A New York federal court has partially sided with Chanel in its ongoing trademark battle against a resale company. The luxury goods brand has been seeking partial summary judgment against What Goes Around Comes Around (“WGACA”) for trademark infringement and false association in connection with its advertising and sale of Chanel-branded goods that allegedly “violate Chanel’s trademarks and improperly trade off [its] brand in order to create the false perception that WGACA is affiliated with Chanel,” while WGACA moved for summary judgment on all of Chanel’s claims on the basis that its use of Chanel’s marks in advertising constitutes nominative fair use.

In an Opinion & Order dated March 28, Judge Louis Stanton of the U.S District Court for the Southern District of New York denied the bulk of WGACA’s motion for summary judgment, agreeing only to dismiss the New York Business Law claims waged against it by Chanel. At the same time, the court sided with Chanel to an extent, partially granting its motion for summary judgment in terms of WGACA’s liability for the sale of “non-genuine CHANEL-branded point-of-sale items,” an array of “non-genuine CHANEL-branded handbags with serial numbers that were stolen from [a Chanel supplier] factory, and one [otherwise] counterfeit handbag.”

Setting the stage in a 55-page opinion, the court states that Chanel filed suit against WGACA in March 2018, alleging that the New York-based reseller sold “non-genuine, infringing Chanel products, and improperly used Chanel marks in its advertising and marketing.” Specifically, Chanel’s claims for trademark infringement and false association are based on WGACA’s sale of four categories of goods: (1) nearly a dozen “non-genuine and counterfeit” CHANEL-branded handbags bearing serial numbers that were allegedly stolen from a Chanel supplier factory” in Italy; (2) two “non-genuine and counterfeit” CHANEL-branded handbags that do not match Chanel’s recorded characteristics for the bags associated with those serial numbers; (3) 50 “non-genuine” CHANEL-branded handbags that bear serial numbers that were voided by Chanel during inventory audits at its factories; and (4) 779 “non-genuine” point-of-sale items bearing Chanel logos that “were never authorized for sale by Chanel.” 

Chanel WGACA

Additional claims for false advertising, false association, and trademark infringement lodged by Chanel center on WGACA’s advertising practices, including its use of retail displays that prominently feature Chanel trademarks; email advertisements that “prominently display the Chanel marks;” its use of the #WGACACHANEL hashtag in social media posts; and advertising, such as “ads for general WGACA sales” that “prominently featured CHANEL-branded items.” 

WGACA’s Advertising & Nominative Fair Use

First addressing Chanel’s claims that WGACA’ s use of Chanel trademarks in its advertising channels amounts to trademark infringement and WGACA’s arguments to the contrary, Judge Stanton denied both parties’ motions for summary judgement, stating that while likelihood of confusion is a question of law to be determined by the court, issues of material fact are at play here. These issues – which include “market proximity and competitiveness” of the two parties’ products, evidence of actual consumer confusion (Chanel alleges, and WGACA disputes, that WGACA’s advertising practices caused actual confusion among consumers in the marketplace), and whether there is bad faith on the part of WGACA in making use of the Chanel marks – must be determined by a jury.

On the nominative fair use front, which WGACA cites as a defense to Chanel’s trademark claims, the court states that neither of the parties has put forth evidence about whether the products being offered up by WGACA are (or are not) “readily identifiable without use of the [Chanel] marks.” Even so, Judge Stanton states that “courts in this district,” including the court in Chanel v. The RealReal, “have found this factor ‘is satisfied’ when, like here, the ‘marks used and goods sold by the defendant are indeed the same as the plaintiff’s marks and goods.” As such, “This factor cuts against a finding of consumer confusion about the source of the product and facilitates affiliation and endorsement.” 

Even so, Judge Stanton determined that there is a genuine issue about whether WGACA’s use of the Chanel marks exceeds what is necessary to identify Chanel products. Chanel argues that WGACA’s use goes beyond what is permissible, i.e., “only so much of the plaintiff’s mark [is used] as is necessary to identify the product or service.” For instance, Chanel claims that “WGACA’s welcome email to customers and Facebook cover photo features the Chanel marks; its social media uses #WGACACHANEL and also features Chanel marks and indicia; [and so] do its retail displays, and its direct-to-consumer advertisements, one of which featured the Chanel mark more prominently than WGACA’s and in the WGACA stylized font.” 

The court notes that “WGACA disputes Chanel’s characterization that its use of the Chanel marks is either more prominent than that of any other brand or done independent of any specific Chanel product.”  

WGACA’s Sale Chanel-Branded Items 

The court similarly determines that summary judgment is not appropriate for Chanel’s claim that WGACA is on the hook for infringement in connection with its sale of Chanel-branded items given that issues like “whether Chanel authorized the initial sale of the bags” are in dispute. Pointing to the “conflicting factual record” when it comes to the 50 allegedly “non-genuine CHANEL-branded handbags that bear serial numbers that were voided [by Chanel] during inventory audits at [its] factories,” for instance, the court states that “it cannot be determined as a matter of law whether the bags were non-genuine because they allegedly never passed through Chanel’s quality procedures and were not authorized for sale.” As such, the issues must be tried, and Chanel’s and WGACA’s motions are both accordingly denied. 

Turning to the “point of sale items” (i.e., those used in displays in Chanel boutiques), the court sides with Chanel, stating that while WGACA argues that the point-of-sale items bearing the Chanel logo “are genuine because they were authorized for manufacture and meet the standards that Chanel set up for those items,” it offers “no evidence that Chanel authorized the initial sale of these goods.” On the other hand, Chanel provides evidence by way of declarations, retailer agreements, and its internal boutique policy, which “demonstrate that Chanel’s Point-of-Sale items are not products or for sale.” As such, Chanel’s motion for partial summary judgment of infringement is thus granted as to this claim. 

In terms of the eleven bags with serial numbers that were allegedly stolen from Chanel’s Renato Corti factory, Chanel asserts the bags were either not genuine because they were not put through its quality control processes and not authorized for initial sale by Chanel, or “counterfeit” because the bags were not made by Chanel’s authorized factories. Because WGACA does not put forward “any evidence that creates a genuine dispute as to whether bags with these serial numbers went through Chanel’s quality control procedures or were ever initially sold by Chanel,” the court granted motion for summary judgment on the “narrow grounds that WGACA infringed Chanel’s marks by selling eleven non-genuine bags.” 

As for Chanel’s claim of counterfeiting for those same 11 bags, the court funds that “based on the evidence offered by the parties,” including internal product information from Chanel, which shows that no bags with these serial numbers were ever produced,” and WGACA’s argument that the bags “could have stolen serial numbers and still have been made in Chanel factories,” the court states that a reasonable jury “could find either way as to whether the bags were manufactured by Chanel (thus genuine and not counterfeit) or elsewhere (and thus infringing counterfeits).” Accordingly, both parties’ motions are denied as to counterfeiting. 

Chanel asserts that two handbags sold by WGACA were non-genuine and counterfeit because, according to its records, the characteristics of bags with those serial numbers were different from the characteristics of the bags WGACA sold. The court granted partial summary judgment on Chanel’s claim of trademark infringement, finding that the characteristics of one of the bags “differ[s] materially from the product authorized by the trademark holder for sale.” The bag sold by WGACA was a “Chanel Clear Vinyl Boy 9” whereas Chanel’s system listed it as a Chanel red leather bowling bag. 

False Advertising & Chanel’s State Law Claims

Still yet, WGACA moves for summary judgment to get Chanel’s claim for false advertising for failing to adequately allege injury dismissed. “As it is undisputed that Chanel and WGACA are not direct competitors, the presumption of injury will not apply,” per Judge Stanton. However, the court found that Chanel has created “a genuine issue of material fact as to whether it suffered reputational injury due to WGACA’s false advertisement of counterfeit, infringing, and repaired CHANEL- branded products as genuine and unaltered and its false advertisement of CHANEL-branded point of sale items as genuine products originally made and sold by Chanel.” 

Specifically, the court states that Chanel offers the testimony of Joyce Green, Chanel’s General Manager of Fashion, who stated that “WGACA’s false advertisements cause reputational harm to Chanel due to the risk that a consumer buys a CHANEL-branded item from WGACA and “has an experience … with a quality of product that is not up to the standard of Chanel,’ which damages what that customer (who could be a current or potential future Chanel customer) thinks of Chanel and its products.” 

As such, the issue will be left for the jury to decide, and accordingly, WGACA’s motion for summary judgment dismissing the false advertising claim has been denied. 

In a win for WGACA, the court granted its motion to dismiss Chanel’s final two claims for deceptive business practices under the New York General Business Law. According to the court’s opinion, “Chanel has not demonstrated that this dispute involves injury to the public interest over and above ordinary trademark infringement,” having offered “no evidence of injury beyond that suffered by Chanel and a select group of individuals who end up purchasing a counterfeit product.” Accordingly, WGACA’s motion is granted dismissing the state law claims. And in a final finding in favor of Chanel, the court dismissed all of WGACA’s affirmative defenses.

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

Christian Dior, Chanel, and Givenchy are not the only brands being targeted by an influx of trademark applications in Russia. Nike, adidas, Puma, Levi’s, BMW, and Audi have joined a growing list of Western titans falling prey to bad faith filings, as varying sanctions, widespread logistics/supply disruptions, and intense pressure from stakeholders have prompted most retail companies to temporarily halt their operations in Russia. At the same time, reports that the Russian government is considering putting a moratorium on trademark protections for companies in “unfriendly” countries and talk that the country’s Ministry of Economic Development will allow for the free flow of grey market goods is forcing companies to consider both the immediate and long-term implications for their valuable brands. 

One of the immediate results of the exodus of Western brands from the Russian market has been an “unprecedented amount of [unauthorized trademark] filings,” targeting companies that range from Audi to adidas, Moscow-based intellectual property lawyer Ana Skovpen tells TFL. While the Federal Service for Intellectual Property in Russia – commonly known as Rospatent – has faced similar filings in the past and “refused such applications without interference from the [non-native] rights holders,” she states that the volume of “abusive” filings is significantly greater now, and trademark practitioners and brands, alike, are “not sure how Rospatent will examine these applications” in the wake of the war and Western sanctions

The Wild West for Trademarks in Russia

Skovpen says that she does not believes that Rospatent will “spontaneously ignore all regulations and case law” and register these obviously-opportunistic trademark applications across the board. The recent decision of a Russian court to toss out a trademark and copyright case against a Russian individual over his infringement of popular cartoon character Peppa Pig, citing American and British sanctions as a basis for refusing to recognize Peppa Pig-owner Entertainment One’s rights, was, in fact, “a surprise,” Skovpen says. However, she is skeptical that heavily-criticized decision will prove to be the norm when it comes to how trademarks will be treated in Russia going forward. (Entertainment One is headquartered in the United Kingdom, and was acquired by U.S.-based Hasbro following the start of the lawsuit.)

In the event that bad-faith filings, such as those filed for Chanel, Dior, Levi’s, etc., are, in fact, widely registered by the Russian intellectual property office, what can brands expect? In a worst-case-scenario, the effect could be far-reaching. Should such hypothetical registrations come intro fruition, the targeted companies “may expect an array of fraudulent actions” to follow, Skovpen asserts, such as “the subsequent registration of similar domain names, and the creation of similar websites and social media accounts,” along with a rise in “parallel trade (imports) of their products and counterfeiting.” 

If such a situation were to come into play, it would be “a wild west,” Skovpen says, and it certainly “would be challenging – or even possible – for brands to return” to the Russian market. 

Trademark Russia

Echoing this sentiment, Caldwell Intellectual Property Law attorney Julie Tolek states that “the unpredictability of the future for enforcement of intellectual property in Russia makes it difficult for “brands from ‘unfriendly countries’” to anticipate what a return to the Russian market might look like. It certainly is easy to imagine the possibility that the parties currently seeking to co-opt famous’ companies’ trademark by way of fraudulent applications may “hold those marks/brands hostage and extort the non-native brands with a licensing agreement in order to use their own marks in Russia again.” 

Tolek notes, of course, that if these “Russian spin-off trademarks are, indeed, allowed registration, and the [bona fide rights holders’] current registrations in Russia are not cancelled but rather, merely go unenforced, the more recent trademarks would, technically, have a later priority date than those original, valid marks.” If this scenario were to occur in the U.S., she states that “the first mark would have priority rights over the second mark,” and thus, the bona fide rights holders “would have the ability to file a cancellation of the spin-off/infringing marks.” This could be a potential course of action for companies if/when they opt to re-enter the Russian market.

And speaking of cancellations, in the event that such bad-faith marks are registered, Skovpen says that because at least some of the applications are being lodged purely as a way to gain registrations (Russia is a first-to-file jurisdiction) and not because the filing party “actual intends to use the mark,” Western brand owners may be able to “aim for cancellations on non-use grounds if the trademark owner does not use trademarks for three consecutive years.” 

A Market for Fakes?

As for the immediate future, an increase in counterfeits and/or grey market goods is expected, as the Russian government explores ways to make up for the overarching loss of goods, including in the retail space. In some sense, Tolek contends that brands like McDonald’s, which was one of the first to be targeted by bad faith filings, may not face much damage, as counterfeiters might face an uphill battle that goes beyond merely registering a trademark should they actually want to compete. “They need to do more than just register a name – they need the trade secret recipes that make McDonald’s, McDonald’s,” she says. “If these knock-off McDonald’s in Russia are just selling plain burgers that you could grill yourself, the value of these knock-off trademarks is somewhat questionable.”

The same rings true for luxury brands. “Many consumers are not merely looking for the prestige of a brand name or logo” when they purchase luxury garments and accessories, per Tolek. They also seek “the quality and artisanship that goes into these luxury items – the details that make them coveted investment pieces.” With this in mind, the consumers that were buying up the bulk of luxury goods in the Russian market prior to the onset of the war and corresponding sanctions may not be easily tempted by sub-par copycat offerings. 

Should the luxury knockoffs “fail to deliver on this higher standard, any perceived value of the spin-off trademarks will likely also fizzle out,” according to Tolek, “just like the knock-off McDonald’s.” 

And practically speaking, it is worth noting that the potential for luxury brands to suffer the ill-effects of a surge in counterfeits in the Russian market may be dimmed by the fact that no shortage of their most loyal clients (i.e., the deep-pocketed, multiple passport-holding Russian oligarchs) are accustomed to – and may have already resumed – shopping for the bulk of their luxury goods purchases in markets outside of Russia, such as Dubai. As the Guardian reported this weekend, the richest Russians have fled the country, with many seeking refuge in luxury havens like Dubai, where “the oligarchs and other cashed-up Russians and their riches are welcome,” as the UAE has “not followed western governments in using sanctions as retaliation for the invasion of Ukraine.” 

THE BOTTOM LINE: Ultimately, no matter where brands stand on the spectrum of competition/damage from a rise in counterfeits, the reality is that uncertainty abounds, and Skovpen says that there is nary a foreign company that does not “fear nationalization, trademark and domain squatting, and a lack of protection” for their valuable trademarks in Russia. 

Stussy is the latest brand to name Shein in a trademark infringement and counterfeiting lawsuit. According to the complaint that it filed in a federal court in California on Thursday, Stussy alleges that its trademarks – including (but not limited to) its stylized brand name – are “widely recognized and understood as standing for [its] excellent reputation and products” and that by using them without its authorization on apparel and footwear, Shein is “knowingly and intentionally” infringing those marks “for the purpose of causing confusion and diverting customers” away from Stussy for its own benefit.  

In the newly-filed lawsuit, Stussy claims that Shein is on the hook for trademark infringement and counterfeiting, trademark dilution, and unfair competition in connection with its sale of products that bear “copies and close reproductions of the STUSSY trademarks.” By making use of the “Stussy” mark in a way that is “virtually identical to the genuine STUSSY marks” on apparel and footwear, for which Stussy maintains federal trademark registrations, Stussy claims that the Chinese fast fashion giant’s use goes beyond trademark infringement and meets the higher bar of counterfeiting. However, “in order to hide [its] counterfeit products,” Stussy claims that in at least some instances, Shein “avoids using the term ‘Stussy’ in connection with [the listings for] its counterfeit Stussy products.” 

As distinct from other trademark cases, the harm at play as a result of Shein’s alleged sale of Stussy trademark-bearing goods is heightened here, per Stussy, due to the significant value of the brand’s trademarks. The STUSSY marks – which “have come to represent and symbolize the excellent reputation of [its] products and valuable goodwill among members of the public throughout the world” – are “more valuable than ordinary marks,” the 42-year-old skate/surf brand claims, given that “Stussy’s business model is to create an exclusive brand with limited distribution.” 

Stussy lawsuit

As a result of this model, which sees it offer up a limit drops of its wares in order to court enduring and outsized demand, Stussy argues that there is “much unmet demand for [its] products and for products with [its] look.” And while it has carefully crafted its strategy to include such limited product quantities, Stussy argues that Shein has “attempt[ed] to fill the market for Stussy’s products” by way of its copycat wares. 

Shein has “impaired Stussy’s valuable goodwill, created a likelihood of confusion, actually confused the public and otherwise adversely affected Stussy’s business” by way of its alleged infringements,” causing Stussy to “suffer great damage and injury,” including loss of profits and other damages. With that in mind and given that Shein has allegedly “earned illegal profits as the result of [the] aforesaid acts,” Stussy is seeking to disgorge Shein of any corresponding profits. Additionally, Stussy is seeking injunctive relief to temporarily and permanently bar Shein from infringing or diluting its trademark “or using or causing the use of any word, term, name, symbol, device or combination thereof that causes or is likely to cause confusion, mistake or deception.” 

The case come as companies, such as Stussy, Supreme, and other streetwear/skatewear, have built sizable businesses on a model that sees them regularly “drop” limited quantities of new products, a tactic that has since been adopted across much of the fashion industry and beyond. The result has come on the form of enduring demand – and a robust resale market for such goods – but at the same time, has brought with it widespread copying aimed at filling the gap intentionally left by these brands when it comes to consumer demand. 

Supreme, for instance, has been plagued by sweeping efforts to piggyback on the striking demand for – and relatively limited supply of – its branded wares, with companies like Supreme Italia, for instance, playing on global demand for Supreme and its markedly unhurried expansion efforts outside of a few U.S. cities and a smattering of international capitals, in order to “win over less-informed fans of the streetwear brand and convinced retailers and shops that they were purchasing originals,” Italian intellectual property attorney Silvia Grazioli of Bugnion SpA stated in connection with one of Supreme’s cases against Supreme Italia-creator IBF. 

While a seemingly inevitable side effect of the strictly limited-edition product strategy that dominates the streetwear/skatewear space is a thriving market for counterfeit goods, brands like Stussy and Supreme have taken to litigation to protect their valuable indicators of source, with Stussy somewhat consistently filing trademark-centric lawsuits dating back to at least 2000, and Supreme’s corporate entity Chapter 4 Corp., on the other hand, escalating its fight against fakes in recent years by way of a growing number of suits filed in the U.S. beginning in 2018.

A rep for Shein was not immediately available for comment in response to the Stussy lawsuit. 

The case is Stussy, Inc. v. Shein Corp., 8:22-cv-00379 (C.D.Cal.). 

Amazon platforms were not among the names on the latest version of the U.S. Trade Representative (“USTR”)’s annual Review of Notorious Markets for Counterfeiting and Piracy. Released on Thursday, and based on nominations that it receives, as well as other input, such as from U.S. embassies, the Notorious Markets list highlights online and physical markets that “reportedly engage in or facilitate substantial trademark counterfeiting or copyright piracy,” and this year, identifies 42 online markets and 35 physical markets that are reported to engage in counterfeiting or piracy, including Alibaba-owned AliExpress and Tencent’s WeChat e-commerce ecosystem, two significant China-based online markets that “facilitate substantial trademark counterfeiting.”

Among the other China-based entities on the 2021 “Notorious Markets” list, an official U.S. government intellectual property “black list,” are search-engine provider Baidu Wangpan, marketplace DHgate, social shopping site Pinduoduo, and Alibaba-owned Taobao, which appear on the list for another year in a row, along with nine physical markets located within China that the USTR asserts “are known for the manufacture, distribution, and sale of counterfeit goods.” 

AliExpress, DHGate, PinDuoDuo & WeChat

Addressing the inclusion of AliExpress for the first time, the USTR stated in its report that despite falling under the Alibaba umbrella, which is “known for having some of the best anti- counterfeiting processes and systems in the e-commerce industry,” and boasting “much-improved communication with right holders, on their IP protection and enforcement issues,” rights holders have cited “a significant increase in counterfeit goods being offered for sale on AliExpress, including goods that are blatantly advertised as counterfeit and goods that are falsely advertised as genuine.” In addition to reports of “a vast increase in the number of sellers offering counterfeit goods” via AliExpress, the USTR asserts that “another key concern is that known sellers of counterfeit goods on AliExpress remain prevalent, purportedly due in part to the lenient seller penalty system and a removal process that does not deter sellers from continuing to offer counterfeit goods.” 

Turning its attention to DHgate, the USTR states that the business-to-business cross-border e-commerce platform is reported to be “the most popular online market for purchasing bulk counterfeit goods that are then resold on other markets, including the online and physical markets listed in this year’s Notorious Markets list.” While DHgate pointed to “continued improvements to its seller vetting system,” the USTR, nonetheless, noted that “right holders again identified [its] inadequate seller vetting, ineffective proactive anti-counterfeit processes, and lack of transparency,” which the USTR puts forth as “likely reasons why the volume of counterfeit goods on the platform remains unacceptably high.” 

As for PinDuoDuo, the USTR revealed that “despite significant improvements to its anti-counterfeiting tools, processes, and procedures in the past few years, the large volumes of counterfeit goods that stubbornly remain on the platform evinces the need to improve the effectiveness of the tools or close the gaps in their implementation.” Based on feedback from rights holders, the USTR states that Pinduoduo “appears to be moving in the wrong direction, with delays in takedowns, lack of transparency with takedown procedures, more burdensome and expensive processes, less effective seller vetting, and reduced cooperation with brands participating in the Brand Care program.”  

And in a lengthy entry dedicated to WeChat, the USTR characterizes the Tencent-operated platform, which has 1.2 billion active users around the world in 2021, as “one of the largest platforms for counterfeit goods in China.” Of primary concern for the USTR when it comes to WeChat is the company’s e-commerce ecosystem, which “seamlessly functions within the overall WeChat platform and facilitates the distribution and sale of counterfeit products.” For example, the USTR states that sellers of counterfeit goods are allegedly “directing potential buyers to their counterfeit product offerings by advertising on WeChat [and] other communication portals.” 

Amazon is Off

Maybe even more striking than the names that appear on this year’s list are ones that were not included. On the heels of a handful of the Amazon sites being included on the 2019 and 2020 versions of the Notorious Markets list, the Jeff Bezos-founded company has been wiped from this year’s list.  (It is worth noting both that the USTR list is not an exhaustive measure of all markets that reportedly “deal in or facilitate commercial-scale copyright piracy or trademark counterfeiting,” just as it “does not reflect findings of legal violations or the U.S. government’s analysis of the general intellectual property protection and enforcement climate in the country concerned.”)

After reportedly skirting placement on the USTR’s Review of Notorious Markets in 2018, Amazon made headlines when a handful of its international e-commerce arms were officially cited in the 2019 list. In connection with its inclusion of Amazon’s Canadian, United Kingdom, German, French, and Indian platforms, the USTR asserted that “submissions by right holders expressed concerns regarding the challenges related to [Amazon] combating counterfeits with respect to e-commerce platforms around the world.”

No small matter, the inclusion of Amazon sites on the U.S. government’s list in 2019 and again in 2020 was characterized as a “watershed event,” due to the company’s American heritage, and it marking the first time that an American company was targeted on the annual list since it was first published by the USTR in 2006. In adding Amazon’s sites to the list in 2020, the USTR cited rights holders’ challenges with “high levels of counterfeit goods,” and concern that “Amazon does not sufficiently vet sellers on its platforms” and that its “counterfeit removal processes can be lengthy and burdensome, even for right holders that enroll in Amazon’s brand protection programs.” 

Speaking out about the list at the time, Amazon called its inclusion a “purely political act” by the Trump Administration and “another example of the administration using the U.S. government to advance a personal vendetta against Amazon.” 

Companies that are identified on the annual USTR list are not subject to financial penalties or regulatory oversight. Instead, the USTR’s list is used to encourage foreign entities and nations to crack down on piracy and counterfeiting. Nonetheless, being name-checked is generally considered to take a reputational toll in the individual company, particularly entities that are looking to position – or reposition – themselves to shed perceptions that their websites are riddled with fakes – a key to gaining bigger customer bases and traction among potential brand partners, while also taking market share from global competitors. 

No mention has been made in this year’s list or by the USTR about how Amazon managed to avoid being named.  

The RealReal will pay $500,000 and make reforms to its corporate governance, including in connection with its authentication practices, whistle-blower policy, and oversight policy for “retail sales practices and customer relationships” to settle an ongoing stockholder derivative lawsuit, after getting the green-light from a federal court in Delaware. In a final order and judgment dated February 11, Judge Leonard Stark of the District of Delaware approved the terms of The RealReal settlement, calling it “fair, reasonable, and adequate as to each of the [plaintiffs] and current [The RealReal] shareholders,” and ordering the parties to “perform the terms to the extent [they] have not already done so.” 

At the heart of the settlement terms is the $500,000 in attorneys’ fees and expenses that The RealReal (“TRR”) will pay – $3,000 of which will be awarded to the named plaintiffs, Iwona Grzelak and Junior Aguirre, who filed similar – but initially separate – cases in 2020, accusing the San Francisco-based luxury resale company’s board members and management of “intentionally or recklessly breaching their fiduciary duties” as directors and/or officers, and violating the U.S. Securities Exchange Act in the process. Specifically, both Grzelak and Aguirre claimed in their since-consolidated suits that while TRR has promoted itself – both in its IPO documentation and in subsequent statements by its management team – as a source of “authenticated, consigned luxury goods,” its authentication operations were “nowhere near as robust as the defendants professed.” 

As a result, the two plaintiffs claimed that “hundreds of counterfeit items supposedly processed by the [TRR’s] rigorous authentication procedures were sold to [its] customers,” and all the while, “between June 27, 2019, and November 20, 2019, the individual [officer and management] defendants breached their fiduciary duties by making and/or causing the company to make a series of materially false and misleading statements and omissions regarding [its] authentication processes, risk exposure and purported growth and success, and by failing to maintain internal controls.” 

After agreeing to the material terms of the settlement and engaging in negotiations regarding the sum that The RealReal will pay to the plaintiffs’ counsel, the parties alerted the court in a motion for final settlement last month that “notice was provided to current TRR Shareholders on December 17, 2021,” and that as of the date of filing their motion, they had not received any objections to the settlement terms from shareholders. 

As for what the terms of the settlement entail, in addition to agreeing to “pay $500,000 to the plaintiffs’ counsel for their fees and expenses,” TRR will implement reforms “to address, and mitigate risk of the recurrence of, the misconduct alleged in” the case at hand, the reforms require TRR to make corporate governance improvements, including by “incorporat[ing] semi-annual assessments of all authentication staff and certifications into the company’s existing training programs” by TRR’s Chief Operating Officer, who will “oversee TRR’s training for staff engaged in authenticating TRR’s products;” and adopting a new policy for board oversight over the company’s retail sales practices and customer relationships, including “semi-annual reporting to the Board by the COO or its designee concerning oversight over TRR’s retail sales practices and the Company’s customer relationships.”

Beyond that, TRR will create a “management-level Risk and Compliance Committee to determine, implement, and assess TRR’s risk management policies and the operation of TRR’s risk management framework to identify TRR’s compliance risk exposure.” It will also make “amendments to [its] Whistleblower Policy and Procedures to specifically state that the company’s reporting channels may be used to ‘report concerns relating to business practices, ethical business or personal conduct, integrity, and professionalism.’”

In a filing last year, the plaintiffs asserted that the settlement reforms represent “a material and substantial improvement to TRR’s corporate governance and provide for new policies and procedures that will help to prevent a recurrence of the wrongdoing alleged” in the case at hand. At the same time, TRR stated in the stipulated settlement that it was “entering into this Settlement solely to eliminate the uncertainty, distraction, disruption, burden, risk, and expense of further litigation, and without admitting any wrongdoing or liability whatsoever.”

The RealReal, Sanders Settlement

The settlement comes as TRR is in the midst of coming to a resolution in a separate case, filed in a California federal court in November 2019, in which lead plaintiff Michael Sanders has accused TRR, its founder and CEO Julie Wainwright, former Chief Financial Officer Matt Gustke, Chief Accounting Officer Steve Lo, board members like Stefan Larsson, and the company’s IPO underwriters, including Credit Suisse Securities, B of A Securities, and UBS Securities, among others, of running afoul of federal securities laws. 

Sanders and fellow named plaintiffs Nubia Lorelle and Garth Wakeford allege that the defendants misled investors about the nature of TRR’s authentication process by making “false and misleading statements” about it “purported authentication process,” which served to “artificially inflate” the price of its Nasdaq-traded shares, and then damage those same shareholders “when the artificial inflation dissipated” following multiple media reports about the “true” nature of TRR’s authentication process.

As previously reported by TFL, the plaintiffs filed an unopposed motion for preliminary approval of settlement in November, in connection with which The RealReal will pay $11 million to be shared among class members and their counsel. That case is still underway before the U.S. District Court for the Northern District of California.

In its latest monthly business update, TRR revealed that it was continuing to see increases in the wake of the pandemic, reporting gross merchandise value of approximately $153 million for December 2021, an increase of 40 percent and 49 percent compared to the same period in 2020 and 2019, respectively. According to TRR, December average order value was approximately $518, an increase of 10 percent and 4 percent compared to the same periods in 2020 and 2019.  

The company says that it introduced monthly reporting on key metrics – gross merchandise value and average order value – “in an attempt additional transparency regarding the effects of the COVID-19 pandemic on its business.” After reporting such figures in a monthly basis through the end of 2021, TRR stated in January that it “plans to return to a more typical quarterly and annual guidance cadence in 2022 and will no longer provide monthly business updates going forward.” 

The case is Iwona Grzelak v. Julie Wainwright, et al, 1:20-cv-01212 (D. Del.).