Much has been written over the past few years about the problem of counterfeit goods.
There are many losers from this unethical practice. Consumers end up with less reliable and potentially unsafe products. Manufacturers suffer from lost sales, loss of reputation and potential liabilities for warranties. Finally, in cases where such products are sold through online auctions, the online auction houses themselves suffer from loss of reputation.
In addition, sales of counterfeit goods at online auctions raise some interesting legal and ethical issues. These were highlighted by the well publicized court case in France between online auction house eBay and luxury goods manufacturer LVMH.
LVMH took legal action against eBay on two grounds. Firstly, they claimed that eBay did not take sufficient steps to prevent the sale of counterfeit goods on its site. Secondly, LVMH claimed that even sales of legitimate goods on the site were illegal as the company only allows sales of its merchandise through selective distribution channels.
A French court last week ordered eBay to pay 40 million Euros ($63 million) in compensatory damages, a decision which eBay has indicated its intention to appeal.
The case has highlighted two interesting legal and ethical issues:
• whether or not online auction houses be held responsible for the sale of counterfeit goods on its site; and
• whether or not a manufacturers should have a right to control distribution of their products.
Responsibility for counterfeit goods at online auction houses
In my opinion, primary responsibility for sales of counterfeit goods must lie with individual sellers, who have a duty of care to ensure that their merchandise is genuine.
Online auction houses themselves have a duty of care to take reasonable steps to detect and prevent such sales. Failing this, they should be held liable for compensation from affected manufacturers and/or consumers.
In the case of eBay, its Verified Rights Owner scheme invites brand owners to report suspected counterfeit sales. The company also restricts seller activity in certain cases and enforces limits on items favored by counterfeiters. (click here for details)
These are constructive steps, but the company could do more. For one thing, sellers found to have sold counterfeit goods should be placed on a blacklist and permanently barred from future auctions.
Manufacturers right to control distribution channels
The second aspect of the eBay case involves a more basic question as to whether goods manufactured by LVMH should be allowed to be sold on eBay at all. As part of its branding strategy, sales of LVMH merchandise are restricted to selective distribution channels. The company claims that eBay, by allowing merchandise to be sold on its site, violated the company’s right to control how its products were distributed.
I have considerable empathy for LVMH on this point. Surely, a company has a right to decide how its products are distributed, particularly given the impact this can have on branding. Parties who violate that right should be held accountable.
A case of poor conduct
Regardless of the final outcome, eBay’s conduct in relation to the case has been very poor.
Rather than publicly address the issue about distribution rights, the company has chosen instead to insult LVMH and spout rhetoric about consumer choice and livelihoods of sellers.
Equally as poor is the company’s flagrant disregard for European legal proceedings. According to a Business Week report, the company has refused to remove any LVMH products from its site until an appeal is heard, despite an injunction preventing the sale of LVMH perfume on its European sites.
Whatever the final result, eBay has not covered itself in glory during the proceedings. In future, the company should show more respect toward both the distribution rights of manufacturers and to legal proceedings across all jurisdictions in which the company operates.