In March 2018, Chanel filed suit against What Goes Around Comes Around (“WGACA”) in a New York federal court. The Paris-based luxury brand accused the luxury resale company of counterfeiting, false advertising, and unfair competition in connection with its alleged pattern of offering up counterfeit Chanel goods and attempting “to deceive consumers into falsely believing [that it] has some kind of … relationship or affiliation with Chanel or that Chanel has authenticated WGACA’s goods in order to trade off of Chanel’s brand and good will.”
Since then, the parties have been locked in a high-stakes legal battle that puts a spotlight on the multi-billion dollar resale economy. The latest turn of events? A discovery dispute that centers on the information/evidence that the parties need to exchange leading up to trial. In an order dated May 5, Judge Louis Stanton of the U.S. District Court for the Southern District of New York stated that Chanel must specify with “particularity and detail” the products that WGACA sold that are not genuine; that were falsely advertised; or that were acquired under circumstances in which the first sale doctrine does not apply.
Once Chanel produces such information, WGACA will then be required to share with Chanel “all documents, witness statements and arguments [in connection with those products] that it proposes to use or refer to at trial.”
Despite such instructions from the court, WGACA alleges that Chanel has failed to make good on its end of the deal, a move that the reseller claims is part of Chanel’s “ongoing abuse of the discovery process” and a “continued pattern of Chanel seeking to destroy WGACA through the weight of litigation and an onslaught of false claims.”
“Counterfeits” and a Discovery Dispute
According to a letter that WGACA’s counsel sent to Judge Stanton on July 31, while the court previously “required Chanel [in its May 5 order] to make ‘plausible’ claims [as to the allegedly infringing nature and/or the false advertisement of Chanel products at issue] with specificity before WGACA would need to respond with discovery on those claims,” Chanel failed to adequately do so. After reviewing a spreadsheet identifying each Chanel branded product sold by WGACA since 2014, WGACA’s counsel argues in the letter to the court that while Chanel identified 63 items that are “counterfeit,” it did not provide any “evidence that the bags [at issue] would be ‘counterfeit’ as defined by the Lanham Act,” the federal trademark statute in the U.S.
What was the “plausible” reasoning that Chanel provided as to why the bags are fake? 11 of them came with “serial number labels … for bags that had been stolen in 2012” when an authorized factory of Chanel in Milan was robbed, and thus, “the serial numbers were never used in connection with any authorized Chanel-branded products.” Chanel identified a twelfth bag, one “bearing serial number 10218184,” which it defined as fake, as “the serial number is widely known to be used by counterfeiters and the description of the item that WGACA sold does not comport with the original Chanel item.” WGACA’s description of the bag – “Lambskin lining replaced in 2004” – is not accurate because the actual genuine bag bearing Chanel Serial No. 10218184 was not produced until 2005,” per Chanel.
Another group of bags – some 51 that WGACA had sold or offered for sale – are also counterfeits, according to Chanel, because, as its records indicate, the bags “were never received by Chanel for quality control and approval.” To be exact, Chanel says the these bags were never “approved by Chanel or authorized for sale by Chanel,” nor were they “actually sold by Chanel or any of its authorized retailers.”
WGACA takes issue with Chanel’s arguments in connection with both groups of bags. In regards to the bags allegedly containing stolen materials, WGACA claims that “Chanel has never warned anyone that there is a cache of allegedly stolen serial numbers or bags from an authorized factory [out there],” and if there were, “surely [Chanel] would have sought to identify the counterfeiters and track down the ‘fake’ merchandise.”
In terms of the 51 bags that Chanel claims are counterfeit because they were not quality-checked, authorized, or sold by Chanel, WGACA calls foul, arguing that a “Chanel bag made by an authorized factory does not morph into a counterfeit simply because the factory does not follow some element of a designated protocol.” In that same vein, WGACA asserts that such a claimis “hardly one that speaks to counterfeiting.”
With the foregoing in mind, WGACA has asked the court to prevent it “from having to produce any discovery on these alleged counterfeit items until Chanel makes an actual ‘plausible claim’” as to their inauthenticity, such as by way of a declaration from an individual or individuals at Chanel with personal knowledge that “sets forth the necessary facts to substantiate that the items at issue are counterfeit as defined by the Lanham Act.”
Chanel: Not So Fast
Chanel responded to WGACA’s letter to the judge with a letter of its own, in which it accuses WGACA of taking positions that not only “appear to condone trafficking in unapproved and stolen designer goods, but [that] also are antithetical to the spirit of the Lanham Act and well-established Second Circuit precedent.” In an August 7 letter, counsel for Chanel asserts that “there is no legal or factual basis for WGACA’s [request to compel], which is nothing more than a transparent attempt to avoid having to provide highly relevant discovery.”
According to Chanel’s letter, “Underlying WGACA’s Request is its position … that Chanel cannot simply conclude that any item which it has not reviewed and approved for purposes of quality control is not genuine.” Chanel argues that such an assertion “ignores nearly four decades of precedent” from the U.S. Court of Appeals for the Second Circuit – namely, El Greco Leather Products Co., Inc. v. She World Inc. – which establishes that, “simply put, goods that are not approved for manufacture and/or sale by the trademark owner are not genuine goods and the sale of such unapproved products gives rise to trademark infringement.”
At the heart of the El Greco case, per Chanel, is an important holding: “The holder of [a] trademark is entitled to require . . . that no merchandise be distributed without it first being inspected by the holder or its agent to ensure quality.” In other words, “Goods manufactured by agreement with the holder of a trademark, but distributed without authorization of the holder and before the holder approved the goods for quality purposes [are] not ‘genuine’ for purposes of the Lanham Act and that third-party seller’s sale of the goods [is] sufficient ‘use’ for it to be liable for trademark infringement.”
Still yet, Chanel asserts that “even if [the] items are genuine as WGACA claims (they are not), Chanel nevertheless has demonstrated a ‘plausible’ claim that the 51 additional items [that were not quality-checked, approved or distributed by Chanel] were acquired by WGACA under circumstances which do not qualify as a first sale under that doctrine,” thereby, giving rise to Lanham Act claims.
Since all “63 Chanel-branded items it has identified fall within the scope of the Court’s May 5, 2020 discovery protocol,” Chanel claims that it is “clearly entitled to discovery from WGACA concerning [those] items that it has identified pursuant to the Court’s May 5th Order.”
What is Really Going On?
Looking beyond the two parties’ seemingly different definitions of what should be considered a counterfeit good, and their corresponding clash over discovery, a footnote in the July 31 letter from WGACA’s counsel sheds light on what might be going on at the core of the lawsuit in the eyes of WGACA, at least.
WGACA has long argued that, as it alludes to again in the July letter, that the “zeal with which [Chanel] is pursuing this plainly irrelevant information suggests that this entire lawsuit is a pretext to find out WGACA’s sourcing so that it can make a collateral attack.” In an earlier round, counsel for WGACA argued that Chanel’s desire to uncover such information is for no purpose other than “to harass and/or intimidate such sources to discourage their sales to [it].”
More recently, the reseller’s lawyer states that Chanel’s “fixation on WGACA’s sources, as the court is aware, has nothing to do with counterfeiting.” Instead, WGACA argues that Chanel’s apparent quest to uncover WGACA’s sellers “conveniently facilitate[s] Chanel’s, or perhaps its ‘partner’ FarFetch’s entry into the secondhand market itself since with that knowledge Chanel would get to skip the step every new entrant into the mark must address – where to acquire genuine product in good condition.” (Chanel has seemingly partnered with Farfetch – which it took a minority ownership stake in in February 2018 – to offer up pre-owned products).
All the while, Chanel has argued from the outset that its aim is simpler than that. As it asserted in its complaint, “The Chanel trademarks” – which it has been using, in some cases, “for more than eight decades in United States” – “are vital to Chanel, and Chanel will suffer irreparable harm if any third parties, including [WGACA], are allowed to continue selling infringing, counterfeit and/or knock-off goods utilizing and/or bearing identical or substantially similar trademarks to [those] trademarks.” Such use will diminish the “enormous amount of goodwill” that Chanel has built up in its name and various trademarks, and “the worldwide public acceptance, overwhelming fame, and great recognition of products bearing or sold under the Chanel trademarks,” which (in our view) is precisely what enables the brand to maintain its position in the market and the price points at which it sells its good.
* The case is Chanel, Inc. v. What Goes Around comes Around, LLC, et al., 1:18-cv-02253 (SDNY).