Who’s Holding the Bag? When a Website Sells Infringing Articles, Credit Card Companies May Face Liability

By Thomas Carey. A member of our Business Practice Group
Research assistant Katherine Zhou provided valuable support in the writing of this article

July 2010 IP Update

Can a company that provides credit card services be held liable for the activities of merchants using its accounts?

In 2007, the Ninth Circuit, an influential federal appeals court, held that Visa and Mastercard could not be held liable for copyright infringement even though their credit card services were used to sell infringing photographs. Perfect 10 v. Visa Int’l Service Ass’nThe court reasoned that, because the credit card companies  exercised no control over the infringing websites, their connection to the infringement was too remote to establish secondary liability.

One judge dissented. He noted that the credit card companies had established special procedures for handling websites involved in selling supposedly infringing merchandise, and maintained that Visa and Mastercard were as instrumental in the infringement at hand as were Napster and Grokster, both of which had notoriously distributed peer-to-peer file sharing software that enabled widespread, unauthorized copying of copyright-protected music files.

The same Ninth Circuit, which has appellate jurisdiction over federal courts in many Western states, had previously held Napster liable for contributory infringement, and, in a case that we previously reported, the U.S. Supreme Court had similarly held Grokster liable for contributory infringement.

Last month, a federal judge in the Southern District of New York revisited the question of credit card company liability in Gucci America Inc. v. Frontline Processing Corp. Luxury goods manufacturer Gucci America had sued Laurette Company for selling “replica” Gucci products on TheBagAddiction.com. Charged with trademark infringement, Laurette eventually admitted liability for counterfeiting.

Still hungry for battle, Gucci also targeted three companies that provided credit card processing services to Laurette. Durango Merchant Services assisted merchants in setting up merchant credit card accounts, while Frontline Processing Corporation and Woodforest National Bank provided and serviced such accounts.

The defendants argued that they could not possibly be held liable for the website’s trademark infringement. The judge agreed that the three service companies could not be held liable for direct infringement because there was no evidence that they themselves sold or advertised counterfeit products.

Secondary liability, however, was a different matter. Gucci presented evidence that Durango’s website boasted of the company’s specialization in “hard to acquire accounts,” and it reached out to “high risk” merchant accounts, such as those selling replica products. Durango helped Laurette avoid chargebacks by making customers check a box reading “I understand these are replicas” upon purchase.

On these facts, the judge ruled, Durango could be held liable for induced infringement because it took “affirmative steps…to foster infringement.”

As for Frontline and Woodforest, both companies were familiar with the BagAddiction website and its products and had investigated customer disputes peculiar to that website. According to Gucci, these investigations should have tipped them off to the sale of infringing merchandise.

Gucci also alleged that Laurette would not have been able to sell its counterfeit products without the credit card operation that the three service companies enabled. Since virtually all purchases from BagAddiction were made using credit cards, the processing operation was fundamental to selling the counterfeit products.

According to the court, both Frontline and Woodforest face liability for contributory infringement because they “knew that Laurette traded in counterfeit products, or were willfully blind to that fact,” and because they provided services that were a “necessary element for the transaction of counterfeit goods online.”

Citing the dissenting opinion in Perfect 10, the judge concluded that Frontline and Woodforest “knowingly provide[d] a financial bridge between buyers and sellers of [counterfeit products], enabling them to consummate infringing transactions, while making a profit on every sale.”

The court also drew upon Getty Petroleum Corp. v. Aris Getty, Inc. (1995)–in which the First Circuit Court of Appeals found a gasoline supplier liable for trademark infringement because it provided unbranded gasoline to gas stations that it knew would re-sell under the Getty name–to support its conclusion that Frontline and Woodforest “exerted sufficient control over the infringing transactions and knowingly provided [their] services to a counterfeiter.”

In sum, none of the companies that Gucci sued could be responsible for direct infringement. However, Durango was found potentially liable for inducinginfringement, because it encouraged the credit card service providers to set up their services with a seller of counterfeit goods.

Frontline and Woodforest, by the same token, were potentially liable for contributoryinfringement because they continued to provide their essential services, despite knowing that Laurette sold counterfeit products.

As a result of this case, credit card servicers are likely to become more cautious about providing services to dubious merchants, and owners of infringed trademarks and copyrights may be able to hold accountable those who provide the credit that greases the wheels of infringement.

Courts evaluating such claims now have inconsistent precedents to consider, so this issue may be one in which the choice of forum–say, a federal court on the West Coast vs. the Southern District of New York–may be key.