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Image: The RealReal

Chanel and The RealReal are going back-and-forth about whether the resale company should be permitted to amend its previously-filed answer to make anti-competition claims against the luxury fashion titan. On the heels of Chanel filing suit against The RealReal (“TRR”) in November 2018, accusing the San Francisco-based luxury resale pioneer of selling “at least 7” counterfeit Chanel handbags and “attempt[ing] to deceive consumers into falsely believing that TRR has some kind of affiliation with Chanel or that all [of the] Chanel-branded goods [that it] sells are authentic,” TRR responded with an answer, denying Chanel’s claim and setting out an array of defenses. 

One those defenses – in which TRR argues that Chanel’s claims are barred by the doctrine of unclean hands – is proving particularly relevant, as TRR is pointing to that defense in furtherance of a more recent attempt to amend its answer in order to set out a handful of counterclaims against Chanel. As we first reported in October, in a letter to Judge Gabriel Gorstein of the U.S. District Court for the Southern District of New York, TRR sought 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 TRR. 

In short: TRR claims that Chanel is engaging in an “overarching anticompetitive scheme” to “impair the growth and development of innovative resale rivals like TRR that threaten Chanel’s dominance.” Part of that scheme? Chanel is allegedly targeting such secondary market competitors with “bad faith” lawsuits, while also entering into “anticompetitive” agreements with a handful of publications, from the New York Times and New York Magazine to Women’s Wear Daily, and retailers, such as Saks and Neiman Marcus, to stop them from doing business with TRR, thereby, stunting its growth. 

Chanel’s Supplemental Letter

Chanel has since pushed back against TRR’s quest to amend its answer and bring such monopoly-centric claims against it. Following a telephonic conference with Judge Gorstein in which the judge stated that he is not entirely sure how the addition of TRR’s proposed antitrust and tortious interference counterclaims would not “drastically alter the character of this case,” counsel for Chanel argued in a letter dated January 26 that TRR’s “proposed amendment is certain to prejudicially expand the existing scope of discovery in this case.” And even if it does not, TRR’s proposed claims should be filed in a separate suit (and not as counterclaims in the already-existing case), per Chanel, because they “bear no logical relation – much less an ‘immediate and necessary’ one – to Chanel’s allegations” at the heart of the case. 

Specifically, Chanel argued that in its proposed counterclaims, “TRR does not allege, for example, that Chanel has engaged in counterfeiting or in falsely representing counterfeit goods as genuine.” Instead, TRR asserts that Chanel created “(1) a vast ‘group boycott’ conspiracy with retailers Saks Fifth Avenue and Neiman Marcus and publications Vogue, WWD and The New York Times which took place years before the unrelated alleged infringements by TRR, and (2) has achieved a monopoly … by treating Farfetch differently than TRR, and determining the supply and pricing levels of its own handbags.” 

(Farfetch is significant, according to TRR, because while Farfetch has offered up pre-owned Chanel products in much the same way as TRR (and What Goes Around Comes Around, which is also currently being sued by Chanel in a separate but similar case) has, Chanel has failed to take uniform legal action against Farfetch because it maintains an ownership stake in the e-commerce company. Such inaction implies that Chanel is acting in a “bad faith” attempt to control the resale market for its bags.)

With the foregoing in mind and given that TRR’s proposed counterclaims do not “even come close to meeting the heightened pleading standards required to allege an antitrust violation,” Chanel “respectfully requests that the court deny [TRR’s] motion and refuse to allow TRR to amend its answer to add its untimely and unduly prejudicial counterclaims.” 

TRR’s Letter

In a February 3 letter of its own, counsel for TRR argues that despite Chanel’s claims to the contrary, its proposed counterclaims should be permitted because they “involve the same anticompetitive conduct and issues of proof” the unclean hands defense that TRR cited in its May 2020 answer. As TRR’s attorney told the court during the parties’ conference in January, “We already have an unclean-hands defense in this case,” with the allegation at the heart of that defense being that “Chanel is bringing this litigation as a mean to push a competitor and other competitors out of the market,” thereby, neatly setting the stage for its proposed monopoly claims. 

TRR claims that Chanel would not be unduly prejudiced by the inclusion of the counterclaims because it “has been on notice for years that one of TRR’s defenses to this lawsuit would be based on Chanel’s anticompetitive conduct aimed at quashing the secondary market for Chanel handbags.” For example, TRR asserted that in its motion to dismiss, which filed in January 2019, it “stated on the first page of the brief: ‘In response to TRR’s success in expanding the availability of the resale market to consumers, Chanel seeks to shut down the secondary market for Chanel goods by permanently preventing TRR from reselling its consignors’ products.’”

More than that, TRR says that it also previously “argued that Chanel’s lawsuit was aimed at ‘stifl[ing] legitimate competition,’ that Chanel’s contention that ‘[o]nly Chanel itself can know what is genuine Chanel’ would ‘make it impossible for all secondary dealers to do business,’ and that ‘[t]he gravamen of Chanel’s complaint is an unfounded and anticompetitive attack on a business model it perceives as a threat—a secondary marketplace where consumers exercise their established right to consign, sell, and buy luxury items.’” 

As such, TRR argues that “Chanel cannot now claim ignorance as to TRR’s theory of its unclean hands defense. 

Turning its attention to the applicability of its unclean hands defense, TRR contends that “Chanel is correct [in asserting] that, for the unclean hands defense to apply to a false advertising claim” – such as the false advertising claim that Chanel lodged against TRR – “the ‘plaintiff must be guilty of allegedly the same type of false advertising or deceptive trade practices of which it accuses the opposing party.’” Here, Chanel contends that “its false advertising claims are based on TRR’s statements that ‘all of the Chanel-branded handbags it sells are authentic’ despite having sold seven allegedly inauthentic Chanel handbags.” 

“Under the unclean hands doctrine, TRR must allege the ‘same type’ of statements and conduct” by Chanel. With that in mind, the resale company claims that Chanel has made the “same types of statements” – i.e., “false statements about the authenticity of Chanel items bought online and on secondary resale platforms like TRR.” For instance, “Chanel claims on its ‘anti-counterfeiting’ webpage that there are ‘no authorized sellers of Chanel leather goods . . . on the Internet,’ and that items purchased on ‘unauthorized websites are likely to be fake.’” These statements “are objectively false,” according to TRR, as “a Chanel handbag purchased on TRR’s website is categorically not ‘likely to be fake.’” (TRR also asserts that the unclean hands doctrine is “recognized as a valid defense in an appropriate trademark infringement or unfair competition case.”)

With the foregoing in mind and even in light of the fact that the proposed new counterclaims “will result in additional expert discovery,” TRR argues that “Chanel would not be unduly prejudiced by the addition of TRR’s proposed counterclaims, and TRR’s motion to amend should be granted.” 

All the while, in a filing in November, Chanel pushed back against the merit of TRR’s monopoly claims, asserting that the reseller failed to adequately show that Chanel actually monopolized – or attempted to monopolize – the market, and that its tortious interference claims are either time-barred or without merit. 

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