Louis Vuitton Malletier, S.A. v Akanoc Solutions, Inc. et al., No. 07-03952 JW, slip op. (N.D.Cal., 19 March 2010); see also 591 F. Supp. 2d 1098 (N.D.Cal. 2008)
Citation: Journal of Intellectual Property Law & Practice, doi:10.1093/jiplp/jpq079
In the summer of 2009, a jury in the US District Court for the Northern District of California found a web host contributorily liable for copyright and trade mark infringement because it harboured websites selling counterfeit Louis Vuitton goods from China.
Despite a relative wealth of jurisprudence on indirect liability, US federal courts have struggled in the digital millennium to apply these theories in the converging areas of IP and internet law. What duty does a web host owe to a copyright owner when third parties store infringing content on the web host's servers? And what duty does an online auction house owe to a brand owner when third parties use the service to sell counterfeit goods? As both legislation and judicial precedent in the USA have evolved to address questions such as these, two primary theories of indirect liability—vicarious and contributory—have driven the law forward.
The roots of vicarious liability lie in the agency principles of respondeat superior, ‘let the superior answer’ for the torts of the agent. Accordingly, vicarious liability for copyright infringement requires that an intermediary defendant hold both (1) the right and ability to supervise directly infringing conduct and (2) a direct financial interest in the infringing activity. This standard differs markedly from trade mark law. Vicarious liability for trade mark infringement requires that an intermediary defendant and a direct infringer have an apparent or actual partnership or exercise joint ownership or control over an infringing product or service.
In contrast, contributory liability is based on tort principles of enterprise liability and imputed intent. Contributory liability for copyright infringement requires that an intermediary defendant have (1) actual or constructive knowledge of another's direct infringement and (2) either intentionally induced a direct infringer or materially contributed to direct infringement. Again, this standard differs markedly from trade mark law. Contributory liability for trade mark infringement, a much less solidified area, requires actual knowledge of specific infringement and either intentional inducement or continued assistance by supplying an infringing product. When an intermediary defendant supplies a service rather than a product, federal courts typically consider the extent of control exercised by that defendant over the third party's means of infringement. Although these standards may appear to be similar, the US Supreme Court has explicitly instructed that the tests for indirect trade mark infringement are more difficult to satisfy than for indirect copyright infringement.
Courts often struggle in applying these theories to intermediaries on the internet because analogies to traditional brick-and-mortar entities can be difficult. Cases involving IP and contributory liability often turn on whether an internet service provider is more like a landlord or a flea market operator than a telephone service provider or some other type of public utility. In addition, courts attach great significance to the actions taken by an internet service provider once it has knowledge of direct infringement. Akanoc Solutions represents the relatively rare circumstance where an internet service provider entirely fails to mitigate direct infringement by taking appropriate action.
Louis Vuitton Malletier (‘LVM’), which owns trade mark and copyright registrations relating to a variety of handbags and other goods, is the sole and exclusive distributor of its luxury merchandise. In late 2006 it discovered five websites it believed to be selling counterfeit LVM merchandise. By tracing the internet protocol addresses of the websites, LVM was able to send repeated takedown notices to the entity harbouring the websites on its servers—Akanoc Solutions, Inc. (‘Akanoc’). As a web host, Akanoc provided its customers with ‘internet protocol addresses, routers that link internet traffic to websites, and servers that store internet content and allow the content to be accessed through the internet’.
Shortly after sending its takedown notices, LVM purchased and tested items from the websites. Each item was sent using a return address located in China—Akanoc's website advertised an ‘extensive background knowledge of the Chinese economy’ and specialization in ‘creating unique solutions’ for Chinese companies seeking to sell goods in the USA. Each item was determined by LVM to be a counterfeit replica of its products. As its investigation progressed, LVM observed that the infringing websites either remained operable or were moved to different internet protocol addresses that were also owned by Akanoc.
Faced with such persistence, LVM sued Akanoc, its principal—Stephen Chen—and Managed Solutions Group, Inc. (‘MSGI’)—another entity controlled by Chen that owned Akanoc's servers. The complaint, filed in the US District Court for the Northern District of California, alleged four causes of action: (1) vicarious copyright infringement, (2) vicarious trade mark infringement, (3) contributory copyright infringement, and (4) contributory trade mark infringement. After conducting discovery, LVM filed an amended complaint that extended its allegations of indirect copyright and trade mark infringement from the five original websites to an additional 72 counterfeiting websites.
In late 2008 the Northern District of California issued a decision granting the defendant's motion for summary judgment with respect to LVM's vicarious liability claims and denying the motion with respect to LVM's contributory liability claims. The Court held that:
- No reasonable jury could find the defendants vicariously liable for copyright infringement because there was no evidence of a ‘direct financial interest’ in the underlying infringing activity. In the Ninth Circuit, ‘the central question of the "direct financial benefit" inquiry ... is whether the infringing activity constitutes a draw for subscribers, not just an added benefit’. The ‘essential aspect’ of the inquiry is ‘whether there is a causal relationship between the infringing activity and any financial benefit a defendant reaps’. LVM's claim for vicarious copyright liability was denied because there was no evidence that third parties sought or abandoned the defendants' web hosting services based on their ability to infringe, or that the defendants ‘made more money when they allowed infringement to continue’ and ‘less money when they did not’. The defendants' wilful blindness of the direct infringement was not enough to carry the claim.
- No reasonable trier of fact could find the defendants vicariously liable for trade mark infringement because no ‘actual or apparent partnership’ existed. The defendants only sold their web hosting services to ‘resellers’, not individual websites, and thus did not deal directly with or receive money from any website operators. Again, wilful blindness was not enough to carry the claim.
- The defendants could be held contributorily liable for copyright infringement because they had actual knowledge, or at least should have known, of specific pirated material available on their servers and failed to purge such material from the system. To establish the defendants' knowledge of infringement LVM proffered a number of its takedown notices, letters between counsel for the parties, and the defendants' internal emails discussing the takedown notices. LVM also proffered evidence on the ‘simple measures’ the defendants could have taken to purge infringing material from the system, including internal emails discussing their ability to remove individual websites by disabling a single internet protocol address. Moreover, Stephen Chen's deposition testimony illuminated the defendants' apathy toward takedown notices, ‘[We] just don't have a lot of experience with [complaint letters], and we don't have any mechanism to take care of letter complaints’.
- The defendants could be held contributorily liable for trade mark infringement because they had actual knowledge of specific counterfeiting websites on their servers and continued to provide their web hosting services while remaining wilfully blind to infringing activity. The evidence proffered by LVM to establish specific knowledge of direct infringement sufficed for both its contributory copyright and trade mark infringement claims. However, the Court struggled to determine whether the defendants exercised sufficiently ‘direct control and monitoring’ of the web hosting service. In order to find such direct control, the Court analogized web hosts to brick-and-mortar flea market operators, ‘Defendants physically host web sites on their servers and route internet traffic to and from those websites. This service is the internet equivalent of leasing real estate’.
LVM's contributory copyright and trade mark claims continued on to trial and, in August 2009, the jury returned a verdict in favour of LVM for a total of $34.2 million. Each individual defendant was found liable for $10.5 million and $300,000 in damages for wilful contributory infringement of 13 LVM trade marks and two LVM copyrights, respectively.
In March 2010, the Northern District of California issued a decision granting the defendant's motion for judgment as a matter of law with respect to MSGI and denying the motion with respect to Akanoc and Stephen Chen. On consideration of the motion, the Court found that evidence was insufficient with respect to MSGI, which merely ‘owned servers that were operated by ... Akanoc’ because ‘[t]here was no evidence that [it] sold domain names or operate[d] the servers’. Accordingly, the jury verdict regarding MSGI was vacated and the overall damages were reduced by $10.8 million.
The Court, however, upheld the jury's consideration of Akanoc's and Stephen Chen's ‘action or inaction after receiving notice of infringement’ because they had ‘numerous tools at their disposal for monitoring their servers and terminating abusive users’ including ‘the ability to suspend a particular user, disable IP addresses used by a particular website or if necessary, unplug a server that contained the data for a particular website’. The Court also denied Akanoc's attempt to seek Digital Millennium Copyright Act (‘DMCA’) immunity from damages for contributory copyright infringement. Stephen Chen ‘testified that he did not understand the DMCA’ or its requirement to reasonably implement a policy to terminate web hosting service for repeat infringers. Moreover, ‘evidence indicated that Defendants had not terminated certain repeat offenders’.
Finally, the Court issued a permanent injunction against Akanoc and Stephen Chen, enjoining them from knowingly hosting internet web sites that display, advertise for sale, offer for sale, or actually sell, export or distribute goods or services that exhibit unauthorized reproductions of the LVM trade marks or copyrights. The injunction left in place a reasonable notice and takedown policy with Akanoc.
Akanoc continued to supply its web hosting services to known pirates and counterfeiters and was held to be contributorily liable for copyright and trade mark infringement. It invited spurious Chinese goods into the USA, it ignored takedown notices from rights holders, it failed to implement a reasonable takedown policy, and it even took steps to obscure the internet protocol addresses of counterfeiting websites.
This case builds on a fairly well-established jurisprudence on indirect liability for copyright infringement. It also adds to a rapidly evolving jurisprudence on indirect liability for trade mark infringement. Most importantly, it highlights the disparity between theories of indirect infringement for these two forms of IP on the internet. The Northern District of California's copyright analysis was well supported with direct precedent, whereas its analysis of trade mark law followed doctrinal trends in favour of protecting trade mark owners. Although this case may appear to be run-of-the-mill in the copyright arena, it is a significant advancement in trade mark jurisprudence. As the law of the internet evolves, federal courts are likely to become increasingly open to a notice and takedown regime for brand owners, similar to that of the Digital Millennium Copyright Act.