eBay garnered a significant legal victory this week when the 2nd U.S. Circuit Court of Appeals upheld a lower court's finding that the online auction site did not infringe on or dilute the trademark of Tiffany & Co. even though it facilitated the sale of thousands pieces of knock-off jewelry on its site.

However, eBay (NASDAQ: EBAY), which has been harshly criticized by software developers, retailers and industry trade groups for its apparent inability to stop or indifference to the rampant sale of counterfeit goods on its site, was scolded by the three-judge panel for potentially exposing itself to future false advertising claims by continuing to advertise that all the products sold on its site are authentic.

The upscale jeweler filed a lawsuit against eBay in 2004, claiming it was infringing and diluting its trademark and guilty of false advertising because an estimated 73 percent of the advertised Tiffany & Co. items listed on the site at the time were counterfeit.

The New York-based appellate court upheld the lower court's ruling absolving eBay of copyright infringement and dilution charges. It also left in place the false advertising ruling in eBay's favor but returned the case to the judge for further consideration.

"The law requires us to hold eBay accountable for the words that it chose insofar as they misled or confused consumers," the panel wrote in its decision. "A disclaimer might suffice. But the law prohibits an advertisement that implies that all of the goods offered on a defendant's Web site are genuine when, in fact, as here, a sizable proportion of them are not."

eBay general counsel Michael Jacobsen said the online auctioneer is confident the lower court will uphold its original decision on the false advertising claim.

"The decision is a critically important victory for online consumers who want the best prices for genuine products and underscores eBay’s commitment to connecting buyers and sellers under the pillars of trust, value, and selection," Jacobsen said in a statement.

"We continue to support cooperation, rather than litigation, as the best way to address these issues in everyone’s best interests and we remain confident that the one remaining issue in the case will be decided favorably on remand," he added.

In the past year, eBay has worked with local and federal law enforcement agencies as well as anti-piracy organizations to help investigate and prosecute people selling stolen or counterfeit goods on its site.

Those efforts have resulted in lengthy prison sentences and fines for a number of convicted pirates and the company said it will continue to explore new policies and technologies to help stem the trade of counterfeit products through its auctions.

Tiffany & Co. said its attorneys are in the process of reviewing of the appellate court's decision and will consider an appeal to the U.S. Supreme Court.

"Obviously Tiffany is very disappointed by today’s decision," Tiffany & Co. CEO Michael Kowalski said in a statement. "As an e-commerce leader, eBay has a responsibility to protect consumers and promote trust in its marketplace."

"eBay knew that counterfeit merchandise was being sold on its site—and eBay took no effective steps to stop it. eBay deliberately misled consumers for profit, and unfortunately, the court has justified its actions," he added. "The consumer is the real loser today."

Larry Barrett is a senior editor at InternetNews.com, the news service of Internet.com, the network for technology professionals.

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