Today’s solution to a closet full of unworn clothing is to ship it off to companies like The RealReal or thredUP, which take on the task of reselling your items, and then sending you a payout. While this exchange is simple on the consignor’s end, each individual listing created by The RealReal and theadUP represent an unquantified amount of labor associated with unpacking, evaluating, cataloging, authenticating, photographing, pricing, and ultimately, listing the good for sale. To make matters more complicated, each item has a unique combination of factors that determine its resale value, including – but not limited to – brand, style, and condition. 

It is this complexity that may be preventing The RealReal and thredUP from profitability, despite growing market demand for secondhand goods.  The RealReal’s Q2 2022 results and thredUP’s Q3 2022 results reflect net losses of $53.2 million and $23.7 million, respectively.  Additionally, The RealReal’s convertible debt load, which is due in 2025, exceeds its entire corporate valuation. Against this background and with CreditRiskMonitor’s FRISK scores – which measure the probability of a company filing for bankruptcy within 12 months – in mind, both of these companies may be at risk of bankruptcy, and if either were to file for bankruptcy, it is unclear what will happen to the warehouses filled with fashion/luxury goods – both processed and unprocessed – that these companies do not have legal ownership of.  

While consignors enjoy the relative frictionless experience of selling the contents of their closets in this manner, an important question remains unanswered: What happens to your stuff if the company goes bust?

What the Law Says

A consignment occurs when a supplier (or consignor) supplies goods to a merchant (or consignee) for sale.  The consignor still owns the consigned goods and the consignor acts as an agent to sell those goods. When the goods are sold, the consignor receives the balance of the proceeds, minus a commission for the sale.  UCC § 9-109(a)(4) applies to every “consignment,” and under UCC § 9-102(20), “consignment” means a transaction, regardless of its form, in which a person delivers goods to a merchant for the purpose of sale and … 

In such a case, a consignor would need to file a UCC-1 financing statement to perfect its interest and avoid becoming a low priority general unsecured creditor.  However, it seems that a “consignment” exception would apply to the above in the cases of thredUP and The RealReal. Factors indicating that the parties intended a “true” consignment include that the consignor retains control over the sale price, the consignee is given possession with authority to sell only upon consent of the consignor, the consignor may recall the goods at any time, and the consignee is to receive a commission instead of a profit from the sale.  This would mean that consignment would be a “security interest” under Article 9 of the UCC, the consignor would not be required to comply with the UCC’s filing and notice provisions, and that the unperfected consignor can prevail over a secured lender.  

Unfortunately, the “consignment” exception is heavily fact dependent and would require litigation. It is likely that consigned goods may be sold off as part of a company’s assets to satisfy the claims of other creditors.

Resale Terms

Additionally, it is unclear how the UCC would interact with said companies’ consignment agreements.  For example, The RealReal’s consignment agreement states: “Your use of our services is at your sole risk.  Our consignment, get paid now, and other services are provided on an ‘as is’ and ‘as available’ basis […]  The RealReal and its subsidiaries, affiliates, officers, employees, agents, partners, and licensors will not be liable to you for any, indirect, incidental, special, consequential, or exemplary damages or for damages for loss of profits, goodwill, use, data, or for other intangible losses (even if we have been advised of the possibility of such damages) resulting from:  (a) the use or the inability to use our services or our website; (b) unauthorized access to or alteration of your transmissions or data; (c) the activities contemplated by this agreement; or (d) any other matter relating to our services or this agreement.”

The agreement continues, “In no event will our liability under this agreement exceed the amount we have actually received or paid as a result of selling or purchasing your property hereunder.” Similarly, thredUP’s consignment agreement states, “If there is a dispute between you and thredUP, thredUP will have no obligation to pay any payout or other amounts due to you, including without limitation, amounts unrelated to the dispute, unless and until the dispute is resolved.” Still yet, both The RealReal and thredUP have a Terms of Use requiring binding and final arbitration and waiving class action.

2nd Time Around

The most instructive example of what could happen to consignors’ goods if The RealReal or thredUP were to file for bankruptcy is the 2017 bankruptcy of 2nd Time Around, a brick-and-mortar chain of consignment stores. In the wake of 2nd Time Around shuttering its stores, consignors were informed that the company could not “commit” to paying individuals whose items were sold prior to a certain date. Many individuals were told that their consigned items had been lost, that they would not be paid, and in some cases, those wronged simply “grabbed merchandise from the shelves as compensation.”

While consignors discussed a lack of transparency in the way the bankruptcy was handled, they at least had physical stores they could try to return to in attempt to get answers.  Additionally, there was at least a possibility that consignors knew where their consigned goods were located. In contrast, most consignors with The RealReal (which maintains some brick-and-mortar stores but primarily operates online) and thredUP would have to communicate through customer service agents; it is not clear if individual items would be able to be located within a warehouse that can hold 5.5 million items

Looking Forward

While we can look to the law for guidance, the overall outcome of what would happen to consigned goods if one of these big-name resale companies were to go bankrupt is entirely unclear. It is safe to assume that the inventories of The RealReal and thredUP are massive; in 2021, alone, thredUP reported processing more than 125 million items.  In the event of a bankruptcy, both companies might opt to engage in a fire-sale type of situation, selling individuals’ items at rock bottom prices to try to minimize the amount they owe to creditors, which would be allowed under most consignment agreements (“Unless We have agreed otherwise in writing to a specific price at which a specific item must be Sold, We, in our sole discretion, will determine the initial selling price for each item of Consigned Property”). 

Additional questions remain. For instance, how would such a company handle a flood of individuals demanding the return of their individual items, which would further increase expenses for an already struggling company? And would a company even be physically able to return said items? Moreover, even if consignors could prevail as plaintiffs, how are they going to collect?  And in bankruptcy, would a trustee be required to spend money to make consignors whole?  

As a result, consignors should closely monitor the health of online resale platforms that they actively consign with, carefully review all terms of consignment agreements, and understand that the status of their Birkin may be up in the air in the event of a company’s collapse.

Julie Tamerler is a family law, business, and intellectual property attorney.

Over the past decade, sellers of counterfeit goods have flocked to the web, taking the formerly brick-and-mortar-based trade, such as Canal Street sales, online, and saturating sweeping e-commerce marketplaces and standalone websites, alike, with everything from trademark infringing face masks to counterfeit footwear and luxury handbags. The stunning rise in online sales of fake goods does not mean that former physical hotspots are not still in operation, nor does it mean that attempts by trademark holders to hold bad actors accountable for such sales have disappeared, as brands continue to routinely file trademark lawsuits focused on the online offering of counterfeit or otherwise infringing products.  

While trademark infringement lawsuits play out in courts across the U.S. in connection with the sale of fakes online, an appeals court has found that landlords can be held contributorily liable for trademark infringement when they knew – or should have known – of a tenant’s infringement and took little to no action to stop that infringement. That is what the U.S. Court of Appeals for the Second Circuit held early this year in Omega SA v. 375 Canal, LLC, a long-running case that pitted Swiss luxury watch group Omega SA against the property owner of 375 Canal Street in Manhattan over the sale of counterfeit Swatch and Omega watches.

The defendant in the case, landlord 375 Canal, LLC (“375 Canal”) knew that counterfeit goods were being sold at its leased Manhattan property for years and in fact, was previously sued by the City of New York and Louis Vuitton Malletier on the basis of counterfeiting and other trademark violations. Despite previous penalties, injunctions, and settlements, counterfeit items continued to be sold at 375 Canal, and an individual working at the defendant’s Canal Street location sold a counterfeit Omega watch during a police sting in —, prompting counsel for Swatch SA to send a letter to one of the 375 Canal property owners, informing him of potential contributory and vicarious liability in connection with the sale of counterfeit products on the premises. 

Despite Omega’s letter and despite 375 Canal’s claims that they removed the offending tenant, vendors that occupied the defendant’s outpost continued to sell counterfeit goods. Omega filed suit against 375 Canal in a New York federal court in September 2012 for contributory trademark infringement after Omega’s private investigator purchased a counterfeit Omega Seamaster watch at 375 Canal’s premises, alleging that the defendant continued to lease its space despite knowing that its vendors were selling counterfeit Omega goods.

In response to Omega’s suit, 375 Canal maintained that it was not liable for contributory infringement because Omega did not prove that it continued to lease its space to a specific, identified vendor that it knew or should have known was selling counterfeit Omega goods. Unpersuaded, a panel of judges for the Second Circuit found that this argument conflicted with the court’s decision in Tiffany (NJ) Inc. v. eBay Inc., stating that a landlord “may be held liable for contributory trademark infringement despite not knowing the identity of a specific vendor who was selling counterfeit goods, as long as the lack of knowledge was due to willful blindness.” 

While landlords do not have a duty to look for infringement occurring on their property, they do have to undertake efforts to “root out” infringement once they know or should know of its occurrence. Because 375 Canal had known of the counterfeiting occurring at its property for years, a jury awarded $1.1 million in damages to Omega for the defendant’s contributory infringement of Omega’s trademarks.

Looking Beyond Canal Street

The outcome in the Omega case is relatively straightforward because of the nature of the (clearly-counterfeit) products at play, and Defendant 375 Canal’s high level of prior knowledge about its tenants’ infringing activities. However, it remains unclear how the decision in this case would apply to instances in which the nature of the products, themselves, is not quite so clear-cut, such as when authentic products are modified, and what that would mean in terms of a landlord’s knowledge of the authenticity of those products – or the lack thereof. 

This scenario is likely to be prove a relevant one given the rate at which luxury brands have been losing some control in the market (due, in part, to the rise of e-commerce and the burgeoning resale segment), and have been facing off against sellers of trademark-bearing products that have been modified and/or that are being sold in different conditions (or are subject to different terms) than the ones maintained by the rights holder and its authorized retailers. 

Luxury brands have increasingly been utilizing trademark law to police the sale of their goods in such post-sale capacities. While the First Sale doctrine states that a trademark owner cannot prevent the subsequent resale of its goods once it releases them into the market, this doctrine does not apply if the product is “materially different” than the product sold by the trademark holder. A blatantly fake Omega watch like the ones at issue in Omega is infringing, but the jury is still out regarding what level of alteration, for instance, makes a good “materially different,” and therefore, transforms an otherwise authentic product into an infringing one. 

Despite this ambiguity, brands like Chanel and Rolex have been hollowing out the First Sale doctrine by attacking alternate distribution channels for selling “materially different” goods, in furtherance of a bid to ensure that potential customers buy their goods from them directly and/or are not misled about the nature of the unauthorized goods. 

By clearly establishing landlord liability for trademark infringement, Omega may represent another avenue for luxury brands to chip away at the First Sale doctrine. Upon receiving a notice of (alleged) infringement from a rights holder, such as a luxury brand, a landlord has two options. It can terminate the tenant’s lease to forestall future liability, or it can attempt to determine whether the tenant is actually selling infringing goods, and potentially uphold the lease, thereby, challenging the rights holder’s claim. (A commercial landlord will likely have a provision in its lease empowering it to declare that a tenant is in breach of the lease agreement if participating in illegal activity, allowing the landlord to unilaterally terminate the lease without penalty.)

But as instances of modification/alteration demonstrate, the concept of “authentic” versus “infringement” is not always as cut and dry as it may seem, which could complicate the ability of a landlord to determine whether its tenant is infringing upon a brand’s trademarks. Because Omega establishes that a judgment may be looming, it may be safer for a landlord to accept a trademark holder’s notice of infringement at face value and evict the tenant, even though the tenant may not be infringing upon a brand’s trademarks. 

Further complicating the matter is the requisite level of landlord knowledge regarding a tenant’s infringement. Omega states that there is no affirmative duty to police, but there is no prescribed level of action between doing nothing and being willfully blind, and policing, the latter of which is supposedly unnecessary. Since almost all cases adjudicated to this point have featured landlords and vendors who were the subject of police raids or civil settlements prior to the present suit, the current standard evaluating landlord knowledge appears to be a fact-specific, “I know it when I see it” standard. By sending notices of infringement, a brand may effectively become both judge and landlord.

Julie Tamerler is a judicial law clerk for President Judge Michael J. Koury, Jr. in Easton, Pennsylvania. Her work, “The Ship of Theseus: the Lanham Act, Chanel, and the secondhand luxury goods market,” is forthcoming in the Fordham Intellectual Property, Media & Entertainment Law Journal.