Everything isn’t Gucci: Trademark law and the secondhand luxury goods market

June 18, 2021 - Secondhand luxury re-sale is on the rise and so are concerns regarding authenticity, modification, and market control.

While certain philosophical issues have always surrounded the issue of “real” versus “fake,” “original” versus “unauthorized reconstruction,” the stakes are now higher than ever: according to Vogue, “[i]n 2019, resale grew 25 times faster than retail — and what is now a $28 billion secondhand-apparel market will more than double to an astonishing $64 billion by 2024.”

These issues have come to a head in Chanel Inc. v. RealReal Inc. The RealReal, founded by Julie Wainwright, is a California based company specializing in secondhand luxury consignment. The RealReal takes possession of goods and guarantees that what it sells is authentic. However, Chanel has asserted that The RealReal has sold eight counterfeit “Chanel” items to customers.

According to Chanel, “[t]he only way for consumers to ensure that they are in fact receiving genuine CHANEL products is to purchase such goods from Chanel or from an authorized retailer of Chanel.” Chanel does not sell secondhand goods and has no involvement in authenticating any secondhand Chanel inventory. Unfortunately for luxury re-sale companies, entities that take possession of goods are strictly liable for trademark infringement.

Section 32(1)(a) of the Lanham Act, 15 U.S.C.A. § 1114(1)(a), imposes civil liability on any person who, without the consent of the registrant “use[s] in commerce any reproduction, counterfeit, copy, or colorable imitation of a registered mark in connection with the sale, offering for sale, distribution, or advertising of any goods or services on or in connection with which such use is likely to cause confusion, or to cause mistake, or to deceive.”

In general, a person who places a counterfeit item within the stream of commerce may be liable for violating trademark law. Trademark law aims to prevent consumer confusion so that consumers can reasonably depend upon the item they are purchasing to retain the brand's characteristics. Otherwise, infringing trademarks or counterfeit items may induce a consumer to purchase an item when they otherwise would not have.

Individuals are able to sell, display, or offer goods under its original trademark pursuant to the first sale doctrine. However, the first sale doctrine does not protect a defendant who makes or sells a reproduction of a copyrighted work. Similarly, the first sale doctrine does not apply to an item that is materially different than the one sold by the trademark holder.

The Fifth Circuit’s decision in Rolex Watch USA, Inc. v. Meece is the most instructive case regarding the secondhand luxury goods market and what level of “materially different” constitutes trademark infringement. Meece holds that replacing a necessary and integral component of a Rolex watch with a non-Rolex approved part, including any non-Rolex customizations, renders the entire watch counterfeit.

The court found that the bezel on a Rolex watch is a necessary and integral part of the watch because it serves a water-proofing function. The court also described bracelets and dials as necessary and integral parts because a watch cannot be worn without a bracelet and a watch cannot tell time without a dial.

As a result, aftermarket alterations to the Rolexes in question were significant enough to create completely "different" products, deserving the designation of counterfeit.

While the Fifth Circuit found it relatively simple to determine what parts of a Rolex are necessary and integral (essentially all of them), such a test is much more difficult to apply to other luxury goods. Take, for example, a pair of Christian Louboutin heels, a coveted and highly counterfeited status shoe. Is replacing a heel tap at your local cobbler a replacement of a necessary and integral part?

Following this logic even further, what is one to do if the interior zipper of their Chanel flap is damaged? If a person wants to have their cobbler repair it, potentially using a "non-Chanel" zipper, then should we think of this entire bag as a literal counterfeit? Most would still regard this altered bag as authentic, but following the logic of Meece, it would technically be affecting the very function of the bag itself, necessitating a counterfeit designation.

While it may make sense to some to continue to be this exacting and critical when it comes to individuals who make a living "piggybacking" off a brand's trademarks, such criticism ignores realities of ownership.

Things break, and components need to be fixed or replaced; does this mean that said alterations, which may be more necessary than discretionary, need to occur through the very brand itself? Luxury brands may continue to advance a strict definition of material alteration in an effort to prevent secondhand goods from cutting into sales of new luxury items.

Gone are the days of a single person selling a fake Fendi Baguette out of the trunk of a car; today, counterfeit goods are knowingly or unknowingly being sold on eBay, Poshmark, or The RealReal. The court in Tiffany (NJ) Inc. v. eBay Inc. was the first to apply the concept of contributory trademark infringement to an online marketplace.

In this case, Tiffany & Co. ("Tiffany"), a seller of branded jewelry, among other items, sued eBay, an online marketplace that connected various buyers and sellers, for trademark infringement and other claims in relation to eBay's advertising and listing practices.

eBay facilitates sales between independent buyers and sellers on its platform, collecting various fees from its user base along the way. Because eBay exists to facilitate the sales that occur on its website, it does not take physical possession of the items that are sold, nor does it know when items are delivered to buyers.

Despite their relatively hands-off approach toward the sales themselves, eBay was aware that sellers on eBay were selling counterfeit Tiffany jewelry under the guise of them being authentic Tiffany pieces.

The court found that eBay was not liable for trademark infringement because it did not exercise sufficient control over the infringing conduct. To successfully establish liability, a service provider must have more than a general knowledge or reason to know that its service is used to sell counterfeit items.

Essentially, a trademark holder would have to show that a service provider knew or had reason to know of specific instances of actual infringement beyond those that it addressed upon learning of them.

The court acknowledged that this ruling was creating a willful blindness problem, referring to the fact a service provider could turn a blind eye towards the existence of trademark infringement on its platform in an effort to avoid their own liability.

Tiffany (NJ) Inc. represents the best possible outcome for companies in the luxury goods market because platforms are rewarded for not exercising sufficient control over the infringing conduct, creating massive grey areas in regards to authenticity of luxury goods.

These grey areas are maximized when a third party selling platform can maintain that it prevents fakes from appearing on the platform, but does not take enough action to be regarded as exercising sufficient control over the items being sold.

Tiffany (NJ) Inc. rewards a "hands off" platform while simultaneously disincentivizing a platform from taking an active role in determining an item's authenticity for the benefit of consumers. As a result, companies that take possession of secondhand luxury goods, such as The RealReal, have two options: sell authentic goods one hundred percent of the time or stop taking possession of goods.

Proceedings in Chanel, Inc. v. RealReal, Inc. are currently on hold while the parties engage in mediation. However, the legal issues surrounding secondhand luxury re-sale will continue to exist even if a settlement is successfully negotiated.

Consumers who care about bargains and sustainability are fueling other re-sale platforms like Poshmark, Vestaire Collective, and many others. Brands, and consumers, will still need to grapple with what level of modification makes a luxury secondhand good counterfeit.

Luxury brands would like to push for an expansive definition of "materially different" in an effort to protect market share in the face of rising sales of secondhand luxury goods. However, current interpretation of trademark law opens up endless opportunities for luxury brands to have courts deem altered yet authentic goods to be counterfeit, creating further restraints on alienation.

By silently chipping away at ways an individual can sell their luxury goods, luxury brands are protecting the market for their new goods while also making it difficult for former customers to tap into the equity of their luxury investments.

Previous precedent, specifically regarding control over product, may result in a stop to innovation in the secondhand luxury goods market.

Companies that take possession of goods in an effort to provide authentication must be correct regarding its assessments one hundred percent of the time to escape potential liability. Or, a company may switch to a business model in which it does not take possession of goods, even if that theoretically means that more inauthentic items end up being sold to consumers.

Disincentivizing control over goods results in platforms adopting a hands-off approach regarding sales. While companies like The RealReal should not make absolutist guarantees regarding authenticity, improvement in preventing counterfeit items from entering the stream of commerce should be encouraged.

Until luxury brands and secondhand re-sellers agree to co-exist, luxury secondhand goods are stuck being sold in a manner that rewards a certain lack of oversight.

 Source - https://www.reuters.com/legal/legalindustry/everything-isnt-gucci-trademark-law-secondhand-luxury-goods-market-2021-06-18/

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