Chanel decision teaches strategy and limits to controlling reseller’s use of brand’s marks

24 Apr 2020 , 6:42pm

A New York federal court decision has mixed messages for those seeking to protect their brands. Milton Springut of Springut Law dissects the findings.

Brand image is paramount for fashion and luxury goods companies.  Controlling who sells your product and how it is marketed is a crucial part of maintaining this most important brand asset.  

Fashion house Chanel has in the last few years brought several US trademark suits in an attempt to control unauthorised resellers, the most recent against second-hand consignment retailer The RealReal.  

In March, a New York federal court dismissed one set of Chanel’s claims, which alleged that The RealReal’s use of Chanel’s trademarks falsely implied that The RealReal is an authorised dealer.  But the court allowed a second set of Chanel’s claims based on alleged sale of counterfeit Chanel product to proceed. 

Counsel advising brands how to enhance their own enforcement efforts should learn from the Chanel decision.  What are the important points to investigate? What could Chanel have done differently to avoid dismissal of its false-association claims?  How can Chanel leverage its remaining counterfeiting claims to achieve its goal of maintaining its brand image? 

The RealReal’s business model

California-based retailer, The RealReal, offers secondhand luxury goods on a consignment system, allowing individuals to sell their items through the company’s website and brick-and-mortar stores.   

While the individuals retain title to their items until sold, The RealReal controls, in its sole discretion, all aspects of the sale, including approving items for sale, listing and displaying the item, setting the price, processing the purchase and shipping.

The RealReal strongly advocates to the public its authentication of offered items.  Its website brags that it takes possession of and authenticates every single item it offers, using a team of experienced authenticators, many former employees of luxury houses and auction houses.  The company’s website also provides a “guarantee” of authenticity. 

Chanel clearly believed that this arrangement hurt its brand image; and its suit was aimed at stopping The RealReal from offering Chanel products.  But the court allowed only some of Chanel’s claims to proceed.

The court dismisses Chanel’s false-association claim

Chanel’s first set of claims, brought under both the federal Trademark Act (commonly called the Lanham Act) and state law, alleged that The RealReal’s prominent use of its trademarks created a false impression that Chanel sponsored or authorised the site.  Chanel only sells its products online through its own website, as well as through “carefully selected high-end, prestigious specialty stores.”  The RealReal is not one of them. 

Such false-association claims can be legally sound, but, as the Chanel court noted, they are limited by two established principles of US trademark law:   

(1) The sale of genuine branded goods is permitted, even if the seller is not authorised by the trademark owner; and

(2) The reseller is also permitted to use the brand’s marks to advertise and promote these genuine products. Thus US trademark law “does not prevent one who trades a branded product from accurately describing it by its brand name, so long as the trader does not create confusion by implying an affiliation with the owner of the product.”  

Further, for Chanel to succeed, it would ultimately have to prove that it was probable, not merely possible, that The RealReal’s customers would be confused into believing that The RealReal was sponsored by or affiliated with Chanel.  

Federal courts have in recent years become more discerning in their review of complaints. In Iqbal v. Ashcroft (2009), the United States Supreme Court made the standard for pleading a claim more stringent:  a party now has to plead sufficient facts to make out a plausible claim under the relevant law.   A complaint that merely lays out conclusions will not survive dismissal.

That new standard had real bite in the Chanel case.  To survive a motion to dismiss, Chanel had to allege specific facts to make out a plausible claim that there was a probability that consumers would be confused by The RealReal’s marketing.  Yet the court found nothing in Chanel’s allegations that would support such a conclusion:

  • The RealReal did not use Chanel’s marks more prominently than other brands. While its website had a page specifically devoted to Chanel products, it also had similar pages devoted to nine other luxury brands.  Nothing about this use of Chanel’s marks suggested that The RealReal was authorised or sponsored by Chanel.
  • The RealReal bragged that some of its authenticators were former employees of luxury houses.  But its website made clear that the luxury houses themselves have no involvement in its authentication efforts.
  • The RealReal did provide a “guarantee” of authenticity, but again, there was no indication that this was in any way tied to Chanel or other brands.

The court contrasted The RealReal’s use of Chanel’s mark with that in a different case brought by Chanel against the retailer What Goes Around Comes Around.  There a court found that there was a danger of confusion as to affiliation, because the unauthorised retailer had used Chanel’s mark very prominently, more prominently than other brands, and had offered confusing authenticity cards, which together suggested a connection to Chanel beyond the offering of authentic product.  

In short, Chanel’s complaint simply failed to provide sufficient supporting evidentiary facts that would allow a court or jury to conclude that Chanel’s alleged false-association  confusion was probable.  

Often in cases involving false-association claims, the trademark owner will conduct and proffer a consumer survey to bolster its case.  Given the thin facts alleged by Chanel, such a survey might well have avoided dismissal of these claims.

The Court allows Chanel’s counterfeiting claims to proceed

Chanel’s counterfeiting claims fared better.  Chanel alleged that over a period of time, it had made test purchases of Chanel product, and seven turned out counterfeit. By definition counterfeit goods cause confusion as to the source of the product, and so selling counterfeits almost automatically results in a finding of trademark infringement.  

One notable aspect of the decision was the rejection of The RealReal’s argument that it was not liable because title in the goods was retained by the individual consignees.

The RealReal relied on Tiffany v. eBay (2010), where the Second Circuit Court of Appeals ruled that eBay did not use Tiffany’s trademark (a requirement of liability) when vendors on its platform sold counterfeit Tiffany product. 

But the Chanel court distinguished Tiffany, because unlike eBay’s relatively passive connection to the transactions on its site, The RealReal maintains close control over all aspects of the consignment sale.  This deep level of involvement in the sales and marketing process meant that, unlike eBay, The RealReal was considered to be “using” the Chanel mark in connection with the sales of the counterfeits, and was directly liable for trademark infringement.

Chanel’s strategy going forward

Despite dismissal of its false association claims, Chanel can still use its remaining claims to achieve the result of upholding its brand image.  Proof of sales of counterfeit goods, even a small number, generally leads to liability for trademark infringement.  A commonly awarded remedy is an injunction against further sales of counterfeits. 

Any further sales of counterfeit Chanel products would raise the spectre of contempt sanctions against both The RealReal and its officers.  

And, if the counterfeiting were repeated, the court could very well then bar all sales of Chanel by the company, including of authentic product.    The “safe distance rule” is an established equitable doctrine under which a court may prohibit even legal conduct if that is necessary to ensure that illegal conduct does not repeat itself.  If 

The RealReal were shown to be incapable of controlling sales of counterfeits, then a court could consider barring sales of all Chanel product.

So Chanel can leverage its remaining counterfeiting claims to attain Chanel’s apparent goal – stopping the reseller from offering Chanel product. 

What the Chanel Decision Teaches Counsel for Other Brand Owners  

Counsel advising brands should appreciate several lessons from the Chanel decision: 

1) False association claims are easy to make, but hard to prove.  Today, a brand needs hard facts, even to survive a motion to dismiss. Chanel would have been well-advised to do a survey (even a preliminary, mini-survey) before asserting these claims.  Had its complaint referenced survey results showing false-association confusion, that might well have saved those claims from dismissal. 

2)Investigate the authenticity of the goods offered. The sale of counterfeits gives a basis for the brand to obtain substantial relief, that can then be leveraged to achieve the ultimate goal, controlling brand image.

3) Carefully review the reseller’s level of involvement in the marketing and sales of the product.  The Chanel court specifically distinguished eBay’s selling arrangement from The RealReal’s; the formality of who has title to the goods was not dispositive.  The greater the seller’s involvement and control, the more likely it will be found liable. 

US law sharply limits the rights of a trademark owner to control the sale of genuine goods.  The Chanel decision exemplifies both the limits and potential of trademark law as a means of controlling where branded product is sold.  Counsel tasked with advising brands can learn from that decision how to effectively exploit what control the law allows.