A Handcrafted Problem: Etsy's share price woes and IP infringement

Etsy describes itself as a "marketplace where people around the world connect, both online and offline, to make, sell and buy unique goods." For a site based on creativity and uniqueness, they have a surprisingly long history of high profile disputes between Etsy sellers and intellectual property owners. Among a myriad of other incidents, sellers have reportedly had problems with FOX over ugly hats, with Taylor Swift over coffee mugs and pillows, and even with the general idea of upcycling adult clothing into children’s clothing.

After Etsy’s April initial public offering (IPO), ValueWalk reported that a research note from Gil Luria and Aaron Turner of Wedbush Securities examined the listings. The note determined that greater than 5% of the items listed on the site may involve some form of infringement on intellectual property rights, because the items are counterfeit or use copyright protected material or trademarks without a licence. The note raised the concern that the original IP owners may get serious about policing infringement on Etsy, and that a resulting decrease in listings could impact Etsy’s revenues. Etsy stock tumbled after the note was released. Shareholders have launched a suit claiming Etsy failed to disclose information related to infringing items in their IPO prospectus.

The Wedbush research note listed a variety of well known brands and detailed the number of items search results that appeared to use the intellectual property of other brands. At the top of the list was Disney; the search found over 700 thousand items using Disney's characters and marks.  Sports leagues, comic books companies, toy and game companies, bands, and TV shows also made it onto a list that totaled over 2 million items.

Luria and Turner were careful to note that they could not be certain that any of the items found in their searches were definitely infringing. The individual brands would have to examine the items to determine authenticity of vintage items or infringement by handcrafted items. However, they reviewed a sample of listings and even purchased some items to check for the expected trademark indicators or licensing information and did not find evidence from those samples that intellectual property was being used with permission.

Neither the Wedbush note nor the shareholder lawsuit contend that Etsy is itself liable for the infringement. The Wedbush note cites the precedent regarding secondary liability established by the US 2nd Circuit Court of Appeals in Tiffany v eBay (to read more about this case, see IPilogue post here).  While eBay had general knowledge of counterfeit Tiffany items being sold on their site, they did not have specific knowledge about which particular items were infringing and the court found that they could not be expected to determine on their own if a given item was infringing. eBay had a program for responding to IP owners' complaints and the court felt that was sufficient to shield them from secondary liability. The court also rejected an argument from Tiffany that eBay had an incentive to be willfully blind to the infringing listings since they earned revenue based on the listings and sales, noting that eBay had to deal with unhappy customers when items were determined to be fake and that the sale of counterfeit items reduced the reputation of eBay with buyers.

The circumstances are similar for Etsy. Etsy has a general policy and procedure covering both copyright and other intellectual property claims that is based on requirements for service providers under the Digital Millennium Copyright Act. While they may not actively police items, they do respond to complaints by IP owners. The disincentive to allow counterfeit items may be stronger for Etsy than for eBay, because authenticity is such an important element of Etsy's brand. They mention authenticity in their corporate mission statement and describe it as a cornerstone of their brand in their IPO prospectus.

Etsy also addressed infringing content in the prospectus. A section is devoted to the risk that Etsy "may be subject to claims that items listed in our marketplace are counterfeit, infringing or illegal.” It discusses the possibility that they would not be able to allow the infringing listings, although it does not explicitly mention the potential revenue impacts of losing those listings. It also mentions the possibility of liability for secondary infringement outside of the United States, where the laws may be less favourable to online marketplaces. That is the situation in France, where a case very similar to Tiffany v eBay was decided in favour of the plaintiff, LVMH, instead of eBay.

Although Etsy may have more infringing items listed than shareholders were aware of when they purchased stock, the claim that they were unaware of the risks associated with infringement may be difficult to support. Though there were not specific percentages attached, the possibility of infringing items and the risk they pose was clearly identified in the prospectus.