A New York federal judge has given The RealReal (“TRR”) the go-ahead to amend its answer in the trademark infringement and counterfeiting case filed against it by Chanel in 2018 to assert anti-competition counterclaims against the luxury brand. In an order dated February 24, Judge Gabriel Gorstein pushed back against Chanel’s arguments that TRR’s quest to amend its previously-filed answer in light of its discovery of “new evidence” about Chanel’s “motivation” in bringing various trademark-centric lawsuits against its competitors is improper. Instead, he sided with TRR, holding that “no bad faith by [TRR] has been shown,” and there is no “undue delay” at play, as TRR’s “request to amend came a mere five months after the initial answer was filed and before any document production or depositions have taken place,” making it permissible in the eyes of the court.
Addressing the issue of potential prejudice that might come from TRR amending its complaint, Judge Gorstein of the U.S. District Court for the Southern District of New York stated on Wednesday that this “question turns on the issue of the scope of the … ‘unclean hands’ defense” that TRR cited in its May 2020 answer to Chanel’s complaint. TRR has sought to piggyback on its unclean hands defense, arguing that the previously-asserted affirmative defense and its more recently proposed antitrust counterclaims both stem from Chanel’s alleged decision to file this case – and others like it – “as a means to push [TRR] and other competitors out of the market” because it views them as a threat to its ability to maintain a monopoly in the market for “top tier investment grade handbags.”
Judge Gorstein stated in his order that if TRR’s “proposed antitrust counterclaims would vastly expand discovery beyond what was going to take place anyway by virtue of the existing claims and defenses that would be a good reason to find that the addition of the antitrust counterclaims would needlessly prolong this case and would possibly result in our denying the motion to amend on the ground that the proposed amendment would introduce collateral claims that were appropriately brought as a separate lawsuit.”
However, in response to supplemental briefings from the parties, the judge held that “the Court cannot at this time find that the addition of the proposed counterclaims would expand the scope of discovery.” As such, Chanel “cannot show prejudice that would result from the addition of the antitrust counterclaims,” the judge determined, granting TRR’s motion to amend its answer.
TRR’s Amended Answer
Fast forward a day and the resale giant filed its amended answer, denying the majority of the allegations that Chanel made in its February 2019 amended complaint, including that TRR has engaged in trademark infringement and counterfeiting by offering up pre-owned Chanel products on its e-commerce site and in its brick-and-mortar outposts (as it did in the first answer it filed with the court in May), and again, setting out an array of affirmative defenses, including the aforementioned unclean hands defense. The noteworthy addition to the February 25 answer is, of course, TRR’s five newly-permitted counterclaims, in which it claims that Chanel has engaged in violations of Section 1 and 2 of the Sherman Act, anticompetitive arrangement in violation of the Donnelly Act, tortious interference with contract, and tortious interference with prospective business relations.
As we first reported in October when TRR submitted its proposed amended answer and counterclaims to the court, the crux of its antitrust-centric arguments is that Chanel has been quietly carrying out an “aggressive campaign” of “exclusionary and anticompetitive conduct” aimed at “monopoliz[ing] the market” – and thus, the supply and price of its goods, both new and pre-owned – to the detriment of its competitors and consumers, alike.
In direct response to the burgeoning, multi-billion dollar luxury resale market, which is “a new threat to the core of [Chanel’s] business model,” TRR alleges that Chanel has gone beyond the work of a diligent company looking to preserve the meticulously-crafted positioning of its rarefied luxury brand in the face of the evolving modern marketplace. Instead, TRR says that the 110-year old luxury stalwart has “attempted, acquired, and maintained monopoly power” in the “relevant market” by way of an ongoing scheme to “impair the growth and development of innovative resale rivals like TRR who threaten Chanel’s dominance” by “creating a robust resale market where none previously existed,” and thereby, giving consumers increased access to “a rich supply of Chanel handbags that would not otherwise be available to [them].”
As one of the primary players in the market for “top tier investment grade handbags and hold-value handbags,” (i.e., certain styles of Chanel, Louis Vuitton, and Hermès bags that hold or increase their retail value over time), Chanel commands a 30-plus percent share, and has as much as a 50 percent share in related handbag submarkets, per TRR. The Coco Chanel-founded company has been able to not only “maintain … [this] monopoly power despite the entry of multiple high-quality resale competitors,” TRR alleges that Chanel has actually “enhanced” that power due, in part, to its “anticompetitive intent of pushing out resellers of Chanel handbags and increasing its own market dominance.”
In order to illegally “stymie competition” that comes from resellers, which “threaten the very core of Chanel’s business model, [one that] is premised on a limited supply and few access points for consumers,” TRR claims that Chanel has specifically entered into “exclusive contracts with high-end retailers and us[ed] its monopoly power to force the[m] to refuse to engage in any ancillary relationship with resale competitors.” For instance, TRR argues that on the heels of it entering into resale partnerships with Neiman Marcus and Saks Fifth Avenue in or around 2015, Chanel threatened to pull all of its products from their stores unless both retailers agreed to prevent consumers from consigning Chanel products to TRR in their stores.
In both cases, the nearly-decade-old resale company claims that it was “economically infeasible” for the retailers to “resist Chanel’s demands” due to its “power over the market” for top tier handbags, and thus, “Chanel intentionally caused” them to “breach their respective contracts [with TRR] by terminating their relationships with [it].” The loss of these partnerships “significantly inhibited [TRR’s] business development and growth,” the company asserts.
Beyond that, TRR alleges that Chanel “engag[ed] in a concerted refusal to deal – i.e., a vertical group boycott – with print and digital advertisers” that “deprived [its] competitors,” such as TRR, “from placing advertisements in the most highly desirable locations.” Specifically, TRR contends that Chanel used its position “as the most powerful luxury brand to force New York Magazine into an agreement not to deal with TRR” in late 2015 or early 2016 when it was “in discussions” with the publication about a digital and print media campaign.
“Chanel did not stop at New York Magazine.” It “used its influence to reach agreements with Vogue and The New York Times to refuse to deal with TRR and boycott TRR’s advertisements.” As recently as 2019, TRR claims that it was “in discussions with Women’s Wear Daily to run an advertisement promoting its recent landmark partnership with Burberry.” However, “shortly before the ad was set to run, Chanel used its dominance and influence to convince WWD not to run TRR’s ads.” This is one of the latest examples in Chanel’s alleged pattern of “repeated coercion of various publications to refuse to deal with TRR, [which] constitutes anticompetitive agreements in restraint of trade without any procompetitive justifications,” according to TRR.
Each of Chanel’s actions “alone, constitutes an overt anticompetitive act capable of redress by this Court,” TRR alleges. However, “the totality” of these actions when considered together “constitute a full-scale assault on resale competitors and an effort to continue Chanel’s dominance in the market.”
The Role of Farfetch
TRR goes further with its allegations, and asserts that while Chanel has been actively seeking to ensure a firm grip on its “monopoly” in the market by “coercing or pressuring” various retailers and publications, it has also been taking legal action against resellers, including but not limited to TRR. (As TRR notes, fellow consignment company What Goes Around Comes Around (“WGACA”) is currently embroiled in a similar lawsuit initiated by Chanel).
Interestingly, there is “one major secondary reseller” that has been “notably absent in Chanel’s war,” TRR points out. Farfetch – the online retailer in which Chanel made a “significant” investment in in February 2018, and which has been making increasing inroads in the resale market, including by way of its own resale pilot program, “Farfetch Second Life.”
According to TRR’s new filing, Farfetch “promotes, advertises, markets, and sells pre-owned Chanel goods that are sourced from numerous brick-and-mortar boutiques” and “guarantees the authenticity of all of its pre-owned items,” in much the same way as TRR and WGACA. Yet, despite Chanel taking issue with TRR and WGACA’s assertions about their ability to properly authenticate the Chanel bags they sell because – as it has asserted in both cases – “only Chanel can authenticate Chanel [products],” and ultimately, filing lawsuits against them as a result, Farfetch has not landed on the opposite end of litigation with Chanel due to its own declarations of authenticity.
This is not necessarily an issue on its face. However, TRR contends that Chanel’s failure to take uniform legal action against Farfetch for marketing its pre-owned Chanel products as being subject to “a rigorous process to ensure that all items meet our authenticity standards” shows that “Chanel will only tolerate the resale of Chanel handbags … by a company in which [it] holds a significant investment.” The purpose of this, according to TRR? So that Chanel “can continue to control supply and prices in the market for top tier … handbags.”
Distinct from the work of a company that is merely enforcing its rights in good faith, TRR says that Chanel’s “overarching anticompetitive scheme” has resulted in significant harm to the relevant market. This takes the form of “reduced supply of top tier handbags, fewer options for consumers for where and how to purchase top tier investment grade and hold-value handbags, the limitation of innovation from the entry and growth of competitors, supra-competitive prices for consumers …, and increased market dominance by Chanel.” As a result, TRR sets out its five counterclaims against Chanel, and asserts that with Chanel’s allegedly unlawful conduct in mind, it is entitled to monetary damages, as well as injunctive relief to legally prohibit Chanel from engaging in such behavior going forward.
Surviving a Motion to Dismiss
In the wake of TRR introducing its counterclaims this fall, Chanel argued that TRR’s “proposed amendment is certain to prejudicially expand the existing scope of discovery in this case.” And even if it does not, the reseller’s counterclaims should not be included, as they do not “even come close to meeting the heightened pleading standards required to allege an antitrust violation,” per Chanel. Specifically, Chanel argued in a supplemental letter dated January 26 that the Sherman Act places “narrow limitations on the use of supposedly false advertising about a competitor as the basis of an antitrust violation, none of which are satisfied here.”
“As an initial matter,” Chanel claimed that “the supposedly false statements” alleged by TRR – including Chanel’s assertions that Chanel handbags purchased from resellers are “likely to be fake” – are “not competitor ‘disparagement’ of the type properly analyzed under the antitrust laws.” For example, Chanel asserts that “the alleged statements at issue were not directed at TRR or any other competitor, and instead, are statements about the problem of counterfeiting of handbags generally, which everyone – including the parties [here] – agrees is a major and persistent problem.”
Moreover, “even if the alleged statements did fall within the scope of the Sherman Act,” Chanel argued that “there is a presumption that disparaging a competitor, or otherwise engaging in ‘misleading advertising and publicity’ has a ‘de minimus’ effect on competition, and therefore, is not a violation of antitrust laws.” And TRR clearly has not been impacted too significantly by such alleged disparagement, Chanel asserted, noting that TRR “affirmatively allege[d] that it is thriving – meeting unmet demand and supplying vast amounts of product to millions of customers.”
And even if TRR can overcome the presumption that disparaging a competitor has little effect on that competitor (by showing that the disparaging representations were “clearly false, clearly material, clearly likely to induce reasonable reliance, made to buyers without knowledge of the subject matter, continued to prolonged periods, and not readily susceptible to neutralization or offset by rivals”), it would still be “irrelevant,” according to Chanel, as in order to prevail, all of the other elements of a Sherman Act violation must be established, “including that the advertiser of the disparagement is a monopolist – i.e., it has ‘the power to exclude competition.’”
Doubling-down on previous arguments, Chanel claimed that TRR has not – and cannot – assert that it has a monopoly. “Instead, TRR alleges that there is a ‘Holy Trinity’ of three dominant brands in its proposed markets, that many other companies pose a competitive threat to those brands, and that new competitors are successfully entering the market.”
With this in mind, Judge Gorstein stated in his order on Wednesday that with respect to Chanel’s argument that antitrust counterclaims could not survive a motion to dismiss, “it more appropriate for the arguments regarding the merits of the antitrust counterclaims to be made in a motion addressed to the merits of the proposed claims and with the benefit of the full briefing that a motion addressed to the merits provides.”
* The case is Chanel, Inc., v. The RealReal, Inc., 1:18-cv-10626 (SDNY).