Chanel is Maintaining a “Monopoly” With the Help of Big-Name Retailers, Publishers, The RealReal Claims in New Filing

Image: The RealReal


Chanel is Maintaining a “Monopoly” With the Help of Big-Name Retailers, Publishers, The RealReal Claims in New Filing

Chanel is actively engaging in an “overarching anticompetitive scheme” in order to limit the supply of its products in the market, “inhibit the growth and development of competitors, and artificially raise and maintain [its] prices,” and it has had help from prominent ...

October 30, 2020 - By TFL

Chanel is Maintaining a “Monopoly” With the Help of Big-Name Retailers, Publishers, The RealReal Claims in New Filing

Image : The RealReal

Case Documentation

Chanel is Maintaining a “Monopoly” With the Help of Big-Name Retailers, Publishers, The RealReal Claims in New Filing

Chanel is actively engaging in an “overarching anticompetitive scheme” in order to limit the supply of its products in the market, “inhibit the growth and development of competitors, and artificially raise and maintain [its] prices,” and it has had help from prominent publications and big-name luxury fashion retailers in doing so. That is what The RealReal argues in a new filing with a New York federal court, along with claims that Chanel is violating both federal and state antitrust laws in furtherance of its alleged quest to achieve and maintain a monopoly in the market for its pricey handbags. 

In a letter addressed to Judge Gabriel Gorenstein of the U.S. District Court for the Southern District on Friday, The RealReal (“TRR”) asks the court to permit it to“amend its answer to assert antitrust and related anticompetitive counterclaims” in light of its discovery of “new evidence” about Chanel’s “motivation” in bringing various trademark-centric lawsuits against its competitors, including the one it filed against TRR in November 2018, as first reported by TFL

Along with the letter, the San Francisco-based resale entity submits a proposed amended answer and counterclaims in response, which follow from the allegations that Chanel made in its February 2019 amended complaint, including that TRR has engaged in trademark infringement and counterfeiting by offering up pre-owned Chanel products on its e-commerce site and in its brick-and-mortar outposts. 

After rejecting the bulk of Chanel’s allegations in that filing, TRR sets out twenty-three different affirmative defenses to those allegations – from puffery, First Sale Doctrine, and First Amendment claims to the argument that “the system put in place by Chanel to monitor … the distribution and sale of CHANEL-branded merchandise is so ineffectual that Chanel can no longer distinguish [between] genuine CHANEL-branded goods and counterfeit CHANEL-branded goods, [thereby] render[ing]” various Chanel trademarks “invalid and unenforceable.” 

What the publicly-traded resale site devotes the majority of its strongly-worded 47-page filing to, though, is detailing the striking new counterclaims that it endeavors to make against Chanel, assuming the court allows it to amend its answer. 

Maintaining a “Monopoly”

The crux of TRR’s antitrust-centric arguments is that Chanel has been quietly carrying out an “aggressive campaign” of “exclusionary and anticompetitive conduct” aimed at “monopoliz[ing] the market” – and thus, the supply and price of its goods, both new and pre-owned – to the detriment of its competitors and consumers, alike.

In direct response to the burgeoning, multi-billion dollar luxury resale market, which is “a new threat to the core of its business model,” TRR alleges that Chanel has gone beyond the work of a diligent company looking to preserve the meticulously-crafted positioning of its rarefied luxury brand in the face of the evolving modern marketplace. Instead, TRR says that the 110-year old luxury stalwart has “attempted, acquired, and maintained monopoly power” in the “relevant market” by way of an ongoing scheme to “impair the growth and development of innovative resale rivals like TRR who threaten Chanel’s dominance” by “creating a robust resale market where none previously existed,” and thereby, giving consumers increased access to “a rich supply of Chanel handbags that would not otherwise be available to [them].” 

As one of the primary players in the market for “top tier investment grade handbags and hold-value handbags,” (i.e., certain styles of Chanel, Louis Vuitton, and Hermès bags that hold or increase their retail value over time), Chanel commands a 30-plus percent share, and has as much as a 50 percent share in related handbag submarkets, per TRR. The Coco Chanel-founded company has been able to not only “maintain … [this] monopoly power despite the entry of multiple high-quality resale competitors,” TRR alleges that Chanel has actually “enhanced” that power due, in part, to its “anticompetitive intent of pushing out resellers of Chanel handbags and increasing its own market dominance.” 

The Alleged Role of Retailers & Publications

In order to illegally “stymie competition” that comes from resellers, which “threaten the very core of Chanel’s business model, [one that] is premised on a limited supply and few access points for consumers,” TRR claims that Chanel has specifically entered into “exclusive contracts with high-end retailers and us[ed] its monopoly power to force the[m] to refuse to engage in any ancillary relationship with resale competitors.” 

For instance, TRR argues that on the heels of it entering into resale partnerships with Neiman Marcus and Saks Fifth Avenue in or around 2015, Chanel threatened to pull all of its products from their stores unless both retailers agreed to prevent consumers from consigning Chanel products to TRR in their stores, and to similarly keep consumers from purchasing new Chanel products with the Neiman Marcus and/or Saks gift cards they received as a result of consigning products with TRR. 

In both cases, the nearly-decade-old resale company claims that it was “economically infeasible” for the retailers to “resist Chanel’s demands” due to its “power over the market” for top tier handbags, and thus, “Chanel intentionally caused” them to “breach their respective contracts [with TRR] by terminating their relationships with [it].” 

“The loss of these partnerships significantly inhibited [TRR’s] business development and growth,” the company asserts.  

Beyond that, TRR alleges that Chanel “engag[ed] in a concerted refusal to deal – i.e., a vertical group boycott – with print and digital advertisers” that “deprived [its] competitors,” such as TRR, “from placing advertisements in the most highly desirable locations.” Specifically, TRR contends that Chanel used its position “as the most powerful luxury brand to force New York Magazine into an agreement not to deal with TRR” in late 2015 or early 2016 when it was “in discussions” with the publication about a digital and print media campaign. 

“Chanel did not stop at New York Magazine,” per TRR. It “used its influence to reach agreements with Vogue and The New York Times to refuse to deal with TRR and boycott TRR’s advertisements.”

As recently as 2019, TRR claims that it was “in discussions with Women’s Wear Daily to run an advertisement promoting its recent landmark partnership with luxury brand Burberry.” However, “shortly before the ad was set to run, Chanel used its dominance and influence to convince WWD not to run TRR’s ads.” This is one of the latest examples in Chanel’s alleged pattern of “repeated coercion of various publications to refuse to deal with TRR, [which] constitutes anticompetitive agreements in restraint of trade without any procompetitive justifications,” according to TRR.

Each of Chanel’s actions “alone, constitutes an overt anticompetitive act capable of redress by this Court,” TRR alleges. However, “the totality” of these actions when considered together “constitute a full-scale assault on resale competitors and an effort to continue Chanel’s dominance in the market.”

All the while, TRR asserts that Chanel has been “raising prices and restricting output … in order to maintain the desirability of its brand.” For example, TRR claims that “in recent years, Chanel became concerned that its classic flap handbag was being carried by too many people ‘without style,’ so it reduced supply and significantly increased prices.” This is, of course, well within the rights of a brand to do, and raising prices while strictly limiting supply in order to create and/or uphold the impression of soaring demand is far from an unheard of tactic in the upper echelon of the fashion industry. 

Enter: Farfetch

TRR does not stop there with its allegations, and goes on to assert that while Chanel has been actively seeking to ensure a firm grip on its “monopoly” in the market by “coercing or pressuring” various retailers and publications, it has also been taking legal action against resellers, including but not limited to TRR. (As TRR notes, fellow consignment company What Goes Around Comes Around (“WGACA”) is currently embroiled in a similar lawsuit initiated by Chanel).

Interestingly, there is “one major secondary reseller” that has been “notably absent in Chanel’s war,” TRR points out. Farfetch – the online retailer in which Chanel made a “significant” investment in in February 2018, and which has been making increasing inroads in the resale market, including by way of its own resale pilot program, “Farfetch Second Life.” 

According to TRR’s filing, Farfetch “promotes, advertises, markets, and sells pre-owned Chanel goods that are sourced from numerous brick-and-mortar boutiques” and “guarantees the authenticity of all of its pre-owned items,” in much the same way as TRR and WGACA. Yet, despite Chanel taking issue with TRR and WGACA’s assertions about their ability to properly authenticate the Chanel bags they sell because – as it has asserted in both cases – “only Chanel can authenticate Chanel [products],” and ultimately, filing lawsuits against them as a result, Farfetch has not landed on the opposite end of litigation with Chanel due to its own declarations of authenticity. 

This is not necessarily an issue on its face. However, TRR contends that Chanel’s failure to take uniform legal action against Farfetch for marketing its pre-owned Chanel products as being subject to “a rigorous process to ensure that all items meet our authenticity standards” shows that“Chanel will only tolerate the resale of Chanel handbags … by a company in which [it] holds a significant investment.” The purpose of this, according to TRR? So that Chanel “can continue to control supply and prices in the market for top tier … handbags.” 

“Although notable,” TRR asserts that Farfetch’s “absence” from Chanel’s list of defendant resellers “is far from surprising” due to Chanel’s “juicy side hustle” with Farfetch. 

(As previously reported by the Financial Times, Chanel took an undisclosed minority stake in Farfetch in February 2018).

“Exclusionary Conduct”

Distinct from the work of a company that is merely enforcing its rights in good faith, TRR says that Chanel’s “overarching anticompetitive scheme” has resulted in significant harm to the relevant market. This takes the form of “reduced supply of top tier handbags, fewer options for consumers for where and how to purchase top tier investment grade and hold-value handbags, the limitation of innovation from the entry and growth of competitors, supra-competitive prices for consumers …, and increased market dominance by Chanel.” 

As a result, TRR proposes five counterclaims against Chanel: violations of Section 1 and 2 of the Sherman Act, anticompetitive arrangement in violation of the Donnelly Act, tortious interference with contract, and tortious interference with prospective business relations. 

Primarily, the resale company asserts that “Chanel’s significant investment in and partnership with Farfetch [has] … an intended consequence of reducing output and other anti-competitive effects.” The same is true for Chanel’s alleged agreements with powerful publishers, as well as Neiman Marcus and Saks, which “constitute unlawful vertical restraints of trade,” as they “restrain a sufficiently substantial portion of effective advertising” – and “effective sales” – in the relevant market “to the detriment of competition.” TRR argues that this runs afoul of Section 1 of The Sherman Act, a federal statute that prohibits activities that restrict competition in the marketplace. 

More than that, Chanel’s “attempt to monopolize the relevant market … as shown by both direct evidence of its ability to raise prices and restrict output and indirect evidence of its dominant market share in the market” violates Section 2 of The Sherman Act, which makes it illegal to “monopolize, or attempt to monopolize … any part of the trade or commerce among the several States, or with foreign nations,” as well as New York’s Donnelly Act, a state antitrust statute.

With Chanel’s allegedly unlawful conduct in mind, TRR alleges that it is entitled to monetary damages, as well as injunctive relief to legally prohibit Chanel from engaging in such behavior going forward. 

In the corresponding letter to Judge Gabriel Gorenstein, counsel for TRR details the lawsuit that Chanel initiated against it in 2018, in which the luxury brand made “sweeping claims for trademark infringement, unfair competition, false endorsement, and false advertising.” TRR asserts that at the heart of the suit is an attack to “the core of TRR’s business model in a blatant attempt [by Chanel] to stifle legitimate competition and undermine confidence in sellers of Chanel goods other than Chanel itself.” 

In the wake of Chanel’s initial complaint, TRR – which has faced backlash in recent years, including in the form of litigation, about the rigorousness of its authentication practices and thus, the nature of the hundreds of millions of dollars of fashion and luxury goods it sells each quarter – has characterized Chanel’s suit as “an unfounded and anticompetitive attack on a business model [that Chanel] perceives as a threat.” Moreover, TRR has called the case “an effort by Chanel to uproot the settled [First Sale] doctrine” – which generally gives consumers the right to resell products they have purchased without recourse from the trademark holder – “to the detriment of consumers, undermine consumer confidence in the secondary market, and stifle legitimate competition.” 

In the same letter on Friday, counsel for TRR tells the Judge that “Chanel disclosed new evidence” in the proceedings in the WGACA case that demonstrates that “Chanel’s actions are not a good faith effort to police counterfeiting but rather a targeted campaign to prevent certain competitors from operating in this specialized market while sparing others – specifically, those in which Chanel has a financial stake.” Those disclosures “provide direct support for TRR’s proposed counterclaims against Chanel,” and as a result, it claims that it should be permitted to amend its answer in order to assert antitrust and related anticompetitive counterclaims. 

A rep for Chanel was not immediately available for comment. 

* The case is Chanel, Inc., v. The RealReal, Inc., 1:18-cv-10626-VSB (SDNY).

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