Yesterday, Tiffany & Co finally had their day in court. In 2004 the jeweller sued the monolithic auction site eBay for trademark violation; specifically for knowingly failing to prevent the mass trafficking of counterfeit goods through its website. The case has been winding its way through the US district court system and will finally, after three long years of paperwork, be heard in the southern district of New York in front of Judge Richard J Sullivan.

Companies concerned about counterfeiting, among them Gucci, Prada and LVMH, have been watching closely. Dana Thomas, author of Deluxe (Allen Lane), a study of the luxury market, says: "Luxury companies created this problem when they created demand within a market that can't afford their goods to begin with. The real issue is that eBay is a democratic sales outlet, like a garage sale, and nothing should be banned. What is the difference between eBay and a consignment shop? Just the 50 per cent fee you pay to the store.

In the court complaint filed by Tiffany & Co on July 13 2004, the company seeks to restrain eBay from assisting in the sale of any Tiffany & Co goods "except for genuine merchandise that in its entirety has been made, sponsored or approved by plaintiffs". This raises the question of whether Tiffany will want to approve goods presented to them by eBay.

Purchasing online has always been fraught with issues of authenticity. Type the word "fake" into the discussion boards on eBay and the results are full of would-be buyers asking about authentication of everything from Hermès scarves to Tiffany key chains and complaining about items already purchased.

None of this is lost on eBay, of course. According to the company's spokesperson Catherine England, "We started VeRO [an anti-counterfeiting and trademarks protection programme] in 1998 and we had only begun the company in 1995. Given the sheer volume of more than 100m items listed at any given time, with 6.1m new items listed each day ... it's not always possible to be an expert in every item that could be listed, but we partner with 18,000 rights owners through VeRO."

But being too involved works against eBay's very business model. The site makes money on volume: lots of transactions equals lots of third-party fees; the more involved the company has to be with each transaction the lower the profit margin. eBay is not coy about this: on the site it clearly says: "As a seller, you're ultimately responsible for the legality of any item you offer for sale on eBay and the listing describing that item."

It is also stated: "Under federal law (the Communications Decency Act), because eBay does not censor feedback or investigate it for accuracy, eBay is not legally responsible for the remarks that members post." In other words, they are expressly not responsible for assuring the authenticity of everything that is sold.

"We're not a retailer; we're a conduit," says England. "Transactions happen directly between buyers and sellers. At no time does eBay ever take possession of the items sold, nor do we intermediate transaction. Goods go directly from seller to buyer, and payment goes directly from buyer to seller."

Yet the crux of the Tiffany claim is that eBay is enabling, knowingly, the movement of thousands of dollars of illegal goods, thereby making eBay the trafficker of the illegal goods themselves. Indeed, Tiffany & Co vice-president Linda Buckley says that on occasion eBay has done even more. "eBay is more than a conduit," claims Buckley. "eBay also trains its sellers in advertising and promotional techniques and as the [official legal] Complaint shows, in the past it advertised Tiffany goods on its home page and directed potential buyers to other Tiffany sites."

Not all luxury companies share Tiffany's stance on authentication. Hermès, for example, doesn't authenticate in their stores. But if luxury companies themselves do not authenticate, should it become eBay's burden to do so?

A climate of dissatisfaction with eBay may make that question moot. On July 2, David Steiner, founder of the AuctionBytes.com site, posted Nielsen/NetRatings data refuting eBay's claim that time spent on their site was increasing; many responded, pointing to eBay's unhelpful customer service as the cause. Said poster Steve49: "eBay's downfall is going to be their complete lack of communication." And last month's issue of Consumer Reports has a survey of eBay dissatisfaction.

Guidelines on eBay's Help section and postings by eBay's staff make clear that eBay uses discretion in which sellers are removed and what auctions are shut down and that the rules are not transparent. "I put a real Louis Vuitton, in the original box, with photos showing it was genuine," says one seller. "I was living in Paris and the morning after I listed, I had not responded in time to a Vuitton spotter on Texas time wanting me to prove it was real, and by the time I woke up, eBay had shut down the sale by the request of this spotter. I was outraged. Why do I have to answer to eBay?"

eBay has taken steps to tackle such complaints. Since January, says England, they have made additional checks in the luxury category, such as limits on cross-border sales and on volume of items per day and verifying seller's financial information. "We've seen a 60 per cent decrease of reports to VeRO from rights owners," she notes.

But it may be too late. Competition has sprung up. An authentication service called MyPoupette will make money doing what Louis Vuitton will not: put a stamp of approval on LV goods sold on eBay. KarenKooper.com and Portero.com resell nothing but authenticated luxury goods. Michael Sheldon, chief executive of Portero, says: "eBay is ... facilitating a bunch of sellers they can't control. It's so easy to put a photo of a real item and then sell a fake item. The eBay marketplace doesn't work for luxury goods."

Financially, eBay is not hurting: on July 18, it reported a 50 per cent increase in net income (over the same time period in 2006) with second-quarter profits at $376m and revenues at $1.83bn.

But this month in the UK, France, Germany, Spain and Belgium L'Oréal took legal action against eBay, alleging it facilitates the sale of fake cosmetics and fragrances. Louis Vuitton and Dior, too, filed complaints in 2006 in France. Much hinges on the judgment in New York.

Syl Tang can be reached at ceo@hipguide.com