When Website Sells Infringing Goods, Credit Card Companies May Face Liability

Can a company that provides credit card services be held liable for the activities of merchants using its accounts? In Gucci Am., Inc. v. Frontline Processing Corp., 2010 U.S. Dist. LEXIS 62654 (S.D.N.Y. June 23, 2010), a federal judge revisited the question of credit card company liability. In this Analysis, Thomas Carey, partner at Sunstein Kann Murphy & Timbers LLP, ponders the implications of this issue. He writes:

     In 2007, the Ninth Circuit, an influential federal appeals court, held that Visa and Mastercard could not be held liable for copyright infringement even though their credit card services were used to sell infringing photographs. Perfect 10 v. Visa Int'l Service Ass'n, 494 F.3d 788, 83 U.S.P.Q.2d (BNA) 1144 (9th Cir. Cal. 2007).  The court reasoned that, because the credit card companies exercised no control over the infringing websites, their connection to the infringement was too remote to establish secondary liability.

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     Last month, a federal judge in the Southern District of New York revisited the question of credit card company liability in Gucci America Inc. v. Frontline Processing Corp., 2010 U.S. Dist. LEXIS 62654 (S.D.N.Y. June 23, 2010). Luxury goods manufacturer Gucci America had sued Laurette Company for selling "replica" Gucci products on TheBagAddiction.com. Charged with trademark infringement, Laurette eventually admitted liability for counterfeiting.

     Still hungry for battle, Gucci also targeted three companies that provided credit card processing services to Laurette. Durango Merchant Services assisted merchants in setting up merchant credit card accounts, while Frontline Processing Corporation and Woodforest National Bank provided and serviced such accounts.

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     . . . Gucci presented evidence that Durango's website boasted of the company's specialization in "hard to acquire accounts," and it reached out to "high risk" merchant accounts, such as those selling replica products. Durango helped Laurette avoid chargebacks by making customers check a box reading "I understand these are replicas" upon purchase.

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