Counterfeit items are no longer just sold at flea markets in Hong Kong or the back rooms of shops in Manila. The Internet has emerged as the dominant marketplace for fake Prada bags, counterfeit Tiffany jewelry and imitation Rolex watches.

For years now, manufacturers and distributors of luxury items and brand name goods have fought against the sales of counterfeit items at hawker stalls and booths alike, but the Internet poses a unique problem. In the World Wide Web, anonymous sellers successfully utilize services such as eBay to market their counterfeit items, to the detriment of buyers who don’t know the difference or who find out after the item has been shipped and it’s too late to get a refund. The online sale of knockoffs especially harms the manufacturers who own the trademarks.

In a case out of the federal court in New York, eBay has come out on top in the latest battle between manufacturers and online marketplaces. Tiffany & Co. sued eBay, asking that eBay be held liable for the sale of counterfeit Tiffany jewelry by eBay sellers. For those unfamiliar with how eBay works: sellers list items for auction with the online service, and then mail the items to the winning bidder.

eBay has been described as an online flea market, but that label undermines the sophistication of eBay’s service. eBay is a massive operation; in 2007, the total value of items sold through it approached $60 billion. Traders who post products for sale online must register with eBay and sign a user agreement. eBay also offers seminars and workshops on how to maximize sales opportunities. Sellers with large volumes of commercial traffic can avail themselves of account managers, health-care benefits and lines of credit. eBay put into place several methods of stemming sales of counterfeit items. For example, it removed listings of suspected counterfeit items upon Tiffany’s request. It also suspends and blocks sellers who are found guilty of selling fake items. eBay also instituted a program through which companies can review listings and advise eBay of possible counterfeit items.

In spite of these measures, sales of counterfeit items still occur on eBay – the point of Tiffany’s lawsuit. Tiffany claimed that eBay created the venue which allowed the sale of counterfeit items, eBay profits from its service and controls the service. Tiffany argued that accordingly, it is eBay’s obligation to investigate and stop the sale of counterfeit items, and that it should be held responsible when these items are sold over its virtual connections.

However, the court rejected Tiffany’s arguments and found that eBay could not be held liable just on the basis that it has generalized knowledge that trademark infringement might be occurring on its Web site. Rather, the court held, it is up to manufacturers and distributors, such as Tiffany, to police their brands in the online marketplace.

The federal court’s decision has been appealed, and so, at least for now, the standard remains that online auction services, particularly those which institute a number of anti-counterfeiting measures like eBay, are likely not liable if counterfeit items are traded on their websites. This standard also implies that, in the United States, manufacturers and distributors, solely, shoulder the burden of policing the trade of counterfeit goods passed off as authentic. However, as the Internet is a global phenomenon, other countries view the responsibilities of the parties differently. Earlier this summer, a French court ordered eBay to block all sales of knockoff products bearing trademarks owned by LVMH Moet Hennessy Louis Vuitton SA, and also ordered eBay to pay $61 million in damages.

This issue will undoubtedly evolve. In the meantime, Web site operators and online marketplace services who do not implement the same degree of collaboration with manufacturers and distributors as eBay has instituted may not find the same success. Also, arguably, the real winners of this most recent court decision are the sellers who violate counterfeiting laws and who remain virtually anonymous.

-Elyze J. McDonald is a partner at Carlsmith Ball LLP. She may be reached at [email protected]