How Chanel's Trademark Infringement and False Advertising Win May Help Brands Protect Their Rights in the Resale Market

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Kelley Drye & Warren LLP

Contributor

Kelley Drye & Warren LLP is an AmLaw 200, Chambers ranked, full-service law firm of more than 350 attorneys and other professionals. For more than 180 years, Kelley Drye has provided legal counsel carefully connected to our client’s business strategies and has measured success by the real value we create.
Chanel recently emerged victorious in its trademark infringement and false advertising lawsuit against luxury reseller What Goes Around Comes Around (WGACA).
United States Intellectual Property
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Chanel recently emerged victorious in its trademark infringement and false advertising lawsuit against luxury reseller What Goes Around Comes Around (WGACA). A jury in the U.S. District Court for the Southern District of New York awarded Chanel a unanimous verdict on all counts of liability, plus $4 Million in statutory damages for willful trademark infringement in connection with the sale of counterfeit bags that were never authorized for sale by Chanel. The case will now proceed for Judge Louis Stanton to decide what equitable relief Chanel may be entitled to, including a potential injunction and disgorgement of WGACA's profits.

In the world of luxury fashion, where the allure of exclusivity meets the burgeoning appeal of "vintage" products, this legal battle casts a spotlight on the dynamics between intellectual property rights and the thriving market for pre-owned goods.

Whether the media attention surrounding this decision will cause consumers to think twice about purchasing products from luxury resellers such as WGACA, The Real Real1 , and others, remains to be seen. Regardless, it should cause resellers to re-examine their marketing and sourcing decisions, and provide luxury brands with confidence that they have some recourse to protect their intellectual property in the resale market.

This article provides a brief summary of the lawsuit and tips for brand owners to protect their rights in the resale market.

THE ESSENCE OF THE DISPUTE AND THE JURY VERDICT

Chanel is a brand synonymous with haute couture and an unyielding dedication to protecting its intellectual property. In March 2018, it sued the luxury retail company WGACA in connection with its unauthorized resale of CHANEL branded products. Its complaint was based in large part upon the allegation that WGACA's conduct implied a non-existent endorsement or affiliation with Chanel that was likely to mislead consumers and dilute the brand's esteemed reputation. These allegations were bolstered by the fact that some of the products sold by WGACA as "authentic" CHANEL branded products were proven to be counterfeit.

WGACA countered Chanel's claims by championing the authenticity of its offerings and asserting that the law's first sale doctrine entitled it to resell genuine Chanel items.

The parties participated in a nearly month-long jury trial in January 2024, after which the jury rendered a unanimous verdict finding WGACA liable on all counts, and decisively finding that Chanel had proven:

  • Its claim for trademark infringement, false association, and unfair competition based on WGACA's use of Chanel's trademarks or other indicia of Chanel;
  • That WGACA acted "willfully, or with reckless disregard, or with willful blindness in its use of Chanel's trademarks or other indicia of Chanel" and its use of hashtags that included the Chanel mark;
  • That WGACA infringed Chanel's trademarks and engaged in unfair competition by creating and using various hashtags containing "Chanel" or "Coco Chanel" to advertise and market WGACA products on social media;
  • That certain Chanel branded products sold or offered for sale by WGACA were not authorized for sale, differed materially from the product authorized for sale, or did not pass through Chanel's quality control procedures;
  • That certain Chanel branded handbags sold or offered for sale by WGACA were counterfeit; and
  • That WGACA engaged in false advertising and acted willfully, with reckless disregard, or with willful blindness in its false advertising.

IS RESALE ALLOWED UNDER THE LAW?

The result in the Chanel case does not change the law, and the application of the law will depend upon the facts of each case. However, this verdict provides guidance to both resale companies and brand owners with respect to the delicate balance between permitted resale of genuine products, and protection of a brand's valuable intellectual property rights.

The legal doctrine of "first sale" provides that once a genuine product has been sold, the purchaser may resell the product without recourse from the intellectual property owner.2 However, there are some exceptions. Resale is not lawful if the goods are not "genuine", or are "materially different" from the goods that were originally authorized for sale by the brand owner.3

Examples of goods that are "materially different" under the law include products that have been materially altered via new materials or designs that were not subject to a brand's quality control measures (such as the unauthorized alteration of the bezel of a Rolex branded watch), or that include packaging, labeling, ingredients, or materials that are not authorized for sale in the U.S. market.4 Products that are not "genuine" under the law include products that have not been cleared for sale by the brand owner because they did not meet the brand's quality control measures, such as defective products or products created or distributed by factories without the brand owner's permission.5

The right to resell a genuine product also does not give the re-seller the right to use the brand owner's trademarks and other intellectual property in a way that is likely to lead consumers to believe that the brand owner has endorsed, or is somehow associated with the reseller. In particular, while the doctrine of "nominative fair use" permits a party to use a trademark or brand name as necessary to describe another party's product, it may only use a mark so much as necessary to identify the product.6 A reseller is not allowed to use a trademark or other brand indicia in a way that would likely mislead consumers into believing the brand is endorsing, sponsoring, or is somehow affiliated with the reseller or its resale business.7

Therefore, a reseller may state that it is reselling a Chanel bag, if in fact the bag is a genuine, unaltered, Chanel bag. However, making excessive use of trademarks or other indicia associated with the brand to promote a resale business is more than the law allows because it is likely to cause consumers to falsely believe that the brand is endorsing the resale.

In the Chanel case, WGACG prominently and persistently used Chanel's marks and other indicia associated with the famous fashion house to promote its resale business, including the hashtag "#WGACACHANEL", references to the brand's founder, images from Chanel advertising campaigns, and the prominent display and sale of promotional products such as notepads and tissue boxes that were gifted at fashion shows but were never authorized for sale by Chanel. Some examples of this conduct from the Chanel court filings are included below.

1448838a.jpg

WGACA's claims that the Chanel branded products it sold were "guaranteed authentic" (such as the claim shown below), and letters purporting to authenticate such products, also likely lead to the jury's decision that WGACA's conduct would falsely lead consumers to believe that Chanel endorsed the products sold by WGACA and/or its resale business.

POLICING RESELLER ACTIVITY AFTER THE CHANEL VERDICT

The Chanel decision confirms that while brands cannot stop the resale of genuine products, they may exert some control over the manner in which their intellectual property is used – and how their products are advertised and sold – in the secondary market. The jury verdict in the Chanel case may cause luxury resellers to re-examine their advertising practices and authentication claims. It may also cause the resellers to be more receptive to requests from luxury brands to refrain from conduct that is likely to confuse consumers and violate the brand's intellectual property rights.

If a brand is unsuccessful in convincing an unauthorized reseller to correct false or misleading practices, litigation may be a necessary step.

If a brand is unsuccessful in convincing an unauthorized reseller to correct false or misleading practices, litigation may be a necessary step. While the outcome of any legal dispute would depend upon the particular facts at issue, recent cases including Chanel v. WGACA, 8 demonstrate the courts' willingness to protect brands' intellectual property rights and to hold resellers accountable for unauthorized activities and false advertising.

If a reseller has a large inventory of one or more style of a brand's product, it may be an indication that the product is counterfeit and/or that one of the brand's distributors is in violation of its agreement with the brand.

STEPS FOR BRANDS TO CONSIDER TAKING

Brands should consider the following actions to monitor and protect their intellectual property in the resale market.

  • Monitor Reseller Use of Brand Name and Images: Brands should monitor and investigate how resellers are using their brand name, logos, trademarks, and copyrighted content9 to promote the sale of products, including via reseller websites and social media. Making prominent and persistent use of a brand's intellectual property and other indicia associated with the brand may give rise to infringement and false advertising claims.

  • Monitor Reseller Authenticity Claims: Stay informed about how resellers are representing their authentication processes to identify misrepresentations or exaggerations that could harm brand reputation and support legal challenges. Brands should also look out for events that claim to demonstrate how to authenticate their branded products and other brand-specific events. Particularly after the Chanel verdict, claims that a reseller employs "Brand Authenticators" or provides "100% authenticity guarantees" may be found false and misleading to consumers.

  • Monitor Reseller Advertising Claims Regarding Price: Many resellers claim that their products are sold at prices significantly below retail prices. In fact, many resellers are selling the products at the same or very near the brand's suggested retail

    1448838b.jpg

    price. Such claims may give rise to false advertising claims under the law.

  • Implement and Utilize Quality Control Measures: Establish sophisticated quality control measures including integrating unique identifiers such as UPC codes, blockchain technology, and other measures that can be used to verify the authenticity of products in the resale market. Such tracking measures provided Chanel with the ability to prove that certain products offered for resale by WGACA were never authorized for sale by the brand and therefore were not genuine Chanel products. Treat at least some of these quality control measures as confidential and proprietary information to prevent counterfeiters and other bad actors from finding ways to circumvent the protections.

  • Monitor Resellers' Inventory: If a reseller has a large inventory of one or more style of a brand's product, it may be an indication that the product is counterfeit and/or that one of the brand's distributors is in violation of its agreement with the brand. If a reseller is selling product that is not authorized for resale in the United States, this may also be a basis for legal action.

  • Educate Consumers: Consider running informational campaigns that educate consumers about where authentic brand products may be available for resale and the dangers of purchasing products from unauthorized distributors.

  • Establish Authorized Resale Channels: Many brands have instituted their own cooperation agreements with reputable resale companies that include the brand authenticating its own products. Others have launched their own resale platforms where consumers can purchase genuine goods with confidence.

Footnotes

1. Chanel also sued luxury reseller The Real Real in 2018 in a case captioned, No. 1:18-cv-10626, Chanel, Inc. v. The RealReal, Inc. (S.D.N.Y.). According to the court docket, this case is currently suspended pending mediation.

2. E.g., Coty Inc. v. Cosmopolitan Cosms. Inc., 432 F. Supp. 3d 345, 349 (S.D.N.Y. 2020) (citing Polymer Tech. Corp. v. Mimran, 975 F.2d 58, 61 (2d Cir. 1992) (quoting NEC Electronics v. CAL Circuit Abco, 810 F.2d 1506, 1509 (9th Cir. 1987))); Liz Claiborne, Inc. v. Mademoiselle Knitwear, Inc., 979 F. Supp. 224, 230 (S.D.N.Y. 1997).

3. E.g., Zino v. Davidoff SA v. CVS Corp., 571 F.3d 238, 243 (2d Cir. 2009) (citing Polymer Tech. Corp. v. Mimran, 37 F.3d 74, 78 (2d Cir. 1994); Original Appalachian Artworks, Inc. v. Granada Elecs., Inc., 816 F.2d 68, 73 (2d Cir. 1987)).

4. See, e.g., Rolex Watch USA, Inc. v. BeckerTime, L.L.C., No. 22-10866, 2024 WL 301768, at *3 (5th Cir. Jan. 26, 2024); Societe Des Produits Nestle, S.A. v. Casa Helvetia, Inc., 982 F.2d 633, 638 (1st Cir. 1992).

5. See e.g., El Greco Leather Prods. Co. v. Shoe World, Inc., 806 F.2d 392, 395 (2d Cir. 1986).

6. Laatz v. Zazzle, Inc., No. 22-cv-04844-BLF, 2023 WL 4600432, at *14 (N.D. Cal. July 17, 2023).

7. Id. (citing Applied Underwriters, Inc. v. Lichtenegger, 913 F.3d 884, 894 (9th Cir. 2019).

8. See also Rolex Watch USA, Inc. v. BeckerTime, L.L.C., No. 22-10866, 2024 WL 301768, at *3 (5th Cir. Jan. 26, 2024) (Affirming the district court's holding that BeckerTime sold watches that were "materially different than those sold by Rolex" and finding that modifying watches with "added diamonds," "aftermarket bezels," and aftermarket bracelets or straps constituted an infringement of Rolex's intellectual property rights).

9. Unauthorized use of copyrighted materials, including images from ad campaigns and brand websites may give rise to claims for copyright infringement.

Originally Published by The Intellectual Property & technology Law Journal

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

How Chanel's Trademark Infringement and False Advertising Win May Help Brands Protect Their Rights in the Resale Market

United States Intellectual Property

Contributor

Kelley Drye & Warren LLP is an AmLaw 200, Chambers ranked, full-service law firm of more than 350 attorneys and other professionals. For more than 180 years, Kelley Drye has provided legal counsel carefully connected to our client’s business strategies and has measured success by the real value we create.
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