Is PayPal holding funds in your account? They can if you are sued for trademark infringement. If you are an online retailer, here is what you need to know about trademark infringement on ecommerce platforms, and things you should be aware of if you are required to defend yourself from trademark infringement allegations.

A Mixing Pot of Commerce and Cultures

Domestic e-commerce sites such as Amazon Marketplace and eBay are big business. More than 1 million sellers are on the Amazon Marketplace alone, representing all 50 states. This is not just a US phenomenon – people from more than 130 countries are selling on Amazon.

International platforms, such as AliExpress, owned by Chinese internet giant Alibaba, are also increasingly popular in the United States, allowing American consumers to purchase goods directly from Chinese small and medium sized businesses.

This mixing pot of commerce and cultures has created thousands of jobs, but it is not all smooth sailing. Intellectual property infringement runs rampant in online sales, a problem that is only magnified by retailers from other cultures with different attitudes and laws on the subject.

Once a trademark is registered, brand owners can sue competitors for putting products with confusingly similar marks on the market – even if the competitor did not know the original trademark existed.

Trademark 101

Trademarks are a source indicator, letting consumers know what company provides a particular good or service. They also allow companies to prohibit their competitors from utilizing confusingly similar goods and services in an effort to take advantage of the company’s reputation and customer base.

In the United States, trademarks are protected by the Lanham Act. Once a trademark is registered, brand owners can sue competitors for putting products with confusingly similar marks on the market – even if the competitor did not know the original trademark existed.

This is because intent is not an element of trademark infringement. Instead, because trademarks are meant for consumer protection, courts are primarily concerned with the “likelihood of consumer confusion.” As a result, even innocent infringers can be found liable for trademark infringement.

Trademark owners have an affirmative duty to police the unauthorized usage of their own marks. If a trademark owner does not actively search for infringers, he or she may lose the ability to exclude others from utilizing their marks. Because trademark brands can be extremely valuable, their owners can be aggressive in rooting out infringing activity.

Although the most common reason plaintiffs file trademark infringement lawsuits is to stop the infringing actions, defendants can still be hit with monetary damages, including:

•   The plaintiff’s actual business damages,
•   The plaintiff’s lost profits due to the infringing activity, and
•   The defendant’s profits.

Defendants may also be required to destroy all remaining inventory, at their own costs, and have injunctions issued prohibiting them from engaging in infringing activity again in the future.

Although the question of infringement does not look at the defendant’s intent, courts do consider whether or not the infringement was willful when calculating monetary damages. When a court finds that the defendant willfully infringed the plaintiff’s marks, the court can award:

•   Treble damages,
•   Punitive damages, and
•   The plaintiff’s attorney fees and costs.

This is particularly true for counterfeit goods, some of which are designed to be exact replicas of the original branded product. People who traffic in counterfeit goods are subject to both civil and criminal penalties, which, for first time offenders, can include:

•   10 years in jail,
•   Fines up to $2 million, and
•   Restitution to the victims.

Takeaways for Online Retailers

If you are an online retailer, you need to be diligent about ensuring the authenticity of brands you sell. This can include only working with reputable wholesalers and manufacturers, and regularly performing quality analysis on the goods you put on the market.

You should remember that, in the US, trademark owners have a responsibility to actively seek out infringers, so it may be difficult to try to fly under the radar if you know you are selling products that are designed to be confusingly similar to other brands.

If you are a brand owner looking to put new products into a new e-commerce stream, you should do research first to determine whether there are existing marks already registered.

In the United States, the Trademark Office has a searchable online database containing all pending and registered marks. Although it can often be difficult to determine whether a court would say that one mark is confusingly similar to another mark, the trademark directory is a good place to start.

Although some trademark owners may exhibit “troll” behavior, threatening expensive infringement lawsuits to scare online retailers into paying steep settlements, many are primarily concerned with getting the infringing goods off the market. Because of this, if you are contacted by a brand owner concerned about infringing activity, they may be satisfied if you agree to stop selling a particular product in a market. You may not have to pay any damages to the trademark owner at all.

Online retailers should also note that, under the “first sale” doctrine, trademark owners cannot prohibit resale of legally purchased branded goods. This means that if you legally buy a trademarked item, the brand owner cannot prohibit you from later selling it on eBay or the Amazon Marketplace, even if you are directly competing with their products. In order to take advantage of this affirmative defense, you should keep detailed records demonstrating that you purchased your stock legally.

Jurisdiction: Where can I be Sued?

When a plaintiff files a lawsuit, one of the first things they must say in the complaint is an explanation of how the court has jurisdiction over this case. There are both subject matter and geographic limitations on which courts have jurisdiction to hear a case over a particular defendant.

Federal courts have jurisdiction over intellectual property matters, including trademark infringement disputes. However, there are dozens of federal districts, and hundreds of federal courthouses across the United States in which a plaintiff could potentially file a lawsuit.

A trademark plaintiff would then need to determine which geographic area has appropriate jurisdiction. Defendants can only be sued in a geographic area they have contact with, such as by:

•   Living,
•   Visiting,
•   Working, or
•   Doing business in that state or country.

Someone who never travels to or does business in the United States is not under US jurisdiction. However, if an online retailer sells products to domestic consumers from another country, they can be sued in US courts. Similarly, business owners who have lived in Michigan all their lives cannot be sued in New York, unless they have done some kind of business in the state that could give rise to a lawsuit.

Once a plaintiff has narrowed down the list of courts that have jurisdiction over the defendant, there may be a choice between jurisdictions. If the defendant is an online retailer living in Michigan, but they sell counterfeit products across the country, the plaintiff may choose a jurisdiction it believes is most favorable. Then buys a counterfeit product from the defendant that is shipped to that jurisdiction, and then bring a trademark infringement lawsuit there.

In certain situations, it is possible for companies to limit the jurisdictions they can be sued in through contractual law. For example, an appliance company may put contractual language in the terms of sale that limits the geographic jurisdiction of where it can be sued for personal injury or product liability cases.

However, this kind of contractual limitation is not applicable for trademark infringement matters. This means that selling even one small item on the other side of the country, or internationally can open a retailer up to an infringement action in that jurisdiction.

Takeaways for Online Retailers

If you are an ecommerce retailer, it is possible that you are doing business across the United States or even locally. For many online sellers, the market is extremely competitive and it makes sense to broaden distribution as much as possible.

By selling to different states or countries, you may be opening yourself up to lawsuits in those jurisdictions. In the US, because trademark law is generally governed by the Lanham Act, it is generally the same across the country. It is important to note that different district courts may apply slightly different tests to determine whether or not infringement occurred, and different judges may be quicker to determine the existence of willfulness in a case.

Not knowing the local rules is not a defense in trademark infringement cases.

As a result, online retailers will need to weigh the pros and cons of doing business in each jurisdiction to which they ship. For American sellers brought into domestic cases, being sued in another state can be difficult to manage. At minimum, it requires taking time off work and away from your family, as well as additional travel expenses getting to and from court.

Global E-commerce and Foreign Retailers

With the global nature of e-commerce, foreign retailers may also find themselves brought into US trademark infringement lawsuits, governed by laws that could be significantly different than those of their home countries.

This is particularly important for Chinese retailers and manufacturers who want to do business in the United States to consider. While there are some similarities between the way the two countries approach trademark protections, there are many significant differences. By doing business in the United States, Chinese retailers are opening themselves up to lawsuits under a different trademark regime. Not knowing the local rules is not a defense in trademark infringement cases.

If you are being sued for trademark infringement, it is always a good idea to have an experienced intellectual property attorney on your side. This is doubly true for foreigners doing business in the United States, who may be unfamiliar with the system of laws, judicial procedures, and jurisdictional matters that govern our court systems.

PayPal Holding Funds in Pre-emptive Freezes and Default Judgments

It often makes sense for online retailers to keep funds in online payment processing accounts, such as PayPal, rather than continuously withdraw money that might be subject to processing fees. However, these funds may be at increased risk for being frozen, or even seized, if a retailer is sued in a trademark infringement lawsuit. This is potentially why PayPal is holding your funds.

the court will often award the entirety of the PayPal balance to the plaintiff, regardless of actual damages

It is often difficult for victorious plaintiffs to collect monetary judgments from defendants, even when everyone is located in the United States. These problems can increase exponentially if the defendant is located outside of the US and has limited, or no, assets.

One way that trademark plaintiffs solved this problem in the past is to have a federal judge issue an order that places a hold on the defendant’s PayPal accounts during the litigation. This prohibits defendants from withdrawing PayPal funds to overseas accounts. If defendants do not respond to the lawsuit, the plaintiff is granted a default judgment.

In this situation, the court will often award the entirety of the PayPal balance to the plaintiff. This award is made regardless of actual damages sustained by the plaintiff due to the infringing activity, or what the defendant’s actual profit was from improper sale of trademarked goods. In previous cases, defendants who sold less than $20 of infringing goods have lost more than $10,000 from their PayPal accounts because they did not respond to their lawsuit.

Takeaways for Online Retailers

First, if you receive a summons, you should read it carefully and contact an experienced attorney to help you understand your options. Sustaining a default judgment can be difficult, especially if the court has frozen some of your assets. Once these assets are given to the plaintiff, defendants face a momentous task in trying to have them returned.

Second, online retailers should consider carrying a lower balance in online PayPal accounts, in order to minimize the risk if their accounts are frozen. Even if you are confident that you will not be subject to this sort of lawsuit, PayPal is not a bank and therefore not subject to the same federal regulation and oversight, so PayPal will hold your funds more readily than a bank.

Working with an Experienced E-Commerce Attorney

If you are an online retailer, it is important to work with an E-commerce attorney who knows the ins and outs of laws relating to the growing industry. If you find yourself being sued for trademark infringement, you need to understand what options are available to you, as well as the potential consequences of the lawsuit.

Branded companies hire high-powered law firms to enforce their intellectual property rights – you deserve to have an experienced trademark attorney in your corner, too. If you need to speak with an attorney about options for intellectual property rights protection on e-commerce platforms, click here to email us, or call 855-473-8474.