An interesting order from a New York federal judge this week suggests that the case that Chanel filed against What Goes Around Comes Around in March 2018 for allegedly selling “counterfeit” handbags – and duping “consumers into falsely believing [that it] has some kind of approval of or relationship or affiliation with Chanel” – might not be quite as clear-cut as Chanel initially alleged. In an order dated May 5, Judge Louis Stanton of the U.S. District Court for the Southern District of New York responded to an existing dispute between the Paris-based luxury brand and the luxury reseller over discovery (i.e., the pre-trial phase in which the parties exchange information relevant to the case).
According to recently-issued order, Judge Stanton says that Chanel and What Goes Around Comes Around (“WGACA”)’s the parties’ “conduct with respect to Chanel’s [discovery] inquiries” must essentially be carried out as follows: Chanel will specify – “with particularity and detail as to make it identifiable by WGACA” – each offer/sale of an allegedly infringing or counterfeit “Chanel” product by WGACA, which shall respond by “promptly producing or otherwise disclosing to Chanel all documents, witness statements and arguments that it proposes to use or refer to at trial with respect to that instance.”
That process is straightforward enough. The interesting element is what the judge says falls within the potential pool of instances of questionable dealings by WGACA.
Instead of simply referring to situations in which WGACA allegedly offered up and/or sold counterfeit or otherwise infringing Chanel products, he goes further (almost certainly in line with an argument made by Chanel on the subject), stating that WGACA must also provide the relevant information in connection with “each instance of an offer or sale … of an item which Chanel plausibly claims is or was: [a] so repaired, reconditioned or altered as to have lost its identity as a genuine Chanel item, or [b] acquired by WGACA under circumstances which do not qualify as a First sale under that doctrine, or [c] mislabeled or falsely advertised by WGACA.”
The first point that the judge makes seems to mirror the stringent definition of counterfeit that Rolex uses. Unlike the federal definition of counterfeit (i.e., a “spurious mark [that] is identical with, or substantially indistinguishable from, a registered trademark” that is used on the same types of goods as the ones for which the mark is registered), Rolex has something of a different take. In addition to traditional counterfeits, the Swiss watch company considers whether any changes have been made to the original components of authentic Rolex timepieces that would impact their aesthetic and/or their functionality. If such changes have been made, an otherwise perfectly authentic watch becomes a counterfeit in the company’s eyes.
That expanded interpretation of the definition of a counterfeit (or otherwise infringing goods) appears to be what is being observed here, as well, thereby, widening the pool of the potentially problematic goods sold by WGACA.
The second point that the court makes centers on the First Sale doctrine, a trademark (and copyright) tenant that states that once a trademark owner, such as Chanel, releases its goods into the market, it cannot prevent the subsequent re-sale of those goods by their purchasers. In other words, if a purchaser of a product decides to resells it, he/she cannot be sued by the rights holder (again, Chanel) for trademark infringement for doing so. There is one key exception here, which is likely what Chanel, and thus, the judge, is referencing: the doctrine does not apply when the product, itself (and/or potentially, its packaging) is “materially different” than the product (and packaging) sold by the trademark owner or its authorized dealers.
Still yet, in some cases, alterations to packaging – such as the scraping of relevant codes or serial numbers from a product or removing tags that contain that information – has been deemed to stand in the way of First Sale protections. (That is part of what Chanel asserts is going on in the separate case that it filed against The RealReal, which allegedly has a practice of removing serial numbers from the Chanel-branded bags it offers up for sale).
Still yet, the court orders that instances in which authentic products have been “mislabeled or falsely advertised by WGACA” may be included in Chanel’s discovery requests. This is striking, as in addition to its trademark infringement claims, at the heart of Chanel’s suit are claims of false advertising, unfair competition, and violations of the New York Deceptive And Unfair Trade Practices Act, all of which center on WGACA’s alleged attempt to “deceive consumers into falsely believing [that it] has some kind of approval of or relationship or affiliation with Chanel or that Chanel has authenticated WGACA’s goods in order to trade off of Chanel’s brand and good will.”
Specifically, Chanel asserted in its complaint that WGACA has been utilizing an elaborate strategy “designed to suggest that [it has] an affiliation or relationship with Chanel,” which is does not. Chanel claimed that WGACA facilitates the appearance of a connection between itself and Chanel and/or an endorsement of its own brand and its products by Chanel “by making repeated and unnecessary use of Chanel’s famous trademarks” on its website and social media accounts; “by posting images and content exclusively associated with Chanel;” and by selling products, such as Chanel-branded tissue box covers, trays, and mirrors, which “are not authorized for sale to the public.” Against this background, Chanel very well may argue that all of the Chanel-branded products that WGACA has offered for sale and/or sold have been “falsely advertised.”
As such, the court’s order arguably opens the door for a wide range of products, including ones that are potentially authentic, or at least, ones that originated with Chanel, to be put under the microscope in the trademark-centric suit.
WGACA, which has outposts in New York and Los Angeles, has long asserted that Chanel’s case is not really about counterfeiting, and instead, comes as part of Chanel’s “quest to paint a far darker picture of the resale market for its goods than actually exists.” In addition to pushing back against the counterfeit-focused nature of the case, since the start of the litigation, the reseller has also fought back against Chanel’s push to force it to identify its suppliers. “One of [its] most valuable trade secrets,” WGACA claims that Chanel’s desire to uncover such information is for no purpose other than “to harass and/or intimidate such sources to discourage their sales to [it].”
More than that, counsel for WGACA has argued in earlier filings that the “zeal with which [Chanel] is pursuing this plainly irrelevant information suggests that this entire lawsuit is a pretext to find out WGACA’s sourcing so that it can make a collateral attack.” While such supplier information might be relevant with respect to any counterfeits that WGACA offered or sold, the resellers has argued that because it “has never sold a single counterfeit item, ever,” the information is actually irrelevant to the case.
* The case is Chanel, Inc. v. What Goes Around Comes Around, LLC, et al., 1:18-cv-02253 (SDNY).