UPDATE 3-EBay scores victory in Internet trademark case

(Recasts first and 2nd paragraphs; adds comments from brand expert, updates share prices)

By Martha Graybow and Alexandria Sage

NEW YORK/SAN FRANCISCO, July 14 (Reuters) - EBay Inc scored a major legal victory on Monday when a federal judge absolved it of taking more steps to police fake Tiffany jewelry sold on its website and held that brand owners are ultimately responsible for protecting their own trademarks.

All of Tiffany's trademark infringement claims against eBay (EBAY.O: Quote, Profile, Research) were rejected -- a knockout blow to the four-year-old lawsuit that had been closely watched by Internet companies as well as luxury goods makers seeking to stop the sale of counterfeit products online. The ruling is expected to be appealed.

Tiffany & Co (TIF.N: Quote, Profile, Research) had alleged that eBay turned a blind eye to the sale of fake Tiffany silver jewelry on its site. EBay countered it was not in a position to determine which goods were knock-offs of the prestigious New York brand and had said the jeweler did not adequately participate in eBay's programs that help brand owners prevent fraud.

The judge, in a 66-page decision following a non-jury trial in U.S. District Court in Manhattan last November, said he was "not unsympathetic" to Tiffany and others who have invested in building their brands only to see them exploited on the Web. But he said the law was clearly on eBay's side.

"It is the trademark owner's burden to police its mark and companies like eBay cannot be held liable for trademark infringement based solely on their generalized knowledge that trademark infringement might be occurring on their websites," wrote Judge Richard Sullivan.

EBay called the ruling a "victory for consumers," saying it "appropriately establishes that protecting brands and trademarks is the primary burden of rights owners."

"All I can say to that is that I'd be surprised if Tiffany did not appeal this decision," said Mark Aaron, Tiffany's vice president of investor relations.