Amid an existing battle over lookalike logos, Walmart and Yeezy are facing off in court, as well, after Yeezy and its founder Kanye West filed suit against Walmart and a handful of unnamed third-party Walmart sellers over the sale of copycat Yeezy foam runner footwear on the retail behemoth’s third-party marketplace site. On the heels of Yeezy and West naming Walmart and co. in an unfair competition complaint in California state court in June, Walmart is looking to get the case tossed out of court on the basis that it is shielded from liability by Section 230 of the Communications Decency Act. 

According to the notice of demurrer that it filed on September 22, counsel for Walmart argues that West and Yeezy have failed to make their case on the unfair competition front, as they have not stated facts “sufficient to constitute a cause of action as a matter of law because the complaint fails to allege any unlawful, fraudulent or unfair conduct under the Unfair Competition Law” (namely, California Business and Professions Code s. 17200, which prohibits “any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising,” and any acts that fall within a catch-all provision). Specifically, Walmart argues that they fail to “plead actual misconduct by [Walmart] and fail to allege grounds for vicarious or secondary liability for conduct of the actual seller of the subject shoes.” 

Walmart argues that “it is utterly unclear as to what … allegedly constitutes an unfair business practice” in the situation at hand, as Yeezy and West’s complaint “obscures all facts regarding the nature of the seller [of the lookalike footwear], fails to allege that [Walmart] participated in the creation or development of the product listings at issue, declines to identify a single representation made about the shoes by anybody, and fails to allege any facts related to [Walmart’s] relationship with or control of third-party sellers on its platform.” 

Walmart argues that a demurrer is also warranted because West and Yeezy’s claims are barred by Section 230 of the Communications Decency Act, which “preempts the cause of action to the extent that [West and Yeezy are] seeking to hold Walmart liable for the conduct of the seller” of the imitation footwear. Beyond that, Walmart argues that the plaintiffs’ quantum meruit claim fails, as well, as “there is no cause of action for unjust enrichment in California,” and even if the claim is construed as one for quasi-contract, the retailer asserts that “it fails for all the same reasons the [unfair competition claim] fails.” 

In relying on Section 230, Walmart is seeking to escape liability on the basis of the 1996 federal law, which was originally designed to protect online websites from defamation lawsuits for user-generated speech, and states that “[n]o provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.” 

Defamation is not the cause of action at hand here. However, Section 230 is potentially still a lifeline for Walmart, as it has been invoked in response to an array of claims, including unfair competition. And as professors Benjamin Edelman and Abbey Stemler have noted, “Online marketplaces, in particular, have tried to use Section 230 to protect themselves from everything from product liability to obligations under a myriad of state and local rules,” unfair competition, included. 

(Generally, for a provider to benefit from immunity under Section 230, three conditions must be met: (1) the provider is a “provider or user of an interactive computer service;” (2) the information which the plaintiff seeks to hold the provider liable is “information provided by another information content provider;” and (3) the plaintiff’s claim seeks to hold the provider liable as the “publisher or speaker” of that information.)

While Walmart does not elaborate on its Section 230 argument in the demurrer filing, it may have an easier case to argue here from a Section 230 perspective in light of the fact that Yeezy and West did not assert an actual trademark infringement claim in connection with the lookalike footwear, and given that one of the exceptions to Section 230 immunity is for “any law pertaining to intellectual property.” At the same time, Yeezy and West’s unfair competition claim does clearly stem from the sale of a copycat shoe style on Walmart’s third-party site – one that the plaintiffs emphasize is clearly tied to the Yeezy brand, hence the language in the complaint about the similarity of the respective footwear designs, the likelihood of consumer confusion, and the impact of the copycat footwear on its goodwill. 

It is worth noting, as the Congressional Research Service did in a Section 230 review this spring, that courts have “expressed different interpretations” when it comes to handling intellectual property claims and Section 230. The Ninth Circuit, for one, has “construed the intellectual property exception narrowly, to include only ‘claims pertaining to an established intellectual property right . . . like those inherent in a patent, copyright, or trademark,’” and thus, held that the intellectual property exception did not apply to a Lanham Act false advertising claim. 

At the same time, some courts have held that “the exception does include state intellectual property claims, allowing, for example, state law claims for copyright infringement, misappropriation, and unfair competition, and right of publicity to proceed.” Meanwhile, “other courts, including the Ninth Circuit, have held that Section 230(e)(2) encompasses only federal laws and that Section 230 bars state intellectual property claims.” 

Walmart’s demurrer comes six months after Yeezy and West filed suit against it, and follows from the retailer’s initiation of an opposition proceeding with the U.S. Patent and Trademark Office’s Trademark Trial and Appeal Board over their respective sun ray logos. In their complaint, Yeezy and Weat argue that Walmart and the unnamed third-party sellers were “flagrantly trading off of [Kanye] and the Yeezy brand’s popularity by offering for sale an imitation version of the Yeezy Foam Runner.” By selling footwear that “imitates … the original and distinctive Yeezy Foam Runner” and that amounts to an “unauthorized exact copy of the Yeezy [shoe] in every respect, including the clog-silhouette, foam slip-on body, and characteristic varying-sized cutouts on the sides and top of the shoe,” Walmart and the other defendants are causing significant harm to the “multi-billion dollar” Yeezy brand and confusing consumers in the process, per West and Yeezy. 

Beyond that, West and Yeezy claim that “by trading off of [their] popularity and goodwill to increase sales of the imitation shoe, without authorization or compensation to the plaintiffs,” Walmart and the other defendants “have unjustly enriched themselves to the detriment of the plaintiffs,” and thus, they set out a claim of quantum meruit in order to regain the profits that were allegedly amassed by the defendants in an unjust manner. Aside from monetary damages, including “restitution or disgorgement of the defendants’ profits,” Yeezy and West are looking for injunctive relief in order to formally bar the defendants from engaging in such conduct going forward. 

The case is Kanye West and Yeezy LLC v. Walmart Inc., et al., 21STCV23514 (Cal.Sup.)

Thom Browne wants the trademark infringement, unfair competition, and dilution case that adidas filed against it over their respective uses of stripes tossed out of court. In a newly-filed motion to dismiss, the New York-based fashion brand argues that despite using its own source-identifying “four band” and “five stripe” designs since as early as January 2009 without objection from adidas, “it recently became an unexpected target of adidas’ latest trademark enforcement campaign – with adidas apparently taking the sweeping position … that no item of clothing can have any number of stripes in any location or orientation without infringing or diluting [its] Three-Stripe Mark.”

In its October 6 motion to dismiss and corresponding memo in support, counsel for Thom Browne argues that despite asserting claims of federal and common law trademark infringement, unfair competition, and dilution based upon its “purported rights in [its] so-called ‘Three-Stripe Mark,’” adidas fails to sufficient make its case on a number of fronts. Primarily, Thom Browne argues that adidas does not define “what exactly [its three stripe] mark is.” Browne asserts that in the June 2021 complaint, adidas makes trademark claims against Browne and its allegedly infringing wares on the basis of 24 federal trademark registrations, but does not identify “any specific product or design that [it] contends infringes any specific trademark registration.” 

Aside from providing a list of “representative examples” of Thom Browne products that allegedly infringe its trademarks, Browne claims that adidas simply defines the allegedly infringing offerings as “athletic-style apparel and footwear featuring two, three, or four parallel stripes in a manner that is confusingly similar to adidas’s Three-Stripe Mark.” The problem here, according to Browne, is that adidas’ claims are “too vague to provide adequate notice as to the identity of the allegedly infringing products or the factual basis for its trademark infringement, unfair competition and dilution claims.”

This vagueness is heightened by the nature of adidas’ Three-Stripe trademark, itself, per Browne, which argues that “significant variations” exist between the marks depicted in the 24 trademark registrations that adidas cited in its complaint. Specifically, Browne’s counsel claims that the 24 marks “cover curved, slanted, and straight-line designs, and include designs that vary drastically in lengths, color patterns, line spacing, placement and product type,” making it “impossible that all the cited registrations constitute a single ‘Three-Stripe Mark.’”  

Against that background and given that the Thom Browne brand has “designed and sold for years a wide variety of apparel and footwear bearing its own marks,” Browne claims that it is “simply at a loss to know what it is that adidas contends infringes each of its trademarks.” Browne’s counsel at Wolf, Greenfield & Sacks, P.C. and Harley Lewin, who is occupying an Of Counsel role, further argues that it is “impossible … to discern whether adidas’ claims are directed only to items that allegedly include stripes positioned in the same manner, or to all products that display any number of stripes, regardless of specific locations, specific uses or specific lengths.” 

Some of the 24 registered trademarks

In short, Browne contends that adidas’ complaint “begs the question of exactly what it is that adidas is alleging infringes what trademark registration,” thereby, leaving Browne “in the dark as to which of the 24 registrations are asserted against which of its products, or which products allegedly likely cause dilution,” infringement, and/or unfair competition. Practically speaking, Browne’s counsel claims that it “cannot answer the complaint,” unless adidas – “at a minimum” – provides a “specific identification of the products that [it] contends infringe each of its trademarks.” 

The seemingly bigger issue here, though, according Browne, is that adidas “cannot and does not own exclusive rights to such a generically broad design motif as ‘two, three, or four parallel stripes’ on apparel and footwear, [and] because adidas has not limited its claims to specific products or otherwise clearly defined the product types at issue which relate to adidas’ registrations, [it] has failed to sufficiently allege trademark infringement, unfair competition or dilution by Thom Browne.” 

At the same time, Thom Browne argues that the fact that it has become a target of adidas is “particularly outrageous because over a decade ago, adidas approved Thom Browne’s adoption and use of four stripes on its clothing instead of three stripes.” And beyond that, “adidas never complained about Thom Browne’s use of the Five Stripe Ribbon or the then adopted Four Band Design despite knowing about it for over a decade.” (Adidas will presumably push back against this point by arguing that it did not consent to Browne’s use of the mark on athleticwear, and that it approved of the brand’s use of stripes in the context of suiting and other formal ready-to-wear, for which the Thom Browne brand is best known. Browne recently entered into the sportswear, complete with big-name partnerships with the likes of European football club FB Barcelona beginning in 2018.)

With the foregoing in mind, Browne claims that adidas has “failed to properly and adequately plead ownership of valid trademark rights that could be the basis of its claims and has failed to identify the specific Thom Browne products that could possibly violate adidas’s purported rights.” As such, “all claims in adidas’s complaint should be dismissed,” per Browne. Or alternatively, the German sportswear giant should be required to submit “a more definite statement of its claims.” 

As for the trademark opposition proceedings that predated – and ultimately, prompted – the filing of this suit, in which adidas has sought to block the registration of a number of Thom Browne trademarks in the U.S. and the European Union, the stateside battle has been put on hold for the time being in light of the filing of this litigation. 

Some of the Thom Browne wares cited in adidas’ complaint

In its complaint, adidas claims that in furtherance of Thom Browne’s “more recent encroach[ment] into direct competition with adidas by offering sportswear and athletic-styled footwear that bear confusingly similar imitations” of adidas’s three-stripe mark, Thom Browne went so far as to file trademark applications in the EU and with the U.S. Patent and Trademark Office (“USPTO”) to register various stripe designs. In fact, adidas alleges that “the present dispute began in 2018, when [it] opposed a trademark application that Thom Browne filed in the EU” for a striped mark. 

Shortly after initiating an EU opposition, adidas states that its counsel “began investigating Thom Browne’s product lines in the United States,” and found uses of allegedly infringing “two- and four-stripe” marks. In the summer and fall of 2018, “adidas’s in-house counsel attempted to negotiate a resolution with counsel for Thom Browne” in connection with its use of the striped marks, but such efforts “proved fruitless.” 

Fast forward to December 2020 and adidas filed an opposition with the USPTO’s Trademark Trial and Appeal Board, urging the trademark body to put a stop to three pending U.S. trademark applications for red, white, and blue stripe trademarks for use on footwear, filed by Thom Browne earlier that year on the basis that the marks are confusingly similar to its own, pre-existing marks. 

From the outset of the case at hand, Thom Browne has slammed adidas’ efforts to shut down its use of stripes, saying in a statement in June that the case “is an attempt to use the law illegally,” and noting that “adidas gave its consent to Thom Browne over 10 years ago and in fact suggested that Thom add an additional stripe to reach four on the sleeves or the pants and that this would be OK by Adidas. From that point for over a decade Adidas never said a word to Thom Browne.”

The case is adidas America, Inc., et. al., v. Thom Browne, Inc., 1:21-cv-05615 (SDNY).

Ahead of the United Nations Climate Change Conference – or COP26 – in Glasgow later this month, more information about the workings of a budding new fashion industry taskforce is coming into view. First announced this spring, a fashion-centric arm of His Royal Highness Prince Charles of Wales’ Sustainable Markets Initiative (“SMI”), an endeavor aimed at forging partnerships between government, business and private sector finance,” is bringing together executives from across various major fashion brands to combat climate change, including by coming to a definitive understanding of what “sustainability” entails in a fashion context, and ideally, pushing that definition on to the industry at large. 

As TFL first reported earlier this year, the Prince of Wales has been spearheading an inter-industry collaboration effort as part of his broader SMI, in which fashion industry leaders are expected to play a significant part given the $2.4 trillion industry’s position as one of the world’s largest manufacturing sectors and simultaneously, one of its most prolific polluters. According to the SMI, the global apparel industry contributes approximately 10 percent of global GHG emissions, and consumption within the sector is only expected to rise within the next decade, with the volume of garments and accessories purchased by consumers slated to grow by 60 percent by 2030, making it an industry of priority on the climate front. 

In terms of the fashion taskforce, which exists alongside other industry-specific taskforces, including Energy, Natural Capital, Road Transport, Health Systems, Technology, Waste, Plastics & Chemicals, Aviation, and Shipping, the SMI revealed in May that former YNAP founder Federico Marchetti will act as chair for the group, which is looking to “accelerate the transition towards a more sustainable future,” but did not elaborate on the taskforce’s individual members or its goals. 

This week, the group provided insight its agenda and the makeup of its membership.

In a letter of intent published this week, the Fashion Taskforce’s revealed that for the rest of 2021 and through to 2022, it will be working on a Digital ID system designed to “inform consumers of the sustainability credentials of their garments” and to “unlock new services for customers while delivering circularity at scale.” (Chances are, connected products company EON’s CircularID™ Protocol – which connects products, customers and partners across a product’s entire product lifecycle – will serve as the backbone for this effort.)

In connection with this aim, and in what appears to be one of the most groundbreaking aspects of the initiative thus far, the group says it is working towards “a common definition for sustainable products,” something that, as TFL has noted in the past, is sorely lacking in fashion (and beyond). A lack of legal definitions for frequently-used terms, such as “sustainability,” and a dearth of otherwise agreed-upon frameworks to gauge things like whether a garment is “sustainably made” has resulted in widespread and consistent examples of greenwashing by brands, which have, for the most part, gone without legal ramifications (although, that may be starting to change in light of a growing number of lawsuits and rising attention from the Securities and Exchange Commission, among other regulators across the globe). At the same time, such consistent use of eco buzzwords continues to cause confusion among consumers.

A bid to formalize a concrete (and potentially industry-specific) understanding of sustainability is also particularly noteworthy, as regulators have failed to take on that task to date. The U.S. Federal Trade Commission, for instance, opted not to define sustainability or a handful of other eco-centric terms for marketers when it issued its 300-page Green Guides in 2012. (The FTC is expected to revisit the Guides next year, and it would not be surprising if the regulator places more emphasis on sustainability terminology then).

Additionally, the Fashion Taskforce says that it is investigating regenerative farming practices across raw materials because “for brands, the highest environmental impact takes place at the very beginning of the supply chain, at the raw material level.” In furtherance of this aspect of their agenda, the Taskforce states that it is “exploring how a common approach to regenerative farming practices could represent a concrete solution not only to reduce emissions but to even reverse the climate crisis with a focus on nature-based solutions.” 

In terms of membership, in addition to Mr. Marchetti, the Fashion Taskforce boasts members that is says have been “drawn from across a range of brands, platforms and retailers from all over the world.” These include Emaar Properties and Noon.com founder Mohammed Alabbar, Burberry CEO Marco Gobbetti, Mulberry CEO Thierry Andreatta, Chloé President and CEO Riccardo Bellini, resale giant Vestiaire Collective’s CEO Maximillian Bittner, Stella McCartney CEO Gabriele Maggio, Gabriela Hearst founder (and Chloé creative director) Gabriela Hearst, luxury e-commerce site Moda Operandi co-founder Lauren Santo Domingo, Giorgio Armani Deputy MD Giuseppe Marsocci, Brunello Cucinelli CEO Riccardo Stefanelli, Selfridges CEO Anne Pitcher, Zalando co-CEO David Schneider, Johnstons of Elgin CEO Simon Cotton, and EON’s founder and CEO Natasha Frank. 

Speaking about the Fashion Taskforce, HRH the Prince of Wales asserted that in order to tackle climate change when it comes to the fashion industry, in particular, “We need cross-industry collaboration that goes beyond borders and brands,” which is why he says he is “so pleased that some of the world’s top fashion businesses have joined forces to transform the industry and work to ensure our fashion choices do not cost us the planet.”

As we have noted in the past, while the fashion industry does not operate in a vacuum, cross-sector partnerships have largely been left out of its attempts to get a handle on its role in the larger climate movement. As Jeanine Becker and David Smith stated in their 2018 article, “The Need for Cross-Sector Collaboration,” too often, companies and industries have approached issues, including on the climate front, “with piecemeal and even siloed solutions, and with efforts that are not sufficient to address the problems at the scale at which they exist.” 

The scope of the issue calls for “new processes of co-creating change and new outcomes,” Becker and Smith aptly assert (and both HRH Prince Charles and the various SMI stakeholders seem to understand), noting that change is afoot in light of “increased focus on public-private partnerships, and the rise of complex collaborative structures, in pursuit of such change.” In other words, “We are seeing the rise of cross-sector collaboration – alliances of individuals and organizations from the nonprofit, government, philanthropic, and business sectors that use their diverse perspectives and resources to jointly solve a societal problem and achieve a shared goal.” 

After mentioning Environmental, Social, and Governance – or “ESG” – almost 100 times in the nearly 60-page S-1 that it filed with the Securities and Exchange Commission (“SEC”) in August, Allbirds is reigning its sustainability-centric declarations back a bit. In an amendment form filed with the securities and stock market regulator on Monday, the San Francisco-based brand best known for its lineup of eco-friendly wool trainers “removed several key references to the sustainability principles and objectives framework” that it outlined in its earlier filing, according to the FT, cutting the number of references to the Sustainable Public Equity Offering framework from 65 to 33.

Interestingly, Allbirds has limited its language about the Sustainable Public Equity Offering framework and its applicability to other companies, as well as to investors in order to help them “better identify public companies that are committed to sustainability and positive outcomes for all stakeholders,” and has reined in its use of “ESG” – albeit minimally – from 89 times in the October 4 versus 91 times in August. At the same time, it has increased the use of other sustainability-centric buzzwords. For instance, the brand mentioned “sustainability” 112 times in its August 31 S-1; it mentions the term 129 times in the October 4 filing. 

Consumer & Regulator Attention

As the FT notes, the alterations to Allbirds’ S-1 come as the company has been facing “questions over the genuine sustainability of its business,” including a class action complaint accusing it of peddling “false, deceptive and misleading” ESG information in order to bank on the fact that “consumers are increasingly influenced” by companies’ business practices and prioritize companies that “act in a way that protects the environment, labor practices and animal welfare.” 

In the complaint that she filed this summer in a New York federal court, plaintiff Patricia Dwyer specifically alleges that Allbirds’ life cycle assessment tool – which identifies the carbon footprint of each product – does not assess the environmental impact beyond the manufacturing of the shoes, themselves, such as the impact of “wool production, including on water, eutrophication, or land occupation,” and thus, “exclude[es] almost half of wool’s environmental impact.” The plaintiff also claims that the brand’s carbon footprint figures “are based on ‘the most conservative assumption for each calculation, skewing the calculations in its own favor,’ so it can make more significant environmental claims.” 

Consumers and prospective class action members are not the only parties paying attention to companies’ ESG claims. The SEC confirmed in September that it is prepared to review and investigate public companies’ ESG disclosures. “While the SEC generally keeps matters under investigation confidential,” Winston & Strawn LLP attorneys Jonathan Brightbill and Jennifer Porter note that on September 22, the SEC revealed that its staff is sending letters to dozens of public companies in order to “seek more information about how climate change might affect their financial earnings or business operations.” 

In addition to calling for information about “how climate change may physically impact companies and their operations, the SEC is asking companies to disclose how putative changes in climate change policies may impact financial performance,” per Brightbill and Porter, further solidifying the agency’s enhanced focus on climate-related financial risk amid its ongoing efforts to draft proposed regulations that would mandate enhanced – and uniform – climate and other ESG disclosures

The Impact of ESG Disclosures

Despite skepticism about the veracity of its “eco-friendly” messaging and a growing focus on companies’ sustainability claims more generally, Allbirds has, nonetheless, emphasized its efforts on the sustainability front not only in its consumer-facing ad campaigns but in various regulatory filings leading up to its impending initial public offerings, as indicated by its S-1s. This comes in furtherance of a larger trend of companies playing up their consciousness credentials, including in IPO forms. 

Just this week, Rent the Runway filed its own S-1 with the SEC, in which it touts “the importance of sustainability” generally, as consumers are “increasingly aware of the impact their choices are making on the environment and seeking more sustainable alternatives,” and the role that it plays in RTR’s model. The company states that its “platform allows brands to participate in the circular economy and provides a way for them to address the secondhand market in an aspirational way.” Meanwhile, in its August 24 S-1, eyewear brand Warby Parker – a public benefit corp. – stated, among other things, that “ESG is embedded in our core value and vision.” 

(It is worth noting that while Warby Parker made mention of the importance of ESG to its model, the company’s S-1 was not jam-packed with ESG jargon, and for another point of reference, neither was the S-1 that luxury resale marketplace 1stDibs filed in May.)

The overarching emphasis on ESG in companies’ pre-IPO regulatory filings is likely multi-purposed: it is aimed at luring top-notch talent to fuel expansion (millennial jobseekers are increasingly factoring in ethos and ESG efforts when gauging the attractiveness of a company), catering to sustainably-minded consumers, and potentially, boosting share prices. As for therelationship between ESG communications and IPO pricing and valuation, Alessandro Fenili and Carlo Raimondo took on this issue in a recent paper, in connection with which they examined the amount of ESG disclosures – or more specifically, the use of words related to the ESG topics – in the S-1 prospectuses for 783 Nasdaq or NYSE IPOs between 2012 and 2019. 

In addition to determining that S-1 forms on average have “become more prolonged and detailed,” and that the same is also happening for ESG disclosures, which may be the result of “companies seeing it as more critical to disclose more, and possibly be more detailed, on such topics,” the two University of Lugano academics found that a “significant relationship” exists between companies’ ESG communications, and their IPO pricing and evaluation. 

Specifically, Fenili and Raimondo found that there is a negative relationship between the amount of ESG disclosures – both as topics generally and in terms of the individual E, S, and G components – in S-1 forms and a stock’s underpricing, or the increase in stock price from the initial offering price to the first-day closing price. The reason for this, according to Fenili and Raimondo? “ESG disclosures usually bring positive benefits to the companies’ financial performance,” and thus, disclosing more of this information at the outset “diminishes the information asymmetry” between a company and investors. (Information asymmetry exists when one party to a transaction has more or superior information compared to another.)

The potential for benefits here is particularly relevant given that “more and more investors use ESG criteria to evaluate investment opportunities and IPOs, and also because they might want to avoid investing in companies associated with insufficient and inefficient environmental, social, and governance practices.” 

While the relationship between ESG communications and IPO pricing and valuation that Fenili and Raimondo detected may not directly explain the rise in ESG disclosures in companies’ S-1 filings, their findings, nonetheless, “contribute to the other researchers’ results that the disclosure of ESG information … leads to higher corporate financial performance, here in terms of lower underpricing and more precise firm evaluation,” which may play some role in the drafting of regulatory paperwork. The researchers’ findings should, of course, be balanced against the need for companies to be careful when it comes to ESG claims thanks to rising SEC attention and a growing number of lawsuits, something that Allbirds is well aware of.   

On the heels of customs agents in Hong Kong and Mainland China confiscating HK$120 million ($15.5 million) worth of luxury goods in a headline-making raid in June, customs officers in Hong Kong made a record-breaking seizure this week, taking custody of HK$210 million ($27 million) worth of luxury watches and handbags, as well as endangered wildlife products, including shark fins, destined for mainland China. Unlike the frequent, large-scale seizures that see law enforcement agencies across the globe intercept shipments of millions of dollars worth of trademark infringing and/or counterfeit goods – from branded sneakers to high fashion apparel and accessories, this growing string of seizures is distinct because the products at issue are authentic.

The most recent seizure – which saw officials take custody of more than 370 designer handbags and wallets from brands including Burberry, Hermès, Gucci and Louis Vuitton, and 60 luxury watches – comes as law enforcement agencies in Hong Kong and Mainland China say that they are working overtime and in a collaborative capacity to crack down on goods that are being shipped to Hong Kong (oftentimes from Europe and the United States) and then smuggled into China. This enables the importing parties to avoid various value-added taxes and customs duties that serve to hike up the prices of foreign brands’ wares for Chinese consumers.

Price Gaps and Travel Restrictions

The increase in collective action from customs agencies and regional anti-smuggling bureaus coincides with what a Moodie Davitt report has characterized as “a recent upward trend of sea smuggling activities,” which is likely being driven, at least in part, by the enduring standstill in international travel that has forced luxury buyers in China to do all of their shopping on the Mainland.  

The Chinese government lowered import taxes in recent years in furtherance of an aim to “upgrade the domestic supply system,” as China’s Ministry of Finance put it in 2017, and induce a repatriation of Chinese luxury goods spending in light of a large-scale practice of Chinese consumers’ acquiring luxury goods during their international trips; such overseas excursions have consistently enabled luxury-happy Chinese buyers to purchase luxury goods for significantly less than they would be able to at home. To put the overarching trend in perspective, an estimated 70 percent of Chinese spending on luxury items – a cool $83 billion of the total $120 billion spent on luxury goods by Chinese consumers – was done in the U.S. and Europe in 2019. 

Yet, despite the narrowing of price gaps that have come as a result of diminished import-linked taxes (which brands have traditionally passed on to Chinese consumers, thereby, significantly upping the price tags), the playing field when it comes to price is still not even in many cases. While some brands, such as Bottega Veneta, Celine and Tod’s, are reportedly looking to follow in the footsteps of Chanel and adopt a global strategy that sees prices harmonized across different markets, and while the Chinese government “has been pressuring luxury brands to reduce the price gap between China and Europe in an effort to corral Chinese spending on these goods on the Mainland” for the past several years, according to Bernstein, not all brands are on board. 

As research and investment solutions firm Bernstein stated in a luxury pricing report this spring, a number of big-name luxury brands continue to increase prices in China faster than Europe, resulting in sometime-striking price differentials. Valentino is a good example of this, according to Bernstein analyst Luca Solca, who has noted that the Italian fashion brand has been increasing prices two-fold in China compared to France. Meanwhile, Balenciaga, Burberry, Tods, Loewe, and Louis Vuitton are among the brands that have exhibited the greatest median price increases on the mainland, resulting in the sizable price differential between China and other markets.

The overall result comes in the form of “persistent high price gaps” and markups of between 60 and 75 percent on luxury goods in China versus Europe, which ultimately sets the stage for a number of potential outcomes. Among them is, of course, the enduring smuggling that has been underway in China and the corresponding practice of parallel importing, which refers to the taking of genuine branded goods obtained in one market (i.e., a country or economic area) and importing them into another market, where they sold without the consent of the trademark owner. Beyond that, the difference in prices is also expected to parlay neatly into the anticipated return of overseas travel and shopping.

The percentage of luxury goods acquired each year by Chinese consumers outside of the Chinese Mainland may not return to the previously-observed figure after all pandemic-related restrictions have been lifted, but Solca, for one, expects that such staggering price gaps very well may prompt luxury spenders to start shopping abroad again. 

Desire for Different Things

Another factor that will likely prompt international shopping once Chinese consumers can travel again, and that very well may have a hand in driving some of the demand for smuggled goods? Their desire to access goods that they view as more unique than the ones being offered up en masse in their home market. “More than merely a way to avoid formerly steep VAT taxes, traveling further afield to Europe enables Chinese consumers to buy luxury goods that enable them to distinguish themselves from their peers,” namely by way of “regional designs that are different than those offered up by the same brands in China,” according to Xiaoqing Chen and Carol Zhang. In furtherance of a survey of post-90s Chinese women, the two academics found that many expressed a preference for luxury goods acquired outside of China over “the basic items that are available everywhere [in China].”

The striking spending rebound that followed from the initial COVID-19 outbreak in China seemed to suggest that consumers were more than willing to buy the luxury goods being offered up on their home turf. However, that may be starting to change. A recent report from China-focused news site Sixth Tone suggests that Chinese luxury consumers in Shanghai, Beijing, Chengdu, and Shenzhen have begun tightening the reins on their spending at home “hoping international travel may soon resume.” The result is a drop in spending as of mid-2021. That slump in luxury consumption is expected to turn around one “wealthy Chinese consumers begin to travel to shop once again, so it could take place very soon,”