eBay scrambles to reverse loss in LVMH case

July 9, 2008, 5:48 PM UTC

EBay (EBAY), the world’s leading e-commerce marketplace, finds out Friday if it’s been granted a reprieve from a lower court injunction that will otherwise force it immediately to change the way it does business around the world.

On June 30, the Commercial Court of Paris granted a sweeping injunction sought by LVMH Moët Hennessy Louis Vuitton (LVMUY) that would not only require eBay to block all sales of counterfeit Louis Vuitton Malletier and Christian Dior Couture products on its site — a feat eBay has claimed is not technologically feasible — but  also to block all sales of genuine LVMH perfumes being sold there by unauthorized distributors.

The latter prohibition would effectively force eBay to block all sales of the specified perfumes — Christian Dior, Guerlain, Givenchy, and Kenzo — since no licensed LVMH distributor is authorized to sell over eBay. The practice of selling genuine products through unauthorized channels — sometimes called gray marketeering — is generally lawful in the United States because it is thought to benefit the consumer.

The commercial court also ordered eBay to pay various LVMH units $60.8 million in damages for past counterfeit or unauthorized sales. The key issues presented by the decision (available here in French) are well summarized in this New York Times article. (eBay’s official statement about the ruling is here; LVMH’s is here.)

The day the commercial court ruled, eBay asked the French Court of Appeals to stay the injunctive portion of it while it appealed the rest of the lower court’s ruling. Without the stay, the injunction — enforceable by daily fines of 50,000 euros (about $80,000) — takes effect as soon as copies of the decision have been formally delivered to eBay’s headquarters in San Jose, California, and its international subsidiary in Berne, Switzerland. (It’s unclear if that has happened yet.) LVMH has agreed to postpone enforcement, however, until the Court of Appeals rules on the stay application, according to an eBay spokesperson. That court told the lawyers today that it would rule Friday.

“We have to demonstrate that the injunctions are not technically realistic, and are impossible to execute,” says French attorney Alexandre Menais, who heads the eBay business unit that deals with European trademark issues.

If the stay is denied, eBay can still seek a stay from the Cours de Cassation, the nation’s highest court, but it does not appear that LVMH will afford eBay any further grace period.

“LVMH Group do not intend to hold off enforcing the injunction,” says LVMH’s outside counsel, Didier Malka of Jeantet Associés in Paris, in e-mailed responses to questions from Fortune.

The ruling applies to all eBay sites worldwide to the extent that they are accessible from France, and not merely to the company’s French site at http://www.ebay.fr/, according to both Malka and Menais. It would even bar individuals from reselling LVMH perfumes that they had received, for instance, as unwanted Christmas presents, both lawyers say.

Menais declined to comment on what eBay will do in the short term if it can’t win a stay, except to say that eBay will, no matter what, proceed to appeal the substance of the ruling. He claims that the ruling simply does not acknowledge “the reality of the Internet,”  which has “no frontiers” and has created “a new way to consume.”

On the merits, eBay has been arguing that the French courts lack jursidiction to impose that country’s unusually restrictive commercial regulations on worldwide e-commerce. In addition, it contends that, even under French law, eBay is not responsible for the transgressions of its users because it is a mere passive provider of Internet “host” services. Such services, according to a French statute and European Community policy, are not generally considered responsible for the transgressions of their users.

The Commercial Court of Paris rejected both contentions, finding that eBay’s sites were subject to French law because they were accessible from France, and that eBay’s very active role in facilitating sales, together with the fact that it takes a commission on every sale, make it an active “broker” rather than a mere passive “host.” (Earlier in June, a different lower French court, sitting in Troyes (southeast of Paris) similarly found, in a case brought by Hermès International against eBay, that eBay was not a mere  “host,” but a “publisher,” actively involved in creating content and, therefore, responsible for what was being advertised and sold there.)

If the French appellate courts reject eBay’s appeals, it’s unclear whether eBay might be able to appeal still higher, to a European Community court. LVMH’s lawyer, Malka, says he sees no basis for such an appeal “at this stage.”

On the other hand, Jane Ginsburg, a professor of intellectual property law at Columbia Law School, says that the case may pose an issue appealable to the European Court of Justice in Luxembourg over proper application of the European Community policy against holding passive “host” internet services responsible for transgressions of users.

eBay’s Menais maintains, moreover, that eBay might also be able to appeal the French ruling to a different European court, if necessary: the European Court for Human Rights in Strasbourg, France. In that case, he explains, eBay would argue that the decision illegally restricts the freedoms of European consumers.

Joseph Berghammer, an intellectual property practitioner in Chicago, says that if the LVMH case were just about counterfeiting, he thinks it would settle. There are ways to safeguard Internet commerce, he says — for instance, through the use of third-party services that verify the authenticity of products being offered for sale — that both eBay and luxury good sellers might be willing to live with. But to the extent that Louis Vuitton is insisting on restricting sales to traditional, authorized distribution channels, says Berghammer, “then there will be no settlement.”