Southern District Distinguishes Online Marketplaces in Chanel v. The RealReal

May 4, 2020

Online marketplaces like Grailed, GOAT and The RealReal have emerged in recent years as fashion retail disruptors. Emerging online marketplaces have provided high-fashion consumers and “sneakerheads” access to an incredible assortment of “genuine” new, used, and vintage clothing, shoes, and accessories, often in a peer-to-peer marketplace, for well-below retail prices.  As with eBay in its 2010 dispute with Tiffany & Co., however, these emerging second-hand fashion marketplaces are now having to defend their use of genuine trademarks and marketing of counterfeit goods.

Background

A recent case concerning second-hand fashion marketplaces involves a dispute between iconic fashion house, Chanel, and high fashion consignment-retailer, The RealReal.  Chanel needs no introduction, but to those unfamiliar with The RealReal, it is an online and brick and mortar consignment shop that sells high-fashion second-hand merchandise to consumers through an online “marketplace.” The RealReal prides itself on its rigorous authentication process designed to ensure that every item for sale on The RealReal is “100% the real thing.” Unfortunately, these authenticity guarantees were not “100%” supported by its sales, as at least seven counterfeit Chanel items were sold to consumers by The RealReal.

The Court’s Decision

On March 30, 2020, Judge Vernon S. Broderick of the United States Southern District of New York issued a notable decision on Chanel’s trademark infringement and counterfeiting claims against The RealReal. Judge Broderick distinguished the Second Circuit’s decision in Tiffany v. eBay and denied The RealReal’s motion to dismiss Chanel’s counterfeiting and false advertising claims.  The Court, however, granted The RealReal’s motion to dismiss Chanel’s trademark infringement claims.

Counterfeiting Claim

Chanel brought trademark counterfeiting claims against The RealReal pursuant to 15 U.S.C. § 1114(1)(a) on the grounds that The RealReal had sold counterfeit Chanel products through its marketplace.  In its motion to dismiss, The RealReal analogized its marketplace to eBay’s and argued that it was not liable for the sale of counterfeit products in its marketplace.  The RealReal maintained that the Second Circuit decision rendered in Tiffany v. eBay should prevent the Court from holding The RealReal liable to Chanel.

The Tiffany Court held that eBay’s knowledge that users sold counterfeit goods on its marketplaces could not be the basis for a direct trademark infringement or counterfeiting liability because eBay had consistently removed counterfeit listings and taken steps to identify and remove any counterfeit Tiffany products for sale. The RealReal argued that, like eBay, it has implemented stringent measures to ensure the authenticity of the products in its marketplace and that it does not knowingly list counterfeit products for sale.

Despite these similarities, Judge Broderick rejected The RealReal’s argument and found that The RealReal’s marketplace differed significantly from eBay’s. The Court’s distinction was largely premised on the fact that The RealReal “takes possession of all items and physically evaluates every item to authenticate it.”  Chanel Inc. v. RealReal, Inc., 18-CV-10626 (S.D.N.Y. Mar 30, 2020).  The Court found that while eBay serves as merely a sales platform for peer-to-peer third party sales, and is not involved in any aspect of the individual sales, The RealReal is heavily involved with every aspect of every sale on its marketplace. 

The Court found that, as a result, “The RealReal itself controls a secondary market for trademarked luxury goods, and by curating the product offered through that market and defining the terms on which customers can purchase those products, The RealReal reaps substantial benefit.”  Id. at 22.  Therefore, the Court held that The RealReal should bear the burden of the potential liabilities and permitted Chanel’s counterfeiting claims to proceed.

Takeaways

Tiffany v. eBay was previously understood to provide broad protections for online marketplaces from direct liability under anti-counterfeiting laws so long as the marketplace took substantial steps to thwart the sale of counterfeit goods. Judge Broderick, however, took a narrower view of Tiffany v. eBay decision in finding that online marketplaces with substantial control of product authentication and marketing could be held responsible for the sale of counterfeit goods.  Although the full implications of this decision on online marketplaces are yet to be seen, companies similar to the RealReal, and entrepreneurs pursuing like-ventures, should take heed of the distinctions drawn in this case.

Trademark Infringement Claim

Chanel’s also alleged trademark infringement claims against The RealReal pursuant to 15 U.S.C. § 1114(1) based on The RealReal’s use of genuine Chanel trademarks.  To determine whether there was a likelihood of consumer confusion, the Court applied the eight-factor Polaroid test that the Second Circuit adopted in Polaroid Corp v. Polarad Electronics Corp., 287 F.2d 492 (2d Cir. 1961).

The Court also applied the three nominative fair use factors derived from New Kids on the Block v. News America Publishing, Inc., 971 F.2d 302 (9th Cir. 1992).  After analyzing the facts of the case using the applicable factors, the Court determined that The RealReal’s use of Chanels genuine trademarks constitutes nominative fair use.  The Court reasoned that retailers are permitted to use genuine trademarks to describe products so long as the retailer does not create confusion by implying affiliation with the genuine trademark holder.

Likelihood of Confusion and Nominative Fair Use

In its Polaroid analysis, the Court found that: 1) Chanel’s marks are incredibly strong and recognizable; 2) despite competing against Chanel’s primary market offerings, evidence shows that The RealReal’s secondary market may in fact bolster the primary market; and 3) Chanel showed no evidence of actual consumer confusion.  Balancing the factors, the Court concluded that “it is highly unlikely that a customer buying a secondhand Chanel product from The RealReal . . . would confuse the nature of the The RealReal’s business, the source of its products, or its affiliation—or lack thereof—with Chanel.”  Chanel at 18. 

The Court reached the same conclusion in its analysis of the nominative fair use factors, finding that “Chanel has not plausibly alleged 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.”  The Court also noted that The RealReal’s assurances of product authenticity, without more, were insufficient to create a likelihood of consumer confusion.

Because the Court found that Chanel had not demonstrated a likelihood of consumer confusion, overuse of Chanel’s marks, or an inaccurate depiction of the relationship between the parties, the Court granted The RealReal’s motion to dismiss Chanel’s trademark infringement claims.  The Court also held that The RealReal’s use of Chanel’s marks amounted to nominative fair use. 

Takeaways

Judge Broderick’s ruling essentially confirms the common understanding of the use of genuine marks to sell secondhand goods; nevertheless, this was a welcome affirmation for online marketplaces.   In the wake of this decision, online retailers should remain cautious about their use of unaffiliated brands’ trademarks to ensure the use of genuine marks does not signal confusing affiliations to consumers.