Gucci America, Inc. v. Frontline Processing Corp.
721 F. Supp. 2d 228 (2010)
Rule of Law:
A service provider, such as a credit card processor, may be held contributorily liable for trademark infringement if it continues to supply its services to one whom it knows or has reason to know is engaging in trademark infringement, and has direct control over the instrumentality used by the third party to complete the infringing sales.
Facts:
- Gucci America, Inc., a New York corporation, is the exclusive U.S. distributor of products bearing the registered 'Gucci Marks'.
- An online merchant known as the 'Laurette Counterfeiters' operated TheBagAddiction.com, a website that sold counterfeit 'replica' Gucci products and openly stated the items were not authentic.
- Durango Merchant Services advertised its ability to set up 'High Risk Merchant Accounts,' including for those who sell 'Replica Products,' and connected the Laurette Counterfeiters with payment processors.
- Frontline Processing Corporation began processing credit card transactions for TheBagAddiction.com, earning fees on over $500,000 in sales of counterfeit goods.
- Woodforest National Bank also began providing credit card processing services after its employees conducted a review of TheBagAddiction.com, which involved printing pages from the website that displayed counterfeit Gucci products.
- Both Frontline and Woodforest investigated customer 'chargebacks' related to the counterfeit products sold on the website.
- The Laurette Counterfeiters relied on credit cards for approximately 99% of payments, making the services provided by Frontline and Woodforest essential to their ability to conduct business.
Procedural Posture:
- Gucci America, Inc. ('Gucci') previously sued the operators of TheBagAddiction.com (the 'Laurette Counterfeiters') in the U.S. District Court for the Southern District of New York, resulting in a consent judgment where Laurette admitted liability.
- Gucci then filed this lawsuit in the U.S. District Court for the Southern District of New York against Durango Merchant Services, Frontline Processing Corporation, and Woodforest National Bank.
- The three defendants jointly filed a motion to dismiss the complaint pursuant to Federal Rules of Civil Procedure 12(b)(2) for lack of personal jurisdiction and 12(b)(6) for failure to state a claim upon which relief can be granted.
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Issue:
Does a company that provides credit card processing services to an online merchant it knows is selling counterfeit goods face contributory liability for trademark infringement under the Lanham Act?
Opinions:
Majority - Baer, Jr., District Judge
Yes. A company that knowingly provides essential services to an online counterfeiter can be held contributorily liable for trademark infringement. The court analyzed contributory liability under the Supreme Court's test in Inwood, which holds a party liable if it intentionally induces infringement or continues to supply its product to a known infringer. For service providers, the court adopted a modified test requiring knowledge plus 'direct control and monitoring of the instrumentality used by a third party to infringe.' The court found Gucci failed to state a claim for direct or vicarious liability. However, it found Gucci plausibly alleged contributory liability. Durango may be liable for 'intentional inducement' because it specifically marketed its services to 'high risk' and 'replica' merchants. Frontline and Woodforest may be liable under the second prong because they allegedly knew Laurette was selling counterfeit goods (or were willfully blind) and continued to provide their services. Crucially, the court held they exercised the requisite 'control' because their payment processing services were an 'essential step in the infringement process.' Unlike in Perfect 10, where the infringement was displaying images, here the infringement was the sale of tangible goods, which could not be consummated without the defendants' financial services. By controlling the 'financial bridge' for these sales, they controlled the instrumentality of infringement.
Analysis:
This decision expands the scope of contributory trademark infringement liability by applying it to third-party financial service providers. It establishes that 'control over the instrumentality of infringement' does not require control over the infringing content itself (e.g., the website), but can be satisfied by control over an essential component of the infringing transaction, such as the payment system. This ruling provides trademark holders with a powerful tool to combat online counterfeiting by targeting the financial infrastructure that supports it. Consequently, payment processors and other financial intermediaries may face increased pressure and legal risk, requiring them to implement more robust monitoring of their merchants' activities to avoid liability for contributory infringement.
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