factor in the case, because  the Tiffany court was especially concerned, as a  policy matter, with reaching a result that would tend to suppress otherwise non-infringing sales. See Tiffany, supra at 509-510. Citing Justice White’s concurring opinion in Inwood, the court stated that “the doctrine of contributory infringement should not be used to require defendants to refuse to provide a product or service to those who merely might infringe the trademark.” Tiffany, supra at 510, citing Inwood. The presence of authentic Tiffany goods on eBay precluded a finding that generalized knowledge of counterfeiting imputed knowledge to eBay of any specific acts of actual infringement. Tiffany, supra at 510, and cases cited therein. The imposition of contributory liability was therefore unjustified under the “knowledge” prong of Inwood.

On appeal, the Second Circuit agreed with the distinction drawn by the district court between generalized and specific knowledge, and upheld its ruling that eBay could not be held liable for contributory infringement regarding either the terminated or non-terminated listings on eBay. Tiffany v. eBay, 600 F.3d 93, 107-109 (2d Cir. 2010), affirming in part and remanding in part, 576 F.Supp.2d 463 (S.D.N.Y. 2008). Tiffany argued that the distinction was uncalled for, and that only relevant inquiry was “whether all of the knowledge, when taken together, puts [eBay] on notice that there is a substantial problem of trademark infringement.” Tiffany, 600 F.3d at 107.

Tiffany’s reading of Inwood was too broad, the court held. Id. It Although Inwood leaves the “knows or has reason to know” prong of the contributory liability test ill-defined, the court reasoned that the Supreme Court’s choice of words, conferring contributory liability on a defendant who “continues to supply its product to one whom it knows or has reason to know is engaging in trademark infringement” supported the district court’s interpretation. Id. at 108, citing Inwood, 456 U.S. at 854 (emphasis added).

For want of other Supreme Court guidance, the Second Circuit looked to the Betamax case, Sony Corp. of American v. Universal City Studios, Inc., the sole Supreme Court case discussing the Inwood test.  464 U.S. 417, 104 S.Ct. 774,78 L.Ed.2d 574 (1984). The Betamax case involved claims of contributory copyright infringement brought by Universal Studios and Walt Disney Productions against Sony, the manufacturer of home video recorders. The plaintiffs claimed that consumers were using Sony’s recorders to tape television shows to which they held the copyrights, and that such use was therefore copyright infringement. Tiffany, supra at 108 (citations omitted). Sony, they argued, should be held contributorily liable for its role in the alleged infringement. See Id. The Sony Court rejected their claim, observing that had Inwood applied, it’s “”narrow standard” would have required knowledge by Sony of “identified individuals” engaging in infringing conduct.” Id.

Acknowledging that the Supreme Court’s language regarding the “knows or has reason to know” prong of the contributory liability test set forth in Inwood was dicta, the Second Circuit concluded that it nevertheless supported the district court’s interpretation of the law. Tiffany, supra at 108-109. Applying Sony, the court agreed that Tiffany “failed to demonstrate that eBay was supplying its service to individuals who it knew or had reason to know were selling counterfeit goods.” Id. at 109. (Emphasis added.) Thus, ‘[f]or contributory trademark infringement liability to lie, a service provider must have more than a general knowledge or reason to know that is service is being used to sell counterfeit goods. Some contemporary knowledge of which particular listings are infringing or will infringe in the future is necessary.”  Id. at 107.

Similarly, where a plaintiff wireless telecommunications provider failed to allege or show any evidence of the defendant’s knowledge of particularized instances of direct trademark infringement by its customers, the court granted the defendant’s summary judgment motion and dismissed the plaintiff’s contributory liability claim. MetroPCS Wireless, Inc. v. Virgin Mobile USA, L.P., 2009 WL 3075205 (N.D. Tex. 2009). In doing so, it expressly rejected the “reasonable anticipation” standard for finding knowledge on the part of the defendant. Id. at *17.

The dispute  in MetroPCS arose out of MetroPCS’s “reflashing” service, in which it “unlocked” its customers’ cell phones so that they could be used over the wireless network offered by MetroPCS rather than the one sold to them by the original company together with the handset. See MetroPCS, supra, at *1 – *2. The declaratory judgment defendant and competitor, Virgin Mobile, contended that MetroPCS’s practice undermined its business model, targeted at low-income customers, which was to sell its handsets at well below market value and then recover its losses over time with the sale of airtime. Id. Thus, according to the defendant, “[i]f a customer purchase[ed] a Virgin Mobile-branded handset at an artificially low price and then reflashe[d] the handset for service on a competitor’s network, Virgin Mobile suffer[ed] financially.” Id.

Prior to the onset of litigation, Virgin Mobile sent cease and desist letters to MetroPCS demanding that it stop reflashing Virgin-branded handsets. MetroPCS, supra at *2. Metro PCS responded with a lawsuit seeking declaratory judgment that, among other things, it was not infringing on Virgin Mobile’s trademarks. Virgin Mobile asserted a number of counterclaims, including direct and contributory trademark infringement. Id.

Specifically, Virgin Mobile maintained that “when MetroPCS induce[d] customers to switch from Virgin Mobile to MetroPCS and, through the [reflashing] service, to alter their Virgin Mobile-branded handsets for use on the MetroPCS network” it infringed, both directly and contributorily on its trademarks. Id. Virgin Mobile based its counterclaims “on the fact that, after Virgin Mobile-branded handsets [were] reflashed to operate on the MetroPCS network, they still [bore] Virgin Mobile’s trademarks.” Id. Reflashing, Virgin Mobile argued, enabled MetroPCS to “free-ride on Virgin Mobile’s effort and investment in developing, marketing, and distributing its wireless products and services.”Id.  It argued further that, as noted above, this practice prevented Virgin Mobile from recovering its losses on the low-priced handsets. Id. It asserted that reflashing could lead to “decreased functionality” or the handsets and could damage them as well. Id.

For its part, MetroPCS maintained that it reflashed handsets only at the request of the handset owner and  that it required the customer to, among other things, represent that he did not have an agreement with any other service provider and would not “use the original provider’s trademarks in selling, offering for sale, distributing, or advertising” MetroPCS’s handsets. Id. at *2, n4.  MetroPCS consequently responded with a motion for partial summary judgment seeking dismissal of, among other things, the contributory trademark liability claim. Id.

To support its motion, MetroPCS advanced two arguments: first, that Virgin Mobile had neither alleged nor proved any direct acts of infringement by MetroPCS’s customers; and second, that because its customers pledged not to infringe Virgin Mobile’s trademarks, MetroPCS was insulated from liability. MetroPCS, supra at *15. In  granting the motion for dismissal, the court addressed both arguments, but ultimately based its decision on straightforward application of Inwood, finding that MetroPCS had neither induced any of its customers to infringe nor had it continued to sell reflashed handsets to customers whom it knew or had reason to know were reselling the handsets. Id. at *17. (As to the first argument regarding direct infringement, see Section II.B.5; the significance of the licensing pledge is discussed in Section II.B.c.i .)

Based on Inwood, the court stated that “to be held liable for contributory trademark infringement, MetroPCS must have either intentionally induced its [reflashing] customers to directly infringe the original wireless provider’s trademark or continued to offer its [reflashing] service to particular customers whom it knew were committing acts of infringement.” MetroPCS, supra at *17, citing Inwood, 456 U.S. at 854-855. (emphasis added). It found, as noted above, that Virgin Mobile had neither alleged nor offered any evidence of intentional inducement. Id. It also failed to allege or present evidence that MetroPCS “continue[d] to reflash handsets for those particular customers whom it kn[ew] [were] reselling their branded handsets.” Id.

At most, the court concluded, Virgin Mobile could show only that MetroPCS continued to offer it reflashing service “to the general public when it ha[d] reason to know that some past [reflashing] customers [had] resold their reflashed handsets.” MetroPCS, supra at *17. Such generalized knowledge, the court held, was insufficient under Inwood, citing that case for the proposition that the “standard is not whether [the] defendant “could reasonably anticipate” possible infringement.” MetroPCS, supra at *17, citing Inwood, supra at 854 n13. Cf. TracFone Wireless, Inc. v. SND Cellular, Inc. 2010 WL 2265152, *2, *4 (S.D.Fla.)(where defendants bought plaintiff wireless service provider’s phones in bulk, resold them “reflashed” and out of their original packaging and with the warranty removed, court upheld  plaintiff’s claims for both direct and contributory trademark infringement).

Note in this regard that the “reasonable anticipation” standard is often urged on the court by trademark plaintiffs who argue, based on the Restatement, that a party ought to be found liable for contributory trademark infringement where it “fails to take reasonable precautions against the occurrence of the third person’s infringing conduct in circumstances in which the infringing conduct can be reasonably anticipated.” See Tiffany v. eBay, 576 F.Supp.2d 463, 502 (S.D.N.Y. 2008), affirmed in part and remanded in part, 600 F.3d 93 (2d Cir. 2010), citing the Restatement (Third) of Unfair Competition Sec. 27 (1995). The Tiffany court expressly rejected the reasonable anticipation standard as “foreclosed by Inwood itself.” See Id., noting Justice White’s concurring opinion and the majority response. It noted that with the exception of cases in the Third Circuit, the majority of courts considering the question have rejected it as well. See Id. at 503 and cases cited therein.

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(b) Constructive Knowledge, 3. Knowledge, B. The Elements of Contributory Liability Under Inwood, II. Contributory Trademark Infringement Comments Open

B. The Elements of Contributory Liability under Inwood: 3. The Requirement of Actual or Constructive Knowledge: (b) Constructive Knowledge

By Jane Coleman

The question under Inwood of whether a plaintiff’s proactive measures give a defendant “reason to know,” i.e. constructive knowledge, of infringement, generally has been treated by the courts in the context of willful blindness, discussed in detail infra.  In Tiffany, supra, however, the court was meticulous to examine separately whether Tiffany’s generalized assertions of infringement, by way of demand letters and the like, were sufficient to impute knowledge to eBay. Citing its reasoning regarding the “knowledge” prong of Inwood discussed above, Tiffany, supra at 513, the court held that such generalized assertions were similarly insufficient to impute knowledge or a “reason to know” of counterfeiting to eBay as well.

Central to Tiffany’s argument was the “five-or-more” rule set forth in its demand letters to eBay, the “operative framework through which [according to Tiffany] eBay should have known that a listing was counterfeit.” Tiffany supra, at 512. Specifically, Tiffany argued that it had sent eBay demand letters “asserting that counterfeiting was rampant on eBay’s website and that any listing of five or more Tiffany items was presumptively counterfeit.” Tiffany, supra at 511. It argued further that these letters should not be dismissed as too general “because they provided detailed notice to eBay of the problem and included the fact that there [were] no authorized third-party vendors for Tiffany merchandise.” Once again, the court rejected Tiffany’s arguments, noting precedent that “mere assertions and demand letters are insufficient to impute knowledge as to instances not specifically identified in such notices, particularly where the activity at issue is not always infringing.” Tiffany, supra at 511 and see cases cited therein.

It found the “five-or-more” rule especially problematic, because the record showed that Tiffany itself dismissed its effectiveness and had been vague about how to define it and inconsistent in enforcing it.  See Tiffany, supra at 511. Moreover, the court noted, among other findings, that lots of five or more pieces of authentic new Tiffany silvery jewelry had been available on eBay. There was thus little support in the record for the claim that the “five-or-more” rule presumptively demonstrated the presence of infringing items. Id. at 512.  Under these circumstances, the court refused to “impute knowledge or a reason to know of counterfeiting based on Tiffany’s demand letters and its proposed five-or-more rule.” Id.

Here again, the court cautioned against using contributory liability law to suppress a legitimate secondary market.  “eBay was under no obligation,” the court concluded,

to credit the potentially self-serving assertions of a trademark owner, particularly when those assertions … were unfounded, and when the trademark owner’s demands, if met, clearly would have eliminated even legitimate sales on eBay. The doctrine of contributory liability cannot be used as a sword to cut off resale of authentic Tiffany items.

Tiffany, supra at 512, citing Polymer Tech. Corp., 975F.2d at 61-62.

In addition to the demand letters, Tiffany had presented eBay with the results of its own survey of Tiffany items listed on eBay’s website (known as the “Buying Programs”), revealing that “73% of the sterling silver Tiffany merchandise on eBay was counterfeit, and that only 5% was genuine.” Tiffany, supra at 482. It argued that these results “provided eBay with knowledge of any and all instances of counterfeiting” on its website. Tiffany, supra at 512.

The court found problems with the Buying Programs for many reasons, not the least of which was that Tiffany failed to provide eBay with its results until after it filed its complaint. Tiffany, supra at 512.  Before the litigation began, Tiffany had only told eBay about its Buying Programs results in a general way, and the court therefore concluded that eBay only had general notice that some counterfeit Tiffany goods were being sold on its website. Id. Even if Tiffany had presented its findings to eBay at an earlier date, though, the court rejected their probative value as to the “five-or-more” rule, described above.

More fundamentally, the Buying Programs were rejected by the court as “methodologically flawed and of questionable value in any event.” Tiffany, supra at 512. To make matters worse for Tiffany, the one thing the court did recognize about the Buying Programs was that they revealed that some quantity of the jewelry sold on eBay was in fact genuine. The court ultimately concluded that the Buying Programs, beset with flaws,  did not provide eBay with the requisite knowledge under Inwood, nor did they justify requiring eBay to ban all listings of five or more pieces as presumptively counterfeit. Id. at 513. There was simply no basis, pursuant to the Buying Programs, to require eBay to ban all Tiffany listings, especially because Tiffany had failed to demonstrate that eBay ever failed to remove a specific listing reported to it, as discussed below. Id.

Finally, Tiffany pointed to over a thousand NOCIs (notices of claimed infringement) it had filed, coupled with over a hundred emails sent to eBay from buyers during a six-week period complaining that they had purchased fake Tiffany jewelry. Tiffany, supra at 513.  It argued that these, together with NOCI’s from other rights owners, gave eBay both actual knowledge of specific infringing listings and “general knowledge that a counterfeiting problem existed on its website.” Id. Once again, the court was unpersuaded. “[E]vidence of general knowledge of infringement on its website was insufficient to impute knowledge to eBay of specific infringing items.” Id. As to the specific notices of infringing items, it concluded that eBay had responded appropriately. Id.

On appeal, the Second Circuit upheld the district court’s ruling that eBay could not be held liable for contributory infringement regarding either the terminated or non-terminated listings on eBay. Tiffany v. eBay, 600 F.3d 93, 107-109 (2d Cir. 2010), affirming in part and remanding in part, 576 F.Supp.2d 463 (S.D.N.Y. 2008).  In doing so, it focused on the distinction drawn by the district court between generalized and specific knowledge of infringement. See Tiffany, supra at 507. Tiffany argued that the distinction was uncalled for, and that only relevant inquiry was “whether all of the knowledge, when taken together puts [eBay] on notice that there is a substantial problem of trademark infringement.” Tiffany, 600 F.3d at 107.

Tiffany’s reading of Inwood was too broad, the court held. Id. It Although Inwood leaves the “knows or has reason to know” prong of the contributory liability test ill-defined, the court reasoned that the Supreme Court’s choice of words, conferring contributory liability on a defendant who “continues to supply its product to one whom it knows or has reason to know is engaging in trademark infringement” supported the district court’s interpretation. Id. at 108, citing Inwood, 456 U.S. at 854 (emphasis added).

For want of other Supreme Court guidance, the Second Circuit looked to the Betamax case, Sony Corp. of American v. Universal City Studios, Inc., the sole Supreme Court case discussing the Inwood test.  464 U.S. 417, 104 S.Ct. 774,78 L.Ed.2d 574 (1984). The Betamax case involved claims of contributory copyright infringement brought by Universal Studios and Walt Disney Productions against Sony, the manufacturer of home video recorders. The plaintiffs claimed that consumers were using Sony’s recorders to tape television shows to which they held the copyrights, and that such use was therefore copyright infringement. Tiffany, supra at 108 (citations omitted). Sony, they argued, should be held contributorily liable for its role in the alleged infringement. See Id. The Sony Court rejected their claim, observing that had Inwood applied, it’s “”narrow standard” would have required knowledge by Sony of “identified individuals” engaging in infringing conduct.” Id.

Acknowledging that the Supreme Court’s language regarding the “knows or has reason to know” prong of the contributory liability test set forth in Inwood was dicta, the Second Circuit concluded that it nevertheless supported the district court’s interpretation of the law. Tiffany, supra at 108-109. Applying Sony, the court agreed that Tiffany “failed to demonstrate that eBay was supplying its service to individuals who it knew or had reason to know were selling counterfeit goods.” Id. at 109. (Emphasis added.) Thus, ‘[f]or contributory trademark infringement liability to lie, a service provider must have more than a general knowledge or reason to know that is service is being used to sell counterfeit goods. Some contemporary knowledge of which particular listings are infringing or will infringe in the future is necessary.”  Id. at 107.

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(c) Willful Blindness, 3. Knowledge, B. The Elements of Contributory Liability Under Inwood, II. Contributory Trademark Infringement Comments Open

B. The Elements of Contributory Liability under Inwood: 3. The Requirement of Actual or Constructive Knowledge: (c) Willful Blindness

By Jane Coleman

The knowledge requirement under the Inwood standard can be met by demonstrating a defendant’s “willful blindness” to ongoing trademark violations. See Hard Rock Café Licensing Corp. v. Concession Services, Inc. 955 F.2d 1143, 1149 (7th Cir. 1992)(“willful blindness is equivalent to actual knowledge for purposes of the Lanham Act.”), citing Louis Vuitton S.A. v. Lee, 875 F.2d 584, 590 (7th Cir. 1989). Accord, Fonovisa, Inc. v. Cherry Auction, Inc., 76 F.3d 259 (9th Cir. 1996) (“a swap meet owner can not disregard its vendors’ blatant trademark violations with impunity”); Gucci America, Inc. v. Frontline Processing Corp., 2010 WL 2541367 at *13 (S.D.N.Y.) (a showing of willful blindness satisfies the knowledge requirement);Tiffany v. eBay, 576 F.Supp.2d 463, 513 (S.D.N.Y. 2008)(“the reason to know” standard can be satisfied by a showing that the defendant was willfully blind to the infringing activity), affirmed in part and remanded in part, Tiffany v. eBay, 600 F.3d 93, 109-110 (2d Cir. 2010); Cartier Int’l v. Ben-Menachem, 2008 WL 64005 (S.D.N.Y. 2008)(finding contributory liability on part of  parents who were willfully blind to the counterfeiting business operated by two of their sons)(unpublished opinion); Perfect 10, Inc. v. Cybernet Ventures, Inc., 213 F.Supp. 1146, 1188-1189 (C.D. Cal. 2002)(rejecting contributory liability claim due to lack of evidence but noting that test for such a claim “can be met where one knows or has reason to know of the infringing activity, and it specifically covers those who are “willfully blind” to such activity.” ) And see Louis Vuitton Malletier, S.A. v. Akanoc Solutions, 591 F.Supp.2d 1098, 1112 (N.D.Cal. 2008) (applying the willful blindness test to ISPs).

To be willfully blind, “a person must suspect wrongdoing and deliberately fail to investigate.” Hard Rock Café, supra. Accord, Monsanto Co. v. Campuzano, 206 F.Supp.2d 1271, 1275 (S.D. Fla. 2002); Medic Alert Found. v. Corel Corp., 43 F.Supp.2d 933, 940 (N.D. Ill. 1999).  And see Tiffany v. eBay, 576 F.Supp.2d 463, 513 (S.D.N.Y. 2008), affirmed in part and remanded in part, Tiffany v. eBay, 600 F.3d 93, 109-110 (2d Cir. 2010); Fare Deals, Ltd. v. World Choice Travel.com, Inc., 180 F.Supp.2d 678, 690-691 (D. Md. 2001), citing Hard Rock Café, supra at 1149.

The willful blindness test has been applied in contributory liability cases in both the “product” and “non-product” contexts, as discussed below. The doctrine is not applied without limitation, however, as courts have recognized that the “reason to know” part of the Inwood standard requires a defendant to “understand what a reasonably prudent person would understand” and does not impose any duty to seek out and prevent violations. Hard Rock Café, supra at 1149, citing Restatement (Second) of Torts. Sec 12(1) & cmt. A. This subsection will discuss how various actions taken by (or taken upon) defendants can affect the outcome of the court’s findings on willful blindness. It will further explore the limitations on the concept of willful blindness, as set forth by the courts.

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(c) Willful Blindness, (i) End User Agreements, 3. Knowledge, B. The Elements of Contributory Liability Under Inwood, II. Contributory Trademark Infringement Comments Open

B. The Elements of Contributory Liability under Inwood: 3. The Requirement of Actual or Constructive Knowledge: (c) Willful Blindness — (i) End User Agreements

By Jane Coleman

1. End User Agreements. In a case involving a software company that had incorporated potentially infringing “clipart” images into its software programs, the company’s inclusion of an end-user licensing agreement restricting the purchaser’s use of those images precluded a finding of willful blindness. See Medic Alert Found. U.S., Inc. v. Corel Corp., 43 F.Supp.2d 933, 940 (N.D. Ill. 1999). Specifically, the fact that the agreement forbade the purchaser from using the images in ways that would infringe led the court to conclude that the company had no reason to suspect wrongdoing. See id.

The plaintiff in Medic Alert was the non-profit corporation, Medic Alert Foundation, which provided products and services to its members related to their non-apparent medical conditions for use in emergency situations. See Medic Alert, supra at 934. Such products included necklaces or bracelets and wallet cards, each of which bore the member’s individualized medical information, a telephone number for further details about the member’s condition, and the Medic Alert logo. The Medic Alert logo, which was registered along with its trademark and service mark, consisted of the words “MEDIC” and “ALERT” in all capital letters running from to bottom on either side of a caduceus (the symbol of medicine and healing depicting two snakes coiled around a staff). Id.

The defendant in Medic Alert, Corel Corporation (“Corel”), was a computer software company whose software packages included a library of “clipart” or graphic images from which a user could select and insert into a document. Id. at 934-935. Among these images, which Corel obtained by way of a licensing agreement with another company, “Techpool,” was one that resembled the Medic Alert logo. Techpool had represented to Corel that the image was licensed and did not infringe any third-party intellectual property rights. Id. Furthermore, purchasers of Corel software programs were required to enter into end-user licensing agreements that prohibited them from using “computer images related to identifiable individuals or entities in a manner which suggests their association with or endorsement of any product or service.” Id.

In apparent violation of the foregoing agreement, a health products company that had purchased the Corel software altered one of the images in question to read “Health Alert” and then used it on its mail solicitations for vitamins. See Medic Alert, supra at 935. Consequently, in addition to various trademark infringement claims against Corel, Medic Alert alleged contributory trademark infringement in connection with the alleged infringement of its logo in those mailings. Id. at 936, 939-940. It argued that upon being appraised of the alleged infringement some years prior to trial, Corel knew that Medic Alert had not licensed its images for use in its products, and should have immediately recalled all its software from distribution.  (Corel had, in fact, taken measures to remove the disputed images from it software, as discussed in greater detail, infra). Notwithstanding these measures, by continuing to sell its existing inventory containing the disputed images, Medic Alert argued, Corel committed contributory trademark infringement. Corel moved for summary judgment on both the direct and indirect trademark infringement claims.

The court granted Corel’s motion, finding the evidence insufficient as a matter of law to support a finding of contributory liability. Medic Alert, supra at 940.  In reaching its decision, the court relied on both Inwood and the willful blindness standard articulated in Hard Rock Cafe, discussed infra, noting specifically that “[a]ctual knowledge … is satisfied by a finding of willful blindness, which means a person must suspect wrongdoing and deliberately fail to investigate.” Id., citing Hard Rock Café Licensing Corp. v. Concession Serv., Inc. 955 F.2d 1143, 1149 (7th Cir. 1992). Even assuming direct infringement had taken place, the court reasoned, “[i]n light of Corel’s end-user agreement, it had no reason to expect that one of its software users would violate the contract and use one of its images for commercial use, until it was provided with actual information that someone had done so.” Medic Alert, supra at 940.  The court further noted that there was no evidence that Corel was ever notified of the direct infringement until it was produced in the instant lawsuit. Id. Referring again to the end-user agreement, the court found that Corel had no reason to suspect any further infringement. Id. By the time the direct infringement came to the Medic Alert’s attention, the court noted, Corel had already taken remedial measures to remove the images in question. (This aspect of the case is discussed in further detail infra.)

A similar argument regarding customer agreements was advanced by the defendant wireless telecommunications company in MetroPCS Wireless, Inc. v. Virgin Mobile USA, L.P., 2009 WL 3075205 (N.D.Tex.), where MetroPCS argued, based on the court’s reasoning in Medic Alert, supra, that because its customers signed pledges not to infringe other companies’ trademarks, it should be insulated from contributory liability for such acts. Note that the MetroPCS court accepted the argument but ultimately based its decision on other grounds, discussed in detail here in Section II.B.3.

The dispute  in MetroPCS arose out of MetroPCS’s “reflashing” service, in which it “unlocked” its customers’ cell phones so that they could be used over the wireless network offered by MetroPCS rather than the one sold to them by the original company together with the handset. See MetroPCS, supra, at *1 – *2. The declaratory judgment defendant and competitor, Virgin Mobile, contended that MetroPCS’s practice undermined its business model, targeted at low-income customers, which was to sell its handsets at well below market value and then recover its losses over time with the sale of airtime. Id. Thus, according to the defendant, “[i]f a customer purchase[ed] a Virgin Mobile-branded handset at an artificially low price and then reflashe[d] the handset for service on a competitor’s network, Virgin Mobile suffer[ed] financially.” Id.

Prior to the onset of litigation, Virgin Mobile sent cease and desist letters to MetroPCS demanding that it stop reflashing Virgin-branded handsets. MetroPCS, supra at *2. Metro PCS responded with a lawsuit seeking declaratory judgment that, among other things, it was not infringing on Virgin Mobile’s trademarks. Virgin Mobile asserted a number of counterclaims, including direct and contributory trademark infringement. Id.

Specifically, Virgin Mobile maintained that “when MetroPCS induce[d] customers to switch from Virgin Mobile to MetroPCS and, through the [reflashing] service, to alter their Virgin Mobile-branded handsets for use on the MetroPCS network” it infringed, both directly and contributorily on its trademarks. Id. Virgin Mobile based its counterclaims “on the fact that, after Virgin Mobile-branded handsets [were] reflashed to operate on the MetroPCS network, they still [bore] Virgin Mobile’s trademarks.” Id. Reflashing, Virgin Mobile argued, enabled MetroPCS to “free-ride on Virgin Mobile’s effort and investment in developing, marketing, and distributing its wireless products and services.”Id.  It argued further that, as noted above, this practice prevented Virgin Mobile from recovering its losses on the low-priced handsets. Id. It asserted that reflashing could lead to “decreased functionality” or the handsets and could damage them as well. Id.

For its part, MetroPCS maintained that it reflashed handsets only at the request of the handset owner and  that it required the customer to, among other things, represent that he did not have an agreement with any other service provider and would not “use the original provider’s trademarks in selling, offering for sale, distributing, or advertising” MetroPCS’s handsets. Id. at *2, n4.  MetroPCS consequently responded with a motion for partial summary judgment seeking dismissal of, among other things, the contributory trademark liability claim. Id.

To support its motion, MetroPCS advanced two arguments: first, that Virgin Mobile had neither alleged nor proved any direct acts of infringement by MetroPCS’s customers; and second, that because its customers pledged not to infringe Virgin Mobile’s trademarks, MetroPCS was insulated from liability. MetroPCS, supra at *15. In  granting the motion for dismissal, the court addressed both arguments, but ultimately reached its decision based on straightforward application of Inwood, finding that MetroPCS had neither induced any of its customers to infringe nor had it continued to sell reflashed handsets to customers whom it knew or had reason to know were reselling the handsets. Id. at *17. See Section II.B.3 for a full discussion. As to the first argument regarding direct infringement, see Section II.B.5.

As to MetroPCS’s second argument, the court seemed to agree that a customer pledge not to infringe would insulate MetroPCS from contributory liability, though it rested its decision on Virgin Mobile’s failure to satisfy the Inwood test. MetroPCS likened its customer pledge to the licensing agreements at issue in Medic Alert, supra, arguing that it had “no reason to expect that any of its customers would commit direct infringement” because its customers signed a pledge to the same effect regarding their cell phones. See MetroPCS, supra at *16. Virgin Mobile argued that the customer pledges were not consistently required and did not prevent the infringing resale of its handsets, creating a genuine fact issue regarding the motion for summary judgment.  Id. The court concluded, however, that the fact issue was immaterial pursuant to its application of the Inwood test further on in the decision. Id.

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(c) Willful Blindness, (ii) Cease and Desist or Demand Letters, 3. Knowledge, B. The Elements of Contributory Liability Under Inwood, II. Contributory Trademark Infringement Comments Open

B. The Elements of Contributory Liability under Inwood: 3. The Requirement of Actual or Constructive Knowledge: (c) Willful Blindness — (ii) 2. Cease and Desist or Demand Letter

By Jane Coleman

The receipt by a defendant of a letter from the plaintiff demanding that he cease and desist from violating his marks may weigh in favor of a finding of willful blindness, particularly when accompanied by other compelling evidence. In one such case, the fact that the defendants had received a cease and desist letter regarding their sale of counterfeit computer software led the court to find willful blindness on their part. Microsoft Corp. v. Black Cat Computer Wholesale, Inc., 269 F.Supp.2d 118, 123 (W.D.N.Y. 2002). In that case, the plaintiff software manufacturer, Microsoft, sued a company that sold and distributed counterfeit software, also naming its owners, alleging both trademark and copyright infringement. Microsoft’s investigations and determinations that the defendants were engaged in the retail sales of counterfeit Microsoft software and hardware were undisputed. See Black Cat Computer, supra at 121. In addition, during the course of the litigation, the defendants pleaded guilty to state criminal counterfeiting charges filed against them. Id.

Upon discovery of the counterfeit sales, Microsoft notified the defendants with a letter demanding that they cease and desist from their unauthorized use of Microsoft’s marks. Black Cat Computer, supra at 121. Notwithstanding this notice, the defendants continued to distribute the counterfeit software. Id. Microsoft followed with a second cease and desist letter, which was similarly ignored. Microsoft then filed suit and moved for summary judgment, seeking both a permanent injunction and damages based on trademark and copyright infringement.

In granting Microsoft’s motion, which was unopposed, the court considered whether the individual defendants could be held contributorily liable for the activities of the infringing company. Considering the copyright and trademark infringement liability issues together,  the court held that the two individual corporate officers involved in the case were both contributorily liable, simply based on their intimate involvement and awareness of the company’s activities. See id. at 123. Specifically, the court noted that each of the officers had received the one of the cease and desist letters and was therefore aware of the company’s infringing activities. Having concluded that these and other facts had established their “willful blindness,” see id., the court further found the individual defendants contributorily liable for their company’s infringing activities. Id. For a general discussion of the liability of corporate officers, see  supra. For a discussion of vicarious liability in this context, see infra.

The receipt of a cease and desist or demand letter does not necessarily compel a finding of willful blindness, however. See Fare Deals, Ltd. v. World Choice Travel.com, Inc. 180 F.Supp.2d 678, 690-691 (D.Md. 2001)(suspicion engendered solely by the allegation in plaintiff’s demand letter could not as a matter of law be deemed willful blindness). See also,   Gucci, 135 F.Supp.2d at 420; Lockheed Martin Corp. v. Network Solutions, Inc., 985 F.Supp. 949, 963-967 (C.D. Cal. 1997)(rejecting plaintiff’s contention that attorney’s demand letter should be sufficient to impute knowledge of infringement), aff’d on other grounds,194 F.3d 980, 984 (9th Cir. 1999).  It bears noting that in Black Cat Computer, supra, the two cease and desist letters were among other factors leading to the court’s finding of willful blindness. Lockheed Martin and Fare Deals, supra are discussed in further detail, infra.

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