Putting the IP in IPO: How a Newfound Respect For Intellectual Property Turned a Notorious Counterfeit Marketplace Into the Largest IPO Ever

 

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By:  Brian  J. Meli

Before September 19th, the date of its initial public offering on the New York Stock Exchange, many Americans had never heard of Chinese Internet conglomerate Alibaba or its eccentric founder and Chairman Jack Ma. Now the Chinese eBay/Amazon (with 10x and 7x the annual sales of those two companies, respectively), and its iconoclast leader are all anyone in the media and the investment community can seem to talk about. And there’s good reason for that. Not only was the Alibaba Group’s IPO the largest ever for a Chinese-based company on the NYSE, but with an estimated value of $25 billion, it was the largest IPO for any company, ever.

Why all the fuss? Well for starters, with its nascent market of 1.3 billion people, China’s burgeoning middle class—with its ballooning disposable income and growing consumer appetite—is viewed as a vast, untapped resource. And Aliaba, who already calls 300 million of those people its customers (a customer base nearly the size of the U.S. population, if you’re counting), is regarded as a direct spigot to that resource. That’s led western investors to see limitless potential in the company, and to clamor like school children for a piece of the action.

In a recent 60 Minutes interview, Jack Ma described his unlikely rise from english teacher and oft-failed entrepreneur with no technical training, to head of the world’s largest e-commerce empire; which between its many divisions, including Taobao, eTao, Tmall and Alipay, controls as much of 80% of the online marketplace in China. But Jack Ma’s meteoric rise to tech titan isn’t the only against-the-odds success story to be had here. In a way, his path parallels that of his company’s, which as recently as three years ago seemed a most unlikely candidate for a listing on an American stock exchange.

As recently as 2011, Alibaba subsidiary Taobao Markeplace was listed on the U.S. Trade Representative’s Notorious Markets List, a who’s-who blacklist of global virtual and physical marketplaces that the U.S. government maintains directly harm American economic and business interests by facilitating rampant trademark counterfeiting and copyright piracy. Taobao_Marketplace_LogoIt’s not a list any business wants to find itself on, and for a company appearing on it in 2011 to go on to become listed on the world’s premier stock exchange in 2014, is nothing short of astonishing. It’s the equivalent of a nation making the transition from state sponsor of terrorism to NATO member over the term of a standard car lease. Could it happen? Sure. But the smart money isn’t betting on it. And yet, now that Alibaba seems to have gotten its intellectual property house in order and placed IP protection atop its list of priorities, that smart money is betting heavily on it succeeding…and succeeding big.

Why the sudden about face? What prompted the Chairman of a company which has historically been indifferent to intellectual property crimes to go on national television and describe counterfeiting as thecancer of our business,” likening himself to an oncologist in the process? It comes down, as most decisions do, to simple risk/reward analysis. The reward is as clear as it is game-changing: direct access to western capital markets has the potential to turn Alibaba from an obscure regional e-tailer with little name recognition or influence outside of the Chinese mainland, into a global Internet behemoth on par with Google, Apple and Facebook. The risk? Such access comes only by playing by the rules of the international community; rules established by the World Intellectual Property Organization (WIPO), requiring heavy investment in the infrastructure and personnel needed to implement robust IP monitoring and enforcement systems. When viewed in this light, Alibaba really didn’t have a decision to make. A meaningful investment in infrastructure in exchange for global legitimacy is a worthy tradeoff by any calculation, and it’s not even close.  

To be clear, Alibaba was never accused of engaging in any counterfeiting or copyright piracy directly. Rather, the U.S. government claimed the company was secondarily liable for the infringing activities of third party sellers on its various sites. This is what’s known as contributory trademark or contributory copyright infringement in legal speak, and it implicates the middleman who knowingly facilitates and indirectly benefits from a transaction involving infringing material. At the very least secondary infringers are guilty of turning a blind eye to illegal activity; at worst of actively assisting it.

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Knowledge is the key to contributory infringement, and a finding that a host website knows or should know about illegal activities happening under its nose, but does little or nothing to prevent it, triggers liability. It’s a bit like aiding and abetting a criminal. You didn’t commit the crime, but you assisted the person who did. It is on this theory that many peer-to-peer file-sharing sites like Napster and Grokster were put out of business, and it’s become one of the primary ways for rights holders to protect their intellectual property in this all-digital age, since going directly after individual infringers is usually cost-prohibitve, inefficient and ineffective.

Among American Internet providers and e-commerce sites, secondary liability is a well-worn concept, and something they have, by and large, managed to successfully avoid. In the area of copyright piracy that’s due in large part to the safe harbor provisions of the Digital Millennium Copyright Act (DMCA), which shields service providers from liability so long as they implement strict notice and takedown procedures and remove infringing content when they are made aware of it. So if somebody uploads a copyrighted video to YouTube without permission, the video’s copyright holder need merely submit a good faith notice of infringement claim, and as long as YouTube takes reasonable steps to remove it, it cannot be held liable for damages.

One of the biggest and most well-known cases of the DMCA successfully shielding a service provider from secondary liability is Viacom v. YouTube, a 2010 case in which media giant Viacom alleged that roughly 150,000 unauthorized clips of its copyrighted programming had been uploaded by users to YouTube’s platform, resulting in more than 1.5 billion collective views. Despite the enormity of these numbers, YouTube was found to be DMCA compliant, and succeeded in getting the case dismissed at the district court level, later settling with Viacom on appeal, reportedly without any money changing hands. The case represents one of the strongest legal precedents to date for service providers defending against contributory infringement claims, and it makes clear that even egregious levels of copyright infringement need not automatically lead to a finding of secondary liability.

Similar protections exist in trademark law as well, mainly through court precedents like those established in Tiffany v. eBay, another 2010 case in which high-end jewelry maker Tiffany accused eBay of assisting in the sale of counterfeit goods bearing its trademark. Much like in Viacom, Tiffany alleged rampant direct infringement, claiming their internal investigations revealed the ratio of counterfeit products to authentic Tiffany merchandise on eBay’s site to be in the neighborhood of 5:1. Still, this wasn’t enough to find eBay guilty of contributory infringement. The courts ruled that by implementing a comprehensive rights owner program that encouraged the submitting of Notices of Claimed Infringement forms (the trademark equivalent of a notice of infringement claim) eBay had taken appropriate steps to avoid liability.

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Clearly Alibaba has been paying close attention to these court decisions and others like them, using them as a blueprint for building a company with a level of oversight that international investors will feel is worthy of their investment dollars. A cynic might say they’re doing just enough to keep their noses clean, rather than demonstrating a genuine concern for the impact intellectual property theft has on the world economy. But that’s really missing the point. They’ve done what they’ve needed to do—what international treaties say a responsible Interent service provider must do to be successful. And Alibaba’s newfound respect for IP is an encouraging sign that companies based in developing countries are increasingly realizing the benefits of more vigorous IP protections.

Of course no IP protection scheme can completely rid any online marketplace of counterfeits or pirated goods. Eradicating “the cancer” is not the goal, nor can it be in a world that values freedom and thrives on open and accessible technology. Implementing effective IP controls is by and large an exercise in responsible containment. Like YouTube, eBay and a host of other online service providers have learned, you don’t have to stop the counterfeits to be successful. You must merely keep it under control. And you do that by acting responsibly, responsively and collaboratively. Having apparently learned this lesson well, Alibaba will no doubt continue to operate in this manner, hopefully serving as a model for other companies to follow.

Jack Ma, the precocious autodidact, once taught himself and his friends how the Internet and e-commerce worked. Before he could launch the world’s largest IPO though, he had to teach himself a thing or two about intellectual property. It’s a lesson he learned well; one that may end up being his most important of all.

The content of this blog is intended for informational purposes only. The information provided in this blog is not intended to and does not constitute legal advice, and your use of this blog does not create an attorney-client relationship between you and The Law Firm of Brian J. Meli. Under the rules of certain jurisdictions, the material included in this blog may constitute attorney advertising. Prior results do not guarantee a similar outcome. Every case is different and the results obtained in your case may be different. 

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