A French court dealt eBay Inc a blow for selling fake luxury goods, but while the Internet auctioneer's business model is unlikely to change, further legal setbacks could shave its margins.
In the near term, the biggest damage could be to the eBay brand, which promises shoppers the widest range of goods in a marketplace that connects millions of buyers and sellers.
eBay has already upped its spending on people and technology to try to keep counterfeit items off its site, and further investments prompted by unfavourable court rulings would be mostly incremental at this point, analysts said.
On Monday, a French court ordered eBay to pay US$61 million (S$83 million) to LVMH, parent of the Louis Vuitton and Dior brands, for failing to properly monitor auctions.
In the United States, a federal judge is due to rule on whether it is the responsibility of eBay or plaintiff Tiffany & Co to police the site for fake Tiffany diamonds.
Legal experts were not predicting the outcome of the eBay-Tiffany case, which will decide the ground rules of doing business in cyberspace and whether traditional notions of trademark and copyright protections deserve greater protection on the Web.
Although the lawsuits are a distraction for eBay, the bigger issue for investors is how the company revives stalled growth.
Adjusted operating margins have stayed stable in the mid-30s due to cost controls, but expansion will rely on sales growth.
Shares of eBay are down 18 per cent since January as the company has made dozens of changes to improve how its core auction business works on behalf of buyers and sellers.
eBay said it planned to appeal the French ruling.
The company maintained that LVMH and a handful of other luxury brands are using the counterfeit goods issue as a "smokescreen" and that its real agenda is to keep a tight rein on distribution of goods outside its own sales channels.
In June, the European Union's highest court said it would hear an appeal by Google in a counterfeit goods case brought by LVMH against Google that parallels the eBay case.
US courts have largely taken the position that it is the trademark owner?s responsibility to establish which goods sold online are counterfeit.
Under this view, Web services like eBay that act as middlemen are protected as long as they act quickly to remove fake items.
Nevertheless, "middlemen" like flea market operators or warehouse owners have been found liable for selling fake goods based on laws that favour strong trademark protection.
eBay claims that more than 90 per cent of offending items are removed from its site within four hours after notification from rights holders and the issue is a red herring.
It counts 18,000 brand owners with which it works, including Apple Inc, Coach Inc, Nike and Oakley, through a simple process that allows them to notify eBay of fake goods on its site.
By contrast, a handful of luxury brand groups such as LVMH have turned to litigation instead of working with eBay's anti-fraud programme. - REUTERS
