Late last year, budding online retailer Honey Bum filed suit against Fashion Nova, accusing its much-larger rival of engaging in a scheme to monopolize the fast fashion market and “stifle its newest competitor,” the now-4-year-old Honey Bum. In its December 2020 complaint, which was filed with U.S. District Court for the Central District of California, Honey Bum alleged that Fashion Nova was engaging in a “conspiracy to restrain trade” by getting more than a dozen of their shared vendors to “unexpectedly” cancel and.or refuse to fill existing purchase orders, and reject new orders from Honey Bum on the basis that it is “a threat to Fashion Nova’s low-cost fast fashion image, and, more importantly, its profit margins.” 

In light of its “immediate success” – including “hundreds of thousands of dollars in sales” within its first few months, and generating “total sales in excess of $600,000” in its first 6 months of operation, Honey Bum claims that it “did not go unnoticed by the dominant player in the market, Fashion Nova,” which “holds approximately 70 percent market share as sales to Fashion Nova constitute approximately 70 percent of each [of the Los Angeles-based] fast fashion vendor’s sales.” (Honey Bum asserts that it “held approximately 2 percent market share in 2017 and the first quarter of 2018 and was trending towards holding 10 percent or more market share thereafter.”)

With its swiftly-growing business in mind, and revenues that were expected to exceed $130 million by 2020, Honey Bum argued in its complaint that Fashion Nova and its founder Richard Saghian sought to maintain their dominant position in the market by “entering into agreements, or conspiracies, with certain [Los Angeles-based] vendors to prevent each from supplying Honey Bum with inventory,” namely by threatening to cancel its own orders with those vendors if they continued to do business with Honey Bum. According to Honey Bum, “Absent an express or implied agreement among the vendors, it would have been economically irrational for any vendor to agree to [Fashion Nova’s] nefarious scheme,” as the agreements with Fashion Nova deprived the vendors of “a profitable sales outlet.”

Given the critical nature of maintaining a local supply chain in order to “quickly produce clothing to meet a retailer’s specific needs” in furtherance of the fast fashion retail model (sometimes “in the matter of a few days”), Honey Bum claims that it has been damaged – potentially to the tune of millions of dollars – by Fashion Nova’s “monopolistic and anti-competitive” tactics. And more than that, Honey Bum – which argues that its entrance into the online fast fashion market would “have helped diversify customers, increase supply outlets and reduce dependence on Fashion Nova” – asserts that Fashion Nova’s “conspiring and/or contracting to impose restraints on trade” by way of agreements with various vendors “has injured the market for Los Angeles-sourced fast fashion more generally.” 

With that in mind, Honey Bum – which has been likened to Fashion Nova by social media users as a result of its digitally-native model, and sweeping array of low-priced, trend-specific wares – accused Fashion Nova and Saghian of violating sections 1 and 2 of the Sherman Antitrust Act and of engaging in tortious interference with business and contract, and seeking various monetary damages and injunctive relief. In response to Honey Bum’s suit, Fashion Nova filed a motion to dismiss the matter in February, arguing that Honey Bum failed to make its case on all counts, and seeking a dismissal of the matter in its entirety. 

Fast forward to late last month and a California federal judge agreed with Fashion Nova to an extent, holding that while Honey Bum “sufficiently alleged a claim for violation of Section 1 of the Sherman Act and tortious interference with business relations, it failed to state a claim for violation of Section 2 and for tortious interference with contract.” 

Siding with Honey Bum on its Section 1 claim, Judge Gary Klausner stated in his March 26 order that the company “plausibly alleged that Fashion Nova and the L.A. vendors engaged in a concerted refusal to deal with Honey Bum” and that Fashion Nova is a “‘dominant purchaser’ of fast fashion clothing from [those] vendors,” as it purchases 70 percent of their products. Moreover, the court found that Honey Bum alleges that the L.A. vendors “entered into vertical agreements with Fashion Nova, whereby [they] agreed to refrain from doing business with Honey Bum,” and also entered into horizontal agreements among themselves “at least implicitly, if not explicitly …. to participate in the group boycott” of Honey Bum. 

In terms of the latter element, which is what Fashion Nova took issue with, the judge states that “Honey Bum’s allegations that the vendors’ contemporaneous refusal to deal with [it], coupled with additional plus factors alleged in the complaint, give rise to a reasonable inference that the vendors agreed, at least tacitly, to engage in a group boycott of Honey Bum.” As such, the court stated that Honey Bum adequately pled a claim for per se violation of Section 1 based on “a theory of a group boycott carried out pursuant to a conspiracy.” 

As for its Section 2 monopolization claim, the court determined that Honey Bum did not meet the requirement that it establish that the defendants have “market power within a ‘relevant market.’” The court took issue with Honey Bum’s definition of the relevant market and products as the “Los Angeles-sourced fast fashion online clothing retail market” and “clothing that is produced quickly in response to prevailing fashion trends.” It held that “there is simply no basis to infer from the complaint that online fast fashion retailers located in New York and elsewhere do not compete for the business of the same customers to whom Honey Bum and Fashion Nova sell their fast fashion online.” At the same time, the court determined that Honey Bum’s allegations “provide no basis to infer that ‘clothing that is produced quickly in response to prevailing fashion trends’ that happens to be sourced in Los Angeles differs from such clothing hat is sourced elsewhere with respect to ‘price, use, and qualities.’” 

As such, Judge Klausner held that Honey Bum failed to plead its monopolization claim under Section 2. The court goes on to side with Honey Bum on its tortious interference with business relations claim, and against it in regard to the tortious interference with contract claim, because, among other things, Honey Bum “does not clearly allege in its complaint that [its] order from vendors amounted to contracts, nor does [it] clearly allege that the vendors’ cancellation of those orders amounted to a breach of contract.” For instance, the court states that in its complaint, Honey Bum “merely states that in November 2018, Tic Toc (one of [its] vendors) ‘refused to fulfill any new orders],'” and does “not allege or even give rise to a reasonable inference that Tic Toc had a contractual obligation to fulfill any new orders from Honey Bum, [or] that Tic Toc breached any order contract prior to November 2018.”

Speaking about the significance of the case on the heels of the court’s partial motion to dismiss decision, Honey Bum’s counsel McDermott Will & Emery partner Michelle Lowery said that the case “provides important safeguards for market entrants from entrenched monopolists and protects an emerging fast fashion industry in the Los Angeles area,” noting that she and Honey Bum “look forward to following this case through to hold the defendant fully liable.” 

In his March 26 order, the judge granted Honey Bum leave to amend its complaint “with respect to the tortious inference with contract claim only,” and Honey Bum has since filed an amended complaint, asserting that both Fashion Nova and Saghian “had knowledge of the contracts that existed between Honey Bum and clothing vendors in Los Angeles” and intentionally “acted to cause the breach and/or disruption of Honey Bum’s contracts with [those] vendors.”

The case is Honey Bum, LLC v. Fashion Nova, Inc., 2:20-cv-11233 (C.D.Cal.)

LEGO has built a strong market position over the past several decades. This is not only due to the quality of their products, but also to their ability to keep the competition at arm’s length. In parts of Europe, for example, LEGO has developed a monopoly-like position in the market for their little plastic “clip bricks” and defends this position with almost all the weapons in the arsenal of intellectual property protection. This is an interesting example of how different intellectual property rights can be used together or gradually – and also what limitations are at play when it comes to the different forms of intellectual property rights.

Originally, LEGO’s colorful little bricks were protected by patents for the technical solution that holds the bricks together. In other words, the durability of the individual bricks and the clip mechanism that enables the entire system of compatible LEGO bricks to hold together was protected. Due to the fixed term nature of patents, once the patent expired, the bricks – and the technical solution behind them – in theory, became available for the public to reproduce.

When other suppliers subsequently wanted to bring compatible bricks onto the market, LEGO initially defended itself – and very successfully – using, among other things, unfair competition law in its native Germany. Under the heading of “insertion into another’s series” (a German variant of “passing off”), competitors were prohibited from producing bricks that were compatible in size with LEGO, because this exploited LEGO’s established competitive advantage and market position. It was not until much later that German courts recognized that the competitive position that LEGO sought to defend stemmed from its monopoly of patent protection, and therefore, should not be allowed to endure through unfair competition law.

Undeterred, LEGO looked to trademark law, and in particular, applied to register its central “2×4” brick as a three-dimensional trademark. This allowed the company to prohibit all other suppliers of compatible bricks from using the iconic “2×4” brick. Since that brick is central to many models and given that there was also the possibility that the trademark’s scope of protection extended to similar shapes, this served to severely restrict other suppliers. Against this background, suppliers in competition with LEGO lobbied for cancellation of the trademark, and they were eventually successful.

Design Rights and Copyright

Since then, third-party suppliers have been on the rise in Europe. LEGO now has only design rights and copyright protection in its arsenal, and only very limited trademark rights. 

LEGO has design rights in some of its newer and more unusual bricks, for example, as well as in some of the minifigures in the LEGO Friends series, in line with the fact that design rights can be used to protect aesthetic achievements – with the prerequisite being that the product is “new” and has “individual character.” This means that the exact product must not have been made known to the public before, and it must stand out from the “previously known set of forms.” This element is not examined during registration, though, and that is why design registrations are easy to obtain. Whether such a registration is valuable, only becomes apparent when it is enforced. 

Meanwhile, copyright protects intellectual achievement in works of art, literature or architecture. Such protection also extends to the design of clamp building block sets and to the building instructions. As such, LEGO is taking action – rightly and vehemently – against suppliers of products who copy individual sets almost identically and sometimes even copy the building instructions. To stop this, LEGO has obtained several judgments in China against the company LEPIN in recent years and even enforced the destruction of one of their factories in 2019 as LEPIN had produced particularly brazen copies of existing LEGO sets on a large scale and offered them up to consumers at a lower price.

However, where third-party suppliers avoid LEGO’s (few) design-protected bricks and put their own sets on the market, there are no legal objections (anymore). According to industry portals, the quality of clip bricks from competitors is constantly improving, while LEGO sometimes struggles with quality problems, which could have an impact on its market position.

Trademark, too

As for trademark law, LEGO still has its 3D EUTM protection in its minifigure (Reg. No. 000050450), and has enforced the rights in this mark extensively and is currently taking action against suppliers (and their importers) who offer even remotely similar minifigures. In Germany, for instance, LEGO has succeeded in obtaining several preliminary injunctions against importers of similar minifigures, meaning that these importers are no longer allowed to sell entire brick sets where they contain the minifigures in question. As a solution, some importers are selling the sets without minifigures, as well as trying to cancel LEGO’s 3D EUTM for the minifigure.

The manufacturers and importers affected by the recent round of warning letters argue that LEGO is ultimately trying to monopolize the idea of a minifigure matching the bricks. For example, the manufacturers and importers argue that a minifigure’s “hand” is designed to hold accessories that are not, and cannot be, protected by intellectual property rights, and so, the same argument applies to the minifigure’s “feet” and their connections that allow the figures to stand or sit on studs. If these – technically conditioned – details were removed, a figure only remotely reminiscent of a human being would remain, which could not be covered by trademark protection. Finally, the range of different figures that LEGO is currently attacking shows that the company seeks a broad scope of protection.

LEGO’s current warnings have been heavily criticized on social media because, among other reasons, wide-reaching influencers were also affected (including “Held der Steine” Thomas Panke, Germany’s most influential YouTuber for clip bricks). The matter will undoubtedly drag on for some time – so, watch out for further episodes in this saga.

Dr. Jan Bärenfänger is Counsel on Bird & Bird’s Intellectual Property team in Düsseldorf, whose focus is on the interplay of infringement and validity proceedings.

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 TimesWWDVogue 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).

A New York federal judge has given The RealReal (“TRR”) the go-ahead to amend its answer in the trademark infringement and counterfeiting case filed against it by Chanel in 2018 to assert anti-competition counterclaims against the luxury brand. In an order dated February 24, Judge Gabriel Gorstein pushed back against Chanel’s arguments that TRR’s quest to amend its previously-filed answer in light of its discovery of “new evidence” about Chanel’s “motivation” in bringing various trademark-centric lawsuits against its competitors is improper. Instead, he sided with TRR, holding that “no bad faith by [TRR] has been shown,” and there is no “undue delay” at play, as TRR’s “request to amend came a mere five months after the initial answer was filed and before any document production or depositions have taken place,” making it permissible in the eyes of the court. 

Addressing the issue of potential prejudice that might come from TRR amending its complaint, Judge Gorstein of the U.S. District Court for the Southern District of New York stated on Wednesday that this “question turns on the issue of the scope of the … ‘unclean hands’ defense” that TRR cited in its May 2020 answer to Chanel’s complaint. TRR has sought to piggyback on its unclean hands defense, arguing that the previously-asserted affirmative defense and its more recently proposed antitrust counterclaims both stem from Chanel’s alleged decision to file this case – and others like it – “as a means to push [TRR] and other competitors out of the market” because it views them as a threat to its ability to maintain a monopoly in the market for “top tier investment grade handbags.” 

Judge Gorstein stated in his order that if TRR’s “proposed antitrust counterclaims would vastly expand discovery beyond what was going to take place anyway by virtue of the existing claims and defenses that would be a good reason to find that the addition of the antitrust counterclaims would needlessly prolong this case and would possibly result in our denying the motion to amend on the ground that the proposed amendment would introduce collateral claims that were appropriately brought as a separate lawsuit.” 

However, in response to supplemental briefings from the parties, the judge held that “the Court cannot at this time find that the addition of the proposed counterclaims would expand the scope of discovery.” As such, Chanel “cannot show prejudice that would result from the addition of the antitrust counterclaims,” the judge determined, granting TRR’s motion to amend its answer. 

TRR’s Amended Answer

Fast forward a day and the resale giant filed its amended answer, denying the majority of the allegations that Chanel made in its February 2019 amended complaint, including that TRR has engaged in trademark infringement and counterfeiting by offering up pre-owned Chanel products on its e-commerce site and in its brick-and-mortar outposts (as it did in the first answer it filed with the court in May), and again, setting out an array of affirmative defenses, including the aforementioned unclean hands defense. The noteworthy addition to the February 25 answer is, of course, TRR’s five newly-permitted counterclaims, in which it claims that Chanel has engaged in violations of Section 1 and 2 of the Sherman Act, anticompetitive arrangement in violation of the Donnelly Act, tortious interference with contract, and tortious interference with prospective business relations. 

As we first reported in October when TRR submitted its proposed amended answer and counterclaims to the court, the crux of its antitrust-centric arguments is that Chanel has been quietly carrying out an “aggressive campaign” of “exclusionary and anticompetitive conduct” aimed at “monopoliz[ing] the market” – and thus, the supply and price of its goods, both new and pre-owned – to the detriment of its competitors and consumers, alike.

In direct response to the burgeoning, multi-billion dollar luxury resale market, which is “a new threat to the core of [Chanel’s] business model,” TRR alleges that Chanel has gone beyond the work of a diligent company looking to preserve the meticulously-crafted positioning of its rarefied luxury brand in the face of the evolving modern marketplace. Instead, TRR says that the 110-year old luxury stalwart has “attempted, acquired, and maintained monopoly power” in the “relevant market” by way of an ongoing scheme to “impair the growth and development of innovative resale rivals like TRR who threaten Chanel’s dominance” by “creating a robust resale market where none previously existed,” and thereby, giving consumers increased access to “a rich supply of Chanel handbags that would not otherwise be available to [them].” 

As one of the primary players in the market for “top tier investment grade handbags and hold-value handbags,” (i.e., certain styles of Chanel, Louis Vuitton, and Hermès bags that hold or increase their retail value over time), Chanel commands a 30-plus percent share, and has as much as a 50 percent share in related handbag submarkets, per TRR. The Coco Chanel-founded company has been able to not only “maintain … [this] monopoly power despite the entry of multiple high-quality resale competitors,” TRR alleges that Chanel has actually “enhanced” that power due, in part, to its “anticompetitive intent of pushing out resellers of Chanel handbags and increasing its own market dominance.” 

In order to illegally “stymie competition” that comes from resellers, which “threaten the very core of Chanel’s business model, [one that] is premised on a limited supply and few access points for consumers,” TRR claims that Chanel has specifically entered into “exclusive contracts with high-end retailers and us[ed] its monopoly power to force the[m] to refuse to engage in any ancillary relationship with resale competitors.” For instance, TRR argues that on the heels of it entering into resale partnerships with Neiman Marcus and Saks Fifth Avenue in or around 2015, Chanel threatened to pull all of its products from their stores unless both retailers agreed to prevent consumers from consigning Chanel products to TRR in their stores. 

In both cases, the nearly-decade-old resale company claims that it was “economically infeasible” for the retailers to “resist Chanel’s demands” due to its “power over the market” for top tier handbags, and thus, “Chanel intentionally caused” them to “breach their respective contracts [with TRR] by terminating their relationships with [it].” The loss of these partnerships “significantly inhibited [TRR’s] business development and growth,” the company asserts.  

Beyond that, TRR alleges that Chanel “engag[ed] in a concerted refusal to deal – i.e., a vertical group boycott – with print and digital advertisers” that “deprived [its] competitors,” such as TRR, “from placing advertisements in the most highly desirable locations.” Specifically, TRR contends that Chanel used its position “as the most powerful luxury brand to force New York Magazine into an agreement not to deal with TRR” in late 2015 or early 2016 when it was “in discussions” with the publication about a digital and print media campaign. 

“Chanel did not stop at New York Magazine.” It “used its influence to reach agreements with Vogue and The New York Times to refuse to deal with TRR and boycott TRR’s advertisements.” As recently as 2019, TRR claims that it was “in discussions with Women’s Wear Daily to run an advertisement promoting its recent landmark partnership with Burberry.” However, “shortly before the ad was set to run, Chanel used its dominance and influence to convince WWD not to run TRR’s ads.” This is one of the latest examples in Chanel’s alleged pattern of “repeated coercion of various publications to refuse to deal with TRR, [which] constitutes anticompetitive agreements in restraint of trade without any procompetitive justifications,” according to TRR.

Each of Chanel’s actions “alone, constitutes an overt anticompetitive act capable of redress by this Court,” TRR alleges. However, “the totality” of these actions when considered together “constitute a full-scale assault on resale competitors and an effort to continue Chanel’s dominance in the market.”

The Role of Farfetch

TRR goes further with its allegations, and asserts that while Chanel has been actively seeking to ensure a firm grip on its “monopoly” in the market by “coercing or pressuring” various retailers and publications, it has also been taking legal action against resellers, including but not limited to TRR. (As TRR notes, fellow consignment company What Goes Around Comes Around (“WGACA”) is currently embroiled in a similar lawsuit initiated by Chanel).

Interestingly, there is “one major secondary reseller” that has been “notably absent in Chanel’s war,” TRR points out. Farfetch – the online retailer in which Chanel made a “significant” investment in in February 2018, and which has been making increasing inroads in the resale market, including by way of its own resale pilot program, “Farfetch Second Life.” 

According to TRR’s new filing, Farfetch “promotes, advertises, markets, and sells pre-owned Chanel goods that are sourced from numerous brick-and-mortar boutiques” and “guarantees the authenticity of all of its pre-owned items,” in much the same way as TRR and WGACA. Yet, despite Chanel taking issue with TRR and WGACA’s assertions about their ability to properly authenticate the Chanel bags they sell because – as it has asserted in both cases – “only Chanel can authenticate Chanel [products],” and ultimately, filing lawsuits against them as a result, Farfetch has not landed on the opposite end of litigation with Chanel due to its own declarations of authenticity. 

This is not necessarily an issue on its face. However, TRR contends that Chanel’s failure to take uniform legal action against Farfetch for marketing its pre-owned Chanel products as being subject to “a rigorous process to ensure that all items meet our authenticity standards” shows that “Chanel will only tolerate the resale of Chanel handbags … by a company in which [it] holds a significant investment.” The purpose of this, according to TRR? So that Chanel “can continue to control supply and prices in the market for top tier … handbags.” 

Distinct from the work of a company that is merely enforcing its rights in good faith, TRR says that Chanel’s “overarching anticompetitive scheme” has resulted in significant harm to the relevant market. This takes the form of “reduced supply of top tier handbags, fewer options for consumers for where and how to purchase top tier investment grade and hold-value handbags, the limitation of innovation from the entry and growth of competitors, supra-competitive prices for consumers …, and increased market dominance by Chanel.” As a result, TRR sets out its five counterclaims against Chanel, and asserts that with Chanel’s allegedly unlawful conduct in mind, it is entitled to monetary damages, as well as injunctive relief to legally prohibit Chanel from engaging in such behavior going forward. 

Surviving a Motion to Dismiss

In the wake of TRR introducing its counterclaims this fall, Chanel argued that TRR’s “proposed amendment is certain to prejudicially expand the existing scope of discovery in this case.” And even if it does not, the reseller’s counterclaims should not be included, as they do not “even come close to meeting the heightened pleading standards required to allege an antitrust violation,” per Chanel. Specifically, Chanel argued in a supplemental letter dated January 26 that the Sherman Act places “narrow limitations on the use of supposedly false advertising about a competitor as the basis of an antitrust violation, none of which are satisfied here.” 

“As an initial matter,” Chanel claimed that “the supposedly false statements” alleged by TRR – including Chanel’s assertions that Chanel handbags purchased from resellers are “likely to be fake” – are “not competitor ‘disparagement’ of the type properly analyzed under the antitrust laws.” For example, Chanel asserts that “the alleged statements at issue were not directed at TRR or any other competitor, and instead, are statements about the problem of counterfeiting of handbags generally, which everyone – including the parties [here] – agrees is a major and persistent problem.” 

Moreover, “even if the alleged statements did fall within the scope of the Sherman Act,” Chanel argued that “there is a presumption that disparaging a competitor, or otherwise engaging in ‘misleading advertising and publicity’ has a ‘de minimus’ effect on competition, and therefore, is not a violation of antitrust laws.” And TRR clearly has not been impacted too significantly by such alleged disparagement, Chanel asserted, noting that TRR “affirmatively allege[d] that it is thriving – meeting unmet demand and supplying vast amounts of product to millions of customers.” 

And even if TRR can overcome the presumption that disparaging a competitor has little effect on that competitor (by showing that the disparaging representations were “clearly false, clearly material, clearly likely to induce reasonable reliance, made to buyers without knowledge of the subject matter, continued to prolonged periods, and not readily susceptible to neutralization or offset by rivals”), it would still be “irrelevant,” according to Chanel, as in order to prevail, all of the other elements of a Sherman Act violation must be established, “including that the advertiser of the disparagement is a monopolist – i.e., it has ‘the power to exclude competition.’” 

Doubling-down on previous arguments, Chanel claimed that TRR has not – and cannot – assert that it has a monopoly. “Instead, TRR alleges that there is a ‘Holy Trinity’ of three dominant brands in its proposed markets, that many other companies pose a competitive threat to those brands, and that new competitors are successfully entering the market.”  

With this in mind, Judge Gorstein stated in his order on Wednesday that with respect to Chanel’s argument that antitrust counterclaims could not survive a motion to dismiss, “it more appropriate for the arguments regarding the merits of the antitrust counterclaims to be made in a motion addressed to the merits of the proposed claims and with the benefit of the full briefing that a motion addressed to the merits provides.” 

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

Lawmakers and regulators across the globe are not backing down from their focus on competition in the marketplace. While big tech has firmly taken center stage, other efforts have been underway, as well, from the Federal Trade Commission’s move to block mergers between buzzy direct-to-consumer brands and consumer goods conglomerates in the U.S. to national governments in Europe and the European Commission, alike, exhibiting increased scrutiny when it comes to anti-competitive restraints in agreements between companies and their authorized – and unauthorized – distributors. 

In that same vein, French skincare brand Caudalie is at the heart of a probe by the Belgian Competition Authority (“BCA”) after the regulator received a complaint from a Belgian store owner that his Caudalie supplier was imposing a strict pricing policy on his subsequent – and authorized – sale of the company’s products. Fast forward to November 20, 2020, and the Belgian competition prosecutor submitted a proposal for a decision in the matter. 

According to the proposal, the prosecutor asserted that the minimum resale price requirement that Caudalie has imposed upon the distributor within its selective distribution network, and the Paris-based brand’s limitation of online sales by its distributors to consumers established in another EU member state run afoul of Article IV.1 of the Code of Economic Law, and Article 101 of the Treaty on the Functioning of the European Union (“TFEU”), the latter of which bars agreements that aim to “restrict, prevent or distort competition within the EU and [that] have an effect on trade between EU member states.”

In accordance with the competition law rules as set out in the EU Vertical Agreements Block Exemption Regulation (“VBER”) and the corresponding the Guidelines on Vertical Restraints, ALTIUS attorneys Carmen Verdonck and Nina Methens state that “distributors must always be allowed to freely determine their sales prices, and any agreements between a supplier and its distributor, which directly or indirectly establish a fixed or minimum price or price level to be observed by the distributor when reselling a product to its customers (such as a maximum discount level) are strictly forbidden, as they artificially encourage higher pricing.” 

Moreover, VBER and the Guidelines also require that companies that maintain a selective distribution system may not prevent distributors operating at the retail level “from engaging in active and passive sales towards end users.” In other words, Verdonck and Methen assert that “distributors must be free to sell, both actively and passively, to all end users,” including online. Should a company run afoul of any of these rules, it is “considered to be a hardcore vertical restriction” that does not benefit from VBER’s safe harbor. (VBER establishes the conditions in which a vertical agreement may be considered an exemption under Article 101(3) of the TFEU). Therefore, such an agreement will likely be considered to run afoul of competition law, and be invalid. 

For Caudalie specifically, the prosecutor’s proposed decision will now go before the BCA’s Competition College for consideration in furtherance of what Verdonck and Methen say may be the start of another long legal battle for Caudalie. After all, “This is not the first time that Caudalie has had to defend itself in competition law cases,” they note, pointing to its relatively recently-resolved 5-year-long legal battle with eNova, the operator of online platform 1001pharmacies.com. 

In that case, Caudalie filed suit against eNova in April 2013 after it discovered that its products – from its Beauty Elixir serum and Vinoperfect Brightening Solution to its Resveratrol-Lift Cream and Instant Detox Mask – were being sold on the company’s online marketplace site. Responding to Caudalie’s complaint, eNova argued that Caudalie’s selective distribution agreements, which explicitly provided that its products could only be sold online by its authorized distributors on their own websites (and thus, not on third-party platforms, such as eNova or Amazon), violated EU competition law, which prohibits such sweeping bans unless they can be objectively justified.

In July 2018, following a decision from the French Supreme Court, the case went back before the Paris Court of Appeal for s second time. This time around, the appeals court held that the marketplace ban in Caudalie’s selective distribution agreements was, in fact, valid. Guided by the Court of Justice for the European Union’s December 2017 decision in the Coty v. Parfümerie Akzente case, in which the court determined that luxury brands may restrict the sale of their goods on third-party online platforms by way of selective distribution systems in order to preserve the quality of their products, the court sided with Caudalie.

Just as in the Coty case, the Paris Court of Appeal determined that Caudalie’s marketplace ban was necessary in order to preserve the luxury image of it products. “Given the absence of any contractual relationship that would oblige 1001pharmacies.com and eNova to comply with Caudalie’s quality requirements, and given the fact that 1001pharmacies.com was displaying Caudalie’s products in close proximity to products that had no connection with the cosmetic sector (e.g., fire alarms and video surveillance cameras), the court held that such ban was necessary and proportionate to preserve the products’ luxury image,” Reed Smith stated in a client note at the time. 

While eNova attempted to argue that Caudalie’s application of selection criteria was discriminatory as Caudalie had not initiated proceedings against other platforms, the court was unpersuaded, as Caudalie was able to show that it had initiated proceedings against Amazon on the same basis, as well. As such, the Paris Court of Appeal confirmed the lower court’s decision, and ordered that eNova immediately and permanently refrain from offering Caudalie products on its site.

The timing of the newly-initiated Caudalie proceedings in Belgium is striking, as the European Commission is currently in the midst of assessing the rules contained in VBER and the corresponding Guidelines on Vertical Restraints, which are slated to lapse in 2022. “The rules that currently apply to resale price maintenance and active and passive sales are on the commission’s radar,” according to Verdonck  and Methen, who note that “their concrete application may consequently be adapted or further elaborated on in the commission’s ongoing assessment process,” which could come as a welcome development for luxury brands that are increasingly seeking to limit how and where their products are sold.