A federal appeals court has upheld Chanel’s $4 million counterfeiting judgment against What Goes Around Comes Around (“WGACA”), rejecting the luxury reseller’s challenges to the jury instructions and the damages award. In a newly-issued summary order, as exclusively reported by TFL, the U.S. Court of Appeals for the Second Circuit affirmed the underlying judgment, including the counterfeiting verdict. The permanent injunction, which WGACA did not challenge on appeal, also remains intact. The court vacated a separate award of approximately $561,000 in litigation costs.
The November 3 order follows September oral arguments during which the panel of judges questioned counsel for both parties about the distinction between counterfeit and infringing goods, the jury instructions, and the basis for the $4 million award.
The Counterfeiting Distinction
In arguments in September, WGACA argued that the district court failed to adequately instruct jurors on the Lanham Act’s definition of a counterfeit mark, including an exclusion for marks used by manufacturers authorized, at the time of manufacture, to use those marks on the relevant type of goods. The reseller maintained that certain disputed handbags may have originated from a Chanel-authorized factory in Italy, even if Chanel had not approved their sale.
The Second Circuit acknowledged that goods produced by a manufacturer authorized to use the relevant marks for that type of product, but not approved for sale, can be infringing without bearing counterfeit marks. However, it found that the jury instructions, considered alongside the district judge’s explanations during trial, adequately conveyed the applicable legal standard. The panel also noted that WGACA had been able to argue that the handbags originated from an authorized Chanel factory.
Why the $4 Million Award Stands
The court separately rejected WGACA’s due process challenge to the $4 million statutory damages award, representing $2 million for each of the two Chanel marks at issue, the maximum available for willful counterfeiting under the applicable provision. WGACA argued that the award was disproportionate to the $12,739 in net profits the district court ordered disgorged from sales of 51 handbags bearing voided serial numbers and 779 counter-support items. The panel disagreed, explaining that statutory damages under the Lanham Act need not be proportional to a defendant’s profits or a trademark owner’s demonstrated losses.
The court also cited evidence that WGACA continued selling several counterfeit Chanel-branded handbags during the litigation after being notified by Chanel about voided serial numbers. Although WGACA attributed those sales to pandemic-related staffing difficulties, the panel found sufficient evidence for the jury reasonably to conclude that the award was necessary for deterrence.
At the same time, the Second Circuit upheld the exclusion of evidence concerning Chanel’s alleged desire to undermine the secondhand luxury market, finding that Chanel’s motivations for bringing the lawsuit were immaterial to the jury’s determination of the trademark violations at issue. The panel noted that WGACA had been permitted to question Chanel witnesses about potential bias.
Separately, the court vacated the approximately $561,000 litigation costs award as premature, finding that the district court had conflated expenses sought as part of Chanel’s unsuccessful attorneys’ fees application with separately recoverable costs. The case was remanded to allow Chanel to submit a supported bill of costs, subject to potential objections.
THE BOTTOM LINE: The ruling leaves Chanel’s $4 million judgment intact while recognizing the statutory distinction between infringement and counterfeiting. Although nonprecedential, the decision confirms that the statutory damages award did not violate due process under the circumstances of this case, notwithstanding the substantially smaller disgorgement award.
The case is Chanel, Inc. v. What Goes Around Comes Around, LLC, et al., 1:18-cv-02253 (SDNY).
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