Handbag, clothing and perfume company Louis Vuitton Moët Hennessy (LVMH) sued eBay in the French courts, claiming that the company did not do enough to combat the sale of counterfeits of its goods.
EBay claims that it cannot police all the sales through its site and that it makes no guarantee that goods are genuine, and that it suspends counterfeit auctions when notified of them.
The French court, though, found "serious faults" in eBay's processes that led to auctions of counterfeit goods going ahead. By allowing the sales, it said, eBay had damaged the reputation of luxury brands such as Louis Vuitton and Christian Dior.
EBay said that it would appeal the verdict. "Today's ruling is not about our fight against counterfeits; today's ruling is about an attempt by LVMH to protect uncompetitive commercial practices at the expense of consumer choice and the livelihood of law-abiding sellers that eBay empowers everyday," eBay said in a statement. "We will fight this ruling on their behalf."
"It is clear that eBay has become a focal point for certain brand owners' desire to exact ever greater control over e-commerce," the company said. "We view these decisions as a step backwards for the consumers and businesses whom we empower everyday."
Pierre Gode, a member of LVMH's board, disagreed. "It's a groundbreaking decision that will help protect creativity,'' he told news agency Bloomberg. "It's an important precedent."
Intellectual Property specialist Iain Connor of Pinsent Masons, the law firm behind OUT-LAW.COM, said that in the UK eBay's liability for counterfeit sales is dependent on its status.
"In the UK eBay's general position is that it is not an auctioneer because if it is an auctioneer under English law it has a lot of potential liability for goods that are sold," he said. "If it was found to be an auctioneer in the UK I could see a case against eBay on similar facts being successful."
EBay runs a system called Verified Owner (VeRO), which allows brand owners to ask eBay to suspend specific auctions of counterfeit goods. Connor, though, said that fake traders find ways to make their auctions less likely to be found.
"Responsibility for monitoring is on the rights holder, so auctioneers often start auctions on Fridays at 7pm and have them close by 9pm on a Sunday night, so that people working traditional hours never see them. There is a spike in this kind of traffic then," he said.
The costs to brand owners can be significant, though. Tiffany is taking a similar case to LVMH's in the US and has claimed that it employed a full time team of staff for months just to provide information on fake auctions to the VeRO system.
The French court not only dealt with counterfeit sales, but told eBay that it must not allow sales of four of LVMH's perfurme brands, even when the goods are new and authentic. Connor said that some kinds of product were allowed that degree of control in some cases.
"It is permissible to have exclusive channels of distribution under European law and it seems that this ruling has taken that right to what in an offline world would appear to be a logical conclusion but would appear to be an interesting extension into the online world," he said.
Pinsent Masons competition law expert Edward Anderson said that the EU Treaty forbids placing anti-competitive restrictions on trade, but that luxury goods producers can impose restrictions on who can sell their goods.
The European Commission published Guidelines on Vertical Restraints (44-page / 145KB PDF) in 2000 which outlined the criteria that producers must demonstrate if they are going to restrict sales of their goods. They are permitted, in some cases, to order outlets not to sell their goods on the basis of a shop's fixtures and fittings, turnover, stocking of other goods and minimum stock requirements, amongst other things.
EBay was told by another French court earlier this year to pay Hermes €20,000 over the sale of three Hermes bags, two of which were fakes.
The £31.5m damages award seems large, but Connor said that it was dwarfed by the scale of general counterfeit sales. "Trade in counterfeit goods worldwide runs into the tens of billions of pounds, it's just a case of getting back a small chunk of that," he said. "It seems a high number, but in terms of trade in counterfeit goods it is probably not unexpected."