Chanel reseller can't get summary judgment on whether it talked too much about Chanel

Chanel, Inc. v. WGACA, LLC, 2022 WL 902931, No. 18 Civ. 2253 (LLS) (S.D.N.Y. Mar. 28, 2022)

Chanel sued What Goes Around Comes Around (WGACA), alleging trademark infringement, false advertising, false association/endorsement, and related NY GBL claims for deceptive/unfair trade practices and false advertising. The court dismissed the GBL claims and held WGACA liable for infringing Chanel’s marks as to eleven non-Chanel handbags sold as having been authorized for sale by one Chanel factory, and one Chanel-branded handbag with a pirated serial number. The rest had to await a factfinder.

Chanel provides its factories with only enough supplies to make the specific number of Chanel products that have been ordered; it does not authorize factory overruns. 30,000 Chanel labels, stickers, and authenticity cards bearing unique serial numbers were stolen from its Renato Corti factory in 2012. Chanel has an internal inventory system and voids such stolen or missing serial numbers. It can use its system to determine whether the type, color, and characteristics of an alleged product correspond with those of the genuine product Chanel manufactured and sold under that serial number.

Meanwhile, WGACA specializes in the sale of luxury secondhand clothing, bags, jewelry, and accessories. WGACA purchases goods from individuals and international whole-sellers, without asking for documentation of how they obtained title to the goods. It “guarantees the authenticity of all products sold” by employing a team of in-house experts who authenticate all goods before they are sold. But it does not dislcose that these in-house experts have never worked for or been trained by Chanel. It also, since 2017, stopped publicizing on its website the Chanel serial number of goods it has available for sale. In 2020, WGACA added the disclaimer: “WHAT GOES AROUND COMES AROUND IS NOT AN AUTHORIZED RESELLER NOR AFFILIATED WITH ANY [sic] THE BRANDS WE SELL.”

WGACA also advertises its products using a combination of its marks and the marks of all of the luxury fashion houses that it sells. It used Chanel marks and indicia, such as Chanel artwork and images of Chanel runway shows, in advertisements and displays featured in-store and on its webpages, social media, and direct-to-consumer emails. Until 2017, it also used the hashtag #WGACACHANEL in its social media posts.

Aside from the allegedly inauthentic/stolen goods, Chanel brought false association claims based on emphasizing Chanel too much: WGACA’s

retail displays’ prominent use of the Chanel Marks, like a giant CHANEL No.5 perfume bottle or CHANEL-branded cake; direct-to-consumer email advertisements that prominently displayed the Chanel Marks, frequently in WGACA’s stylized font; use of #WGACACHANEL in social media posts; and non-product specific advertising, like ads for general WGACA sales, with prominently featured CHANEL-branded items front and center Additionally, Chanel points to WGACA’s website which uses images of and quotations from Coco Chanel (at times stylized in Chanel’s font), and includes statements like “Buy WGACA CHANEL- 100% Authenticity Guaranteed.”

“Chanel points to at least one Chanel customer staying at the Plaza Hotel who saw a WGACA advertising display and went to the nearby Chanel boutique and requested the discount promised in WGACA’s advertisement. Chanel’s customer service call center records have also captured similar instances of confusion on the part of several callers.”

For false association, there was no burden on Chanel to prove injury because lost control over public perception of its goods or services counts as harm. I know this is baked into the law, but: Aside from the theoretical problems with that merger of risk and harm (a risk is not a materialized risk), there’s a separate flaw when the posited harm comes from false association. You first should have to establish that the false association makes it likely that Chanel lost control over public perception of its goods and services. And the evidence that this happens—that consumers blame brands for their partners’ misbehavior, if there is any—is just lacking.

Confusion theory for acts relating to genuine Chanel goods: Because of the nature of the claim, similarity of marks, bridging the gap, quality of products were inapplicable, and the marks were famous, which favors finding confusion. [This is just … dumb as applied to a first sale case, just as it is as applied to a parody case. Mark strength might, all else being equal, increase likely confusion when there are actually two different marks in the case, the plaintiff’s and the defendant’s similar mark. (Though for very strong marks this too is implausible.) But the fact that Ford is famous for cars doesn’t make it more likely that a used-car seller will cause false association with Ford. If anything, fame may make it easier for Ford to avoid any linkage to the used-car seller.]

Proximity of the products: A factfinder would have to decide the relevance of new v. second-hand.

Actual confusion: A customer viewed a WGACA ad featuring a CHANEL-branded handbag and, believing it to be a Chanel ad, asked for the discount to be applied at the Chanel boutique. And multiple customers contacted Chanel customer service representatives with inquiries about Chanel goods sold by WGACA. But WGACA argued this wasn’t confusion as to affiliation (they are clearly known to be a Chanel product sold second-hand) but simply over whether Chanel will honor the second-hand discount. This was for the jury, as was Chanel’s survey and criticism thereof.

Bad faith: WGACA was aware that use of the Chanel marks and indicia was “helpful” to driving its sales, in part because an association with Chanel was a “value add.” “But that fact is not dispositive because ‘[p]rior knowledge of a senior user’s trade mark does not necessarily give rise to an inference of bad faith.’”

Consumer sophistication: Favored WGACA. 

Nominative fair use factors: Also for a factfinder. The use of “Chanel” was probably necessary to describe WGACA’s product, but there was a dispute over whether it used more than necessary and whether it did “anything that would, in conjunction with the mark, suggest sponsorship or endorsement by the plaintiff.”

Courts have to consider “whether the alleged infringer ‘step[ped] over the line into a likelihood of confusion by using the senior user’s mark too prominently or too often, in terms of size, emphasis, or repetition.’ ” WGACA argued that it shows the Chanel branded products featured in the same way as other luxury goods, like Louis Vuitton. But, in a similar case against The RealReal, the court relied upon the fact that “Chanel has identified no facts suggesting that The RealReal displays CHANEL-branded goods ‘more prominently than other luxury-brand goods,’ ... or that The RealReal uses Chanel marks in any other capacity than to identify Chanel products as Chanel.” By contrast, Chanel provided evidence of prominence/extra use. “For example, 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. As 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, WGACA also used Chanel marks and indicia in general advertisements for WGACA and to advertise upcoming sales, despite not advertising any specific Chanel product.” WGACA disputed this, but that was an issue for the factfinder.

Likewise, a factfinder could conclude that WGACA did something that “in conjunction with the mark, suggest[s] sponsorship or endorsement” by Chanel and has obscured the “true or accurate relationship between” the parties, because of (1) Chanel’s consumer survey, which found consumers perceived WGACA to be affiliated with Chanel based on how WGACA listed Chanel products on its website; (2) WGACA’s claim on its website and in advertisements of “WGACA CHANEL- 100% Authenticity Guaranteed” and its inclusion of a letter or card of authenticity with its products; (3) its yearly “Coco Chanel birthday Sale”; and (4) its use of pictures or purported quotes of Coco Chanel on social media and on its website.

Though WGACA claimed that it used the same type of ads for other luxury brands, it didn’t offer evidence of such ads. TheRealReal weighed a website disclosure in that site’s favor, but WGACA’s website had no similar disclosure until April 2020, after this lawsuit was brought. “This factor thus favors a finding of consumer confusion.”

Neither party could prevail on summary judgment.

As to the allegedly non-genuine/never subject to authorized sale items, things were simpler: “[T]he sale of non-genuine goods creates consumer confusion and is sufficient use to establish liability under § 1114(1) (a) and § 1125(a)(1)(A) without resorting to application of the Polaroid factors” (cleaned up). Goods aren’t genuine “if they do not conform to the trademark holder’s quality control standards, even if they were manufactured by the mark holder.” And lack of conformity “can be established by a lack of evidence, or a showing that plaintiff never generated a record of conformity as it usually does in the course of business.” Likewise, goods aren’t genuine “If the trademark owner did not approve the original sale” “... or if they differ materially from the product authorized by the trademark holder for sale.”

There were four categories of items in this group:

First, 50 bags sold with serial numbers that were not verified by Chanel’s internal record system, ORLI, which chronicles every phase in the production cycle. “Chanel argues that these serial numbers went missing before being assigned to a bag and, as a result, the ORLI system has no notation that bags with those serial numbers ever passed through the quality control procedure and were authorized for sale.” But “the evidence tells competing stories of how Chanel conducts its quality control procedures and thus the question of whether the bags were actually subjected to them is best left for the jury.” There was some evidence that Chanel’s internal quality control systems didn’t record everything that actually happened. Likewise, whether Chanel authorized the initial sales was also disputed. Chanel pointed to its lack of internal records that the bags were authorized for sale, but “Chanel itself offers contradicting explanations of how its internal system would record the authorization for sale of a bag that went directly from the factory quality control processes and into the market rather than first passing through a distribution center. WGACA also calls into question the reliability of Chanel’s record system.”

But the claim here wasn’t moot for lack of an appropriate remedy, since Chanel was seeking disgorgement of profits and an injunction. Disgorgement was possible even without egregious conduct; “there are issues of fact as to WGACA’s mens rea and whether it acted in reckless disregard, in willful blindness, or was simply unaware its sale was an infringement. … It may have been reasonable for it to assume the bags’ marketability.” Although injunctive relief might be complicated, it would be possible to require WGACA to publicize the serial numbers on the products it sells.

Second, point of sale items bearing the Chanel logo: Chanel claimed that the point-of-sale items were never authorized for sale but were instead loaned to retailers as counter decor. WGACA offered no evidence that Chanel authorized the initial sale. They were infringing as a matter of law. “[D]isgorgement of profits and injunction are available remedies, the applicability of which is premature to resolve at this stage.”

Third, eleven bags with serial numbers that were stolen from Chanel’s Renato Corti factory. [The court drops a weird footnote saying that items made in an owner’s factory and meeting its specifications, sold without authorization, would be infringing but not counterfeit, which is important because of the more severe penalties for counterfeiting. That has some equitable appeal but is not the law, and seems to contradict what the court then holds.]

Chanel was entitled to summary judgment on the grounds that the bags were not put through Chanel’s quality control processes and not authorized for initial sale by Chanel, even though there were factual issues about whether the bags were actually made by Chanel factories.

Chanel argued that this also constituted counterfeiting under § 1114(1)(a). “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.” Moreover, “[e]vidence that there are discrepancies between a company’s internal product-identification information and the actual characteristics of the contested goods is sufficient to establish a prima facie case that the goods were not manufactured by the trademark holder and thus are counterfeit.” There was evidence of this, but WGACA proffered evidence in support of its argument that the bags could have stolen serial numbers and still have been made in Chanel factories; Chanel employees could not specifically identify issues with the authenticity of two examined bags, including their hardware, which was significant because, in the words of Chanel’s outside counsel, “in the vast majority” of counterfeiting cases, “we can tell that they are counterfeits because the metal bits are not original.” A reasonable jury could find either way, so the counterfeiting claim was not amenable to summary judgment.

Finally, Chanel argued that two handbags sold by WGACA were non-genuine and counterfeit because, according to Chanel’s records, the characteristics of bags with those serial numbers were different from the characteristics of the bags WGACA sold. There was a genuine dispute about one bag’s status, while another was sold under a serial number for a different type of bag and thus Chanel won summary judgment as to that bag.

There was no basis for holding WGACA liable for engaging in counterfeiting itself, as opposed to selling counterfeits; “because Chanel’s cause of action cites 15 U.S.C. § 1114(1) generally, the Court dismisses these claims of counterfeiting but allows them to proceed on claims of infringement under section 1114(1)(a).”

False advertising: WGACA argued that Chanel failed to adequately create a fact issue on injury. Injury can be presumed for comparative false advertising, or deliberate deception in a two-player market, but there’s no presumption when “a misleading advertisement does not make comparative claims about a direct competitor.” Chanel argued that WGACA’s explicit use of the Chanel marks and the parties’ overlapping consumer base justified presuming injury, but this was not a two-player market; other resellers were also potential victims of false advertising.

Still, Chanel 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.” Chanel’s General Manager of Fashion 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.” [Seems highly inconsistent with first sale, at least for the non-counterfeits.] A jury could decide who to believe.

The NY GBL claims were dismissed for want of injury to the public interest “over and above ordinary trademark infringement.”