June 2010

Credit Card Processors Fail to Win Dismissal of Trademark Infringement Suit Based on Doing Business With Counterfeiters

3 min

In late June, the Honorable Harold Baer, Jr., U.S. District Court Judge for the Southern District of New York, issued a lengthy and well researched opinion, permitting Gucci to continue to advance a lawsuit against three defendants who established credit card processing services used to complete the online sales of fake Gucci items.  Judge Baer rejected the three defendants’ motion to dismiss the case for failure to state a claim.  The case now proceeds into discovery.

Gucci is a manufacturer and distributor of products bearing the famous Gucci name and Gucci marks.  Gucci has attempted to eliminate online sales of counterfeit products and the unauthorized use of Gucci marks, including one suit in the Southern District of New York against counterfeiters using a website called “TheBagAddiction.com.”  In that suit, the defendant counterfeiter entered a consent judgment and admitted liability for counterfeiting activities.  To follow up that suit, Gucci brought a suit against Durango Merchant Services, Frontline Processing Corporation, and Woodforest National Bank.  The three small defendants are involved with credit card processing services.  Durango was alleged to have arranged for web companies selling counterfeit Gucci products to establish credit card processing services with companies like Woodforest and Frontline.  Durango’s website billed the company as specializing in services for “high risk merchant accounts” including those who sell “replica products.”

Judge Baer’s opinion recounts the factual allegations of the complaint and proceeds to find personal jurisdiction:

“Gucci has pled sufficient facts to demonstrate that each of the three defendants expected or should have expected that their business relationships with companies like [the counterfeit retailer] who sold counterfeit goods over the internet without restriction to any particular state, would have consequences in New York.”

More importantly, Judge Baer then found that Gucci had stated a cause of action under Section 32 of the Lanham Act.  While finding that Gucci had not put forth sufficient allegations to support trademark infringement claims based on either direct liability or vicarious liability, Gucci did plead a “plausible theory of liability” under the contributory trademark infringement doctrine.

To prevail on that theory, Judge Baer cautioned, Gucci must show that the three participants in the credit card processing business (1) intentionally induced the website to infringe through the sale of counterfeit goods, or (2) knowingly supplied services to websites and had sufficient control over infringing activity to merit liability.  Judge Baer noted that Gucci made substantial factual allegations about the knowledge of each of the three defendants – each knew that the website traded in counterfeit products or each “were willfully blind to that fact.”  Judge Baer concluded that, with respect to one defendant (Durango), there were sufficient allegations that it intentionally induced trademark infringement and, with respect to the other two, that they acted knowingly and exerted sufficient control over the infringing transactions.

The opinion adds another weapon to the arsenal of trademark holders.  Coming on the heels of the disappointing defeat suffered by Tiffany in the eBay case, the opinion is sure to brighten the day of mark holders who want to go after not only counterfeiters but their accessories in crime.