An eBay seller is having panic attacks… A prominent legal expert is shocked and outraged… Seller online marketplace accounts are being shut down…
Law firms are increasingly using a tactic called “Schedule A Defendant” lawsuits to target online merchants on behalf of their clients in the name of trademark enforcement, and it’s having a devastating effect. A single lawsuit targeting hundreds of sellers at a time for selling a branded product can leave each seller owing many tens of thousands of dollars through default judgments that obliterate their businesses.
Law professor Eric Goldman wrote about what he dubbed SAD Schemes (“Schedule A Defendants” schemes) after being retained to opine in one such case in 2021. It led him to look at such cases holistically, and he told us he was shocked by what he saw.
“I saw so many places where the procedures and outcomes just didn’t comport with the law as I understood it,” he told EcommerceBytes in a telephone interview on July 14. “And I couldn’t understand how that kept replicating. It wasn’t like a one-off mistake. It was a systematic sequence of errors that the courts were producing. And when I give the presentation on my paper, the audiences are shocked.”
Most sellers are familiar with programs like eBay’s VeRO, set up to efficiently handle takedown notices by brands who report specific listings as being in violation of their intellectual property. The SAD Schemes bypass such marketplace programs – instead, the brands (“rightsowners”) sue scores of sellers in a single complaint in federal court, accusing them of trademark infringement and counterfeiting.
In an article in April, Bloomberg Law reported that the US District Court for the Northern District of Illinois had received 817 Schedule A filings in 2022, an increase of over 900% from 2013, when the first Schedule A cases were filed.
The SAD lawsuits seek fast injunctions against defendants who don’t immediately know they’re being sued because judges are granting the plaintiffs’ requests that defendant lists be sealed.
Bloomberg quoted Justin Gaudio, an attorney at Greer Burns & Crain LLP, who filed over 100 Schedule A cases last year. Gaudio said the SAD lawsuits allow them to shut down listings and deter counterfeiters through monetary damages. “The strategy is more effective than the “Whack-a-Mole game where you’re sending takedown notices to the platforms.”
After we heard directly from two sellers who lost by default in such lawsuits because they did not answer it, we found other examples of sellers discussing it on industry boards. Typically, we found sellers initially skeptical over the legitimacy of the notices they received.
Most people understand that if they are sued, they must be served notice – by mail if not in person. But federal judges are allowing rightsowners to seal the defendants’ identities when they file their complaints – a hallmark of a SAD Scheme, according to Professor Goldman’s draft research paper available on SSRN.com – “the defendant may first learn about the lawsuit when its marketplace account is frozen,” he wrote.
A seller who joined a 2021 eBay discussion board thread about a case involving a rightsowner’s action against 394 “Does” (unnamed sellers) wrote, “I am skeptical that a default judgement can be issued without proper proof of service, which I previously doubted could be proven by sending an e-mail and not a physical notice via USPS or by use of a process server – however, I am not a lawyer. It appears, however, by reading other documents related to the previous judgement, that notification by eBay (which was done after they presented eBay with a court ordered preliminary judgement) is actually good enough for the Illinois courts.”
Interestingly, that seller noted that they had purchased the items being accused of infringing on the plaintiffs’ trademarks from an Amazon Returns pallet.
Another seller responding on the thread wrote, “At first I thought it was one of those scams people my age get everyday,” describing himself as a 75 year-old man with a heart condition and cancer. “Needless to say, ANY monetary damages would be devastating to me. My wife (84) is panicked. Help??”
In this case, the first seller quoted above advised others to respond to the lawsuit, noting, “These people have been successful before using the same format and procedure in the same courts – hence, the first thing to do is to respond to them so that they cannot get a default judgement against you for lack of response to the complaint – which I have to the email address provided by eBay (today).”
His advice was apparently heeded, as most of the sellers who participated in the thread in September 2021 appeared on the court docket as having had their cases voluntarily dismissed on September 13 – including the senior with health issues cited above.
However, asking for help from colleagues on industry discussion boards can result in advice that could be characterized as misguided, at best. In another thread about a different case, a seller described how eBay informed them that a US Court had directed the company to freeze their account. He was told by a commentor, “You must have ignored earlier warnings. Companies do not take the time to send their lawyers to court, nor are they awarded an injunction, for a first offense and never having notified the person they are suing. In a regular VERO complaint, eBay just pulls your listings and you are told to stop.”
But lawsuits are very different from marketplace takedowns through programs such as VeRO – and SAD Scheme lawsuits are in a league of their own.
Professor Goldman called them in his draft paper, “an underreported system of abusive intellectual property (“IP”) litigation” and outlined an eight-step protocol plaintiffs use in the schemes. “The complaint will contain sparse factual assertions, none particularized to any defendant,” he wrote, and, “The complaint’s generic prose makes it easy to clone-and-revise for subsequent cases.”
In 2022, Goldman conducted research and identified 3,217 cases that met his criteria for a SAD lawsuit. Over 88% were filed in the Northern District of Illinois, with the Southern District of Florida next at (7.5%). We also found numerous SAD Schemes lawsuits filed in the Southern District of New York.
Goldman has been blogging about IP issues and Internet law on the Technology & Marketing Law blog for the past 18 years and is Associate Dean for Research and co-director of the High Tech Law Institute at Santa Clara University School of Law, to mention a few of his many credentials.
But he’s no ivory-tower dweller and appears genuinely distraught over the plight of online sellers at the hands of rightsowners who, in his words, weaponize the legal system.
When we mentioned the stress casual sellers were experiencing compared to larger sellers – one of the sellers who contacted us said he was having panic attacks – Goldman said small businesses have an extraordinary amount of stress too, because they’re literally out of business. “The casual seller you mention has got a very unfortunate sword hanging over their head. But for the people who are trying to run a business, who have payroll, who have mortgages, who have vendors to pay – when they get their accounts freeze and the cash freeze, all of that becomes at risk.”
That said, rightsowners are not going after the big players who are likely to fight back, they’re going after the small players who have no real means of defending themselves, according to Professor Goldman.
The first seller who reached out to us provided us with details but then panicked and asked us not to use his information over fear he could get into further legal trouble. A second seller said she was set to speak to a lawyer for advice on what to do. But both of them had already been named as “defaulting defendants” in a final judgment order from the court.
We asked Goldman if it was a good idea for defendants to communicate directly with the law firm themselves when first contacted (as opposed to hiring an attorney), and if they should they provide their name and contact information.
“That one’s a really tough question because from an academic standpoint, I don’t want any of these defendants rolling over. I want them to force the plaintiffs to prove their case. I want all the defenses that might apply to be brought to bear on the case.
“But that costs time and money, and many of the merchants simply don’t have the expertise to stand up from themselves, let alone all the other resources necessary to do so successfully.
“And so, it is entirely logical for many of those defendants to simply pick the settlement option that’s presented to them and hope that that then moves the law firm to move on.
“I hate that result, it gnaws at me. And yet, I can see why many defendants would pick that.”
In Goldman’s draft paper, he writes of trademark infringement cases, “much of the battle is moving away from notice-and-takedown to even more nefarious enforcement efforts.”
That’s something more sellers need to be aware of. And while many civil and criminal cases drag on for years, the SAD Schemes we reviewed moved with extraordinary speed.
A major problem with letting notices be served via email is the amount of spam sellers receive – and the fact they’re advised by experts to be skeptical of fraudsters trying to extort money from them using pressure tactics. So on the one hand sellers must be wary of not responding to email notices threatening them, and on the other hand, they could be at risk if they do respond to emails with monetary demands from purported law firms.
See the accompanying blog post, Brands Go Beyond Takedowns and Start Suing Sellers.
WAYS TO ADDRESS THE SAD SCHEME
Changes in Online Marketplace Policies
The SAD Scheme would likely evaporate if the online marketplaces did not honor
ex parte TROs so expansively. As just one example, in theory, online marketplaces
could freeze only the items and money associated with the allegedly infringing
activity, not the entire account and all funds-in-possession. However, so long as
online marketplaces fear their own liability exposure, they don’t have enough
incentives to make nuanced interventions. It’s simpler and lower-risk for them to
categorically shut down alleged infringers identified in the TRO.
In other words – if eBay DID ITS JOB CORRECTLY – this wouldnt happen.
Defendant classes. FRCP 23 contemplates that defendants can form classes, just
like rightsowners do.61 For example, a defendant class could bust the rightsowner’s
trademark or establish defenses like descriptive fair use. However, few individual
defendants have enough motivation and resources to organize a class.
IE sue eBay and/or the rights owners in a Class Action suit