July 14 (Bloomberg) -- EBay Inc. isn't responsible for the sale of fake Tiffany & Co. jewelry on its Web site, a judge ruled in a case EBay said had the potential to ``wreak havoc'' with Internet commerce.

U.S. District Judge Richard Sullivan in New York rejected Tiffany's claim that EBay, the biggest online auctioneer, wrongfully allowed sales of thousands of fake bracelets and necklaces. Today's decision followed a nonjury trial in which Tiffany called EBay a ``rat's nest'' of trademark violations.

``It is the trademark owner's burden to police its mark,'' Sullivan said in the ruling. ``Companies like EBay cannot be held liable for trademark infringement based solely on their generalized knowledge that trademark infringement might be occurring on their Web sites.''

The decision, pitting a 171-year-old U.S. luxury-goods pioneer against a leader of the online economy, will likely discourage similar ``anti-consumer and anti-Internet'' suits, said Jeffrey Lindsay, of Sanford C. Bernstein & Co. It contrasted with a French court ruling last month that ordered EBay pay $63.6 million to LVMH Moet Hennessy Louis Vuitton SA, over claims the site didn't do enough to block the sale of counterfeits.

Today's decision ``will stop the momentum that may have been building up among brand owners, to try more of these kinds of lawsuits on,'' said Lindsay, a New York-based analyst who advises buying EBay stock.

Tiffany's Reputation

Tiffany, based in New York, sought a ruling to remove fakes it said threaten its reputation and reduce demand for the real thing. Tiffany notified EBay of more than 284,000 listings it believed were counterfeits, and most were removed by the auction site, court records show.

EBay, based in San Jose, California, fell 52 cents, or 1.9 percent, to $27.49 at 4 p.m. in Nasdaq Stock Market trading. Tiffany rose 29 cents to $37.32 in New York Stock Exchange composite trading.

Tiffany may appeal, spokesman Mark Aaron said in a telephone interview. ``We are shocked and deeply disappointed in the district court's erroneous reading of the law,'' he said.

Judge Sullivan said policy makers may yet decide that the law is inadequate to protect rights owners as online sales rise.

``The court is not unsympathetic to Tiffany and other rights owners who have invested enormous resources in developing their brands, only to see them illicitly and efficiently exploited by others on the Internet,'' Sullivan said in his 66-page judgment.

Tiffany and other retailers have alleged online sales of fake brands of clothes, bags and jewelry cost the industry about $30 billion a year.

LVMH Perfumes

Last month's French ruling also ordered EBay stop all sales of LVMH perfumes on its French site. Another French court, in a case filed by Hermes International, said last month that EBay is a partner to its vendors and must take more steps to ban fakes. Last year, Germany's highest court said EBay needed to better police online sales, in a case bought by Rolex Group.

Counterfeits claims by Tiffany and LVMH, the world's largest luxury-goods maker, hurt the resale of legitimate goods on EBay, said Sarah Davis, who runs Fashionphile, a Beverly Hills, California-based online designer of pre-owned luxury handbags.

``Chalk one up for the literally thousands of individual, honest sellers of legitimate luxury goods who just want the ability to post their authentic goods on EBay,'' Davis said. ``With highly counterfeited brands like Louis Vuitton, Tiffany, Chanel, etc., EBay is doing a ton to keep the fakes off.''

`Wreak Havoc'

EBay, created in 1995, said the ruling confirmed it acted ``reasonably'' and has ``adequate'' procedures in place to address counterfeiting.

In December, EBay said in a legal brief that an adverse ruling might ``wreak havoc'' on some Internet-based businesses. Before the trial, the company said in a sealed court paper that an unfavorable ruling might force it to ``shut down entirely,'' according to Tiffany's response, which was public.

EBay ``does not have responsibility, or liability in U.S. courts for policing everything sold on its site,'' Laura Martin, an analyst with Soleil Securities Group Inc., said today in a phone interview. She recommends investors hold EBay shares and doesn't own any.

Tiffany sued EBay in 2004, accusing it of turning a blind eye to sales of counterfeits because it profited from them.

Michael Kowalski, Tiffany's chief executive officer, testified that the only effective way to fight online sales of fakes is to go after distribution networks. He said it was uneconomical for Tiffany to pursue sellers of counterfeit goods who operate under aliases and from outside the U.S.

Today's ruling is only ``round one,'' said Heather McDonald, a partner at law firm Baker Hostetler who specializes in intellectual property enforcement litigation. ``I'm sure there are going to be ongoing battles fought,'' McDonald said.

The case is Tiffany (NJ) Inc. v. EBay Inc., 1:04-cv-04607, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Erik Larson in New York at elarson4@bloomberg.net; Beth Jinks in New York at bjinks1@bloomberg.net

Last Updated: July 14, 2008 17:22 EDT