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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