By Erik Larson and David Glovin

Feb. 8 (Bloomberg) -- A U.S. court ruling may require EBay Inc. to pour more money into blocking the online sale of counterfeit luxury goods.

Tiffany & Co. accused EBay in a nonjury trial in November of trademark infringement by allowing sales of bogus silver jewelry. Tiffany and other retailers say online sales of fake clothes, bags and jewelry cost them about $30 billion a year.

A Tiffany lawyer urged a judge in New York to order EBay to take all feasible steps to block counterfeit sales, declaring there's ``a problem with its business model.'' EBay says it already spends $20 million annually on ``trust and safety'' matters including piracy, and an adverse finding might mean more expenses, lawsuits and damage awards. The judge said in November he would rule soon.

``EBay will look considerably different than it does today'' if it loses, said Geoffrey Potter, who heads the anti- counterfeiting practice at the New York law firm Kramer, Levin, Naftalis & Frankel, which isn't involved in the dispute.

EBay, based in San Jose, California, was sued in September in five European countries by L'Oreal SA, the largest cosmetics maker, and in 2006 by units of Christian Dior SA and LVMH Moet Hennessy Louis Vuitton SA, the biggest luxury-goods maker. In a suit by Rolex Group, Germany's top court ruled in June that EBay may have to take more steps to block counterfeit watch sales.

In addition to the $20 million, or 0.33 percent of annual revenue, that EBay says it spends on enforcement, the world's largest online auctioneer said it conducts computer searches for suspect items and assigns 250 of its 16,000 employees to prevent infringement.

No Prediction

EBay didn't spell out in court papers its worst-case scenario if it loses the suit. Company attorneys and spokeswoman Kim Rubey wouldn't predict anti-piracy steps in case of a defeat or estimate their costs.

``We decline to speculate on a hypothetical.'' Rubey said.

The U.S. case pits a 171-year-old U.S. luxury-goods pioneer against a 13-year-old leader of the online economy. New York- based Tiffany sued in 2004, saying EBay allows hundreds of thousands of bracelets, necklaces and pendants to be falsely sold as Tiffany jewelry.

Tiffany lawyer Ewa Zalewska worked four years as a part- time detective, scanning EBay listings for fake merchandise, she testified at the trial. She looked for suspiciously low prices and offerings of five or more of the same piece in one sale. In 2006, she found 134,779 fake Tiffany items offered, she said.

Zalewska notified EBay of suspect sales, sometimes flagging hundreds in a single e-mail, she said. About 10 percent of the time, EBay wouldn't act until she followed up, she said.

Monitoring Goods

Tiffany asked the judge to order EBay to take ``technically feasible'' steps to block fakes, like stopping bulk sales, vetting sellers more rigorously and searching harder for phony goods.

``Those steps won't put EBay out of business,'' Tiffany lawyer James Swire said in an interview.

An adverse ruling ``would potentially wreak havoc on businesses that, in formulating and refining their business models, have relied upon the settled law that Tiffany now seeks to overturn,'' EBay said in court papers.

The online auctioneer can't make wide-scale computerized searches for counterfeits because ``there's a limit on the number of filters that you can have,'' Robert Chesnut, EBay's deputy general counsel, testified. ``At some point, the engine can't handle the volume.''

EBay has about 102 million listings at any one time and about 6 million new ones each day. Revenue jumped 30 percent last year to $7.8 billion.

`Disaster' Unlikely

``It would be a disaster for EBay to be forced to verify the validity of every single item, which is one of the reasons I'm pretty sure it won't happen,'' said Timothy Boyd of American Technology Research in Greenwich, Connecticut. ``As far as I know the precedents are on EBay's side.''

A loss wouldn't be devastating, said Donald Yacktman, founder of Austin, Texas-based Yacktman Asset Management, owner of more than 1 million EBay shares as of Dec. 31.

``I think they would probably have to do some adaptive things,'' Yacktman said.

EBay said Tiffany isn't doing its part to fight counterfeiting. The jeweler spent just $14 million over five years, averaging 0.1 percent of annual revenue, on its anti- piracy program, EBay said in court papers. The jeweler said what it spends is irrelevant.

EBay's anti-piracy efforts are modeled on a U.S. law requiring that Web site operators remove items that infringe a copyright as soon as the owner alerts them to a possible violation, the company says. No federal law covers online trademark violations.

Vero Program

EBay created a program called Verified Rights Owner, or Vero, to address infringement concerns. Brand owners scour EBay's site for fakes and report them electronically. EBay said it almost always removes suspect items. About 14,000 companies have signed up, EBay says. Tiffany, one of the biggest Vero users, said the program is too cumbersome.

The case will probably turn on how U.S. District Judge Richard Sullivan interprets the law of contributory trademark infringement, which occurs when someone enables another to infringe on a brand name.

``More than in most cases, there is a fundamental disagreement with respect to what the law is here,'' Sullivan said at the end of the trial.

The case is Tiffany (NJ) Inc. v. EBay Inc., 1:04-cv-04607, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Erik Larson in New York at elarson4@bloomberg.net ; David Glovin in Manhattan federal court at dglovin@bloomberg.net .