Trademark reform eliminates online marketplaces

[Eric, 09/28/2021, Technology and Marketing Law Blog, “The SHOP SAFE Act Is a Terrible Bill That Will Eliminate Online Marketplaces,” https://blog.ericgoldman.org/archives/2021/09/the-shop-safe-act-is-a-terrible-bill-that-will-eliminate-online-marketplaces.htm, Accessed: 07/09/24, shl]

[Note: this blog post covers Rep. Nadler’s manager’s amendment for the SHOP SAFE Act, which I think will be the basis of a committee markup hearing tomorrow. If Congress were well-functioning, draft bills going into markup would be circulated a reasonable time before the hearing, so that we can properly analyze them on a non-rush basis, and clearly marked as the discussion version so that we’re not confused by which version is actually the current text.]

The SHOP SAFE Act, H.R. 5374, seeks to curb harmful counterfeit items sold through online marketplaces. That’s a laudable goal that I expect everyone supports. However, this bill is itself a giant counterfeit. It claims to focus on “counterfeits” that could harm consumer “health and safety,” but those are both lies designed to make the bill seem narrower and more balanced than it actually is.

Instead of protecting consumers, this bill gives trademark owners absolute control over online marketplaces by overturning Tiffany v. eBay. It creates a new statutory species of contributory trademark liability that applies to online marketplaces (defined more broadly than you think) selling third-party items that bear counterfeit marks and implicate “health and safety” (defined more broadly than you think), unless the online marketplace operator does the impossible and successfully navigates over a dozen onerous and expensive compliance obligations.

Because the bill makes it impossible for online marketplaces to avoid contributory trademark liability, this bill will drive most or all online marketplaces out of the industry. (Another possibility is that Amazon will be the only player able to comply with the law, in which case the law entrenches an insurmountable competitive moat around Amazon’s marketplace). If you want online marketplaces gone, you might view this as a good outcome. For the rest of us, the SHOP SAFE Act will reduce our marketplace choices, and increase our costs, during a pandemic shutdown when online commerce has become even more crucial. In other words, the law will produce outcomes that are directly opposite to what we want from Congress.

In addition to destroying online marketplaces, this bill provides the template for how rightsowners want to reform the DMCA online safe harbor to make that functionally impossible to achieve as well. In this respect, the SHOP SAFE Act portends how Congress will accelerate the end of the Web 2.0 era of user-generated content.

[The rest of this post is 4k+ words explaining what it does and why it sucks. You might stop reading here if you don’t want the gory/nerdy details.]

Who’s Covered by the Bill

The bill defines “electronic commerce platform” as “any electronically accessed platform that includes publicly interactive features that allow for arranging the sale or purchase of goods, or that enables a person other than an operator of the platform to sell or offer to sell physical goods to consumers located in the United States.”

Clearly, the second part of that definition targets Amazon and other major marketplaces, such as eBay, Walmart Marketplace, and Etsy. I presume it also includes print-on-demand vendors, such as CafePress, Zazzle, and Redbubble, that enable users to upload images (unless those vendors are considered to be retailers, not online marketplaces).

The first part of the definition includes services with “publicly interactive features that allow for arranging the sale or purchase of goods.” This is a bizarre way to describe any online marketplace, and it covers something other than enabling third-party sellers (that’s the second part of the definition), so what services does this describe? Read literally, all advertising “allow[s] for arranging the sale or purchase of goods,” so this law potentially obligates EVERY ad-supported publisher to undertake the content moderation obligations the bill imposes on online marketplaces. That doesn’t make sense because the bill uses the undefined term “listing” 11 times, and display advertising isn’t normally considered to be a listing. Still, this wording is unusual and broad–and you better believe trademark owners like its breadth. If the bill wasn’t meant to regulate all ads, the bill drafters should make that clear.

Like most Internet regulations nowadays, the bill distinguishes entities based on size. See my article with Jess Miers on how legislatures should do that properly. The bill applies to services that have “sales on the platform in the previous calendar year of not less than $500,000.” Some problems with this distinction:

the bill doesn’t define “platform,” so it’s unclear what revenues count. In Amazon’s case, is it only revenues from the marketplace or does it also include the revenues from Amazon’s retailing function? If the latter, then the definition will pick up smallish online retailers that have small marketplace components.

the bill also doesn’t distinguish between gross and net revenue. So, for example, assume a site takes a 10% commission on sales. If a service has $500k in merchandise sales (gross revenue), but only keeps $50k in commissions (net revenue), is it covered by the law or not? I think the bill covers gross revenue, which means the bill reaches companies with small net revenues.

as usual, the bill doesn’t provide a phase-in period. A service may not know its revenues until some time after the calendar year closed, but it would be obligated to comply with the law from the beginning of the calendar year. As usual, then, this forces services below the revenue threshold to comply anticipatorily in case they clear the threshold. How hard is it for bills to include a phase-in period?

I’d fret more about the $500k threshold, but it’s likely to be irrelevant anyways. The bill also applies to smaller services once they receive 10 NOCIs over their lifetimes from all sources. (Unlike the other services, these services get a 6 month phase-in period).

To qualify as a NOCI, the notice must (1) refer to the SHOP SAFE Act, (2) “include an explicit notification of the 10-notice limit and the requirement of the platform to publish” the NOCI disclosures below [I have no idea what this element means], and (3) “identify a listing on the platform that reasonably could be determined to have used a counterfeit mark in connection with the sale, offering for sale, distribution, or advertising of goods that implicate health and safety.” [So, a NOCI counts against the 10 threshold if it “reasonably could be determined” that the listing was counterfeit, even if the NOCI is actually wrong.]

A month after getting its first NOCI, the service must publicly post an attestation that it has less than $500k in revenue and a running tally of the number of NOCIs received…I guess for shits and giggles so that trademark owners can compete to be the one to put the service over the 10 NOCI threshold? I mean, even tiny services will quickly accrue 10 NOCIs. Indeed, I imagine rightsowners will coordinate their NOCIs to ensure that small services clear this threshold and are obligated to comply with the law. Thus, the 10 lifetime NOCIs threshold is a ruse to mislead people that smaller services aren’t governed by the law, when of course they will be.

What’s Regulated?

The law applies to counterfeit “goods that implicate health and safety,” defined as “goods the use of which can lead to illness, disease, injury, serious adverse event, allergic reaction, or death if produced without compliance with all applicable Federal, State, and local health and safety regulations and industry-designated testing, safety, quality, certification, manufacturing, packaging, and labeling standards.” I mean, pretty much every physical product meets this definition, right? Virtually every misdesigned or nonconforming physical item has the capacity to cause personal injury. For example, electronic items that don’t comply with industry standards can cause physical harm from electrical charges, which means every electronic item is categorically within the bill’s scope even if the allegedly counterfeited item actually complies with industry standards. Now, replicate that analysis for other goods and tell me which categories of goods lack the capacity to cause harm. Once again, the “health and safety” framing is another deceptive ruse because the bill functionally applies to all goods, not just especially risky goods.

Overturning Tiffany v. eBay

In 2010, the Second Circuit issued a watershed decision about secondary trademark infringement. Essentially, the court held that eBay wasn’t liable for counterfeit sales of Tiffany items because eBay honored takedown notices and Tiffany’s claims sought to hold eBay accountable for generalized knowledge. That ruling has produced a kind of détente in the online secondary trademark infringement field, where we just don’t see broad counterfeiting lawsuits against online marketplaces any more.

The SHOP SAFE Act ends that détente. First, it creates a new statutory contributory trademark infringement claim for selling the regulated items. Second, the bill says that the new contributory claim doesn’t preempt other plaintiff claims, so trademark owners will still bring the standard statutory direct trademark infringement claim and common law contributory trademark claims (and dilution, false designation of origin, etc.). Third, online marketplaces nominally can try to “earn” a safe harbor from the new statutory contributory liability claim (but not from the other legal claims) by jumping through an onerous gauntlet of responsibilities. Those requirements will impose huge compliance costs, but those investments won’t prevent online marketplaces from being dragged into extraordinarily expensive and high-stakes litigation over eligibility for this defense. Fourth, the law imposes a proactive screening obligation, something that Tiffany v. eBay rejected. Fifth, unlike Tiffany v. eBay, generalized knowledge can create liability; and takedown notices aren’t required as a prerequisite to liability. Sixth, in litigation over direct trademark infringement and common law contributory trademark infringement claims, trademark owners can cite compliance/non-compliance with the defense factors against the online marketplace, putting the online marketplace in a worse legal position than they currently are in.

All told, the SHOP SAFE Act will functionally repeal the Tiffany v. eBay standard that has fostered the growth of online marketplaces for the last decade-plus, and usher in a new era of online shopping that will likely exclude online marketplaces entirely.