Amid their closely-watched legal battle, Chanel and The RealReal (“TRR”) have agreed to temporarily put court proceedings on hold in order to participate in a private mediation. In an order dated April 5, Judge Gabriel Gorstein of the U.S. District Court for the Southern District of New York issued a joint stipulation and order staying the process of the trademark infringement and counterfeiting, false advertising, and unfair competition case for three months, aimed at getting the high fashion titan and the luxury resale pioneer to settle their ever-escalating legal differences out of court and without the need for a trial.
In an order dated April 5, Judge Gorstein stated that “the court has required that parties to ‘make affirmative attempts to settle this matter through discussion among counsel,’ and the parties have attempted to do so.” He further asserted, “If the parties are unable to settle the case by that means” – and that appears to be what has happened in the case at hand – “the parties are ‘required to use meditation to assist them in achieving a settlement.’” He notes that Chanel and TRR “agreed to participate in a private mediation in order to maximize the likelihood of a settlement and achieve a successful result.”
Still yet, Judge Gorstein states that in addition to “promot[ing] economy or time and effort for the court, for counsel, and for the litigants,” a three-month stay will “save the parties the expense of engaging in further document discovery, conducting fact depositions, conducting expert discovery, preparing dispositive motions and responses (including a decision on Chanel’s motion to dismiss [TRR’s antitrust] counterclaims and motion to strike (and Chanel’s replies thereto), as well as any motion for summary judgment by either party,) and preparing for trial. After all, these things “would be rendered moot by a successful mediation.”
With the foregoing in mind, the parties will file a joint status report either one week after the conclusion of their mediation or on June 30, 20201, whichever is earlier, “to advise the court as to the status of the mediation efforts and/or whether and how a new case schedule should be entered.”
Counterfeiting and Trademark Infringement
The latest development comes almost two and a half years into the headline-making case that Chanel filed against TRR in a federal court in New York, in which it accused the San Francisco-based luxury reseller of engaging in “improper business practices” by “represent[ing] to consumers that it ‘ensure[s] that every item on TRR is 100% the real thing, thanks to our dedicated team of authentication experts.’” Despite “advertis[ing] … authentic, secondhand luxury products, including purportedly authentic CHANEL-branded products, that it obtains from third-party consignors,” Chanel asserted in its November 2018 complaint and its subsequently lodged amended complaint that TRR sold eight “CHANEL-branded products, including handbags” that it “purport[ed] to be genuine but [were] in fact counterfeit.”
In addition to allegedly offering up fakes, Chanel has taken issue with TRR’s “advertising and marketing practices,” claiming that the popular reseller “has attempted to deceive consumers into falsely believing that [it] has some kind of approval from or an association or affiliation with Chanel or that all CHANEL-branded goods sold by [TRR] are authentic,” which Chanel claims is not the case. “There is no – nor has there ever been – any approval by or association or affiliation between Chanel and [TRR],” Chanel asserted in its February 2019 amended complaint, arguing that TRR “understands that the value of its CHANEL-branded inventory … is enhanced if consumers believe that Chanel has a business relationship or affiliation with [TRR], and that Chanel approves and/or confirms the authenticity of the products [TRR] sells.”
More than that, Chanel argued that “the only way for consumers to absolutely ensure that they are in fact receiving genuine Chanel products is to purchase such goods from Chanel or from an authorized retailer of Chanel.” The brand doubled-down on this sentiment by further alleging that “training and knowledge regarding authentication of genuine CHANEL-branded goods could only reside within Chanel.” In other words, “Only Chanel itself can know what is genuine Chanel,” an assertion that has been the subject of quite a bit of pushback from TRR.
By offering up allegedly counterfeit Chanel goods and making “representations and guarantees about the reliability and expertise of its authentication process,” including that “the products that consumers purchase from The RealReal are genuine and ‘100% authentic,’” which amounts to “false and deceptive advertising,” Chanel claims that it has suffered from “irreparable injury” because of the “vastly inferior and materially different” nature of the Chanel-branded products sold by TRR compared to genuine Chanel products. Also problematic, per Chanel: “Consumers are likely to be misled into believing that [TRR’s] website and sale of goods bearing the CHANEL trademarks are licensed, sponsored, or otherwise approved by Chanel.”
As a result, Chanel has sought “to prevent [TRR] from: (i) continuing to mislead consumers into believing that [TRR] has an association, affiliation or association with Chanel and/or that Chanel has approved of or authenticated the second-hand and counterfeit items being sold by [TRR], and (ii) continuing to sell counterfeit Chanel products,” asserting that it has taken “this action in order to protect its brand, its goodwill and hard-earned reputation of the CHANEL trademarks, and to protect consumers.
“Stopping the Circular Economy”
TRR swiftly responded to Chanel’s complaint by way of a statement, asserting that it “unequivocally rejects” Chanel’s allegations, and characterizing Chanel’s lawsuit as “nothing more than a thinly-veiled effort to stop consumers from reselling their authentic used goods,” aimed at “prevent[ing] customers from buying those goods at discounted prices,” and thereby, “stop[ping] the circular economy.”
In its answer, which was filed in May 2020 (following a motion to dismiss and subsequently amended complaint by Chanel), TRR denied the majority of Chanel’s claims and set out an array of affirmative defenses. Its “unclean hands” defense would ultimately prove to be significant, as TRR sought to piggyback on it to amend its answer and include counterclaims. After receiving authorization from the court in February, TRR lodged anti-competition counterclaims against Chanel on the basis of its discovery of “new evidence” that shows that Chanel’s “motivation” in bringing various trademark-centric lawsuits against its competitors is improper. (According to TRR, the newly-asserted counterclaims are not really all that “new” because just like the basis of TRR’s “unclean hands” defense, the antitrust allegations stem from Chanel’s alleged quest “to push [TRR] and other competitors out of the market” by way of unmerited litigation.)
According to the amended answer that it filed in late February, TRR accused Chanel of engaging in violations of Section 1 and 2 of the Sherman Act, anticompetitive arrangement in violation of the Donnelly Act, tortious interference with contract, and tortious interference with prospective business relations as a result of an “aggressive campaign” of “exclusionary and anticompetitive conduct” aimed at “monopoliz[ing] the market” – and thus, the supply and price of its goods, both new and pre-owned – to the detriment of its competitors and consumers, alike.
In direct response to the burgeoning, multi-billion-dollar luxury resale market, which is “a new threat to the core of [Chanel’s] business model,” TRR alleges that Chanel has gone beyond the work of a diligent company looking to preserve the meticulously-crafted positioning of its rarefied luxury brand in the face of the evolving modern marketplace. Instead, TRR claims that the 110-year-old luxury stalwart has “attempted, acquired, and maintained monopoly power” in the “relevant market” by way of an ongoing scheme to “impair the growth and development of innovative resale rivals like TRR who threaten Chanel’s dominance” by “creating a robust resale market where none previously existed,” and thereby, giving consumers increased access to “a rich supply of Chanel handbags that would not otherwise be available to [them].”
Specifically, TRR contends that Chanel has tried to illegally “stymie competition” that comes from resellers, which “threaten the very core of Chanel’s business model, [one that] is premised on a limited supply and few access points for consumers,” by entering into “exclusive contracts with high-end retailers and us[ed] its monopoly power to force the[m] to refuse to engage in any ancillary relationship with resale competitors.” For instance, TRR argues that on the heels of it entering into resale partnerships with Neiman Marcus and Saks Fifth Avenue in or around 2015, Chanel threatened to pull all of its products from their stores unless both retailers agreed to prevent consumers from consigning Chanel products to TRR in their stores.
At the same time, TRR alleges that Chanel “engag[ed] in a concerted refusal to deal – i.e., a vertical group boycott – with print and digital advertisers” that “deprived [its] competitors,” such as TRR, “from placing advertisements in the most highly desirable locations,” including Vogue and The New York Times.
And still yet, TRR goes further with its allegations, and asserts that while Chanel has been actively seeking to ensure a firm grip on its “monopoly” in the market by “coercing or pressuring” various retailers and publications, it has also been taking legal action against resellers, including but not limited to TRR, to maintain its grip. Interestingly, there is “one major secondary reseller” that has been “notably absent in Chanel’s war,” TRR points out. Farfetch, the online retailer in which Chanel made a “significant” investment in in February 2018.
Chanel’s lack of legal action against Farfetch for marketing pre-owned Chanel products as being subject to “a rigorous process to ensure that all items meet our authenticity standards” shows that “Chanel will only tolerate the resale of Chanel handbags … by a company in which [it] holds a significant investment.” The purpose of this, per TRR? So that Chanel “can continue to control supply and prices in the market for top tier … handbags.”
Not a Monopoly
In one of its most recent filings, Chanel rejected TRR’s antitrust assertions, arguing that, among other things, the resale titan fails to establish that it actually maintains monopoly power in the relevant market. (Chanel asserts that TRR previously argued that “the proposed relevant market” – i.e., the U.S. market for “hold-value handbags” and “investment grade handbags” – is “‘dominated’ by a ‘Holy Trinity’ consisting of Hermès, Chanel, and Louis Vuitton and that Hermès is the dominant actor.”)
Seeking to get the counterclaims tossed out, Chanel argued in a March motion to dismiss that “after contending for nearly two years that this should be a narrow counterfeiting and false advertising case with limited discovery,” TRR has since “inject[ed] a full-blown antitrust and tortious interference lawsuit, unrelated in time or nexus to Chanel’s original claims, [and] based entirely upon conclusory allegations about purported conduct that TRR contends took place well before the acts and occurrences alleged by Chanel and outside the statutes of limitations.”
The stay in proceedings puts a halt to the escalating anticompetition aspect of the case, as well as the underlying trademark infringement and counterfeiting allegations.
The case has made headlines over the past couple of years due, in part, to the fact that it sheds light on the rocky relationship (in some cases) between brands and unauthorized sellers – and resellers, which has proven a hot topic for brands, as resale sites and marketplaces like Amazon have rapidly chipped away that their former ability to closely (and almost absolutely) control most of the distribution of their goods. (In response to claims of counterfeiting, Amazon, for instance, has asserted that at least some brands are conflating counterfeit or otherwise infringing goods with “the ‘unauthorized’ distribution of authentic” ones, presumably in a quest to regain control over how and where their products are sold, and at what prices).
To a large extent, Chanel has stood out as one of the fiercest opponents of the unauthorized resale of its coveted handbags, filing suits against other resellers, including What Goes Around Comes Around (“WGACA”), which is sued in 2018, and Fashionphile, which landed in the receiving end of a since-settled case in 2014. According to TRR and WGACA, which is also currently in the midst of litigation with Chanel, the luxury stalwart is inching into the resale market by way of its stake in Farfetch, which has been making increasing inroads in the resale market, including by way of its own resale pilot program, “Farfetch Second Life.”
A potential partnership between Chanel and Farfetch to offer up and sell pre-owned Chanel products would come in line with a larger trend among control-happy and image-dependent luxury brands that are testing the waters of the secondary market, while still attempting to exert control over the process. To date, “Most brands have [failed] to capitalize on the booming resale market,” according to Luxe Digital, which means that many are currently weighing their options (LVMH, for instance, is “looking at” resale, according to Antoine Arnault) or jumping in – by way of limited partnerships (i.e., Gucci and The RealReal), third-parties entities (Cartier-owner Richemont’s acquisition of WatchFinder comes to mind), or their own in-house efforts, such as handbag company Mark Cross, which announced in 2019 that it would launch its own secondhand online platform in an effort to cater to the demands of consumers.
Ultimately, this continues to be an evolving (and at times, contentious) market to watch, especially since sales of pre-owned luxury goods are expected to scale to 1 trillion yuan ($154.6 billion) in China, alone, making it a segment that brands cannot afford to sit out both from a revenue perspective, as well as from a control – and of course, authentication – stand point, as well.
The case is Chanel, Inc., v. The RealReal, Inc., 1:18-cv-10626 (SDNY).
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