Here's the response I got back from Etsy Support on this issue:
Thank you for getting in touch with us about this. We understand your concerns and your desire to protect your work.
Since the alleged infringement is taking place on another site, you may want to contact the administrators of the site where the infringement is taking place; many sites have policies to address these issues.
As a venue, Etsy cannot provide legal advice to our members. You may want to consider consulting an expert for help, such as an attorney.
We have compiled some basic info about copyright and intellectual property on our Help site:
http://www.etsy.com/help/article/263?utm_source=compass&utm_medium=emailSome sellers have found that placing a watermark on their images helps protect their photos from being used by others. A watermark is a transparent "stamp" or text you place over your images using editing software. This decision is up to you. You can search our Forums for helpful posts from other sellers about using watermarks:
http://www.etsy.com/forums