A recent article in the New York Times reports on a growing backlash among both eBay buyers and sellers against the growing number of counterfeit items being sold through the giant trading platform. It's not surprising that buyers would be upset at this alleged proliferation of fake merchandise; but sellers too are upset, noting that fake merchandise works to push down prices for the legitimate versions of the same product in addition to making buyers more reluctant to order in the first place.

Since eBay can't possibly monitor the estimated 1.3 billion auctions that take place on its site annually, it's put in place some intricate seller rating programs and other mechanisms meant to have a self-policing effect. It offers a very limited insurance program, and will remove fake items from its site if it is alerted by trademark holders. But above all it protects itself by loudly reminding everyone that it is a marketplace and thus merely a service provider, basically freeing it of responsibility for any of the transactions on its site.

At the moment, eBay seems to have the law on its side. In a major case called Hendrickson v. eBay, decided in 2001, a federal court ruled that the Digital Millennium Copyright Act shields eBay from copyright claims, as long as eBay removes copyright-protected material upon notification from the copyright owner. In the true spirit of the Internet, a company called GenuOne has created an automated service to monitor eBay auctions on behalf of trademark owners, and automatically notify eBay of violations.

The law seemed pretty settled in favor of online marketplaces such as eBay until 2004, when Tiffany & Company filed a lawsuit against it with a novel set of claims, among them that eBay was abusing its trademarks and promoting and profiting from fraud. Interestingly, the majority of lawyers who have been interviewed about this case seem to think Tiffany's might just win. The ramifications for all online marketplaces could be enormous if they became exposed to potential liability for fraudulent sales on their sites. The case is set to go to trial this year.

But not all online marketplaces are created equal. What enables the sale of knock-off merchandise on eBay? First, there are vast numbers of buyers and sellers, affording a lot of anonymity. Second, the majority of buyers and sellers are individuals, making them hard to vet or credential prior to a sale transaction. Third, there are lots of branded, high-value items that can be profitably counterfeited. Fourth, the sheer volume of marketplace transactions makes any kind of serious policing impossible. These characteristics are almost exactly opposite those that define most business-to-business marketplaces. And this suggests to me that consumer marketplaces may ultimately offer a less sturdy model than industrial marketplaces.

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