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A growing number of lawsuits over non-fungible tokens (“NFTs”), including the case that Nike filed against StockX over its use of Nike trademarks on NFTs tied to hot-selling sneakers, are beginning to test the nature of these novel digital assets. In the Nike case, which was filed in a New York federal court in February, the distinction between virtual products and otherwise value-less digital receipts is the critical one when it comes to identifying what StockX’s Vault NFTs are. Nike has argued that the NFTs are “virtual products, i.e., digital collectibles, created and first offered for sale by StockX, and available direct to consumers for purchase and trade on the StockX website and StockX app.” Meanwhile, StockX has argued that its Vault NFTs “are absolutely not ‘virtual products’ or digital sneakers,” and rather, serve as a “claim ticket, or a ‘key’ to access ownership of the underlying stored item.” 

While the lawsuit raises some novel questions that should shed light – and provide guidance – as an increasing number of brands look for ways to adapt their existing models for a Web3-focused world, Nike’s trademark infringement and dilution, and unfair competition lawsuit over StockX’s NFTs is also striking because it carries with it into the virtual world many of the same concerns that brands routinely argue in lawsuits over tangible goods in the “real” world, including issues of control, competition, and authentication, among others. 

One of the most immediate qualms that Nike has with the Vault NFTs that are being offered by StockX – which has allegedly used Nike’s famous marks to “garner attention, drive sales, and confuse consumers into believing that Nike collaborated with [it]” for the NFT venture – appears to be one of control. Specifically, StockX is offering up the Nike trademark-bearing NFTs, while simultaneously robbing Nike of the ability to exert control over the sale and conditions of those NFTs.

An Exercise in Control

Nike’s problem is reflected in no shortage of language in its complaint, including its claim that “despite StockX’s prominent use of Nike’s trademarks and products in connection with the Vault NFTs, Nike has no control over the quality of the Vault NFTs whatsoever.” The Beaverton, Oregon-based titan also asserts that it “has no say in how many Vault NFTs bearing its trademarks are released, where the Vault NFTs are released and traded, when the Vault NFTs are released, how the Vault NFTs are released, traded, or redeemed, and at what price the Vault NFTs are sold and traded.” Clearly, these are pain points for Nike – and (maybe) rightfully so. 

(While brands are generally forced to give up the right the control if/how their products are resold once they release them into the market (this is the tenet at the heart of the first sale doctrine), there are limits in instances where the products being resold – or the conditions in which the products are being resold – are “materially different” than they initially were. Nike has already suggested that is the case here given that StockX is bundling the sneakers (the original products that Nike released into the market) with NFTs, the latter of which “may take a variety of forms, and the holders of NFTs may be entitled to obtain certain products, benefits or engage in certain experiences, such as unlocking a prize or entry into an exclusive sale,” according to StockX’s terms.)

The idea that brands want to carefully control the conditions in which their products are sold is a well-established one. A brand’s ability to control where its products are sold and the terms/conditions of such sales is “critical to its ability to preserve brand equity, maximize profitable e-commerce channel growth, and prevent damaging e-commerce conflicts with its brick-and-mortar business,” among other things, according to Vorys partner Daren Garcia. As such, this is an issue that has come up in a variety of cases in recent years, in particular, as brands look to regain some of the control they that have ceded as a result of the rise of various sales/distribution channels, including the burgeoning resale market

One need not look further than some of the lawsuits that Chanel has waged against resale entities for an indication that the ability to control how and where their products are sold is something that is important to luxury brands – and even more mass market brands like Nike, which is in the midst of prioritizing its direct-to-consumer distribution following decades of relying heavily on a robust wholesale network. 

Chanel demonstrated the concerns of many similarly-situated brands on this front in a since-settled case that it waged against Crepslocker, in which it argued that the British reseller was running afoul of the law by offering up Chanel goods in conditions that were damaging to its wildly valuable brand image. This included shipping Chanel products in packaging that diverged from Chanel’s standards; offering up products in accordance with terms that differ from those observed by Chanel (Crepslocker’s no-return policy and its requirement that consumers pay via PayPal (and not credit card) were cited by Chanel as examples of this); and using Chanel’s trademarks alongside “sportswear and other brands, which do not have similar associations of luxury, prestige, exclusivity, and longevity to those enjoyed by [Chanel].” 

At the same time, brands are increasingly taking actions, including by placing quotas on certain products and/or adding resale-specific language to their terms to websites and receipts, in order to deter resale. Hermes, for example, includes language in its e-commerce terms stating,  “The customer represents and warrants that they are purchasing Hermès product in our boutiques for their personal use. Therefore, you agree you will not, directly or indirectly, resell Hermès products purchased in our boutiques for commercial purposes.” More recently, Nike added resale-specific language of its own to its terms, stating, among other things, that “NIKE Stores, including any consumer rights or policies offered in NIKE Stores, are intended solely for the benefit of end consumers, and therefore purchase of products for resale is strictly prohibited.”

An excerpt from Nike's terms

Such quests for control – and the arguments that come along with them – do not appear to be a million miles away from Nike’s claims in the StockX case, which seem to stem largely from its inability to control the nature of the Vault NFTs, including the “murky terms of purchase and ownership,” which have allegedly “already led to public criticism of StockX and allegations that [its] Vault NFTs are a scam.” (StockX has, of course, disputed this, pointing to the successful completion of 2,853 Vault NFT transactions since the launch of the NFT venture in mid-January.

Issue of Authentication

At the same time, the critical element of authentication – and the advertising of “authenticated” products – often comes hand-in-hand with brands’ pushes for control, and it has come up in Nike v. StockX, with the sportswear behemoth taking issue with the fact that that StockX “touts each Vault NFTs as ‘100% Authentic.’” According to Nike, StockX is making use of such declarations in order to “explicitly mislead consumers that Nike has authorized, approved, sponsored, and/or endorsed StockX’s Vault NFTs,” when no such affiliation or authorization is at play. (Nike amended its complaint to double down on this issue, adding a false advertising claim to the mix in May.)

Again, this is not new. In its case against The RealReal, for example, Chanel has pushed back against the reseller’s widespread promises of authenticity. Chanel has argued that The RealReal’s alleged authentication experts are “not properly qualified or trained in authentication of Chanel products to support [TRR’s] claims as to the genuineness of the products it resells.” And beyond that, Chanel has claimed that The RealReal has no business guaranteeing authenticity of Chanel goods, as “only products purchased directly from Chanel and its authorized retailers can be certain to be” – and thus, be advertised as – “genuine and authentic.”

In one more thing worth flagging, the recurring “real” world issue of marketplace operator liability is likely to come up as Nike’s lawsuit over the Vault NFTs proceeds (and potentially future cases against NFT marketplaces like OpenSea), with the Swoosh already contending that “unlike the eBay model, StockX is an active intermediary for each transaction – the seller ships the item to StockX, StockX receives and purportedly verifies the item’s authenticity, StockX then ships the item to the buyer with a StockX-branded verification badge, and StockX pays the seller (less its transaction fees).” As such, Nike may be setting the stage for an argument, should StockX seek to shield itself from liability on the basis that it is merely a marketplace operator and not a seller, which has been the go-to defense for the likes of Amazon

THE BOTTOM LINE: The growing number of trademark lawsuits that center on NFTs is giving rise to an array of novel questions, including ones that might require courts to make precedent-setting determinations about the very nature and purpose of NFTs (digital receipts versus virtual products) and that could have a significant effect on things like the likelihood of confusion analysis. All the while, we should not overlook the fact that these cases still largely revolve around well-established “real” world, brand-centric issues, which these cases are bringing into the virtual realm. 

This article was originally published in April 2022, and has been updated to include a mention of Nike’s new resale-centric rules.

High fashion brands are sliding into the secondary market, with Balenciaga, Valentino, Jean Paul Gaultier, Oscar de la Renta, and brands under the Kering umbrella among the companies looking to take some stake in the market for pre-owned products, one that is very much on the rise. Sales of pre-owned luxury goods “were up 65 percent last year relative to 2017, compared with a 12 percent rise in new luxury sales,” the Wall Street Journal reported this weekend, citing Bain & Co. data, which forecasts that “over the next five years,” sales within the luxury resale market “will increase annually at around 15 percent, double the expected rate of new sales.” 

While a number of very-big-names in luxury have been unapologetic about their unwillingness to actively participate in the resale market (Louis Vuitton, Chanel, and Hermès come to mind), the tide appears to be changing to some extent if the likes of Gucci and co. are any indication – and to some extent, for good reason. Getting into the burgeoning market for pre-owned goods stands to enable fashion and luxury goods brands to tap into the cash that consumers – including the coveted Gen-Z and millennial cohorts – are routinely spending in this segment of the market, prompted in many cases by the affordability that the resale market provides (as distinct from enduring price-hikes by brands) and the elements of sustainability at play.

At the same time, there may be an even more important driver behind high-end brands’ pushes to enter into this space: control. As TFL reported back in 2019, the foundation upon which luxury depends – a mix of exclusivity, high prices, meticulously-crafted marketing, valuable intellectual property, and careful governance of distribution – may be influx given the mainstreaming of resale, thereby, making control one of the critical elements for brands that are looking to maintain their positions in the upper echelon of the industry (and thus, command the necessary pricing power for their offerings). 

Chances are, if brands want to maintain some semblance of command over what happens to their often-trademark-emblazoned-goods after the initial sale of those goods (and if enduring lawsuits over authentication after-the-fact tell us anything, it seems that many of them do), taking a larger role in resale – either by way of in-house operations (à la Gucci) or partnerships (such as those between Vestiaire and Alexander McQueen, The RealReal and Burberry, and Reflaunt and Balenciaga) could prove useful. The potential for brands to be tempted to enter into the secondary market (or alternatively, trademark/false advertising litigation) may be furthered by the fact that their wares are being offered up – and advertised – in this capacity with or without their involvement or authorization. 

Also potentially luring brands into resale? Green credentials, which can be parlayed into Gen Z and millennial-centric goodwill. “We think initiatives in both resale and rental are important in raising the brand’s reputation with younger consumers,” Jefferies analysts Flavio Cereda and Kathyrn Parker stated in a note this summer, reflecting on Sandro and Maje-owner SMCP’s first-half results. They stated that secondary market-centric efforts by the likes of Sandro, as well as Gucci, Valentino, and Jean Paul Gaultier, among others, are “further evidence” that the high-end fashion/luxury market is looking to “address sustainability issues.” 

And finally, brands are likely looking to garner benefits from a post-sale consumer engagement and/or loyalty perspective by tapping into the secondary market (as opposed to opting out or taking a strong stance against it by way of litigation, for instance).

Luxury Hold-Outs

Despite many elements lining up in favor of companies engaging in resale activity, the matter is not so simple that luxury brands are rushing to put their stamp of approval on pre-owned products. It is difficult not to notice that many of the biggest names in the industry continue to distance themselves. This spring, Hermès CEO Axel Dumas, for example, explicitly shot down the prospect during an earnings call with analysts, saying that active participation by the brand in the resale market “would be to the detriment of our regular client who comes to the store.” 

Meanwhile, LVMH’s head of image and environment Antoine Arnault revealed this spring that the group “will stay away from that secondhand market” for the time being; the statement came after Mr. Arnault said in 2020 that LVMH was “looking at [the resale segment] carefully,” but also noting that it was “still a little early” to say whether the group would enter into the space. (More recently, LVMH confirmed this summer that it does not intend to participate in the secondhand market and emphasized efforts to offer repair services for its products, instead.) And last year, Bruno Pavlovsky, president of fashion and president of Chanel SAS, explained the brand’s own aversion to resale, telling WWD that, among other things, “We want to retain control of our distribution.” 

The balancing of factors that brands must do when considering their role in resale market includes considerations of things like cannibalization, as well as the demanding and time-consuming nature of such activities if carried out in house, especially since this is a new market for most brands. 

One need not look further than the balance sheet of The RealReal to see just how difficult – and expensive – it is to successfully build, operate, and scale a luxury resale company. “The business has been a stinker for years,” Martin Peers wrote for The Information in June. “Its losses have mounted as its revenue has grown—we think red ink is supposed to dry up as revenue expands.” In addition to being a costly and consuming endeavor, complete with overhead for platform infrastructure, authentication efforts, etc., and no easy path to profitability, brands may be further put off by the fact that they will likely never maintain complete control over the increasingly robust – and crowded – resale channel. (In other words, the reality of what resale distribution would look like as a whole is a far cry from their retail operations; after all, most brands in the upper-end of the spectrum either consist of direct-to-consumers businesses or in the case of a number of Kering brands, for instance, are in the process of walking way back on their wholesale efforts in order to exclusively maintain self-owned and operated retail stores.)

Still yet, there is the unignorable issue of competition, namely, between a company’s new offerings and any pre-owned ones. To date, “the fear” among fashion’s well-established houses “is that we are cannibalizing their business,” Julie Wainwright, the founder and former CEO of The RealReal, has said. And opinions on this front are mixed. McKinsey analysts, for instance, stated back in 2021 that if “done prudently, brand entry [in the resale market] should not erode margins, and would result in only limited cannibalization.” Achim Berg, McKinsey’s leader of McKinsey’s apparel, fashion, and luxury group, has, nonetheless, referred to the potential for cannibalization as “the elephant in the room” for luxury. 

More recently, Cereda and Parker stated this spring that when it comes to resale, brands are cognizant of and “keen to limit any cannibalization of primary products.”

For the biggest brands, the potential drawbacks and the risks may be too great to allow for an embrace of resale at this time (or ever). On the other hand, the reluctance of some of the biggest names may be the result of their well-documented hesitation to divert from their core business and/or their long-standing understanding of how luxury should operate (think: their unwillingness to operate fully in an e-commerce capacity). Chances are, it very well may be a mix of both. 

The RealReal’s management revealed in the company’s Q2 earnings call last month that it will continue to open new retail stores in the year ahead, saying that they are looking to grow their existing set of 19 stores by “anywhere from one to three stores.” San Francisco-headquartered The RealReal, which has made its name as “the leader in luxury resale” thanks to a seemingly endless supply of Chanel bags, Rolex watches, and high fashion garments, is not the only secondary market company that is currently growing its physical retail footprint; the likes of Rebag, Fashionphile, and Privè Porter, among others – all of which initially launched as digitally-native businesses – have opened brick-and-mortar outposts in furtherance of a segment-wide effort to expand beyond e-commerce or in Privè Porter’s case, beyond Instagram and WhatsApp. 

Across the board, consumer goods brands benefit from maintaining brick-and-mortar stores, where consumers generally spend more money per transaction (compared to e-commerce), for example, and where return rates are uniformly lower. At the same time, stores tend to be an effective – and cost-efficient – driver of new customer acquisition. (For some broader perspective: Formerly dependent on e-commerce sales and online advertising exclusively, Warby Parker revealed last fall that its retail stores serve as “valuable marketing vehicles for introducing new customers to our brand and driving repeat purchases and, in turn, positively impact our sales retention rate.” The eyewear brand boasted nearly 170 stores as of May, with plans for more openings this year.)

While the same is true in the secondary market, the benefits that come with brick-and-mortar expansion are somewhat more nuanced when it comes to fashion and luxury resale.

For one thing, the operation of brick-and-mortar stores can serve as a much-needed way for resale companies to amass stock. As The RealReal, which began opening permanent retail stores in 2017 by way of a 6,000-square-foot space in New York, has consistently stated, its stores are not just a way to “drive new traffic” or generate sales but to accumulate pre-owned products from consignors to offer up to consumers. In an earnings call last November, the company’s management asserted that its stores are a “cost effective channel for securing supply,” and frankly, a “big win,” as the volume of drop-offs of pre-owned products to stores is topped only by at-home visits by the company to consignors’ homes. 

On the supply side, NASDAQ-traded The RealReal says that roughly 30 percent of its consignors “continue to come in from stores.” As for demand, the company’s management contends that just like traditional retail outlets, sales are higher and returns are lower in a brick-and-mortar setting than online. At the same time, TRR’s founder and former CEO Julie Wainwright revealed last year that “in the past, the average order in stores [has been] about two times greater than when [a customer shops] online” and said she believed that was continuing to hold true. 

Using stores to increase revenue is also at the heart of Rebag’s growing push into brick-and-mortar – but there is a trust-building twist for the New York-based luxury handbag-focused resale company. Rebag founder and CEO Charles Gorra told TechCrunch last year that the average ticket for its products is roughly $2,000. “So, when you spend that kind of money,” he says, “you want to build trust” with the company you are buying from. Rebag appears to be looking to traditional retail formats – complete with an “experience that fuses transparency and flexibility with personalized services” – to help it to build that relationship with consumers, currently boasting 10 stores, including its recently-opened outpost in Sawgrass Mills, its third store in Florida. Not stopping now, the company, which raised $35 million in a Series E round in December 2021, is planning for more brick-and-mortar openings that will take the form of “both standalone stores, as well as a continued presence in major luxury malls.” 

Now take Rebag’s average ticket and multiply it almost 20 times and you have Privè Porter, which opened its first retail store in Miami’s Brickell City Centre in November 2020. In addition to helping to prove that their Hermès-exclusive model can scale beyond the Instagram-only business that Michelle Berk started in 2008, co-founder Jeff Berk says that the Birkin and Kelly bag-filled store has resulted in “incremental customers” for the company, “ones who would otherwise be reluctant to make such a huge purchase (our average retail is $35,000) without seeing and touching the bags.” Since the store opened, Berk says that sales have exceeded $12 million – and without any traditional advertising.

And it is obvious, according to Berk, that “new customers who contact us the ‘old way’” – i.e., in Privè Porter’s store – “are empowered to purchase as they are talking to staff at an actual physical store as opposed to someone working from a private office or from home.” 

While Privè Porter is profitable and planning to parlay its current brick-and-mortar success into two more stores, one in Dubai that is slated to open in November and another in Las Vegas after that, it is not the case for all secondary market players, which sheds light on a yet another driving force behind retail expansion. For instance, The RealReal – which generated $468 million in sales in 2021 (up 56 percent year-over-year), its full-year losses also grew (up 34 percent to $236 million) – has been working towards profitability, but does not anticipate hitting the mark until 2024. 

In addition to driving new foot traffic and enabling it to amass vital stock, The RealReal’s relatively low average order value (“AOV”) is likely playing a role in its quest to expand its fleet of stores. The company’s AOV has been lingering near the $500 mark, amounting to $486 for the three-month quarter ending on June 30, 2022, down 7 percent compared to the same period in 2021. During the first quarter of this year, AOV was $487, an increase of 3 percent year-over-year. Chances are, The RealReal is looking to benefit from the higher prices that consumers are willing to shell out in-store versus online by stocking its growing number of stores – which stretch from New York and Greenwich, Connecticut to Dallas, Texas and Newport Beach – with more expensive offerings, whether that be fine jewelry or barely-used Birkin bags. This is one of the levers that it can pull to help increase its overall AOV, and in turn, move towards profitable growth. 

Against the background of its push to achieve profitability, efforts to increase AOV are not an insignificant factor for The RealReal (or other luxury resale players in the field), as without growing the average value of orders, it is difficult to imagine any amount of cost cutting that would put the company on a profit-making path. (On this point, a luxury executive told TFL recently that in order to achieve profitability and avoid a fate similar to that of the likes of Gilt Groupe, The RealReal likely needs to grow its AOV to $800 or more.) A smattering of physical retail posts across the country – stocked with its most covetable (and expensive) wares – just might help. 

Chanel has prevailed in the latest round of a lawsuit over jewelry crafted from upcycled buttons bearing its famous branding. In the wake of Defendant Shiver + Duke (“S+D”) filing a motion to dismiss for lack of personal jurisdiction or to transfer venue, and Chanel being granted leave to conduct jurisdictional discovery on the scope and extent of the defendants’ activities directed at New York, Judge May Kay Vyskocil of the U.S. District Court for the Southern District of New York refused to grant S+D’s motion. According to the court, the Atlanta-based jewelry-maker – which crafts jewelry from “authentic, recycled, and repurposed” Chanel buttons – has not only transacted enough business in New York state to subject it to litigation there but has failed to sufficiently show that the case should be transferred to a federal court in Georgia.   

Laying the groundwork in her August 30 opinion and order, Judge Vyskocil states that Chanel initiated the lawsuit against S+D, alleging that in selling jewelry featuring Chanel’s CC monogram S+D is on the hook for federal and state law trademark infringement, unfair competition, and trademark dilution. On the heels of Chanel filing suit in February 2021, S+D argued that the case should be tossed out on the basis that Chanel lacks the necessary personal jurisdiction over it in New York state. According to S+D, while it maintains an e-commerce site, where it sells the allegedly infringing jewelry, which is accessible to consumers across the U.S., including New York, and while it has, in fact, sold products to consumers in New York by way of that website, Chanel, nonetheless, chose the wrong forum to file suit. 

“All of Defendants’ business activities occur in the State of Georgia,” S+D asserted in its May 2021 motion to dismiss, arguing that its “only perceptible business activity in New York is that its website is accessible from New York,” and even then, its “sales and shipment of the repurposed jewelry giving rise to this matter within the State of New York comprised 0.129 percent of [its] total sales from 2019-2021.” Additionally, S+D claimed that convenience and the balance of equities weighs in favors of transfer because S+D is a small, single-person company with limited resources that will suffer substantial financial hardship if required to litigate hundreds of miles away in New York. 

Chanel jewelry and Shiver + Duke jewelry

Siding with Chanel across the board, Judge Vyskocil primarily finds that S+D and its owner Edith Hunt are subject to personal jurisdiction in New York, citing Second Circuit precedent that “a plaintiff’s showing that a single transaction occurred in New York is sufficient to invoke jurisdiction, even [if] the defendant never enters New York, so long as the transaction was ‘purposeful’ and there is a ‘substantial nexus’ between the business and the cause of action.” Given that S+D operates “a highly interactive website that offers the allegedly infringing goods for sale to consumers” in New York and has “made more than 80 sales total to customers in New York, totaling in excess of $10,000 in revenue” in the last three years, the court states that such facts are “more than sufficient to establish” that both S+D and Hunt, who is also named as a defendant in the lawsuit by Chanel – “have transacted business in the state.” 

And even though S+D’s New York sales “make up a small percentage of their total sales,” the defendant still meets the bar for jurisdiction, according to the court, as they “have availed themselves of jurisdiction in New York.” In fact, Judge Vyskocil states that the Second Circuit “has made clear that a single transaction in New York is sufficient to subject a defendant to personal jurisdiction in New York if the defendant’s activities are purposeful and the claim arises out of the transaction.” 

As for S+D’s push to get the case transferred to its home state of Georgia, the Judge finds that the company has failed to “show by clear and convincing evidence that the balance of convenience favors transfer to the Northern District of Georgia.” For the most part, S+D argues that “convenience favors transfer because all of [its] business records are located in Georgia and a greater concentration of potential witnesses are in Georgia,” and that the balance of equities also weighs in favor of transfer due to its size and amount of resources compared to Chanel’s.

Delving into the convenience claims, the court states that despite pointing to potential witnesses in Georgia, S+D “provide[s] the Court [with] no information about [its] potential witnesses or the importance of their testimony.” On the other hand, Chanel “identifies multiple potential witnesses who reside or work in New York.” At the same time, Chanel also put forth evidence that it “does not maintain offices or have any corporate employees in Georgia, does not have counsel or relationships with attorneys in Georgia, and that all of its employees with knowledge of the issues in this case are located in New York.” 

In terms of the balance of the equities, the court is not persuaded by S+D’s arguments here, either, holding that “the relative means of the parties is not dispositive and does not tip the scales in favor of overturning [Chanel’s] choice of forum, particularly given the other relevant considerations discussed above.” Ultimately, Judge Vyskocil states that S+D has “not demonstrated that interests of justice and convenience favor transfer to the Northern District of Georgia,’ and in reality, transferring the case to Georgia “would only serve to shift the inconveniences of one party and its witnesses to the other.” 

While such arguments went largely unaddressed in the court’s order, S+D asserted in its motion to dismiss that Chanel lacks jurisdiction, as under New York, “a court may exercise personal jurisdiction over a nonresident who causes injury to a person within the state only if the nonresident tortfeasor: (1) expects or should reasonably expect the act to have consequences in the state; and (2) derives substantial revenue from interstate or international commerce.” Here, S+D alleged that it “had no reason to expect that its actions could subject it to suit in New York; first, because all of its actions were taken in accordance with, and under the protection of, the First Sale Doctrine, and second, because all of S+D’s actions occurred in Georgia.” As such, S+D stated that “there is nothing that would raise expectations that [it] would be facing a lawsuit in New York.” 

In addition to being protected by the First Sale Doctrine, which generally permits the resale of a trademark-bearing item after it has been sold by the trademark owner (even if that subsequent sale is done without the trademark owner’s consent), S+D has alleged in response to the Chanel lawsuit that it uses an array of “disclaimers” to alert consumers that it and its products are “not affiliated with Chanel,” thereby, removing necessary element of likelihood of confusion. S+D alleged that it includes “disclaimers to its website, [its] product packaging includes disclaimers, and [there are] disclaimers permanently affixed to the products” in order to “ensure that point-of-sale confusion would be impossible.” 

The case is Chanel, Inc. v. Shiver and Duke, LLC, et al., 1:21-cv-01277 (SDNY).

Luxury brands’ latest revenue results and official reports on U.S. consumer spending, which held “steady” in July despite rising inflation, indicate that shoppers are shopping – but that does not mean that brands/retailers’ inventories are not also rising. Retail inventories grew by 2 percent in June (up from a 1.6 percent increase in May), the Commerce Department revealed this past week, pointing to an 18.5 percent overall rise in “business inventories” on a year-on-year basis in June. Retail titan Walmart, whose inventory is up by 25 percent compared to this time last year, said last week that “it had cleared most of its summer seasonal inventory,” per Reuters, “but still had work to do in reducing stock of electronics, home goods and apparel.” 

Reporting its results for the 3-month period that ended July 30, Target revealed that its profit fell by nearly 90 percent year-over-year due, in large part, to “steep markdowns” on sizable quantities of unwanted merchandise. The company said that unsold inventory for the quarter rose by 36 percent. Kohl’s also reported higher inventory levels – up 47.6 percent for the quarter that ended on July 30, with chief financial officer Jill Timm saying in a corresponding call that the company is “address[ing] inventory, including increasing promotions, being aggressive on clearing excess inventory and pulling back on receipts.” 

Not limited to mass-market entities, Michael Kors and Versace owner Capri Holdings reported earlier this month that for the quarter ending on July 2, it was left with $1.27 billion in inventory, a 66 percent increase over “a historically low level [of inventory] last year” when the group did “did not have enough inventory to meet consumer demand.” In a call with analysts, Capri chief financial and operating officer Thomas Edwards said that “first quarter inventory increased 25 percent,” but noted that the group “anticipated elevated inventory levels as we implemented new programs to receive seasonal merchandise earlier as well as hold more core inventory given supply chain delays.” Edwards contends that Capri expects that inventory levels “will moderate sequentially [for the remainder of the year] and as planned, be below prior year by the end of the fiscal year.” 

As for the impact of such enduring inventory excess on off-price market retailers, which have built big businesses by acquiring – and then selling – over-produced and/or unsold goods from brands and other retailers, the effect may not be as glowing or as straightforward as the media has been suggesting. Ross Stores reported its Q2 earnings on Thursday, stating that while average store inventory during the quarter was up by 15 percent compared to last year and total consolidated inventories were up 55 percent at the end of the quarter versus the same period in 2021, sales results were still “disappointing,” management said. Sales for the three months ending on July 30 totaled $4.6 billion versus the $4.8 billion in sales the Dublin, California-based generated during the same period last year. And its comparable store sales were down 7 percent on top of a “robust” 15 percent gain in the second quarter of 2021. 

Reflecting on the results of Ross Stores, one of the biggest players in the off-price space, Neev Capital managing director Rahul Sharma stated that a 55 percent rise in inventory and a five percent drop in sales makes for “one of the worst spreads in retail.” 

At the same time, revenue for T.J. Maxx, Marshalls, and HomeGoods-owner TJX Cos. similarly fell short of expectations in Q2, despite an influx of buying opportunities for the retail group, which reported a 5 percent decrease in comparable store sales for the quarter ending on July 30. The Framingham, Massachusetts-headquartered company’s net sales dropped to $11.8 billion for the quarter from Q2 2021’s $12.08 billion. Analysts expected TJX to generate $12.05 billion in revenue, and CEO Ernie Herrman blamed “historically high inflation” as putting a dent in consumers’ discretionary spending. In connection with its Q2 results, TJX updated its expectation for U.S. comparable store sales for the full fiscal year in 2023, projecting a decrease of 2 to 3 percent, versus its previous guidance of an increase of 1 to 2 percent. 

These results seem to stand in contrast with the usual course of business for off-price retailers, which traditionally benefit from economic downturns and consumers’ corresponding practice of “trading down” when it comes to discretionary goods, and also whose success is not not just dependent on price but by supply – namely, the companies’ abilities to provide consumers with access to desirable products at lower prices. This model makes the offerings, themselves – and the timeliness and attractiveness of those offerings – a vital part of the equation in driving demand.  (This is likely part of why even off-price retailers are currently stock up excess inventory.)

After all, TJX previously stated in a routine filing with the Securities and Exchange Commission that one of its core advantages is the way that it “consistently offer[s] customers a rapidly changing merchandise assortment at everyday prices,” a point that emphasizes the important of both price and selection of goods. (The demand-driven-by-supply model is not terribly unlike the resale market, with The RealReal founder and CEO Julie Wainwright previously asserting that supply is the “lifeblood” of the company’s business and the primary driver of demand.)

Stumbling by off-price retailers comes as the off-price segment has “increasingly been a growth engine: it expanded faster than the overall industry before the pandemic, it experienced a less pronounced dip in the initial phases, and it is set to grow five times faster than the full-price segment from 2025 to 2030,” McKinsey stated in a report this spring, which noted that growth will likely be compounded by the fact that off-price “has been well positioned to capture an increasing percentage of shoppers moving online.” It also follows from predictions from analysts that off-price names are among those that are situated to fare well in furtherance of the larger return to retail in the post-Covid marketplace.