Only a flexible approach using burden sharing maximizes the cheapest cost avoiding principle

Trademark law promotes three distinct policies: (1) to prevent consumer confusion, (2) to protect the goodwill of businesses, and (3) to promote competition within the market. 110 From an economic perspective, trademark law's furtherance of these policies contributes to efficiency by reducing consumer search costs."' Instead of inquiring into the provenance and qualities of every potential purchase, consumers can avoid confusion by looking to trademarks as shorthand signals of quality and source. 112 In this way, trademarks make obtaining information about products less costly. Consumers will demand more of these signals and will arguably become better informed, leading to a more competitive market.113 Thus, one way to express "[t]he value of a trademark is the saving in search costs made possible by the information or reputation that the trademark conveys or embodies about the brand." 114

These benefits depend on the continued ability of trademarks to function as a reliable shorthand indicator for consumers. For this to be the case, a consumer's past experience with a product or service must be a good predictor of their future experiences with the same brand. 115 This gives trademark owners an incentive to maintain consistent quality of their goods so that the shorthand information conveyed by the trademark is consistent with consumer expectations. 116

Underlying this economic framework is the tenet that consumers must be able to trust that trademarks accurately convey information about the products or services they brand. 11 It should almost go without saying, then, that the economic benefits of trademarks depend critically upon the proper legal protection of trademark rights. Trademark law plays an essential role in upholding a trademark's ability to signal quality because otherwise, free-riding competitors copying a reputable trademark will capture profits that should have gone to the trademark owner if consumers believe the products come from the same source. 118 If such free-riding is allowed to continue, and consumers realize through experience that products bearing the same mark may be offered by different businesses with different standards, the information embodied in trademarks will be destroyed. 119 There is no doubt that free-riding conduct is rife on internet auction sites like eBay, where counterfeit trademarks are used to sell products. Therefore, this is not a situation like the one that may exist when, for example, search engines, advertising firms, and others use trademarks to "help competitors reach their audiences through nontraditional 'uses' of established marks." 120 Such uses may well be consistent with the economic rationale of trademark law by reducing a consumer's overall search costs. 121 The relevant question, as the Tiffany court recognized, is: "[W]ho should bear the burden of policing" against confusing and economically inefficient uses of trademark owners' brands?122

To answer this question from an efficiency perspective, the cost of avoiding a harm should be borne by the party who can do so most cheaply-i.e., the cheapest cost avoider. 123 In the context of counterfeit goods sold in online marketplaces, answering the question of who is the "cheapest cost avoider" is not straightforward.

There are significant arguments for why online marketplaces can bear the cost of combating infringement most cheaply. The marketplace has supervision and control over access to its service. 124 It arguably is in the best position, as Tiffany alleged in its complaint against eBay, to implement antiinfringement measures such as, for example, automated programs that will screen new listings for counterfeit goods as they are being posted and scan existing listings regularly for evidence of infringement. 125 eBay, for example, already employs a "fraud engine" that uses "rules and complex models that automatically search for activity that violates eBay policies."' 26 Furthermore, the online marketplace may have the best access to information that may reveal infringements. eBay's "Verified Rights Owner ('VeRO') Program" allows mark owners to submit notices of infringing listings directly to eBay, while Yahoo! Auctions created a Neighborhood Watch Program that allows users to "review" and report questionable auctions. 127 This could suggest that the marketplace itself already serves as a centralized portal that receives notices of infringement from multiple sources.

It therefore may be more costly for trademark owners to take such measures, because each mark owner would usually be capable of policing only their own brands, and hundreds or thousands of mark owners would replicate the same measures. If trademark owners find infringing items offered for sale on an online marketplace, they would have to contact the marketplace in an effort to get the infringing listings removed, or sue thousands of sellers individually in a piecemeal attempt to solve the problem. 128 Placing the responsibility of policing trademarks in the hands of a single enforcer who has control over the forum hosting the infringement is tempting based on these considerations, and may partly explain why this has been done in other jurisdictions outside the U.S.129 Furthermore, as Tiffany itself suggested in its complaint against eBay, online marketplaces stand to profit from the sale of infringing goods through the charging of listing fees (which means they profit even from the mere offer to sell) as well as, in some cases, a percentage of the final sale price. 130 It could be argued that if the burden of trademark enforcement is not placed on online marketplaces, they would be "[w]ithout a financial reason to prevent counterfeiting."' 131 By contrast, trademark owners have strong financial incentives to develop and maintain the goodwill associated with their brands. 132

The counterarguments that counsel for placing the burden on trademark owners do not lack in persuasive power, however. Trademark owners, as the designers or manufacturers of their goods, have particular expertise in the specific characteristics unique to their brands and are therefore arguably "in the best position to determine if a given listing infringes their rights."' 133 This includes not only familiarity with a brand's distinguishing features and qualities, but also an understanding of which products in a brand line are particularly susceptible to counterfeiting or which products or ranges of products do not exist in the brand owner's product line but have been specifically developed by counterfeiters. 134 A 2003 report of the Trademarks and Unfair Competition Committee of the New York City Bar Association on online auction sites and trademark infringement liability ("Committee Report") observed that before an online marketplace's employees could become experts in detecting counterfeits of various trademarked goods, they would require "special training" to learn these brand characteristics that a brand's owners are already intimately familiar with.135 Without this expertise, the report noted, online marketplaces may also be forced to require proof of trademark rights or authenticity before a listing can be posted, and such measures would detract from the "convenience and ease of the online marketplace."' 136

Moreover, if the legal standard forced online marketplaces to bear the extra costs associated with training employees or slowing down the listing process, it may result in "undue chilling of unquestionably legitimate behavior."' 13 Online marketplaces like eBay have made it significantly easier for consumers to locate and purchase authentic brand name items they seek. Although one source reported two million potentially counterfeit listings on eBay in 2007, this represented less than 0.86% percent of the 2.34 billion listings eBay hosted that year. 138 To continue operating, some online marketplaces may pass the increased costs on to consumers through heightened service fees, which would make the services less accessible to consumers. If these costs are sufficiently high, some online marketplaces "might need to stop selling trademarked goods" entirely. 139 Indeed, the Committee Report concluded that, in some cases, enforcement by the online marketplace could be so "expensive and impractical" that "smaller online auction sites, unable to afford the risks of infringement liability, may be forced out of business" altogether. 140 In other words, if the liability regime placed the costs of preventing trademark infringement solely on online marketplaces, consumers may be deprived of these forums for legitimate goods that have become fixtures of modern commerce. 141 This has been called a "perverse" result that would undercut the role of trademarks to "help consumers conduct efficient searches" for goods they desire. 142

Further complicating this analysis of the competing considerations is the fact that even if particular measures can be taken more cheaply by one party in some circumstances it is unclear whether that will still be the case if other variables change. In addition, enforcing trademarks in online marketplaces is a complex effort that will involve many different measures, and the cheapest cost avoider for each measure may differ. This suggests, at the very least, that a bright line rule that rigidly places the burden on either online marketplaces or trademark owners would be inappropriate. 143 One commentator has noted that given the "valid arguments on both sides," the focus should be on "burden-sharing rather than burden-shifting because it would be a much more efficient, genial, and definite way to prevent consumer fraud."' 144

Accordingly, a liability rule in this context should recognize that it is most efficient to allocate the burden of policing online marketplaces to both brand owners and online marketplaces. Both have a shared interest in ensuring legitimate transactions, and both are, in their own way, uniquely situated to avoid the costs of infringing and counterfeit goods in the most efficient manner. The cheapest cost avoiding principle is best furthered by a flexible rule that recognizes a joint burden. As the Ninth Circuit has observed, "[w]e must be acutely aware of excessive rigidity when applying the law in the Internet context; emerging technologies require a flexible approach."' 145 Similarly, the European Court of Justice has held that precautions demanded of online marketplaces must not only be "effective" but also "proportionate," and "strike a fair balance between the various rights and interests" of the parties involved. 146