What Goes Around Comes Around – Luxury Resellers on Tightrope?
The resale of luxury goods is big business. According to a 2021 McKinsey study, the luxury resale market was estimated at around US$25-30 billion in 2020 and was growing[1]. However, a recent New York lawsuit may put luxury resellers on thin ice.
In March 2018, the famous French luxury fashion house Chanel commenced legal proceedings against What Goes Around Comes Around (“WGACA”), a specialist secondhanded luxury goods reseller, at the Southern District Court of New York, alleging it, inter alia, sold counterfeit Chanel goods and infringed Chanel’s trade marks[2].
After six years of litigation and a month-long trial, on 6 February 2024 the jury ruled unanimously for Chanel on all claims[3] and awarded Chanel US$4 million in damages.
This victory may have a profound impact on how the entire luxury resale market operates.
From the outset, it is important to note that, under trade mark laws, brand owners generally have no right to prevent third parties from (i) selling genuine second-handed goods; or (ii) using the brand owner’s trade marks as an indicia of the second-handed goods that they are selling. This is because under the doctrine of exhaustion, a trade mark owner’s rights in a product is spent (or “exhausted”) once the trade mark owner first put a product on the market; the trade mark owner generally cannot rely on trade mark laws to stop any subsequent sale of the same product.
Given that, some may see Chanel’s lawsuit as a cynical attempt to crack down on the resale market. Whatever the case may be, this case does pose some significant challenges to all players in the resale industry.
Use of brands’ marks and images to promote the resale business
Whilst resellers are generally permitted in law to use a third party’s trade marks to denote the product that they are reselling (for example, a reseller can, without LV’s permission, use the words “LV” or “Louis Vuitton” to describe the second-handed genuine LV bag that it is selling), Chanel alleged that WGACA’s use of Chanel’s marks exceeded what was necessary to identify the resale products.
Chanel claimed that WGACA had:-
- used photos featuring Chanel’s marks in emails to customers;
- used the “#WGACACHANEL” hashtag in social media posts;
- displayed on its website and advertisements the phrase “WGACA CHANEL- 100% Authenticity Guaranteed”;
- used images and quotes from Coco Chanel, Chanel’s founder in promotional materials;
- held annual “Coco Chanel birthday sale” campaigns.
- used images of Chanel’s products, including products that WGACA was not selling at that time.
Chanel claimed that WGACA’s use is liable to “deceive consumers into falsely believing that WGACA has some kind of approval of or relationship or affiliation with Chanel or that Chanel has authenticated WGACA’s goods in order to trade off of Chanel’s brand and good will.”
By finding that WGACA’s use was infringing, it brings into question to how and to what extent resellers can use brand owners’ marks in promotion: Is the standard so strict that only identifiers that are absolutely necessary is permitted? Can resellers carry out marketing campaigns with brand owners’ marks? Would disclaimers (specific statements that the resellers are not affiliated with the brand owners) help?
Sale of “Non-Genuine”/ “Counterfeit” products
The main thrust of Chanel’s case is that WGACA had allegedly sold Chanel bags that were, according to Chanel’s own internal serial number system, “non-genuine” bags that Chanel did not authorize for sale. This allegedly included:-
- bags bearing serial numbers that were assigned to bags stolen from Chanel’s contracting factories and which serial numbers were subsequently voided;
- bags with charactistics that did not match Chanel’s serial number system;
- bags bearing serial numbers that were voided by Chanel during inventory audits at Chanel’s contracting factories;
- counter-support/ point-of-sale items that were not authorized for sale.
Chanel claimed that notwithstanding their sources, the abovementioned items were “non-genuine items” or “counterfeits” as Chanel had not authorized their sale. The doctrine of exhaustion therefore does not apply and, by implication, WGACA’s sale of those bags are no different from selling counterfeits. Again, the jury supported this claim unanimously.
Chanel also challenged WGACA’s claim that it could verify whether the products it was reselling were genuine or not, as only Chanel has access to its serial number system and thus only Chanel could tell whether a product had been put to the market with Chanel’s authorization or not.
This ruling seems to put (at least in a US context) undue power in the hands of brand owners. By defining genuine products solely with reference to the brand owner’s authorization for sale, this in a sense gives brand owners the sole authority to determine whether a product is genuine or not, and even products produced in authorized facilities or placed within authorized sellers may not be “genuine”.
As WGACA commented in a post-verdict interview, without access to Chanel’s internal serial number database, it seems difficult, if not impossible, for the resale industry to determine whether a product has been authorized for sale or not[4]. There seems to be a not insubstantial risk that resellers would unknowingly sell unauthorized products, even where items appear to be legitimate. It seems the only way for resellers to verify the “authenticity” of products is to insist on having sight of full “title documents” (e.g. receipts issued by authorized dealers or retailers) from sellers, which would in turn increase cost for resellers and shrink the supply pool of second-handed products.
It may also be reasonable to ask if this ruling gives brand owners too much power to control distribution and resale channels (e.g. giving undue advantages to resellers authorized or even operated by brand owners themselves[5]) and thus harm competition and consumers, thus giving rise to potential competition law/anti-trust law issues.
Whatever the case may be, the luxury resale market is likely to get rather more interesting.
Disclaimer: This article is provided for information purposes only and does not constitute legal advice. Specialist advice should be sought about your specific circumstances.
[2] Chanel Inc. v. WGACA LLC 18 Civ. 2253 (LLS)
[3] The jury sided with Chanel on all claims that the jury was asked to adjudicate on. Note that some of Chanel’s claims had been struck out in prior motions to dismiss.
[5] Luxury brands are starting to tap into the resale market themselves, see: https://www.scmp.com/magazines/style/luxury/article/3212940/why-luxury-fashion-brands-are-embracing-second-hand-sales-beyond-sustainability-taking-control ; https://fashionista.com/2022/02/luxury-brands-clothes-resale-secondhand-market
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