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Herm?s Beats eBay in Counterfeit Case

And there are bigger suits from global luxury-goods companies pending. Will the online auction house have to change its business model?

Online marketplace eBay (EBAY) has lost an early skirmish in its brewing legal battle with global luxury companies over the sale of counterfeit goods.

A court in the eastern French city of Troyes on June 4 ruled against eBay in a suit brought by Paris luxury house Herm?s over the sale of fake Herm?s-branded handbags listed on eBay's French site. "By selling Herm?s bags and branded accessories on the site and by failing to act within their powers to prevent reprehensible use of the site," both the seller and eBay "committed acts of counterfeiting," the court said.

The case was limited in scope, involving just two bags sold in 2006. eBay and the bags' sellers were jointly ordered to pay $30,000 in damages to Herm?s, and eBay was told to post a notice of the ruling on its French home page for three months. Alexandre Menais, who heads an anti-counterfeiting unit within eBay's European operations, says the company has not decided whether to appeal.

From LVMH to Tiffany

But the decision could be a bellwether for much bigger cases pending against eBay in Europe and the U.S. A Paris court is set to rule on June 30 on a suit filed against eBay by the world's No.?1 luxury group, Paris-based LVMH Moët Hennessy Louis Vuitton, involving more than 400,000 fake Louis Vuitton bags and Dior-branded items. LVMH says the items were offered for sale on eBay during a six-month period in 2006. The company is seeking damages of more than $57 million.

A similar case filed against eBay by jewelry maker Tiffany went to trial in U.S. District Court in New York earlier this year, but a ruling has not yet been issued. In another pending case, Paris-based beauty-products group l'Oréal last year sued eBay in five European countries—Belgium, Britain, France, Germany, and Spain—over the sale of fake cosmetics and fragrances on its site.

If eBay were to lose one or more of those bigger cases, it could be forced to rethink its long-standing business model, which lets buyers and sellers make deals on its site with minimal supervision. eBay maintains that it actively fights counterfeiting through its Vero (Verified Rights Owner) program that allows trademark owners to complain about suspicious listings. But companies such as LVMH and Hermès say the program has failed to curb the spread of knockoffs online.

Unifab, an organization of French manufacturers that has assisted luxury-goods makers in challenging eBay, says it welcomed the ruling in the Hermès case. "Justice has been served," a spokeswoman says.

But eBay's Menais says the ruling in some respects was "positive" for the company. During the trial, eBay argued that since 2006 it had strengthened the Vero program, making it easier to identify and take down suspicious listings. The June 4 ruling does not require eBay to take additional anti-counterfeiting measures—evidence, Menais says, that the court was satisfied with the safeguards now in place. "The judge simply said: 'The tools you had in place in 2006 were not enough,'" he says.

Matlack is BusinessWeek's Paris bureau chief.

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