SMILE! - You're On eBay

By Jeffrey A. Babener
  1999

Surprise!!

The MLM corporate executive was enjoying surfing the Internet until he took a momentary romp thorough the eBay auction site. There it was in black and white. A laundry list of the company's products were being auctioned on the site like so many old chairs and used cameras. He slumped in his chair as the visions of flea markets and drive-in movie parking lots came to mind. What could he do?

E-commerce is Big.

Within a matter of a couple of years, e-commerce on the Internet has exploded. Although, the direct sales industry has taken 100 years to elevate its U.S. sales to $20 billion, e-commerce on the Internet is expected, even in its infancy, to post $50 billion in 1999. By the year 2003, experts expect e-commerce to eclipse the trillion-dollar point.

"the direct sales industry has taken 100 years to elevate its U.S. sales to $20 billion, e-commerce on the Internet is expected, even in its infancy, to post $50 billion in 1999."

Direct sellers have rushed to capitalize on the Internet by creating their own e-commerce sites and engaging in cross-channel marketing. Companies like Amway have turned their corporate cultural upside down with sites like Quixstar, which are viewed simultaneously by industry observers as either a bold reach to new frontiers or a desperate attempt to hold on in the New World order.

Not What We Planned.

Direct selling executives definitely envision the opportunities of cross-channel marketing on the Internet. What they were not looking forward to was to seeing their products resold in auction-style format on sites such as eBay. To many executives, the reselling of MLM products on auction sites dilutes the valuable trademark names of companies and also diminishes the opportunities of its distributors by competing in a nondirect sales channel with other distributors.

Online Auction Sales.

Sites such as eBay function like a cross between the classified ads and an auction. MLM products that are being sold on auction sites are sold at prices substantially lower than available through most authorized company distributors. Either the products are used, unwanted, or are being dumped in the market by distributors who have purchased more product than necessary in order to qualify for larger bonuses and override commissions.

Most MLM companies prohibit sales on the Internet. If distributors are offering products on the eBay site, they are typically in violation of MLM company policies and procedures and, therefore, in violation of their contract with their company. In addition, there is an argument that they are given a limited license to use the company's trademarks, and use that goes beyond the license constitutes an unauthorized use of the company's trademark.

The eBay VeRO Program.

To its credit, eBay anticipated this type of situation and developed a program to protect intellectual property of marketers as products show up for auction. This program is called eBay VeRO Program. According to eBay:

"Due to the volume and nature of the online person-to-person trading format, eBay does not and cannot verify that sellers have the right and ability to sell or distribute their listed items. However, eBay is committed to removing illegal or unlicensed items once a verified rights owner reports them to us."

Through the VeRO program, companies can join the program, search eBay for offending items, and notify eBay that the sale of those products infringes trademarks or other intellectual property. Upon receipt of the sworn statement from an MLM company, eBay will send a notice to the sellers and any bidders that the auction has ended.

Marketers are required to register with eBay, and they are encouraged to place information regarding their products and the rules covering their products on an "about me" page that functions as an informative site regarding the company. This site may contain details as to why the company believes the auction infringes its rights.

The VeRO Program is basically set up to give eBay the protections granted to Internet service providers by the Digital Millennium Copyright Act (DMCA).

It's the Trademark.

Sites like eBay aren't necessarily protecting or honoring agreements between companies and distributors that prohibit marketing at flea markets or on the Internet. Rather, eBay is honoring the company's right to control its trademark.

MLM companies can argue that distributors are trademark licensees by the terms of their agreements and the policies and procedures. As such, they have agreed to use company trademarks pursuant to a license, and the license defines the boundaries of the distributors' permitted use. Pursuant to the license contained in the policies, distributors agree not to advertise product in any way other than by using advertising and promotional materials supplied by the company. Distributors are also typically prohibited from marketing on the Internet or displaying information through any unauthorized web-sites. It would seem that eBay is such a site, and using trademarks on sales in violation of Internet policies is also a breach of the trademark license. Courts have long upheld the right of a trademark owner to restrict the method of distribution of products bearing the trademark.

On the other hand, a seller of used trademarked items or a consumer that buys trademarked product who is not subject to a license agreement, needs no permission to sell trademarked products on the Internet or elsewhere. Such sales are allowed, so long as consumers are not deceived into thinking that the seller is somehow authorized or affiliated with the trademark owner, or there is otherwise confusion as to the source of the product.

Challenging the Auction.

The problem is discovering which of the eBay sellers is a distributor governed by contract, and which are merely consumers reselling product purchased earlier without restrictions. In most cases, this may be difficult, but there could be times when the nature of the product or seller is obvious. Some ads may say that products are "like new," or the ad may be advertising the availability of a quantity of company products. Either of these situations would give a company a good idea as to whether or not the sale is authorized or unauthorized.

If the company is satisfied that the sale is unauthorized, it can alert eBay to this fact, and eBay will cancel the auction. Under the terms of the VeRO Program, the company would need to provide a notice of infringement for every allegedly infringing auction item. Once the company appoints an authorized person, perhaps someone in the information technology department, that person can email future infringement notices to eBay. Once an auction has been terminated, eBay requests an explanation as to reasons why, and forwards this on to the sellers and bidders for their education, or to allow them an opportunity to appeal.

Taking a Stand.

A direct selling company will need to decide whether it will attempt to halt all eBay-type auctions for its product, or to perform further investigation to try to determine if the seller is a distributor, and to stop the auction and institute disciplinary proceedings. It may also be that the company will decide to specifically address this issue in the newsletter to distributors, reminding them that this practice is in breach of their contract, and will be cause for termination if discovered.

Watch for more of these Internet issues to arise.


Jeffrey A. Babener
Babener & Associates
121 SW Morrison, Suite 1020
Portland, OR 97204
Jeffrey A. Babener, the principal attorney in the Portland, Oregon law firm of Babener & Associates, represents many of the leading direct selling companies in the United States and abroad.

www.mlmlegal.com

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