E-Commerce Platform Now Has a New Role as a Gatekeeper?

E-Commerce Platform Now Has a New Role as a Gatekeeper?

Tell me, are you a big fan of online shopping? I am for sure. With just one click, e-commerce platforms will fetch whatever products you want around the world for you.

In the second decade of the twenty-first century, we witnessed e-commerce around the world become deeply integrated into our everyday lives, particularly the e-commerce platforms that sell consumer goods. The scale of e-commerce platforms has escalated drastically due to the spread of COVID-19 in late 2019, when consumers globally were forced to “go on lock downs at home, resorting often to online shopping exponentially more than they had prior.”^[1] Now, in 2022, shopping through e-commerce platforms is no longer just a solution to the challenges of the pandemic, it has now become a mainstream lifestyle preference.

While the emergence and rise of online marketplaces provided consumers with ease of access to consumer goods, at the same time, these markets provide third-party sellers relatively easy access to sell their goods—specifically for their counterfeit products.^[2] Today, the third-party sellers “have acquired a larger share of the e-commerce retail pile.”^[3] However, the shift by e-commerce platforms to allow more third-party sellers directly elevates the scale and the number of the counterfeit activities. The Government Accountability Office found that “20 of 47 items purchased from third-party sellers on popular consumer websites were counterfeits.”^[4]

The trade of counterfeit goods not only “damage[s] an economy and a brand’s reputation” but also “the products themselves can harm a consumer’s health and wellbeing.”^[5] However, the fight against counterfeiting activities has faced a lot of obstacles, and e-commerce platforms themselves present formidable challenges on this issue by facilitating the counterfeiting activities on their platforms. First, “the legitimacy offered by a [online] marketplace will often lull consumers into a false sense of security when purchasing discounted goods on the online platforms.”^[6] With the inadequate identity verification procedures, those counterfeiters as third-party sellers use false identities and addresses and “quickly vanish into cyberspace at the first sign of trouble,” making it hard for brand owners to go after the individual sellers who sell their products through the online market.^[7] Even when they are detected, those online counterfeiters who “are shut down are able to immediately create new false identities and return to their illegal operations on the internet again.”^[8]

Facing the challenges in identifying or even tracking the direct counterfeiters, brand owners have brought multiple actions against e-commerce platforms in an effort to hold them liable for the actions of third-party sellers. Therefore, “the evolution of trademark law lies in the trend of trademark owners to battle … parties who provide the direct counterfeiter with tools for their illegal actions.”^[9]

In 1982, the Inwood Labs case set the stage for the first judge-made doctrine of secondary liability for trademark infringement by those who are not the direct infringer but are within the chain of commerce by “intentionally inducing another to infringe or knowing or has reason to know” that someone is engaging in the trademark infringement.^[10] After the Supreme Court established the trademark contributory infringement test in Inwood, the question became whether Inwood applied beyond the manufacturer-distributor relationship.

In 2010, Tiffany sued eBay for allowing for the sale of counterfeit Tiffany silver jewelry on eBay’s website.^[11] Tiffany v. eBay became the first case in the United States to address the issue of contributory trademark liability of e-commerce platforms.

The Tiffany court ruled that eBay was not contributorily liable, reasoning that “for contributory trademark infringement liability to lie, a service provider must have more than a general knowledge or reason to know that its service is being used to sell counterfeit goods.”^[12] Besides the ruling, one thing worth noting is that the Tiffany court addressed that there was no need for e-commerce platforms to take proactive measures to police counterfeiting activities. Instead, e-commerce platforms can just act “on specific instances of trademark infringement properly when knowledge is raised.”^[13]

Tiffany thus became the landmark case for imposing contributory trademark liability for internet service providers, especially for e-commerce platforms. However, brand owners post-Tiffany have gradually realized that the burden to police online counterfeiting activities lies almost entirely on themselves. As the counterfeit crimes proliferate rampantly despite the brand owners’ efforts in combating counterfeit, creating a “burden-sharing arrangement” between brand owners and online marketplace seems to be needed.^[14] Some legal scholars propose “imposing a comprehensive list of due diligence on e-commerce platforms to detect counterfeit and illicit goods proactively,” which is what the Tiffany court did not obligate the e-commerce platforms to do, and also propose e-commerce platforms undertake due diligence in regulating platforms.^[15] A California district court in Chloe SAS v. Sawabeh Info. Servs. Co, similarly ordered the defendant, an online marketplace, to take such a proactive approach, to “monitor their websites of illegal infringing on an on-going basis.”^[16]

Almost five to six years later, Congress seemed to finally give us its response to concerns and issues in the current secondary trademark liability legal framework for combating counterfeits and pirated goods. In 2020, the legislature proposed the Stopping Harmful Offers on Platforms by Screening Against Fakes in E-commerce Act of 2020 (the “SHOP SAFE ACT” of 2020.)^[17] This proposed bill creates a new statutory contributory trademark liability that applies to online marketplaces selling third-party products that bear counterfeit marks and implicate “health and safety.”^[18] To earn protection from the newly created contributory trademark infringement doctrine, online marketplaces must comply with all thirteen requirements under the proposed bill.^[19] The requirements mandate platforms must implement “reasonable proactive technological measures for screening goods before displaying the goods to the public to prevent any third-party seller’s use of counterfeit mark in connection with the sale, offering for sale, distribution, or advertising of goods on the platform.”^[20] This is the first time that “proactive measures” are brought up in the proposed statutory regulation.

From the Tiffany ruling and post-Tiffany holdings, where courts did not expect e-commerce platforms to take further proactive measures in combating counterfeiting activities, to five years later, in the Chloe case, the court for the first time required online marketplaces to monitor their sites to police counterfeiting activities, then to today, the proposed SHOP SAFE ACT reveals the congressional intent to expect the e-commerce platforms to take more actions. Ten years after Tiffany, and with the the proposed SHOP SAFE ACT, we are heading in a direction to create a more brand-protective environment with burden-sharing arrangements in policing counterfeit activities and imposing proactive technology measures by e-commerce platforms.

However, at the same time, there are some concerns that should be kept in mind considering the realistic practice and compliance of e-commerce platforms. First, the unbalanced abilities in implementing proactive technology measures among different sizes of e-commerce platforms. For small scale e-commerce platforms, the lack of capabilities to impose effective proactive technology measures or afford the cost in implementing advance technologies would be more likely to drive most or all of them out of the industry.”^[21] At the same time, it would also harm the consumers by reducing consumers “marketplace choices.”^[22] In addition to the concerns of the imbalanced ability to enact proactive technology, the overall efficiency and effectiveness of said technology remain an open question. While the giant e-commerce platforms have the technical and financial ability to implement advanced technologies, those large e-commerce platforms never possess the physical products and lack the “technical product knowledge” owned by brand owners that would enable the detection of counterfeits.^[23]

There are also some potential consequences if the e-commerce platforms try to take proactive measures to monitor and take down suspicious counterfeit listings without more accurate information about the actual products. On one hand, those e-commerce platforms will have more risk of facing the secondary trademark liability with a number of litigations. On the other hand, it would potentially harm innocent third party sellers on the platforms. The fear of facing huge numbers of litigations would incentivize the e-commerce platform to take down more suspicious but actually genuine goods in order to avoid secondary trademark liability, and “[t]aking down legitimate offers would have a chilling effect on business in general.”^[24]

By proposing the SHOP SAFE ACT, Congress has taken an important first step to combating counterfeit and pirated goods. As e-commerce continues to explode in growth, it is important to look for a comprehensive solution that establishes the burden sharing arrangements between brand owners and the e-commerce platforms.