Chanel wants the newly-asserted counterclaims – and one of the affirmative defenses – that The RealReal (“TRR”) has waged against it in the parties’ high-stakes legal battle tossed out of court. In a motion to dismiss and corresponding memo that it filed on March 18, counsel for Chanel asserts that “after contending for nearly two years that this should be a narrow counterfeiting and false advertising case with limited discovery,” TRR has since “inject[ed] a full-blown antitrust and tortious interference lawsuit, unrelated in time or nexus to Chanel’s original claims, [and] based entirely upon conclusory allegations about purported conduct that TRR contends took place well before the acts and occurrences alleged by Chanel and outside the statutes of limitations.”
In the 39-page memo in support of its motion to dismiss filed last week, counsel for Chanel argues that the antitrust and related anticompetitive counterclaims that the court permitted TRR to insert into its since-amended answer in February exist separately from the underlying case at hand – which Chanel filed in a New York federal court in November 2018, accusing TRR of trademark infringement, counterfeiting, and unfair competition – and also fall outside of the window of time that TRR had to assert such claims, namely, the four-year period for the Sherman Act and Donnelly Act, and three years under New York law for tortious interference claims.
Chanel spends the majority of the filing, however, arguing that even if TRR’s claims were made within the allotted time period and are related to the underlying case at hand, TRR’s counterclaims should be dismissed, nonetheless, as the “scant factual allegations” that TRR asserts in connection with its claims that Chanel engaged in an “overarching anticompetitive scheme” to “impair the growth and development of innovative resale rivals” like TRR are a clear indication that such antitrust counterclaims “are implausible and without merit as a matter of law.”
To make its own case that TRR’s antitrust counterclaims should be tossed out of court, Chanel asserts that the San Francisco-based luxury resale pioneer fails to plausibly allege its “three species” of antitrust claims, namely: (1) unlawful monopolization; (2) attempted unlawful monopolization; and (3) a “vertical group boycott” conspiracy. According to Chanel, all three of these claims are implausible and legally insufficient on their face,” and thus, should be dismissed.
Unlawful Monopolization
Turning to the merit of each of the individual antitrust claims, Chanel primarily argues that on the “unlawful monopolization” front, TRR needs to – and yet, fails to – establish, among other things, that: (1) Chanel has “dominant ‘monopoly power’ in [the relevant product and geographic] market,” and (2) that it achieved or maintained that power “through anticompetitive ‘exclusionary conduct’ prohibited by the antitrust laws,” thereby, causing “injury to market-wide competition.”
Chanel argues that TRR’s claim that it is “a monopolist” – and that it “is singlehandedly dominating the sale and resale of all ‘top tier’ handbags in the U.S.” – fails because it is “contradicted by its own allegations that Chanel is but one of many brands in a thriving, highly competitive market.” To be exact, Chanel asserts that TRR previously argued that “the proposed relevant market” – i.e., the U.S. market for “hold-value handbags” and “investment grade handbags” – is “‘dominated’ by a ‘Holy Trinity’ consisting of Hermès, Chanel, and Louis Vuitton and that Hermès is the dominant actor.”
This is automatically problematic since there is “no such thing as a ‘joint’ or ‘shared’ monopoly” under the U.S. antitrust laws, Chanel argues. Citing Second Circuit case law, it claims that “it is well-established that a ‘monopoly’ requires the concentration of dominant market power in a single company.” TRR’s “own ‘Holy Trinity’ allegations on their face, therefore, refute the notion that Chanel holds a monopoly over the ‘sale and re-sale’ of all ‘top tier handbags in the U.S.,’” per Chanel.
Beyond TRR’s claim that the relevant market is “dominated by 3 different companies,” with Chanel “only having a 30% market share,” the brand also asserts that “most powerful competitor in the market is Hermès, not Chanel,” and that the “many re-sellers of handbags in the market, including TRR, are thriving and no injury to the market has occurred,” all of which weighs against its argument that Chanel maintains an unlawful monopoly.
Chanel similarly takes issue with TRR’s “attempt to narrowly gerrymander the market” by defining it as “limited to two handbag categories based upon price and resale value: (1) ‘hold-value handbags’ ‘that sell for over $2,000 and retain a resale value of 50% to 100% of the initial sale value’ and (2) ‘investment grade handbags’” – as opposed to including the larger luxury handbag market regardless of their resale prowess, thereby, “arbitrarily ignoring the vast majority of luxury handbags sold in the U.S.” According to Chanel, courts have “routinely rejected such proposed relevant markets which select a narrow price range as the ‘relevant market, rather than reflecting market realities, especially where the number of relevant competitors has been artificially limited.”
And still yet, Chanel argues that “even if TRR has properly alleged a plausible relevant product market and geographic market, its counterclaims “must be dismissed because, on their face, they fail to plausibly allege that Chanel exerts monopoly power in [that] proposed relevant market.” Specifically, TRR asserts that Chanel’s monopoly power is seen in its ability to “literally control prices or exclude competitors from the relevant market,” which can be seen in Chanel’s “ability to raise the prices of its own products, (ii) carefully control the distribution and sale of its products in the marketplace, and (iii) limit the quantities sold.”
“But TRR misconstrues what type of price ‘control’ constitutes illegal monopoly power,” per Chanel, which asserts that its “careful control over the exclusive sales of its designs in the marketplace is not illegal.” Instead, “It is basic hornbook law that the term ‘power to control prices,’ refers to the control of prices in the relevant market, and not to the power to set prices that are charged to the defendant’s customers.”
As for Chanel’s alleged ability to successfully exclude “any competitor from the relevant market,” the brand claims that “at best, TRR’s vague and conclusory allegations claim that Chanel has excluded TRR from selling CHANEL-branded products at Neiman Marcus and Saks or from advertising with The New York Times, WWD, Vogue and New York Magazine.” In terms of TRR’s allegations that “Chanel’s investment in the Farfetch online platform and alleged actions permitting Farfetch to re-sell Chanel [products]” – while taking legal action against companies like TRR and What Goes Around Comes Around for doing so – “constitute exclusionary conduct is likewise without merit because every manufacturer is free ‘to exercise his own independent discretion as to parties with whom he will deal.’” (You can find more about TRR’s Farfetch-specific allegations here).
Ultimately, Chanel argues that even if it does “have a 30% market share in the overall relevant market,” as TRR claims, “that figure is too low to establish monopoly power as a matter of law,” and thus, TRR’s unlawful monopolization claims should be tossed out.
Attempted Unlawful Monopolization
TRR’s attempted unlawful monopolization claims should similarly be dismissed, per Chanel, as in addition to the pleading requirements set out above, in order to succeed here, TRR must also show that “(1) Chanel has a ‘dangerous probability’ of achieving monopoly power in that market; and (2) Chanel engaged in the alleged conduct with the ‘specific intent to monopolize a particular and defined market.’”
The reseller fails in both fronts, according to Chanel. First, TRR does not satisfy the “dangerous probability” prong, which requires it to establish that Chanel has “a sufficiently high market share in the relevant market, and at the same time, “other competitors or potential competitors are unlikely to successfully compete against Chanel.” In addition to taking issue with TRR’s claim that the 30% market share figure that TRR attributed to it is “a sufficiently high market share,” Chanel argues that “TRR not only fails to allege a lack of competition in the proposed market but its counterclaimsaffirmatively demonstrate that Chanel faces extensive, durable, and dynamic competition.” (Presumably included in that pool of competition are resellers like TRR, but Chanel does not explicitly elucidate who its competitors are.)
For these reasons, TRR’s allegations preclude any plausible inference that Chanel has a “dangerous probability” of imminently monopolizing TRR’s proposed market, per Chanel, and more than that, “attempted monopolization requires a specific intent to become a monopolist in the relevant market,” Chanel contends, asserting that TRR’s “conclusory allegations that Chanel intends to ‘push out resellers of Chanel handbags’ or ‘maintain Chanel’s market power,’ do not establish” such an intent.
“Vertical Group Boycott” Conspiracy
“TRR’s remaining ‘vertical group boycott’ theory” – in furtherance of which it claims that Chanel entered 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 – is similarly “deficient,” per Chanel, because it fails to meet the very same relevant product market and geographic market, and antitrust injury requirements set out above.
While it is “well-established” that to adequately plead such a “vertical boycott,” TRR “must plausibly allege that the alleged conspirators had a ‘conscious commitment to a common scheme’ of excluding TRR,” Chanel claims that TRR does not “allege any facts demonstrating that its alleged co-conspirators – which it alleges include Chanel, a newspaper, three magazines, and two retailers – ever coordinated with each other, much less entered into a common, illegal scheme targeting TRR.” Instead, “the only factual allegation TRR makes is that Chanel independently asked Saks and Neiman Marcus to stop consignment of Chanel’s own products at their stores.”
In case that is not enough, Chanel contends that such a group boycott “would not ‘make economic sense’ … where alleged conspirators included only a portion of the relevant market participants,” and still yet, “without the cooperation of the many other luxury handbag makers, magazines, newspapers, and retailers who are not alleged to have participated in the conspiracy, the supposed boycott “would be unlikely to produce the desired results” of excluding TRR.”
Unclean Hands
Finally, in addition to claiming that TRR fails to state claims to support its tortious interference counterclaim, Chanel argues that TRR has not put forth a “legally sufficient” basis for the “unclean hands” defense. The unclean hands affirmative defense, which TRR first set out in its May 2020 answer to Chanel’s complaint, is significant, as TRR piggybacked on that defense to get the court to agree to let it amend it answer to include the newly-asserted counterclaims. In a February 3 letter to the court, TRR successfully argued that its proposed counterclaims should be permitted because they “involve the same anticompetitive conduct and issues of proof” that come in connection with the unclean hands defense.
Taking issue with the affirmative defense, Chanel argues that “TRR was allowed to fundamentally transmogrify [its] … single-sentence unclean hands defense … into an antitrust defense,” which is at odds with precedent from the Second Circuit, which “has repeatedly emphasized the narrowness of the [unclean hands] doctrine’s application.”
Even if TRR has been able to fashion its affirmative defense into counterclaims, Chanel asserts that “where, as here, a defendant charges the plaintiff with a boycott, with conspiring to establish retail price control, and with various other matters, which taken together constitute a claim that the plaintiff is violating the anti-trust laws in certain respects, but not that it is using the trademark to do so, such a defense is insufficient in a trademark infringement case.”
Instead, what is proper, the luxury brand argues, would be for TRR to “assert antitrust violations as a defense to trademark infringement claims” – but “only in the rare case where the supposed antitrust violations involve the plaintiff’s ‘misuse’ of the very trademark being asserted—a theory referred to as ‘trademark misuse’ or ‘antitrust misuse.’” TRR does not do that, though, according to Chanel, which claims that TRR “does not even attempt to plausibly allege an ‘antitrust misuse’ violation,” as there is “no allegation that Chanel has somehow used its trademarks to monopolize the relevant market or implement a ‘group boycott’ conspiracy — i.e., that ‘the mark itself has been the basic and fundamental vehicle required and used to accomplish’ Chanel’s purported antitrust violations.”
As such, Chanel argues that “TRR’s supposed antitrust misuse defense is legally invalid.”
With the foregoing in mind, Chanel asks the court to dismiss TRR’s counterclaims and grant its motion to strike TRR’s unclean hands defense.
* The case is Chanel, Inc., v. The RealReal, Inc., 1:18-cv-10626 (SDNY).
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