US appeals court backs Amazon over counterfeit pillowcases

Amazon will be breathing a sigh of relief after a US federal appeals court upheld an earlier lower court decision in the e-commerce giant's favour regarding a dispute over counterfeit pillowcases.

The ruling follows a four-year legal battle with Seattle-based novelty pillowcase maker Milo & Gabby who sued Amazon after a Chinese racket produced and sold copycat versions of its pillowcase designs on the online marketplace.

The counterfeiters used Amazon's Fulfilment by Amazon programme, which allows access to Amazon's logistical network, and stored the merchandise in Amazon warehouses while it marketed the products online using photos it had pilfered from genuine Milo & Gabby listings, which included copyrighted photos of the owners' children.

The boutique business, which has five US design patents relevant to the case, claimed Amazon was liable for trademark infringement because it made an "offer to sell" the bogus products even though it wasn't the one directly behind the producing, listing and selling of the goods.

The product-detail pages for the knock-off pillowcases identified ten different entities as third-party sellers, court documents said. Out of the 10 third-party sellers selling the knock-off pillowcases, only one, FAC System, used the Fulfilment by Amazon service.

The listings were removed from the site and the third-party sellers were suspended from the online marketplace.

In response to Milo & Gabby's allegations, Amazon denied its services and platform constituted an "offer to sell", arguing that in fact third-party retailers make the offer to sell and that Amazon merely provided services for third-party retailers.

In 2015, the district court ruled in Amazon's favour, saying it found "no evidence in the record that Amazon actively reviewed, edited, altered or copied [Milo & Gabby's] images". The district court further noted that "Amazon is not the seller of the alleged infringing products" because "third-party sellers retain full title to and ownership of the inventory sold by the third party".

But judge Ricardo Martinez noted his concern over the decision.

"[The court] is troubled by its conclusion and the impact it may have on the many small retail sellers in circumstances similar to the plaintiffs. There is no doubt that we now live in a time where the law lags behind technology. This case illustrates that point," he said.

"Under the current case law, Amazon has been able to disavow itself from any responsibility for 'offering to sell' the products at all," he added, calling on Congress, rather than the courts, to explore the issue.

Milo & Gabby appealed the district court ruling but the appeals court found in favour of Martinez' decision after concluding that Milo & Gabby had not been able to prove that Amazon was responsible for patent, copyright or trademark infringement and had failed to provide any reason to find the online marketplace as the "seller" of the pillowcases.

"Because the district court did not err in granting summary judgment on Milo & Gabby's copyright and trademark allegations, and because Milo & Gabby failed to preserve its patent infringement arguments, we affirm," the appeals court said.

The court case comes at a time when fierce criticism looms over e-commerce marketplaces such as Amazon and Alibaba. Indeed, Amazon already finds itself in court after a number of brands – including Run-DMC and makers of the Snuggie blanket – have filed suits against it for infringement and allowing counterfeits to be sold on the online platform.

For Amazon itself, these claims and court cases are concerning given that third-party sellers contribute substantially to its coffers. According to figures from Amazon's recent annual shareholder meeting, third-party sellers accounted for 49 per cent of all paid units in 2016.