Photo by Laura Chouette on Unsplash
Kassidy Michel, Associate Member, University of Cincinnati Law Review
I. Introduction
The circular economy has played a huge role in making fashion more sustainable. This means that either designers are creating pieces that are long-lasting and timeless, or the garments may be repaired, reused, recycled, or refurbished.[1] Resale companies play a large part in the circular fashion economy and have become a place where consumers can sell their items and shop for luxury goods at a discounted price from their computers or phones. Some luxury brands have embraced this new form of fashion, while others feel threatened by resale companies making headway in the luxury brand industry by selling their products. This article will discuss the ongoing lawsuit Chanel filed against resale company The RealReal, the possible implications of the suit on the resale industry, and the issue with counterfeits on the resale market.
II. Background
Since sustainable fashion has become more important, resale companies have increased over the years, specifically on the digital marketplace.[2] The resale industry used to solely consist of brick and mortar consignment shops, but with e-commerce making huge strides, the resale industry has also moved to an e-commerce platform.[3] Companies like The RealReal, ThredUp, Poshmark, Farfetch, and What Goes Around Comes Around have created a $27 billion market that is projected to raise to $51 billion by 2023 and occupy at least 10% of the retail industry.[4]
These resale companies are a more upscale version of the traditional brick and mortar consignment stores that sell clothes and accessories anywhere from $10 to thousands of dollars.[5] Companies like The RealReal (“TRR”) and What Goes Around Comes Around (“WGACA”) have made luxury fashion more attainable, accessible, and affordable.[6] The items that are sold on resale sites, specifically TRR, are authenticated by “the most rigorous…process in the marketplace” and are guaranteed to be 100% authentic.[7]
Luxury brands have been long wary of the resale industry because they believe their exclusive items should be kept forever and not sold online.[8] However, many luxury brands have partnered with TRR, including Kering, the Paris-based parent company of Gucci, Balenciaga, Saint Laurent, and Bottega Veneta.[9] More specifically, luxury brands that partner with resale companies can gain access to resale data, consignment partnerships, and promotional relationships.[10] Although luxury brands may view resale as “cheapening” their products, resale acts as a point of entry-level access for those who enjoy fashion but may not be able to afford the products at the full luxury price.[11]
III. Chanel, Inc. v. The RealReal, Inc. and Related Cases
Although there are some luxury brands who have embraced the resale industry as an evolving luxury retailer in the fashion industry, Chanel has not been so welcoming, filing lawsuits against both TRR and WGACA. On November 14, 2018, Chanel filed a complaint against TRR in federal court in New York, alleging among other things that TRR sells counterfeit Chanel products, in violation of § 32(1) of the Lanham Act, and deceived customers that TRR has approval from or association or affiliation with Chanel.[12] Chanel also alleges that TRR infringes upon Chanel’s exclusive trademark by using the Chanel trademark for use in advertising and marketing, in violation of § 32(1) of the Lanham Act.[13] This lawsuit against TRR closely resembles the lawsuit Chanel filed against WGACA on March 15, 2018, alleging WGACA sells counterfeit goods and attempts to deceive consumers that WGACA has approval from or association or affiliation with Chanel.[14]
In a letter sent to Judge Gabriel Gorenstein of the U.S. District Court for the Southern District of New York, TRR stated that “Chanel’s actions are not a good faith effort to police counterfeiting but rather a targeted campaign to prevent certain competitors from operating in this specialized market.”[15] TRR moved to dismiss Chanel’s claims alleging TRR sells counterfeit goods. Since TRR authenticates every item that is sold on the platform, TRR claims the counterfeit argument is false.[16] The First Sale Doctrine allows consumers the right to sell, display, or otherwise dispose of a copy of a copyrighted work after the consumer purchased a copy from the copyright holder. [17] Therefore, if TRR authenticates the items sold on their platform and consumers have given their products to TRR to sell on their behalf, TRR claims Chanel’s claim is barred by the First Sale Doctrine.[18]
TRR moved to dismiss Chanel’s trademark claims based on the opinion in Tiffany (NJ) Inc. v. eBay Inc., where the court rejected direct liability claims against eBay for allowing counterfeit jewelry to be auctioned on the platform.[19] Under the Tiffany holding, online platforms are unlikely to be liable for infringement because in order to establish contributory liability, the plaintiff must prove the online marketplace had knowledge of the specific listings of counterfeit goods.[20] The court denied TRR’s motion because, unlike eBay, TRR approves every product to be listed, exercises control over the pricing and marketing of the product, and has physical possession over the inventory sold.[21]
IV. Congressional Response to Online Sale of Counterfeit Goods
Congress has responded to the topical issue of counterfeit goods on resale ecommerce platforms. Introduced on March 2, 2020, The SHOP SAFE Act of 2020 requires ecommerce platforms to take ten measures, including receipt of attestations of authenticity and third party seller identity verification, to prevent counterfeits in order to avoid contributory liability for trademark infringement.[22] This Act would shift the burden of searching for counterfeits from the brand owners to the actual resale organization.[23] This Act would also require online resale platforms to be more diligent in searching for counterfeits; therefore, reducing the possibility for lawsuits like Chanel v. The RealReal for selling counterfeit products in the future.
V. Analysis
The issue of selling counterfeit luxury products and cheapening a luxury brand by selling authentic products on resale websites seem to be two separate legal issues that Chanel has lumped into one lawsuit.
Businesses who sell their products on any market to consumers understand that once they have sold their products, consumers have the right to do what they want with that product based on the First Sale Doctrine. By purchasing the product in good faith, not through fraudulent means, the purchaser becomes a bona fide purchaser and takes full possession and exclusive right in the product. Therefore, if a consumer purchases a Chanel bag from Chanel, they are a bona fide purchaser and through the First Sale Doctrine have the right to resell that bag to a resale company, like TRR.
Although there are no specific laws that prevent TRR and other resale companies from selling pre-owned designer bags on their platforms, Chanel, through the lawsuits against TRR and WGACA, is probably hoping to gain some leverage to take away the right for TRR and others to sell their bags. Chanel is also probably anticipating there to be a legal remedy to allow them to have trademark and selling rights over all authentic Chanel bags, no matter if they are pre-owned by consumers. This goal of blocking resale Chanel bags will probably not occur through this lawsuit because of basic property law. Consumers who purchased any good, let alone a bag that costs a couple of thousand dollars, own that good and have rights in that good. To give Chanel rights in a good that they have sold would go against property law and would reshape ownership in general. Instead, the lawsuit will probably settle in some way, with Chanel having some sort of rights to or interest in Chanel bags sold on TRR or WGACA.
Selling counterfeit bags, on the other hand, is a whole other issue. If Chanel’s claims are valid against TRR, and TRR is in fact selling counterfeit Chanel bags, TRR is in violation of trademark laws because they certify each product sold on their platform. Further, TRR could also be subject to lawsuits from consumers who bought Chanel bags that TRR claim to be 100% authentic. Chanel has only cited seven bags on TRR’s website that are possibly counterfeit Chanel bags. If these are fake, and if Chanel can prove TRR has sold other counterfeit Chanel products, then TRR probably will not have a good defense against this claim.
Congress’ SHOP SAFE Act would probably be the best solution for both luxury brands and resale businesses. The guidelines under the Act would require resale businesses to follow strict steps to ensure that the goods they are reselling on their online platforms are 100% authentic. Not only does the Act require resale businesses to take extraordinary steps to authenticate products, but it would require the previous owners to verify the product with receipts. Although this will prove to be more work for the resale businesses, the Act would be a fair balance of responsibility and protection for the resellers and would relieve resale businesses from future lawsuits from brands like Chanel and consumers.
VI. Conclusion
Chanel will forever be a household name in the fashion industry, known for its rich history in luxury goods. The RealReal, and other large resale companies, are newer entrants into the retail industry, but seem to be here to stay. Resale on a digital market has completely reshaped the fashion industry and has made luxury more accessible to consumers. If Chanel v. The RealReal continues in court without settling, that decision could shape the resale industry as we know it. Based on the claims, Chanel would likely lose in court. This would probably benefit consumers in the long run because resale companies would not be changed. However, settlement would be a more economically beneficial solution to this case. Not only would settling cost less, but it would also give both Chanel and TRR the chance to create a solution that would allow the parties to participate in the luxury retail industry together, instead of pinning them against one another. Chanel v. The RealReal, and similar cases, could shape the luxury retail industry, as well as the resale industry as we know it.
[1] Gulnaz Khusainova, Why The Circular Economy Will Not Fix Fashion’s Sustainability Problem, FORBES (June 12, 2019, 4:32 AM), https://www.forbes.com/sites/gulnazkhusainova/2019/06/12/why-the-circular-economy-will-not-fix-fashions-sustainability-problem/?sh=508888734d05.
[2] 2020 Resale Report, THREDUP (2020), https://www.thredup.com/resale/#resale-growth.
[3] Id.
[4] Walter Loeb, The Resale Fashion Industry Is Bigger And More Disruptive Than You Think, FORBES (May 15, 2019, 7:10 AM), https://www.forbes.com/sites/walterloeb/2019/05/15/resale-fashion-industry-bigger-and-more-disruptive-than-you-think/?sh=31dfe70c609b.
[5] Joan Verdon, The Rise of the Resale Market, US CHAMBER OF COMMERCE (Sept. 16, 2019), https://www.uschamber.com/co/good-company/launch-pad/retailers-fuel-resale-trend.
[6] See supra note 2.
[7] THE REALREAL, https://www.therealreal.com/ (last visited Nov. 6, 2020).
[8] Hilary Milnes, The Complicated Relationship Between Luxury Brands and Resale Sites, DIGIDAY (May 20, 2016), https://digiday.com/marketing/complicated-relationship-luxury-brands-resale-sites/.
[9] The Rocky Relationship Between Luxury Resale and (Some) Luxury Brands, THE FASHION LAW (Dec. 19, 2018), https://www.thefashionlaw.com/relationship-between-luxury-re-sale-luxury-brands-is-rocky/.
[10] Id.
[11] Id.
[12] Complaint for Petitioner at 2, 17, Chanel v. The RealReal, No. 1:18-cv-10626 (S.D.N.Y. Nov. 14, 2018).
[13] Id. at 16.
[14] Chanel Files Ugly Suit Against What Goes Around Comes Around, Citing Fakes, THE FASHION LAW (Mar. 15, 2018), https://www.thefashionlaw.com/chanel-files-ugly-suit-against-what-goes-around-comes-around-citing-fakes/.
[15] Chanel is Maintaining a “Monopoly” With the Help of Big-Name Retailers, Publishers, The RealReal Claims in New Filing, THE FASHION LAW (Oct. 30, 2020), https://www.thefashionlaw.com/chanel-is-maintaining-a-monopoly-with-the-help-of-big-name-retailers-publishers-the-realreal-claims-in-new-filing/.
[16] Answer to Complaint at 6, Chanel v. The RealReal, No. 1:18-cv-10626 (S.D.N.Y. May 29, 2020).
[17] 17 U.S.C. § 109 (1854).
[18] See supra note 16 at 15.
[19] Tiffany v. eBay, 600 F.3d 93, 103 (2d Cir. 2010); See also Megan K. Bannigan and Kathryn Saba, Insight: From Chanel and Tiffany Fakes to the Real Deal – Fighting Online Counterfeits, BLOOMBERG LAW (July 8, 2020, 4:00 AM), https://news.bloomberglaw.com/ip-law/insight-from-chanel-and-tiffany-fakes-to-the-real-deal-fighting-online-counterfeits.
[20] See Bannigan supra note 19.
[21] See Bannigan supra note 19.
[22] SHOP SAFE Act of 2020, H.R. 6058, 116th Cong. (2020).
[23] See Bannigan supra note 19.
