The court also told eBay that it could use other people's trade marked terms in ads on its site and in ads it places on other people's websites.
Jeweller Tiffany sued eBay in 2004 over the counterfeit Tiffany items that flooded the site, arguing that the company was liable for the trade mark infringement resulting from the sale of the fakes.
Judge Richard Sullivan in the US District Court in New York ruled that eBay was not responsible for all trade mark infringement on its site and said that its anti-counterfeiting policies were sufficient.
Sullivan said that eBay could not be held responsible for trade mark infringement "based solely on their generalized knowledge that trademark infringement might be occurring on their Web sites".
He said that taking down of specific listings brought to eBay's attention by Tiffany was sufficient protection for trade mark holders. The ruling confirms that it is up to the owner of a trade mark to protect it.
"Tiffany must ultimately bear the burden of protecting its trademark," said the ruling. "Policymakers may yet decide that the law as it stands is inadequate to protect rights owners in light of the increasing scope of Internet commerce and the concomitant rise in potential trademark infringement. Nevertheless, under the law as it currently stands, it does not matter whether eBay or Tiffany could more efficiently bear the burden of policing the eBay website for Tiffany counterfeits – an open question left unresolved by this trial."
"Instead, the issue is whether eBay continued to provide its website to sellers when eBay knew or had reason to know that those sellers were using the website to traffic in counterfeit Tiffany jewelry. The Court finds that when eBay possessed the requisite knowledge, it took appropriate steps to remove listings and suspend service," it said.
Had the court ruled in favour of Tiffany it could have undermined the entire eBay business. If eBay had to check every single listing for authenticity then the cost of listing an item would be likely to become prohibitively expensive, observers said.
EBay suffered a recent court setback when a French judge said that its anti-counterfeiting procedures were inadequate. Handbag, clothing and perfume company Louis Vuitton Moët Hennessy (LVMH) sued eBay, claiming that the company did not do enough to combat the sale of counterfeits of its goods.
The French court found "serious faults" in eBay's processes that led to auctions of counterfeit goods going ahead and ordered it to pay €39 million to the brand holders. By allowing the sales, it said, eBay had damaged the reputation of luxury brands such as Louis Vuitton and Christian Dior, it said.
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 New York court's ruling will protect its US business, which is responsible for nearly half of the company's earnings.
"This ruling appropriately established that protecting trademarks is the primary burden of rights owners – not marketplaces like eBay," said Rob Chesnut, senior vice president and legal counsel at eBay. "The court ruled that eBay does in fact meet its responsibilities regarding counterfeits."
Tiffany spokesman Mark Aaron told the Associated Press news agency that the company was "shocked and deeply dismayed" at the decision, and Tiffany lawyer James Swire told AP that the company may appeal the ruling.
Trade mark law expert Lindsey Wrenn of Pinsent Masons, the law firm behind OUT-LAW, said that the French cases found eBay to be complicit in the sale of counterfeit goods through its failure to act.
"It was held that eBay were more than a passive intermediary as they are well aware of transactions since they take a percentage cut," said Wrenn. "The US court ruling takes a different view on the question of complicity, requiring less of eBay in its actions to prevent counterfeits so as to amount to contributory infringement."
"The US court ruling held that in order for eBay's actions to amount to contributory infringement they would have had to continue supplying services to those whom it knew or had reason to know were infringing the Tiffany trade marks," said Wrenn. "
Wrenn also pointed out that the US court referred to the fact that Tiffany had chosen to sue eBay rather than the individual sellers, and that it had chosen not to participate in eBay's programmes that help brand owners prevent fraud.
"This may have tipped the balance in terms of what was expected of eBay and the US court was not prepared to accept they had been complicit in the infringements," said Wrenn.
The court also defended eBay's right to use the term Tiffany in adverts for eBay which are displayed on other people's websites. The company advertised the availability of Tiffany goods until the jeweller's lawsuit, and the court now says that it can resume that practice.
"The Court finds that eBay’s use of Tiffany’s trademarks in its advertising, on its homepage, and in sponsored links purchased through Yahoo! and Google, is a protected, nominative fair use of the marks," said Sullivan.