Thursday, April 16, 2020

TheRealReal is ok except where it is FakeFake

Chanel, Inc. v. The RealReal, Inc., 2020 WL 1503422, No. 18-CV-10626 (VSB) (S.D.N.Y. Mar. 30, 2020)

Very interesting case: Chanel sued TRR for trademark infringement etc. for allegedly overclaiming its association with Chanel by prominently advertising how much Chanel there was on its fashion resale platform. The court rejects Chanel’s claims except to the extent they’re predicated on the sale of alleged counterfeits, in what is a real victory for resale platforms under present circumstances.

TRR offers purportedly genuine secondhand Chanel products as part of its luxury resale offerings, and in 2018 acknowledged that Chanel was one of the most popular brands bought and sold through consignment.

As you read these claims, consider how many of them might be puffery at least in isolation: TRR advertises itself as “the world’s largest online marketplace for authenticated, consigned luxury goods” and says “[a]uthenticity is the cornerstone of The RealReal.” It claims that it has “developed the most rigorous authentication process in the marketplace,” that it is “the only resale company in the world that authenticates every single item sold,” that “[t]here is no other resale company doing more to remove fakes from the market every day and put counterfeiters out of business,” that its “dedicated Quality Control team provides an additional layer of control to help prevent fakes from being sold on [its] site,” and that its “team works diligently and is constantly innovating to ensure [it] ... keep[s] fraudulent products off the market.” Its FAQ says: “[u]nlike most resale companies, The RealReal takes possession of all items and physically evaluates every item to authenticate it.” Also: “We employ over 100 brand authenticators, gemologists, horologists and art curators. … Our authentication process and all of our internal processes are changing constantly, driven by new technologies like machine learning and AI.”
TRR claimed to use “a rigorous, brand-specific authentication process” in which “high risk” items were “sent to authenticators with significant authentication experience, who are highly specialized in specific categories. Many of these authenticators join The RealReal from the luxury brands themselves—like Tiffany, Hermès and Rolex—or auction houses like Sotheby’s and Christie’s and have a deep knowledge of the markers, materials and craftsmanship behind genuine products. They assess each item based on these and other characteristics.” Low risk items, “such as contemporary brands with clear authenticity markers, are sent to be authenticated by our copywriters, who have a minimum of 30 hours of authentication training.” TRR claims that its Quality Control team adds an additional layer of protection and that it leverages data to use algorithms to ensure that “high risk” products get the most scrutiny.

The TOS state: “You acknowledge and agree that The RealReal’s authentication process is in-house and independent. Brands identified on the Site are not involved in the authentication of the products being sold, and none of the brands sold assumes any responsibility for any products purchased from or through the website. Brands sold on the Site are not partnered or affiliated with The RealReal in any manner. However, The RealReal fully cooperates with brands seeking to track down the source of counterfeit items, which includes revealing the contact information of consignors submitting counterfeit goods.”

TRR takes possession of all goods sold, and “[u]pon receipt, ... evaluate[s] each item ... to determine, in its sole discretion, its authenticity, quality, and value.” TRR could refuse to accept an item; if it determined that an item was counterfeit, it would notify the consignor and give them an opportunity to prove authenticity; any item finally determined to be counterfeit would be destroyed, not returned.

Chanel investigated TRR’s Chanel offerings in 2018, and found at least seven counterfeit handbags that allegedly differed in quality from real Chanel, “and some contained cartes d’authenticité with serial numbers that did not correspond to the genuine serial numbers designated by Chanel for those particular styles of handbag.” When Chanel notified TRR, TRR asked for additional substantiating information. After that, TRR removed the identifying serial numbers from all of its Chanel-branded leather goods product listings, and may have removed physical serial number tags from Chanel handbags. The complaint quoted two customer reviews in which customers state that they were sold counterfeit Chanel handbags. Chanel alleged that TRR’s authentication experts do not have the necessary qualifications to authenticate Chanel products, and have failed to identify counterfeit Chanel bags. It argued that TRR didn’t disclose sufficient information for consumers to understand that Chanel is not involved in The RealReal’s authentication process, or affiliated with The RealReal’s business.

Opening principles: At the motion to dismiss stage, Chanel argued, the court couldn’t consider nominative fair use, because it was an inherently factual inquiry. But it’s Chanel’s burden to plead sufficient factual content to plausibly allege why Defendant’s use of its trademarks is not permissible under the nominative fair use doctrine. However, “where counterfeit marks are involved, it is not necessary to perform the step-by-step examination of each Polaroid factor because counterfeit marks are inherently confusing.”

Application: the complaint didn’t plausibly allege infringement, false endorsement, or unfair competition based on TRR’s use of genuine Chanel marks, but did plausibly allege infringement based on advertisement and sale of counterfeits.

The Lanham Act “does not prevent one who trades a branded product from accurately describing it by its brand name, so long as the trader does not create confusion by implying an affiliation with the owner of the product.” Though Chanel’s marks had great strength, and though there might be direct competition with new products, “the complaint also includes evidence suggesting that secondary fashion markets bolster primary markets,” and Chanel’s lack of its own secondhand market meant that there was no direct competition. There was no evidence of customer confusion over affiliation or of TRR’s bad faith. And the luxury market was relatively sophisticated and high-priced. “Balancing these factors, it is highly unlikely that a customer buying a secondhand Chanel product from The RealReal—which unambiguously holds itself out as consignment retailer in a luxury market—would confuse the nature of The RealReal’s business, the source of its products, or its affiliation—or lack thereof—with Chanel.”  Many of the other Polaroid factors weren’t apposite for a secondhand goods case: “the similarity of the marks, the evidence of bridging the gap, and the respective quality of the products in question are not as relevant where, as here, the marks used and goods sold by Defendant are indeed the same as the Plaintiff’s marks and goods. Such is the nature of resale markets.”

This fact also made the use of Chanel’s mark necessary to identify TRR’s goods, for nominative fair use.  Furthermore, Chanel didn’t plausibly allege facts suggesting that The RealReal “stepped over the line into a likelihood of confusion by using [Chanel’s] mark[s] too prominently or too often, in terms of size, emphasis, or repetition.” TRR has a Chanel page briefly describing Chanel and advertising products with the Chanel marks, it also has brand-specific pages for nine other luxury fashion brands. There were no facts suggesting that TRR displays Chanel-branded goods “more prominently than other luxury-brand goods,” or that it used Chanel marks “in any other capacity than to identify Chanel products as Chanel.”

There were also no non-conclusory allegations to suggest that The RealReal inaccurately depicts its relationship with Chanel or Chanel’s products and services. Statements that “[m]any of [its] authenticators join The RealReal from the luxury brands themselves—like Tiffany, Hermès and Rolex,” were insufficient to allege a probability of customer confusion. This was especially true given The RealReal’s disclosure that “[b]rands identified on [its website] are not involved in the authentication of the products being sold, and none of the brands sold assumes any responsibility for any products purchased from or through the website,” and that “[b]rands sold on the [website] are not partnered or affiliated with The RealReal in any manner.”

Although another court has held that “guarantees of authentication [ ] themselves may be taken as suggesting sponsorship or endorsement by Chanel,” this court found that “such guarantees, without more, are sufficient to demonstrate a likelihood of customer confusion, especially since the law requires ‘a probability of confusion, not a mere possibility.’” In the contrasting case, WGACA, the defendant allegedly overemphasized Chanel; sold “more Chanel-branded products ... than those of any other brand”; and had “social media pages include[d] quotations of Coco Chanel” and photographs of Chanel products accompanied by the hashtags “#WGACACHANEL” and “our #WGACACHANEL.” And its letters of authenticity stated, for example, “[t]his letter confirms that item Q6HCHK00KB000 Chanel Black Long Tissue Box is an authentic Chanel decoration.” “Such an authenticity guarantee is materially different from the authenticity statements on The RealReal’s website.”

However, allegations about counterfeits were different. TRR wasn’t like eBay because it was plausibly directly liable as the actual seller, not the mere facilitator of sales. TRR had “sole discretion” to “approve for sale, price, display, market, and make available for sale the goods sold through its website and retail locations.” [What do you want to bet that eBay’s TOS also let it control these things, albeit that it does not generally use its power to set price terms? Cf. recent discussions about price gouging for PPE on eBay.  Increasing the price of items to a level that is much higher than is considered fair or reasonable is not allowed on eBay,” the platform itself says. [PS eBay: does what’s going on with Liberty wooden jigsaw puzzles count? Because that’s a wild ride.]]  Still, TRR, unlike eBay, was “more than a platform for the sale of goods by vendors.” Even though it didn’t formally take title to the merchandise, it “maintain[s] [the] inventory of merchandise,” and upon receipt of products from consignors “b[ears] the risk of loss” for the products. Thus it was the seller.

The court pointed out that TRR benefited by “curating the products offered through [its] market and defining the terms on which customers can purchase those products,” and thus “must bear the corresponding burden of the potential liability stemming from its ‘sale, offering for sale, distribution, [and] advertising of’ the goods in the market it has created.”

False advertising: For the counterfeits but only for the counterfeits, under the facts alleged, TRR’s authenticity claims were literally false, and even if not, they were misleading.  However, to the extent that Chanel was pleading that the use of its marks for authentic goods misled consumers into thinking there was an affiliation, the court rejected that as a false advertising theory for the same reasons given above, and it rejected Chanel’s claim of false advertising based on The RealReal’s use of the term “vintage.”

TRR made a lot of authenticity claims. Its statement “we ensure that every item on The RealReal is 100% the real thing” was “an unambiguous representation of fact that all of the products advertised and sold by The RealReal are 100% authentic.” This interpretation was bolstered by TRR’s statements distinguishing itself from other luxury consignment retailers, including its representations that “[t]here is no other resale company doing more to remove fakes from the market every day and put counterfeiters out of business,” that it is “the only resale company in the world that authenticates every single item sold,” and that “[u]nlike most resale companies, The RealReal takes possession of all items and physically evaluates every item to authenticate it.” It identifies its authenticators as “experts,” and among the experts listed on its website are four authenticators with particular expertise in authenticating Chanel handbags. The court noted that “[t]o authenticate does not mean, as The RealReal suggests, to merely ‘guarantee that each item offered for sale’ has gone through The RealReal’s ‘authentication process.’” [This seems like it could be fixed, but at time of writing it seems the same. Disclosure: I have bought from TRR and have been satisfied with my purchases; I have no reason to question the authenticity of the items I bought.]

As Tiffany v. eBay made clear, “the law prohibits an advertisement that implies that all of the goods offered on a defendant’s website are genuine when in fact ... a sizeable proportion of them are not.” A sufficient disclaimer might suffice to avoid falsity, but TRR didn’t show “where on its website or advertising it acknowledges the existence, or even the possibility, of counterfeit products in its marketplace.” Its FAQ, for example, doesn’t answer the question:

Q: Are there many fake products on The RealReal?
A: We have developed the most rigorous authentication process in the resale marketplace.

The court pointed out that Tiffany didn’t define “sizeable proportion,” and seven might not be that, but the complaint survived a motion to dismiss.

The court also found “noteworthy,” though unnecessary, the contrast between TRR’s customer-facing ads and its shareholder disclosures. In its IPO, TRR explained:

From time to time we receive counterfeit goods for consignment. While we have invested heavily in our authentication processes and we reject any goods we believe to be counterfeit, we cannot be certain that we will identify every counterfeit item that is consigned to us. As the sophistication of counterfeiters increases, it may be increasingly difficult to identify counterfeit products. We refund the cost of a product to a buyer if the buyer questions its authenticity and returns the item. The sale of any counterfeit goods may damage our reputation as a trusted online marketplace for authenticated, pre-owned luxury goods which may impact our ability to attract and maintain repeat consignors and buyers. Additionally, we may be subject to allegations that a pre-owned luxury item we sold is not authentic despite our confirmed authentication of such item. Such controversy could negatively impact our reputation and brand and harm our business and operating results.

“The attempt at transparency evident in the above disclosure paints a much different picture from that conveyed to consumers shopping at The RealReal’s stores or on its website. This lack of customer-facing transparency undermines the Lanham Act’s goal of ‘protecting persons engaged in commerce [ ] against unfair competition.’”

State law claims: same results. Where state law requires bad faith, Chanel adequately alleged that as to counterfeits: TRR’s initial response was to remove identifying serial numbers from its Chanel product listings, and possibly to remove physical serial number tags from Chanel handbags sold to customers. “A reasonable inference based on The RealReal’s conduct is that it removed product serial numbers from its site and physical products to deprive Chanel and consumers of a legitimate tool for identifying counterfeit goods. Recognizing that discovery might demonstrate that The RealReal had honest motives for removing these serial numbers from its product listings and products, Chanel’s allegations are sufficient to allege bad faith at this stage, and its New York state common law claim can proceed” as to the counterfeits.

However, as to §§349-350 claims, Chanel didn’t show injury to the public interest over and above ordinary trademark infringement, especially since these were luxury goods not generally accessible to the public at large and not implicating public health or safety.

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