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The Green SheetGreen Sheet

The Green Sheet Online Edition

September 14, 2009 • Issue 09:09:01

Gucci accuses processor, others of aiding sale of knockoffs

Responding to the alleged sale of imitation products online, fashion giant Gucci America made an unusual move last week: It filed a lawsuit against the processor, acquiring bank and merchant services provider of a retailer it claims broke the law. The lawsuit, filed in the U.S. District Court, Southern District of New York, Manhattan Courthouse, follows Gucci's successful civil case against online retailer TheBagAddition.com.

In December 2008, TheBagAddiction.com's owner, Laurette Co. Inc., and other defendants were ordered to pay Gucci (a subsidiary of French luxury goods company PPR Group) $5.2 million for selling replica Gucci products. But legal experts contacted by The Green Sheet believe Gucci will have a more difficult time pursuing its new targets.

Among the accused are Frontline Processing Corp., Woodforest National Bank, Durango Merchant Services LLC and other companies not mentioned by name in the lawsuit. Gucci contends that the companies are liable for what is known in the legal world as "contributory infringement" - in this case, contributing to trademark infringement by allegedly assisting in the sale of fake handbags.

"They're liable because they knowingly assisted in the sale of fake Gucci products," said Gucci's lawyer, Robert Weigel. "These so-called 'replica merchants' could not operate unless they have someone willing to process their credit card transactions." Weigel said that TheBagAddiction.com, which has ceased operating, had been selling inauthentic Gucci handbags that bore the company's label. A representative for Durango Merchant Services declined comment, and representatives for Frontline Processing and Woodforest National Bank were unavailable for comment.

An important precedent

According to Theodore Monroe, an attorney who specializes in electronic payments and credit card processing, there is a potentially crucial precedent for Gucci's lawsuit. He said the case will likely hinge on a 2007 trial in which a pornography magazine publisher sued Visa Inc., MasterCard Worldwide, and other affiliated banks and processing services for processing payments for Web sites that the publisher claimed had stolen its copyrighted images. In that case, Perfect 10 v. Visa International Service Association, the United States Court of Appeals for the Ninth Circuit ruled the sued processors were not liable because their payment services did not amount to a "material contribution" to the direct infringement.

"Will [the U.S. District Court] follow the precedent established by the Ninth Circuit?" Monroe said. "Quite possibly, and I expect they will. But note that [the Perfect 10] case was very controversial, and these payment processors aren't out of the woods yet. It's quite possible that this is up in the air and quite possible that, if they don't follow precedent, this case will go to the Supreme Court."

Uphill battle

Payments industry attorney Adam Atlas said Gucci faces an uphill battle, adding that processors aren't generally responsible for the authenticity of merchant products.

"By that logic, every bank in America would have to hire another 300 people to just be snooping around and checking if stuff's real," he said. "And by the way, who decides if something's real? ... The payments industry, in my view, is not equipped to cut the wheat from the chaff in terms of real or fake products. I admire Gucci for their creativity on this one, but I don't think they're going to win."

Yet, Weigel said the companies named in Gucci's lawsuit "knew the merchants were selling fake stuff." Atlas himself conceded that, "in the real world of processors who deal with online, high-risk merchants, it must be said that it's impossible for everyone to be naïve."

Monroe said that, while processors and other parties contracting with merchants are required by law to learn what their merchants do as part of the underwriting agreement, their duties usually end there.

"The way most of these contracts are written, they have the right to [investigate], but they don't have any obligation, and they probably don't do it," he said. end of article

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