A European Union regulator is looking to crackdown on anti-competition within the fashion industry. In a statement on Tuesday, the European Commission announced that it has started “unannounced inspections at the premises of companies active in the fashion industry in several Member States,” and at the same time, “has sent out formal requests for information to several companies active in the fashion sector,” citing concerns that the unidentified fashion industry players may be engaging in anti-competitive behavior in violation of EU law, including by potentially joining together to fix prices, limit production or share markets or customers, instead of engaging in competition. 

“The Commission has concerns that the companies concerned may have violated Article 101 of the Treaty on the Functioning of the European Union (‘TFEU‘) and Article 53 of the European Economic Area Agreement, which prohibit cartels and other restrictive business practices,” the European Commission stated, noting that unannounced inspections are “a preliminary investigative step into suspected anticompetitive practices.” The regulator cautions, stating that fact that it is carrying out such inspections and sending out formal requests for information “does not mean that the companies are guilty of anti-competitive behavior, nor does it prejudge the outcome of the investigation itself.” 

The fashion industry-specific action comes as the focus of the Commission for the 27-member bloc appears to primarily lie with big tech. In March, for instance, the Commission revealed that it had initiated a formal antitrust investigation to assess whether an agreement between Google and Meta (formerly Facebook) for online display advertising services breached EU competition rules, namely, Article 101 of the TFEU and/or amounts to the abuse of a dominant position (Article 102 TFEU). Meanwhile, earlier this month, the European Commission informed Apple of its preliminary view that it abused its dominant position in markets for mobile wallets on iOS devices “by limiting access to a standard technology used for contactless payments with mobile devices in stores (‘Near-Field Communication (NFC)’ or ‘tap and go’),” and thereby, restricting competition in the mobile wallets market on iOS.

Not limited entirely to tech, the Commission has pin-pointed at least one fashion-centric entity this year (aside from the unnamed companies involved in the recently-announced probe) in connection with an anti-competition probe, announcing early this year that it had launched a formal antitrust investigation to assess whether Pierre Cardin and its licensee the Ahlers Group may have breached EU competition rules by restricting cross-border and online sales of Pierre Cardin-licensed products, as well as sales of such products to specific customer groups. According to a statement from the Commission in January that “Pierre Cardin and Ahlers may have breached EU competition rules by restricting the ability of Pierre Cardin’s licensees to sell Pierre Cardin-licensed products cross-border, including offline and online, as well as to specific customer groups.” 

The investigation, which is currently underway, is said to focus on whether Pierre Cardin and Ahlers, its largest licensee, “developed a strategy to prevent parallel imports and sales to specific customer groups of Pierre Cardin-branded products by enforcing certain restrictions in the licensing agreements,” per Reuters, as the Commission has reinforced rules against curbs on cross-border and online sales as part of a push to boost e-commerce.

Harrods is reportedly following in the footsteps of Chanel and limiting sales of luxury goods to Russian consumers in an attempt to comply with sanctions levied by the government of the United Kingdom. The Telegraph reported over the weekend that “the Qatar-owned store has been combing its customer database, singling out those with a Russian phone number or who have said they live in the country,” and alerting them that if they “might currently or ordinarily be [a] resident [of] Russia,” it cannot supply them with “luxury goods” worth more than £300. This means that “items ranging from jewelry and designer clothing to furniture and gym equipment are now off limits.”

“Our priority is to comply with regulations, informing potentially impacted customers on how it may limit their ability to shop at Harrods, and ensuring wider customers are not unduly affected. We are happy that we have been able to take this action and support customers in making them aware of recent government regulations,” a spokesman for the London-based department store stated. And while the move to block individuals who are “either currently or ordinarily in Russia” from snapping up designer wares may enable Harrods to fall in line with escalating sanctions in the United Kingdom, it does, however, stand to land the company on the receiving end of consumer furor, including “accusations of discrimination from Russians affected.” 

Chanel faced pushback – and claims of “Russophobia” – last month when it revealed that it had “rolled out a process” in its stores outside of Russia “to ask clients for whom we do not know the main residency to confirm that the items they are purchasing will not be used in Russia.” This meant that some Russian consumers were blocked from purchasing coveted Chanel products in the wake of Russia’s invasion of Ukraine, in furtherance of an move by Chanel to abide by European Union sanctions that prohibit the export of luxury goods to Russia.

“The latest sanctions from the European Union and Switzerland prohibit ‘the sale, directly or indirectly, of luxury items to any natural, legal person or entity in the Russian Federation or for use in the Russian Federation,’” Chanel said in a statement in early April, noting at the time that it was “working to improve the procedure.” Chanel – which maintains the title of the second largest luxury brand in the world, following only behind Louis Vuitton – also apologized in the statement “for any related misunderstandings and inconveniences” that have stemmed from its efforts to implement the newest EU sanctions that prohibit companies in the 27-member bloc from exporting luxury goods worth more than 300 euros ($330) to Russia. 

The response from Russia consumers, including models and heavily-followed influencers, who went so far as to post videos of themselves destroying Chanel bags on social media in protest, demonstrates the risk of tarnishment that comes from brands taking stands over issues, including geopolitics. On the heels of Western brands making statements about human rights abuses in their supply chains in connection with alleged forced labor in the Xinjian region in northwest China, which is known for its cotton production, massive boycotts came by way of the Chinese market. In addition to consumers swearing off companies – ranging from Nike and H&M to Burberry and Calvin Klein – for expressing their “concern,” leading Chinese e-commerce platforms “kicked major international labels off their sites, and a slew of celebrities have denounced their former foreign employers,” the New York Times reported at the time. 

The Times’ Vanessa Friedman and Elizabeth Paton called the situation, which saw adidas’ Q2 2021 sales fall by more than 16 percent in China “because of geopolitical tensions,” CEO Kasper Rorsted revealed, “a perfect case study of what happens when market imperatives come up against global morality.” H&M similarly reported a drop in sales – 23 percent in Q2 2021 – in China as a result of consumer boycotts, with CEO Helena Helmersson calling the situation “complex.” Meanwhile, seeming looking to save face, Nike’s CEO John Donahoe asserted at the time that Nike, which also faced pushback over comments about the alleged use of Uyghur forced labor in cotton production, is “a brand that is of China and for China.” 

At the same time, while the likes of H&M, adidas, and co. experienced what the Washington Post has characterized as “nationalistic backlash that led Chinese consumers to call for boycotts and hit brand loyalty and market share to a degree that these companies may never come back from,” Japanese apparel giant Uniqlo opted for a neutral stance, and has been rewarded as a result. “I want to be neutral between the U.S. and China,” Tadashi Yanai, the owner of Uniqlo parent Fast Retailing, told Nikkei Asia in December 2021.   While its “more outspoken peers saw their revenues in the greater China region slump sharply,” Bloomberg has since reported that “Uniqlo’s went in the opposite direction, with takings rising 17 percent in the year ended August 2021.”

The publication notes that it is not merely its apparel offerings that set Uniqlo apart from its rivals in the “lucrative–but tricky–Chinese apparel market,” stating that “there is also the Japanese brand’s approach to contentious political issues. In particular, the predominantly Muslim Xinjiang region in China’s northwest.” 

Back in terms of the robust luxury-centric sanctions that have been levied upon Russia by the U.S., UK, and EU, among others, if other brands and retailers are following in the lead of Chanel and Harrods, it is being kept quiet, presumably for fear that bottom-line-impacting backlash is sure to follow. 

Luxury goods are slated to start flowing back into Russia despite moves by most non-native brands to pull out of the market in the wake of the deadly attacks on Ukraine led by Vladimir Putin. A 25-page list of exempted brands/products has been released by Russia’s Industry and Trade Ministry, allowing for parallel imports of luxury cars from Bentley, Ferrari, and Rolls-Royce, among others, consumer electronics from Apple and Dyson, cosmetics, and fashion and leather goods in furtherance of what Russian authorities say is an attempt to “defend the interests of domestic consumers for products of those foreign companies that left the Russian market under the sanctions regime imposed by ‘unfriendly’ countries.” 

First released by the Ministry of Industry and Trade of the Russian Federation last month, the order on parallel imports or “grey market goods” (i.e., genuine branded goods obtained from one market that are subsequently imported into another market and sold there without the consent of the trademark holder) provides that Article 1359 (section 6) and Article 1487 of the Russian Civil Code “are not applied” to the approved list of goods, “provided the specified goods were put into circulation outside Russia by the right holders and with their consent.” In accordance with the principle of trademark exhaustion – or the first sale doctrine, as it is known in the U.S., “the products must be legally put into circulation [in] the country of import,” the trade ministry stated.

The Russian ministry distinguished the new scheme from outright counterfeiting (namely, the unauthorized use of a mark that is identical with, or substantially indistinguishable from, another’s registered trademark), asserting in a statement late last week that allowing for “parallel imports does not mean permission to import and circulate counterfeit goods in Russia.” 

Fashion and other luxury brands may be hit particularly hard when it comes to the impending push to get parallel imports into Russia. While the official list of allowable products specifically indicates brands of electronics and automobiles, among other categories of goods, that may be imported into Russia without the threat of trademark infringement ramifications, it does not set out a list of fashion/luxury goods purveyors whose goods may be legally imported into Russia. “Clothing, footwear, and leather goods are listed without any specific brand indications,” Maksym Popov, a partner at Mentors Law Firm in Ukraine, tells TFL. This means that “everything within these categories of goods is subject to parallel imports,” which could serve to flood the market with a barrage of luxury goods in the not-too-distant future. (Not the only categories that lack brand specifications, the Ministry of Industry and Trade’s list also allows for the unfettered import of spare parts for certain machinery, for example.)

The situation is likely to be a “complicated” one for brands, Popov says, noting that trademark holders “will not have the ability to control the importation of goods into Russia through distributors,” as has been an issue for brands in other countries, including China, which routinely sees a significant supply of grey market goods coming by way of multi-brand stores in places like Italy and landing on the mainland after passing through agents in Hong Kong.

As an extreme example, he says, “We may even see Louis Vuitton and Chanel bags sold in multi-brand boutiques.”

Given the meticulous control and purely direct-to-consumer distribution model that is exercised by Chanel, Louis Vuitton, and other similarly situated luxury titans, it seems unlikely that these brands will be among the most heavily impacted by the newly-implemented grey market scheme in Russia. (Chanel, after all, made headlines last month for reportedly implementing a process in its own stores outside of Russia “to ask clients for whom we do not know the main residency to confirm that the items they are purchasing will not be used in Russia,” a move that has spurred furor from Russian shoppers in markets, such as France, Italy, China, and Dubai.) Chances are, brands that boast a network of authorized third-party distributors will find their wares are more readily being imported into the Russian market without their authorization.

The order that serves to relax the law on parallel imports comes after the country’s Ministry of Industry and Trade was authorized to compile a list of goods for which parallel imports would be allowed, which was published – and went into effect – on April 19. That list followed from a previous revelation from the ministry in March when its “Priority Action Plan for Ensuring the Development of the Russian Economy in the Conditions of External Sanctions Pressure” revealed that an influx of grey market goods would likely follow from Western brands’ exodus from the Russian market. In the Priority Action Plan, which surfaced in early March, the Ministry appeared to propose suspending liability for parties engaging in parallel imports for certain – but then undefined – “groups of goods,” thereby, potentially opening the door for a greater share of out-of-channel products to flow into Russia, which maintains some restrictions on the sale of grey market goods. 

As TFL first reported at the time, depending on how long the effects of Russian-focused sanctions implemented by the U.S., European Union, and others, last, which ban the import of luxury goods into Russia (and chances are this is not a temporary situation), the luxury goods ecosystem in Russia may begin to mirror that of other markets that are readily flooded with grey market goods. In the event that companies’ self-operated stores do not return in a timely manner, certain brands may opt to look the other way, enabling multi-brand stores in other markets to order excess goods and ship them to Moscow with the help of parallel importers, and enabling the brands to add those excess sales to their balance sheets.

Brands at the top of the luxury totem pole are not expected to engage in such grey market-feeding activity; their recent revenue reports indicate that they are not suffering as a result of a loss of sales in Russia, which accounts for no more than 4 percent of their annual sales. However, that may not be the case for other brands that traditionally maintain larger footprints in Russia and their distributors, which have proven to be far less immune to the pull-out of the Russian market. (Reuters reported recently that in March, adidas, for example, “warned of a hit to sales from closing in Russia, without giving an estimate. It operates 500 stores in the country, a quarter of its total.” Around the same time, toy maker Hasbro warned that its revenues could hit of approximately $100 million this year due to its decision to halt its sales in Russia.)

“Usually, official distributors are interested in fighting illegally imported goods,” Popov says. “But now that anyone can [indirectly] import goods into the country, will they want to fight it?” 

The jury is out when it comes to the role of the “metaverse” for fashion/luxury and the extent of that role. Groups, such as Kering and Nike, have made headlines for their efforts in the burgeoning digital space, with the likes of Nike, Gucci and Balenciaga, for example, devoting notable resources to the development of their presences in the Web3 arena. At the same time, others have opted not to embrace this tech trend quite so quickly; LVMH’s chairman Bernard Arnault quipped in an earnings call early this year that the French luxury giant is “not interested in selling €10 virtual shoes,” and instead, is “very much in the real world, selling real products.”

The weight that fashion and luxury goods groups are giving the so-called metaverse is mixed at the moment, but it appears that they may be unable to ignore other aspects of Web3, including, cryptocurrency payment, as the future of consumers’ wallets is expected to consist of both “traditional (centralized) and decentralized finance.” According to a recent report from Morning Consult, some 91 percent of U.S. consumers have heard of cryptocurrency, and 19 percent say they own some, making crypto “no longer just a fringe asset.” A separate survey from Crypto.com and payment processing firm Worldpay found that as much as 75 percent of consumers and 60 percent of merchants want to make use of crypto in the market. 

“In an ideal world, cryptocurrency holders would like to be able to make purchases that take advantage of real-time market prices while avoiding the hassle and cost of fiat conversions,” Crypto.com and Worldpay stated in connection with their findings in February. Given the enduring adoption of Bitcoin and other cryptocurrencies, they argue that merchants (fashion brands, included) cannot ignore consumer interest in crypto for too long. Deloitte echoed this sentiment in a digital assets report of its own, stating that crypto may provide companies with access to new demographic groups, as users often represent “a more cutting-edge clientele.” 

From an internal perspective, Deloitte asserted that “introducing crypto now may help spur awareness within a company about this new technology,” while also “helping to position companies in this important emerging space for a future that could include central bank digital currencies.” 

Against this background, Gucci revealed this week that consumers may begin using cryptocurrencies, including bitcoin, in some of its U.S. stores, including its flagships on Rodeo Drive in Los Angeles and Wooster Street in New York. The announcement comes after Off-White revealed in April that it would follow in the footsteps of fellow fashion brand Philipp Plein (which became one of the first major fashion brands to accept crypto back in August 2021) and start accepting crypto payments in its flagship stores in Paris, Milan, and London. “This is another important step in the growth of the brand, that looks toward the future including Web3 technologies, understanding the needs and desires of its ever-evolving customer base,” the company said in a statement.

Given the wealth that consumers are readily building up – and looking to spend – in Bitcoin, Ether, etc., and the significant gap in where they can actually spend this crypto, other brands will likely follow suit in the not-too-distant future, making this an area worthy of attention when it comes to Web3, which is expected to thoroughly reshape the way consumers pay for goods/services, including those in the fashion/luxury space. 

Rising Challenges & Regulation

Not without challenges and potential regulatory issues, Crypto.com and Worldpay found that while luxury goods companies and fashion brands are “keen to take advantage of higher average transaction value of customers who spend in crypto,” enabling consumers to make crypto payments can be a demanding endeavor. For instance, “Changes to in-store payment systems and infrastructure may be required to ensure compatibility with crypto payments, [which] could present a myriad of challenges that do not exist in digital realms,” they claim. Exacerbating this issue is the fact that customers are often demand “parity between online and in-store payment options,” and there are “fewer opportunities and options to buy, build, and partner with third-party technology companies for in-store solutions, as the providers tend to (still) be focusing their efforts on e-commerce primarily (especially after its rise in customer utilization during the COVID-19 pandemic).” 

Ultimately, online crypto payment channels “will lead the way for mainstream adoption in Europe and North America,” per Crypto.com and Worldpay, but “new in-store crypto payment channels will likely de-prioritized for the short- to medium-term.” 

On the regulatory front, the larger crypto push comes, of course, as the U.S. Securities and Exchange Commission (“SEC”) continues to focus its attention on the $2 trillion crypto market. Chairman Gary Gensler highlighted “three areas related to the SEC’s work in this area: platforms, stablecoins, and crypto tokens” in a talk in April, noting that “there is no reason to treat the crypto market differently just because different technology is used.” Gensler’s comments follow from President Joe Biden signing an executive order in March, in which he called on various U.S. government agencies to examine and develop policy recommendations for digital assets, including cryptocurrencies, in light of explosive growth in recent years. 

At the same time, crypto-focused enforcement efforts are starting to come to the fore. The Department of Justice, for instance, arrested two individuals in February for an alleged conspiracy to launder cryptocurrency that was stolen during the 2016 hack of Bitfinex, a virtual currency exchange, presently valued at approximately $4.5 billion. More recently, the DOJ – which created a new National Cryptocurrency Enforcement Team and appointed Eun Young Choi as its first director – charged two different individuals with conspiracy to commit wire fraud and conspiracy to commit money laundering, in connection with a million-dollar scheme to defraud purchasers of NFTs advertised as “Frosties.” 

Federal regulators and law enforcement have signaled that they will increasingly focus on crypto, NFTs, and other Web3 technologies, thereby, sending a clear message of caution to those participating in this readily developing space, and the many that are eyeing it.

*This article was originally published on April 1 and has been updated.

Allbirds has escaped a false advertising lawsuit accusing it of failing to live up to the claims that it makes in its sustainability-centric marketing, including ones about the carbon footprint of its popular footwear, and its “sustainable” and “responsible” manufacturing practices. In an opinion and order dated April 18, Judge Cathy Seibel of the U.S. District Court for the Southern District of New York granted Allbirds’ motion to dismiss, tossing out the lawsuit that plaintiff Patricia Dwyer filed against it in the summer of 2021, in which she alleged that despite Allbirds’ advertising being “replete with eco-friendly phrases,” the reality of its operations does not match that “eco-friendly”-focused marketing, and the footwear brand has peddled “false, deceptive and misleading” information. 

Specifically, Dwyer alleged in her June 2021 complaint that in furtherance of its offering up its wool-based footwear, Allbirds makes “representations such as: ‘Sustainability Meets Style,’ ‘Low Carbon Footprint,’ ‘Environmentally Friendly,’ ‘Made with Sustainable Wool,’ ‘Reversing Climate Change…’ and ‘Our Sustainable Practices,’” which Dwyer claimed are misleading. Among other things, she took issue with Allbirds’ use of the Higg Material Sustainability Index (“MSI”) to measure the environmental impact of apparel materials, arguing that the Higg MSI “only [addresses] raw materials and lacks standards for comparing different materials,” among other things. 

Additionally, Dwyer asserted that Allbirds’ life cycle assessment (“LCA”) tool – which it uses to identify the carbon footprint of each of its products – does not assess the environmental impact beyond the manufacturing of the shoes, themselves, such as the impact of “wool production, including on water, eutrophication, or land occupation,” and thus, “exclude[s] almost half of wool’s environmental impact.” As such, she argued that the carbon footprint figures that Allbirds advertises “are based on ‘the most conservative assumption for each calculation, [which] skew the calculations in [Allbirds’] own favor,’ so it can make more significant environmental claims.” 

And still yet, Dwyer accused Allbirds, which went public on the Nasdaq in November 2021, of making “misleading animal welfare claims” by improperly “promot[ing] the ‘happy’ sheep” whose wool is at the heart of its products and claiming that its “wool harvesting practices are sustainable [and] humane.”

Not Misleading to a Reasonable Consumer

In her April 18 order, Judge Seibel sided with Allbirds across the board, first finding that Dwyer failed to plausibly allege that the statements that Allbirds makes about the environmental impact of its products and animal welfare are materially misleading. This means that she fell short of making her deceptive business practices and false advertising claims under New York General Business Law. “To state a claim under either section [of the New York General Business Law], a plaintiff must show ‘first, that the challenged act or practice was consumer-oriented; second, that it was misleading in a material way; and third, that the plaintiff suffered injury as a result of the deceptive act,’” the Judge stated.

First examining Allbirds’ environmental impact claims, and namely, Dwyer’s pushback against its use of the LCA tool and the Higg MSI as the basis for such claims, Judge Seibel determined that Dwyer’s “criticism [is] of the tool’s methodology,” not with Allbirds’ statements about its products. Specifically, the court states that Dwyer does not allege that the calculations that Allbirds provides in connection with its carbon footprint are wrong, or that Allbirds “falsely describes the way it undertakes those calculations.” Dwyer also does not “allege that a reasonable consumer would expect [Allbirds] to use another method of calculation or would be misled by [its] use of the LCA tool or the Higg MSI,” according to the court. 

In fact, “in advertising [its] product’s carbon footprint calculations, Allbirds describes the exact components of the calculation, and [Dwyer] provides no facts suggesting that [it] is not calculating the carbon footprint as advertised,” the court states, noting that Allbirds “does not mislead the reasonable consumer because it makes clear what is included in the carbon footprint calculation, and does not suggest that any factors are included that really are not.” 

While the court states that “there may well be room for improvement in the Higg MSI,” that does not mean that Allbirds’ reliance on that “current standard” is deceptive. 

Allbirds Lawsuit

Turning to Allbirds’ animal welfare claims, namely, its marketing that depicts “happy” sheep in “pastoral settings,” which Dwyer claims are based on “empty welfare policies that do little to stop animal suffering,” the court, again sides with Allbirds on the basis that Dwyer fails to identify “any misstatement in any advertisement that would deceive consumers.” 

Dwyer points to two advertisements that show sheep in a field, one of which says, “What if every time you got a haircut they made shoes out of it? That would be pretty cool,” and the other of which says, “Behind every shoe is a sheep. And behind every sheep, is another sheep, probably.” However, according to the court, “These ads, which are obviously intended to be humorous, make no representations at all,” and thus, are not actionable.

As for Allbirds’ claim that its wool harvesting practices are “sustainable, humane and that it intends to eventually source ‘only wool from ‘regenerative’ sources,” the court states that the underlying evidence that Dwyer relies on (i.e., a PETA publication that found cruelty to sheep at over 100 large-scale operations) “does not describe any animal cruelty specific to Allbirds or its products.” Beyond that, Judge Seibel stated that Dwyer’s “allegations that the [wool] industry as a whole deceives consumers do not satisfy her burden to allege that a specific advertisement or statement by Allbirds would mislead a reasonable consumer as to [its] product.” 

And finally, the court shot down Dwyer’s claim that Allbirds’ statement “Our Sheep Live The Good Life” is misleading and deceptive, finding that “this statement, and the depictions of ‘happy’ sheep in ‘pastoral settings,’ are classic puffery, which is not actionable under §349,” which prohibits “deceptive acts or practices in the conduct of any business, trade or commerce or in the furnishing of any service in [New York] state.” 

Specifically, the Judge determines that “‘The Good Life’ is a subjective, non-specific, unmeasurable, and vague statement” that “does not specify any fact about the sheep from which [Allbirds] gets its wool, let alone suggest, as [Dwyer] alleges, that the sheep receive individual care or do not undergo [an inhumane] procedure.”  

Because Allbirds’ “statements, advertisements, and practices relating to [its] products are not materially misleading,” the Judge dismissed Dwyer’s New York General Business Law claims. She similarly dismisses Dwyer’s claims for breach of express warranty, fraud, and unjust enrichment, stating they are “all premised on the assertion that Allbirds’ environmental impact and animal welfare claims are materially misleading” and noting that she “already determined that [Dwyer] fails to allege that the statements, advertising, and practices relating to the [Allbirds products] would be likely to deceive or mislead a reasonable consumer.”

While this loss for Dwyer in her lawsuit against Allbirds may serve to dissuade other potential plaintiffs from taking action over sustainability-centric advertising claims, it is worth noting that a number of other cases that center on sustainability marketing, including cases filed against Reynolds Consumer Products and Red Lobster, are still underway in federal courts in the U.S., and may result in different outcomes for the parties and potentially, for how courts look at sustainability marketing more generally. 

The case is Patricia Dwyer v. Allbirds, Inc., 7:21-cv-05238 (SDNY).