Rolex sues you. Your own insurance company sues you. What's a web host to do?

Posted by Charles Colman

Remember when LAW OF FASHION gave that tedious lesson on "secondary liability" for copyright infringement?  Well, it will come in handy as you make your way through this (hopefully less tedious) post on the evolving plight of Webs, Inc., the unwitting witting host of a site that proudly sold "replica" -- i.e., counterfeit -- Rolex watches.

[Um, who puts a watermark on an image of a counterfeit watch?]

Recall that secondary liability (to oversimplify, once again) is a legal tool for getting parties on the hook for intellectual property infringement when they didn't directly engage in any wrongdoing, and yet encouraged or knowingly profited from someone else's infringement.  For those of you who follow this sort of thing, you're already familiar with the kind-of-a-big-deal 2010 case in which the Second Circuit Court of Appeals ruled that eBay was not liable to Tiffany & Co. for counterfeit jewelry sold on the auction company's site.  To boil down a fairly long opinion, the court ruled that even though eBay might have had some suspicion that there was counterfeit activity on its site, it was responsible only for counterfeit goods of which it had specific knowledge -- and that the evidence demonstrated that eBay had promptly taken action when it had such knowledge.  The court added a caveat: when the host of a website selling trademark-infringing goods is "willfully blind" to the infringement, that can substitute for specific knowledge... but there was no willful blindness here, as Tiffany had spent roughly $20 million a year on policies and tools to promote the sale of only authentic goods on its site.

Tiffany vowed to take the case to the Supreme Court.  The Supreme Court vowed not to hear it.

So if they didn't know before, now New York-based trademark owners can be sure that when they set out to inform hosts like eBay of the trademark infringement going on under their noses, they better include details.

But how many details?  And if a web host gets a notification that its customers are engaging in trademark infringement, does it have to tell its insurance company about it?  Webs, Inc. has been plagued by the first question since March, when it was sued by Rolex.  And it's been plagued by the second question since... Tuesday, when it was sued by the insurance company that's footing its legal bills in the Rolex case.

Here's the timeline:

  • February 2010: Webs receives a notification from Rolex's lawyers that one of its customers,, is selling counterfeit Roles watches.  Webs demands more details under the Digital Millenium Copyright Act.  Rolex's lawyers write back with specifics, and tack on a bitch-slap of a footnote stating that Webs is "undoubtedly aware" that the DMCA does not apply to trademark infringement.  Apparently, nothing happens... perhaps due in part to the aforementioned bitch-slap.
  • August 2010: Webs receives a subpoena from the federal government, demanding that it produce records and other information about
  • September 2010: Webs applies for an insurance policy with Travelers Property Casualty Co.  Travelers' application asks: "Have you received notification that any of your material, products, or services infringe on the intellectual property rights of another party?"  Webs answers "No."
  • February 2011: A year after the first round of letters, for reasons unbeknownst to LOF, Rolex takes a renewed interest in replicastore.  It steps up its threats; Webs apparently takes no action.
  • March 2011: Rolex sues Webs for "contributory and vicarious trademark counterfeiting [and] infringement."  Webs picks up the phone and asks its trusty insurer, Travelers, to pay for its legal defense.
  • May 17, 2011: Travelers sues Webs, claiming that it lied on its insurance application in response to the intellectual property infringement question.  Travelers asks the court to rescind the policy.

I wouldn't want to be Webs right now, would you?  But put yourself in its shoes, circa September 2010.  If you were applying for insurance, and you were asked, "Have you received notification that any of your material, products, or services infringe on the intellectual property rights of another party?", how would you have answered?  Webs' only service (at least for present purposes) is the hosting of sites run by others.  Rolex's letters had certainly "notified" Webs that its customer replicastore was infringing Rolex's intellectual property rights.  But at the time Webs submitted its application, it hadn't yet received a notification that it was itself an infringer -- instead, Rolex had informed Webs that if it didn't deactivate, then it would be a secondary infringer.  While reasonable minds could differ here, it seems to LOF that Travelers didn't ask quite the right question, and that it got a truthful (if legalistic) answer to the question it did ask.

While we're on the subject, query whether a "notification" -- even a simple opinion letter -- from Webs' own lawyers telling them that they were likely engaging in contributory or vicarious trademark infringement by failing to deactivate replicastores would have been sufficient to require an affirmative answer to Travelers' question.  (What if the lawyers' letter said "possibly" instead of "likely"?  What about "there is a small chance"?)  And to complicate matters further, would Webs even be required to mention a letter protected by attorney-client privilege when filling out its insurance application?

Tricky stuff.  So tricky, in fact, that Congress -- which notoriously drops the ball on intellectual property in favor of more "pressing" issues -- is working on web host liability issues right now.  The proposed legislation, however, has advocacy groups and intermediary sites like Google and Yahoo up in arms over the "thousands" of new court orders that they predict will result from the bill's passage.  But LOF has to wonder, wouldn't some legislative solution be better than the patchwork of secondary liability cases we're seeing now?

[This post is for entertainment and informational purposes only, and does not constitute legal advice or create an attorney-client relationship among any individuals or entities.  Any views expressed herein are those of the writer on the particular date of this post, and should not necessarily be attributed to his law firm or its clients.]