Nike is adding to the list of defendants that it is facing off against in a pending lawsuit over allegedly “customized” footwear. In an amended complaint that it lodged with the U.S. District Court for the Central District of California on August 18, the Beaverton-based sportswear behemoth claims that not only is sneaker customizer Customs By Ilene, Inc., dba Drip Creationz (“Drip Creationz”) on the hook for trademark infringement and dilution, and counterfeiting for offering up modified sneakers, as well as outright fakes that bear Nike branding, affiliated entity Dripz 2.0 is similarly liable, as are the companies’ co-founders and owners Ilene Arellano, Raymond Quiroz, and Brian Porter, who Nike claims are actively trying to “hide their own infringing actions” in light of its lawsuit.

In the newly-filed amended complaint, Nike claims that Drip Creationz has been offering up and selling products “purporting to be genuine Nike products, but that are, in fact, counterfeits,” namely, “knockoff Air Force 1-style shoes that it refers to as ‘D1’ shoes,” which bear designs that allegedly infringe upon Nike’s registered trademarks for to its Air Force 1 shoes and that have “crooked proportions, messy stitching, cheap details, and [are] taller than the real Air Force 1 shoes.” 

Southern California-based Drip Creationz – and the other named defendants – do not stop there, though, per Nike. In what is the most interesting aspect of the case, Nike claims that in addition to offering up the unabashedly counterfeit Air Force 1 sneakers, which it advertises as “100% authentic,” Drip Creationz and co. are also promoting and selling unauthorized footwear that they market as handmade “customizations” of Nike’s most iconic products.  The problem, according to Nike, is that in creating the customized footwear, Drip Creationz deconstructs otherwise authentic Air Force 1 shoes and “replace[s] and/or adds materials.” In the process, the defendants “materially alter” the shoes “in ways Nike has never approved or authorized,” thereby, rending them infringing and/or counterfeit. 

Drip Creationz sneakers

Specifically, the Swoosh argues that the defendants’ custom shoes contain “images, materials, stitching, and/or colorways that are not and have never been approved, authorized, or offered by Nike,” including “fake and unauthorized Nike Swoosh designs, as well as third party trademarks and protected images,” such as a pattern that mirrors Burberry’s trademark-protected check, Frito-Lay-owned Cheetos’ Chester Cheetah character, Travis Scott’s Astroworld graphic, and Chick-fil-A’s stylized word mark. 

(Echoing claims that Nike makes in its ongoing case against StockX over NFTs, Nike takes issue with the defendants’ excessive use of elements of its branding and their claims about the authenticity of the footwear, namely, Drip Creationz’s “purported guarantee of authenticity through claims that its products are ‘100% authentic’ Nike products purchased directly through Nike’s website.” Nike alleges that “customers considering purchasing purportedly Nike-branded products from Drip Creationz are, in fact, relying solely on Drip Creationz—not Nike—to guarantee that the products are ‘100% authentic.’”)

With the foregoing in mind, Nike again sets out claims of trademark counterfeiting and infringement, trademark dilution, false designation of origin, and unfair competition in connection with Drip Creationz’s unauthorized use of an array of its trademarks, including its Swoosh logo, which it says is “one of the most famous, recognizable, and valuable trademarks in the world,” as well as its Air Force 1 word mark and trade dress. This time around, Nike claims that Dripz 2.0 is also on the hook for the aforementioned causes of action. At the same time, Nike also asserts that individual defendants – Ilene Arellano, Raymond Quiroz, and Brian Porter – are liable for the activities of Drip Creationz and Dripz 2.0, as they “authorized, directed, and participated in the infringing activities conducted by both Drip Creationz and Dripz 2.0.” This includes procuring counterfeit Nike sneakers, as well as “sourcing the genuine Nike footwear used for the infringing AF1 products.” 

It is especially pressing that the individual defendants be added to the case, Nike claims, as they have “facilitated the sale of the infringing D1 footwear from Drip Creationz to Dripz 2.0 and now own a portion of Dripz 2.0.” This “sale and partial ownership are evidence that the individual defendants are using corporate entities to attempt to hide their own infringing actions,” Nike asserts, arguing that “in such a situation, the Individual Defendants must be party to a litigation to prevent continuing this process of moving inventory anytime a complaint is filed.” 

A screenshot of Drip Creationz website

Nike is seeking monetary damages in an amount to be determined at trial, and injunctive relief to bar the defendants from further nfringing its marks and/or injuring its business reputation, among other things. 

In its formal response to Nike’s initial complaint last year, Drip Creationz argued that its sale of modified sneakers that it purchased from Nike and/or authorized Nike retailers “amount[s] to a resale by the first purchaser of the original product and is, thus, protected under the first sale doctrine and does not constitute trademark infringement or unfair competition.” Counsel for the company further claimed that a critical element is missing from Nike’s complaint, namely, likelihood of confusion, as “there is no likelihood of confusion between Nike’s asserted trademarks and the trademarks and/or usages made by Drip Creationz.”

The case comes as Nike has initiated a growing number of trademark lawsuits against customizers ranging from Drip Creationz and John Geiger to MSCHF and former employee Jeffrey Waskowiak and his company KickRich LLC. The cases have been met with scorn from no shortage of Nike fans, who have accused the sneaker giant on social media of taking customizers ideas and mass producing them, while also benefitting from the culture-building that comes with exercises in customization and potential boosts to the demand for – and thus, the longevity of – silhouettes thanks to the appeal driven by particularly well-done customization projects. 

In terms of what is driving the onslaught of customizer-specific litigation from Nike, a representative for the company said last summer that the company is not aiming to “limit the individual expression of artisans, many of whom are some of the brand’s biggest fans,” and noted that Nike “often collaborates with designers, artists and other creatives to innovate new products and experiences for our consumers with the Nike brand.” Instead, Nike says such litigation is the result of the fact that the brand “cannot allow unauthorized customizers to build a business using and leveraging some of our most iconic trademarks, undermining the value of Nike’s intellectual property,” as well as of its “brand, goodwill, and hard-earned reputation.” In other words, Nike says that it is simply policing its valuable trademark rights in order to maintain that value. 

The case is Nike, Inc. v. Customs By Ilene, Inc., 5:21-cv-01201 (C.D.Cal.)

After partially siding with Chanel this spring in the luxury brand’s long-running lawsuit against What Goes Around Comes Around (“WGACA”) and refusing to toss out the bulk of its claims, including its trademark infringement and false association causes of action, a New York federal court has ordered that the New York-based reseller provide additional information about its sale of Chanel-branded products. Specifically, Judge Louis Stanton of the U.S District Court for the Southern District of New York ordered WGACA to produce the monthly financial statements dating back to 2018 that its expert used to calculate WGACA’s profits, along with its summary of Chanel-branded product “sales and costs.”

Judge Stanton is also requiring WGACA to update and produce “Google Analytics information, data from [URL shortening service and link management platform] Bitly, and internal reports relating to WGACA’s advertising using Chanel’s trademarks” – and the effectiveness of such ads. Beyond that, the court granted leave for Chanel to complete a deposition of an individual affiliated with WGACA who has knowledge about the aforementioned documents, but refused to the luxury brand’s request the tax returns of WGACA’s members from 2014 to the present on the basis that “the members are not party to this litigation and private information pertaining to them is to be sought, if at all, from them directly and not from WGACA.” 

The parties have been battling over the production of these documents since early last year, with Chanel arguing that such information is “relevant to [its] damages claims for disgorgement of [WGACA’s] profits,” which will be at issue during the parties’ trial. 

Among other things, counsel for Chanel has argued that WGACA’s Google Analytics information, Bitly data, and other information regarding the effectiveness of its advertising featuring Chanel’s trademarks is “highly relevant – as it will show, the amount of traffic driven to [WGACA’s] website by their unauthorized use of Chanel’s trademarks and the resulting sales generated thereby.” 

Chanel has alleged from the outset that WGACA has “willfully trad[ed] on [its] well-known trademarks, including using Chanel’s trademarks, quotes, and images of [its] founder Coco Chanel, hashtags with [its] trademarks (including egregiously #WGACACHANEL), pictures of Chanel runway shows and prior Chanel advertisements to draw a false association with Chanel,” in order to sell Chanel-branded goods, some of which have been “non-genuine and/or counterfeit.” And more recently, Chanel pointed to testimony from WGACA Vice Chairman Frank Bober who said thatthe allegedly unauthorized uses that WGACA makes of Chanel trademarks, imagery and Coco Chanel’s name, likeness and quotes is “helpful” to driving sales at WGACA. 

As recently as June 8, Chanel reinforced its request for documentation, arguing that on March 28, 2022, the court entered an order “granting, in part, Chanel’s motion for partial summary judgment,” in which it rejected WGACA’s argument that disgorgement of profits was not available, concluding that: “Disgorgement of profits is … an available remedy the appropriateness of which is unripe for resolution at the summary judgment stage.” Against this background, counsel for Chanel claims that its request for “basic financial information that was the foundation for [WGACA’s] expert damages report and upon which [WGACA] will be relying at trial, and that goes directly to the profits attributable to [WGACA’s] use of Chanel’s trademarks and associated goodwill.” 

WGACA has pushed back against Chanel’s quest for such information, arguing on June 1 that this amounts to “yet another example of Chanel’s over-litigation of this case and continued refusal to follow the Federal Rules’ requirement of proportional discovery,” and calling Chanel’s motion to compel such information “entirely unnecessary and harassing.” 

“The entire premise of the motion is the possibility that the Court might order disgorgement as a remedy,” counsel for WGACA argued, stating that “it is also undeniable that if disgorgement is ever determined by this court to be an appropriate remedy, the court can then consider if any additional information should be disclosed or accounted for to assist the court in determining an appropriate disgorgement remedy.” Additionally, WGACA claimed that “there is no reason at this late stage to reopen discovery to engage in discovery which is grossly disproportionate to the needs of the case and which can, in any event, be addressed if and when the court determines that disgorgement is a viable remedy.” 

(Chanel has, of course, argued since that the court did, in fact, state that disgorgement is a viable remedy; Chanel has also claimed that it “needs to obtain and is entitled to the documents that [WGACA’s] witnesses are and will be relying on, and that otherwise support Chanel’s disgorgement remedy, prior to trial.”)

While WGACA states that it has “already provided financial information on an annual basis, Chanel is demanding in essence a complete accounting from 2018 for all Chanel branded products, on a monthly basis, ignoring that its remaining claims at best address a small fraction of those items and that the court, to whom the issue of disgorgement will be addressed, will be better able to assess the scope of any disgorgement, if indeed it determines such is ‘appropriate,’ after the trial.” 

The latest round comes over four years after Chanel first filed its lawsuit against WGACA, accusing the reseller of trademark infringement, false advertising, unfair competition, and violations of the New York Deceptive and Unfair Trade Practices Act as a result of its alleged practice of “purport[ing] to sell genuine CHANEL-branded point-of-sale items including, tissue box covers, trays, and mirrors,” when such items were “not authorized for sale to the public by Chanel.” Through its business advertising and practices, Chanel claimed that “WGACA has attempted 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 [its] goods in order to trade off of Chanel’s brand and good will,” when no such affiliation exists. 

In addition to allegedly offering up unauthorized and counterfeit Chanel goods, Chanel has argued that at the heart of its lawsuit is WGACA’s pattern of going “out of its way to create an association with Chanel,” including by way of its “extensive use throughout its marketing materials of the CHANEL brand,” and its practice of “purportedly guaranteeing authenticity by posting on its website that ‘[a]ny piece purchased at [WGACA] or one of our retail partners has been carefully selected, inspected and is guaranteed authentic.’” 

WGACA has repeatedly called the allegations at the heart of the Chanel lawsuit “completely unfounded,” and accused the brand of engaging in a “quest to paint a far darker picture of the resale market for its goods than actually exists.” 

Reflecting on the significance of the case, Foley & Lardner’s Jeffrey Greene and Allison Haugen have stated that the implications of the lawsuit – and the similar one that Chanel waged against The RealReal – “could be broad-reaching, providing guidance to resellers on the parameters of a fair use defense to trademark infringement claims.” They also stand to provide “insights into the validity of antitrust-type claims in instances of claimed interference with the resale market, particularly in connection with Chanel v. The RealReal, as well as how resellers ought to describe the authenticity of the goods they sell.”

The case is Chanel, Inc. v. What Goes Around Comes Around, LLC, et al., 1:18-cv-02253 (SDNY).

A new study from the European Union Intellectual Property Office (“EUIPO”) found that the rate at which young people in the 27-member bloc are intentionally buying counterfeits is on the rise. In a report documenting the findings of a survey of individuals between ages 15 and 24 years old residing in the EU that was conducted in February, the EUIPO revealed that 52 percent of surveyed consumers had purchased at least one counterfeit good online in the last 12 months – with 37 percent of them acquiring the fake product(s) on purpose. This marks “a notable increase” compared to the outcome of a similar survey conducted in 2019, when the EUIPO found that just 14 percent of young consumers had intentionally purchased at least one counterfeit good over the course of 12 months. 

In terms of the types of goods that were among the most frequently-purchased by individuals intentionally seeking out counterfeit goods in the last 12 months, the highest percentage purchased clothing and accessories (17 percent), followed by footwear (14 percent), electronic devices (13 percent) and hygiene, cosmetic, personal care and perfume products (12 percent). The EUIPO determined that the unintentional purchase of counterfeits – which was cited by 37 percent of respondents – was highest for “broadly the same product categories,” with the intellectual property office noting that the unintentional purchasers “acknowledge difficulties in distinguishing genuine goods from counterfeits.” 

(It is worth noting that the EUIPO does not explicitly define “counterfeit” in its report, although it does distinguish counterfeiting from copyright-centric piracy. U.S. law characterizes a counterfeit product as one that bears a spurious mark or one that it identical with, or substantially indistinguishable from, a mark registered on the principal register in the United States Patent and Trademark Office, and that is applied to or used in connection with the goods or services for which the mark is registered with the United States Patent and Trademark Office.)

Focusing on the impetus behind such intentional purchases, the EUIPO found that “product affordability” was the primary motivating factor, with 48 percent of respondents who had intentionally bought counterfeits in the last 12 months saying that they had done so because of the cheaper price of the counterfeit. Other factors cited by at least one in five intentional purchasers of counterfeit goods were “simply not caring whether the product was a fake” (27 percent), a belief that there was “no difference between genuine and counterfeit goods” (24 percent), and “the ease of finding or ordering fake products online” (18 percent). 

Additionally, compared to the 2019 survey, the EUIPO noted an increase of 6 percentage points in the proportion citing “another reason, namely the influence of people they knew” in driving the intentional purchase of counterfeit goods.

In this same vein, the EUIPO found that almost a third of respondents who had intentionally bought counterfeits in the last 12 months (31 percent) said they would “stop doing so if more affordable original products were available.” An equal proportion (31 percent) said they would stop purchasing counterfeits “if they were to experience a poor-quality counterfeit.” Beyond that, almost a quarter of respondents (23 percent) said they would do so if they were to experience cyberfraud or a cyberthreat, or if they were to experience an unsafe or dangerous product (22 percent). And still yet, 19 percent and 17 percent of respondents respectively revealed that that “a better understanding of negative effects on the environment or society would stop them.” 

As for what is driving the rise in intentional counterfeit purchases, the EUIPO states that it is likely a result of “the widely documented increase in online shopping during the COVID-19 pandemic (and potentially a shortage of products in some physical stores).” 

In the summer of 2011, a brilliantly bright red Birkin bag was being crafted in a workshop in France. Despite lingering economic woes in the United States following the depths of the Great Recession two years prior, and volatility in the eurozone, the United Kingdom, and China, all of which had “spooked investors and economists, alike,” the demand for Hermès’ most expensive – and recognizable – bags remained unwavering. This particular blood-hued bag was among the tens of millions of dollars’ worth of handbags that were being manufactured in little-known workshops on the outskirts of Paris in order to meet the incessant demand of deep-pocketed devotees.

Finished with a small gold stamp on the front that read “Hermès Paris Made in France” and packaged in one of Hermès’ signature orange boxes, the ones that the 183-year old brand has been using for more than a half-a-century, the Shiny Porosus Crocodile Birkin – a bag that would sell for upwards of $75,000 at retail – was destined for a blissful consumer, an individual almost certainly unaffected by the financial turmoil that was permeating markets across the globe. The problem: the bag that was being assembled that day was anything but the real thing. Despite its lookalike packaging and seemingly high quality materials, this bag was the product of a sophisticated $22 million-plus counterfeit operation that was being carried out in France, right under the nose of the Hermès, the closely-guarded stalwart luxury brand known for its meticulously-crafted leather goods, silk scarves, and saddlery.

While Hermès was working to carefully balance its own supply against the intense and unwavering yearning for its most coveted bags among well to-do consumers from women in sunny Southern California to their counterparts some 6,500 miles away in Shanghai and trying to keep takeover bids by aggressive fashion conglomerates at bay, more than a dozen people were laboring diligently to build and maintain a small-but-mighty counterfeiting ring. In clandestine workshops not far from Hermès’ own workshops, they were producing bags that to even some of the more discerning Hermès collectors looked – and felt – real.

Unlike the cheaply-made, obviously-counterfeit bags – with their plastic-y “leather” bodies, imprecise stitching, and off-kilter Hermès stamps – that are regularly churned out in factories in China and other far-flung locales and sold for cheap on Amazon and in stalls that populate seedy flea markets, these bags were different. In fact, these bags were made in France and as the story goes, at least a portion of the materials being used to craft them were coming directly from bona fide Hermès workshops.

Maybe most critically, as Hermès would later learn, several of its own employees were intimately involved in the budding criminal enterprise, providing those authentic materials and overseeing the manufacturing of the eye-poppingly expensive handbags. The result came in the form of counterfeit Hermès bags of almost unprecedented quality.

This specific ring fit neatly into a much larger pattern of counterfeiting, a sizable and long-standing business in France, with roots that date back to the days of the earliest-operating couture houses in Paris. As the heart of the global fashion market, France’s well-established luxury industry has routinely been plagued by intellectual property crime, and Hermès – which is the name found on some of the most famous and in-demand handbags in the entire world – has routinely been among those hit the hardest.

“It’s an absolute disgrace,” Hermès’ longtime former CEO Patrick Thomas said in 2012, revealing that some “80 percent of objects sold on the Internet under the Hermès names are counterfeit.”

As of that same year, the shadowy trade in infringing goods was costing the French economy as a whole a whopping $7.5 billion in lost revenue per annum (that the government knew of), a number that had been growing steadily over the years, and which was only expected to increase as time went on. However, not only has the dollar-figure associated with the fake trade been escalating, the sophistication of the players and their global counterfeiting operations has been advancing significantly, as well. With that in mind, industry insiders, trade organizations, and law enforcement officials have been paying attention for decades – watching the risks to their own interests rise.

“When counterfeiting was artisanal, it didn’t bother us much,” Adrian de Flers, the head of Comité Colbert, the French luxury goods association, said in back in the 1980s. With the broadening scope of counterfeiting, facilitated in large part by widespread technological advances, and the unending demand for less bank-breaking alternatives, “it’s become an industrial practice, and we’re frankly very worried.”

So, beginning in the mid-2000s, Comité Colbert joined brands in working overtime to stomp out the latest wave of counterfeiting, which was negatively impacting 8 out of 10 European businesses, according to its research. This included educating consumers about the dangers associated with fakes. The summer of 2012, for example, brought the introduction of a new effort by the Comité. In furtherance of a collaboration with Cartier, Chanel, Christian Dior, and Louis Vuitton, among other brands, the Comité plastered France’s 18 airports with 10,000 posters aimed at raising awareness about counterfeiting.

“Buy a fake Cartier, get a genuine criminal record,” read one poster, a reference to the ability of prosecutors to levy fines of up to $300,000 and even jail sentences in connection with the manufacture, sale, and even the purchase of fakes, as under French law it is not only illegal to make and sell counterfeit goods, it is also a criminal offense to buy them. (No such equivalent exists in the United States). Another poster, adorned with a patent Cannage Lady Dior bag, declared, “Real ladies don’t like fake.”

These efforts – which were backed by the Directorate-General of Customs and Indirect Taxes, the French law enforcement agency responsible for investigating counterfeiting – did little to deter those working stealthily to churn out relatively sophisticated, precious-skinned Hermès counterfeits, of course.

Evidence of Abnormal Behavior

Faced with evidence of “abnormal behavior identified through [its] internal monitoring systems,” Hermès had begun to suspect that things were not quite right under its own roof. Armed with such “clues,” Hermès took its findings to French law enforcement and filed a complaint. It was 2011. A year later, inside a police station in Paris, law enforcement officials were trying to get to the heart of what would ultimately reveal to be a very close-to-home scheme that was bringing millions of dollars of counterfeit Hermès bags to market.

In the time that had passed since Hermès had first filed its complaint, a new collaboration had been born: a joint effort between the brand and French law enforcement, one that would ultimately spawn a year-long investigative partnership between the two entities.

After months of following leads, engaging in surveillance, and tracing the orange Hermès-branded boxes – and even some Hermès leather and hardware – back to the brand (by way of at least two rogue Hermès employees), a big break would come in the late spring of 2012. News outlets worldwide were reporting in June that a dozen people had been arrested by French police as part of the dismantling of an international crime ring that was peddling high quality counterfeit Hermès handbags. The expansiveness of the ring’s reach would stretch from Europe to the United States and all the way to East Asia. As far as French authorities knew, the national arm of the counterfeiting operation, alone, had brought in approximately $22 million.

On that same spring day, in another part of town, the two unnamed Hermès employees were simultaneously being let go from their jobs and arrested. The unnamed employees had been integral to the workings of the ring. Despite the two arrests, Hermès harbored suspicions that “several current members of staff could also be involved,” and vowed to continue its own internal probe.

A representative for the traditionally tight-lipped house, said that they were “very satisfied with the efficient and diligent collaboration established with the national gendarmerie in this case and reiterates its relentless commitment to fighting counterfeiting. This action puts an end to the fraudulent project in progress.”

The news of the arrests and the allegedly unparalleled quality of the fake bags made headlines across the globe, prompting luxury handbag resellers, and certain consumers, alike, to question the nature of their own bags. One established resale company told TFL years later that they stopped accepting Birkin bags at the time, a risk management tactic of sorts in light of the sweeping uncertainty about the bags that were currently floating around in the market and in at least some cases, being offered up for resale. At the same time, they simultaneously triple-checked the authenticity of the bags they already had in stock.

Meanwhile, as part of a larger, global – and resource-intensive – effort by Hermès to get a handle on the growing counterfeit market, in which its instantly-identifiable bags are some of the hottest commodities, a federal judge in New York was deciding an unrelated case that Hermès’ legal team had filed against dozens of online sellers, which they accused of hawking fakes. In siding with the Paris-based brand, Judge Denise Cote of the U.S. District Court for the Southern District of New York ordered the operators of 34 different websites to pay $100 million, and asserting that “collectively, they had sold and offered for sale at least nine distinct types of goods” – from Birkin bags to silk scarves – “each bearing numerous counterfeits of the Hermès trademarks and designs.”

In reality, Hermès would see very little – if any – of that $100 million money, as none of the defendants could be identified beyond the domain names they were using to hawk the fakes (such as HermesBagsOutlet.org, HermesBirkin-Bags.org, and HermesOutletStore.com, among others) and none of them responded to the counterfeit-focused suit lodged by Hermès, and certainly did not appear in court to defend themselves against the claims. The only monetary remedy that Hermès would get would be any money in the PayPal accounts that were linked to the defendants’ domains.

A Push for Jail Time

Fast forward to late June 2020 and nearly a dozen individuals appeared in a French court for a trial in connection with that now-notorious counterfeiting ring. Prosecutors set the stage before Paris’ Criminal Court, detailing the workings of headline-making operation eight years after local law enforcement first arrested more than a dozen people and broke up the internationally-reaching crime ring. Among the ten defendants being tried in the counterfeiting-centric case were seven former Hermès employees, who were not only embroiled in intellectual property infringement charges in connection with the manufacture and sale of fake bags. They were also on the hook for criminal breach of trust (abus de confiance), a French cause of action that arises from the misappropriation/misuse of company funds or property. 

The breach of trust claims provided a striking look into the heart of the secretive operation, one that saw then-current Hermès employees, including “leatherworkers, artisan cutters or assemblers at Hermès” steal authentic packaging, raw materials, and tools – from orange Hermès-branded boxes to Hermès leather and hardware – from Hermès’ factories in order to produce and sell high-quality fakes of their own. The result was bags that bore price tags of upwards of 23,500 euros ($26,351 at current exchange rates).

“Prosecutors stated in court that three friends” were at the center of the scheme to manufacture and sell the black market designer bags, “two of whom had worked at Hermès, while the third dealt with the imports of crocodile skins from Lombardy in Italy, from which the [counterfeit bags] were made,” French24 reported in June 2020. “Five other people, who [had also been employed by Hermès] appeared in court, as well: one had provided [hardware] to decorate the bags and the other four were leather workers, who assembled the bags by incorporating hand-stitching saddle-emblematic of the company.”

In connection with the breach of trust charges, alone, which the French penal code states is “committed when a person, to the prejudice of other persons, misappropriates funds, valuables or any property that were handed over to him and that he accepted subject to the condition of returning, redelivering or using them in a specified way,” the defendants faced up to seven years’ imprisonment and fines of up to 750,000 euro each. Prosecutors were pushing for jail time.

According to prosecutors, the small-but-mighty French operation – which “targeted Asian tourists in Paris but also had clients in Hong Kong”  was uncovered after French police wiretapped the home of a man suspected of selling authentic – but stolen – Hermès bags in Asia. In addition to purely counterfeit bags, WWD reported that the ring also resold bags “created under the ‘bon au personnel’ provision, which allows Hermès employees to acquire the elements and make their own bags, identified by a shooting star stamp” – albeit in a strict “for personal use” capacity.  

On the final day of the three-day trial, a number of the defendants expressed their apologies to Hermès. They had been proud to work for the company, and expressed regret for “betraying the trust” of their former employer. Meanwhile, their lawyers, arguing in their defense, attempted to chip away at Hermès’ argument about the damage that it was subjected to as a result of the counterfeiting scheme. “Counsels for the defense argued against the validity of the prejudice incurred by the company, both from a financial point of view by questioning the exchange rate and a 70 percent profit margin mentioned by the plaintiffs, as well as in reputation, hinting at a supposed gain in brand equity due to the proceedings,” WWD stated at the time.

Among the other arguments lodged in favor of the defendants? A challenge to the protectability of the Birkin, and thus, the strength of the brand’s counterfeiting charges. Alexandre Lazarègue, a lawyer representing one of the alleged ringleaders, argued that “Hermès could not identify what constituted the originality of the Birkin bag,” a bag that is “based on an early 20th-century model itself inspired by transport satchels used by gauchos.”

Three months after the close of the trial, the court handed down its sentencing. According to a report from Agence France-Presse on September 25, 2020, punishments for the various defendants – all of whom were criminally charged – range from six months of  suspended jail time to three-year sentences, with the most severe penalty going to the “ringleader,” who was tried by the French court despite not appearing or responding to the legal proceedings. (There is an active arrest warrant out for him). 

“Another ringleader was given an effective one-year sentence, to be served under house arrest, with two more years suspended and a fine of €100,000,” according to the AFP. At the same time, one of the other key members of the group, “a woman who was convicted of selling the bags to Asian buyers, was given a 30-month sentence with 20 months suspended,” all of which will be served under house arrest. 

As for Hermès, while the Paris-based luxury goods brand sought upwards of €2 million in damages in connection with the counterfeit scheme, the court awarded it €580,000.

*This article was initially published in April 2018 and has been updated accordingly.

Many predict that the metaverse will be the next big thing in the internet’s evolution. Large tech companies, including Meta (formerly Facebook), Microsoft, and Amazon are investing massive resources into building it. Among other opportunities, it’s expected to be a robust environment for selling digital goods. One of the big challenges facing brands who hope to profit from the metaverse is protecting their intellectual property. Right now, when infringement occurs in the form of digital goods, brands have little recourse but to turn to the courts. As the metaverse grows, platforms may benefit from putting in place non-judicial protocols, as described below, that help brands enforce their IP rights.

The term “metaverse” is not new – it was first coined in Neal Stephenson’s 1992 novel Snow Crash. Today’s metaverse is in its nascent stage. However, it is envisioned as an immersive digital world where people will use virtual reality and augmented reality hardware devices to socialize, work, and play, in furtherance of what Mark Zuckerberg has referred to as the “successor to the mobile internet.”

The metaverse will also give rise to a digital economy, enabled by digital currencies and non-fungible tokens (“NFTs”), in which users can create, buy, and sell digital goods. And the potential is significant, with market research firm Gartner predicting that by 2026, 25 percent of people will spend at least one hour a day in the metaverse for work, shopping, education, social and/or entertainment, and 30 percent of organizations worldwide will have products, such as apparel, automobiles, artwork, and other goods in the form of NFTs, available in the metaverse. It is not surprising that analysts, such as those from investment bank Jeffries, project that the NFT market will reach $35 billion for 2022, and over $80 billion for 2025.

Intellectual Property Challenges in the Metaverse

Against this background, the metaverse presents significant opportunities for companies to expand into the sale of digital goods, as opposed to purely dealing in physical goods. At the same time, however, it poses legal risks, particularly in the area of intellectual property. A plethora of intellectual property issues, including patent and trademark infringement, will likely come about in connection with the rise of the metaverse. For instance, just as in the physical world, brands will be forced to deal with counterfeiting and piracy by infringers, especially those looking to profit from the decentralized nature of the metaverse. 

We are already seeing alleged infringement occurring, and brands taking steps to protect their intellectual property. One of the most high-profile examples to date is the lawsuit filed by luxury brand Hermès against Mason Rothschild. Hermès alleges that the digital artist created images of the Hermès Birkin bag, minted them as NFTs, and then sold the NFTs for as much as $23,000. Hermès argues that using the MetaBirkins name, Rothchild’s NFTs “infringed upon the intellectual property and trademark rights of Hermès and are an example of fake Hermès products in the metaverse.”

One of the biggest challenges brands will face in the metaverse stems from the fact that it so easy to create and sell digital products, such as an image of a Birkin bag, relative to the cost and complexity of creating and selling a physical counterfeit product. As a result, brands will likely be forced to pursue aggressive enforcement actions in the metaverse.

A Non-Judicial Alternative to Enforcement in the Metaverse

The metaverse is emerging alongside what is referred to as Web 3.0 – often heralded as the next phase of the internet. Web 3.0 runs on the blockchain, thereby, allowing it to function as a decentralized environment, while Web 2.0, on the other hand, is the internet as we know it today, dominated by a few huge companies in areas such as search, social networking, and online commerce. If Web 3.0 is about who controls the internet of tomorrow, the metaverse is about how we will experience it. And part of that experience will almost certainly involve aspects of commerce, with brands advertising and selling digital goods on metaverse platforms. That means new intellectual property challenges will arise for brands, and if the decentralized ethos of Web 3.0 flourishes in the metaverse, then enforcing intellectual property rights will become a difficult, expensive undertaking.

While Web 2.0 may seem archaic in the not-too-distant future, we may look back and realize that its dominant players helped pave the way for metaverse platforms to enable robust economic activity while guarding against rampant intellectual property infringement. As e-commerce has grown significantly on Web 2.0 platforms, such as Amazon and Etsy, over the past decade, infringement became a big problem. For many years, brands had no choice but to run to court to seek a surefire remedy when they copyrights, patents and/or trademarks were infringed, as the platforms on which the infringement occurred were ill-equipped to deal with the problem of intellectual property infringement by sellers.

The solution that emerged on Web 2.0 platforms was the establishment of non-judicial alternatives to resolve intellectual property disputes, such as Amazon’s Neutral Patent Evaluation system, which is meant to streamline dispute resolution for patent infringement claims. Pursuant to the Neutral Patent Evaluation system, a party can lodge a complaint alleging infringement, and if an accused party responds, then Amazon will select a qualified patent attorney to serve as the neutral evaluator to assess the claims. If an accused party either (1) fails to respond to a complaint or (2) loses the evaluation, the relevant product listing(s) will be removed by Amazon. The entire process can take only a few months, and the expenses tend to be significantly lower than they would be if a patent infringement claim was litigated through the judicial system.

Amazon has other procedures in place for sellers on the platform to identify and address other forms of intellectual property infringement, such as trademark and copyright infringement. And other e-commerce platforms that allow third parties to sell goods, such as eBay and Etsy, also have similar policies and procedures in place.

In short, as Web 2.0 platforms matured, they took it upon themselves to enable brands to seek recourse for infringement without necessarily having to resort to the judicial system, and while we currently are in the “Wild West” phase of the metaverse, platforms hoping to monetize by enabling third-party commerce (e.g., sales of digital goods in the form of NFTs) may want to consider, sooner rather than later, creating similar protocols to help guard against IP infringement.

To the extent that a metaverse platform has no means of curbing intellectual property infringement, then it stands to reason that brands selling digital goods will be less likely to utilize such a platform, instead opting for ones that put an emphasis on intellectual property protection. In an infinite metaverse made of bits, intellectual property enforcement and resolution protocols that enable brands to avoid costly lawsuits may create a notable competitive advantage.

Ben Stasa is a shareholder at Brooks Kushman, where he guides the development of clients’ patent portfolios with his extensive knowledge and passion for new and innovative technologies.