First Sale Doctrine – Not a Get Out of Jail Free Card

It is well established that under the First Sale Doctrine luxury resellers have the right to resell genuine, pre-owned goods, and advertise them as such. But does the doctrine give merchants carte blanche in advertising name-brand items in the secondary market?

A federal jury in the Southern District of New York recently answered “no” to that question in the case of Chanel, Inc. v. WGACA, LLC, 18 Civ. 2253 (LLS) (S.D.N.Y. Sep. 14, 2018).  The jury in the case awarded Chanel $4 million in statutory damages on its claims of trademark infringement, false association, unfair competition, and false advertising against What Goes Around Comes Around (WGACA), a reseller and marketer of Chanel products.

WGACA sells secondhand Chanel-branded products in its retail stores and on its website. In its complaint, Chanel alleged, among other things, that WGACA used the Chanel trademark and brand in its advertising and promotions—although WGACA is not an authorized Chanel retailer or affiliated with Chanel—and that its use of the Chanel trademark misled consumers into thinking that WGACA’s sales are affiliated with or sponsored by Chanel.

According to Chanel, WGACA’s retail stores prominently featured the Chanel brand and the WGACA website offered more Chanel-branded products for sale than those of any other brand.  Additionally, WGACA’s social media pages included quotations from Coco Chanel, photographs of Chanel-branded products, and photographs of models and public-opinion influencers wearing or carrying Chanel handbags, including photographs from previous Chanel advertisements.

Particularly problematic, WGACA’s website also contained a section titled “Authenticity Guaranteed,” which stated, that “[a]ny piece purchased at What Goes Around Comes Around or one of our retail partners has been carefully selected, inspected and is guaranteed authentic.” WGACA even provided letters of authenticity to its customers, such as one that read, “This letter confirms that item Q6HCHK00KB000 Chanel Black Long Tissue Box is an authentic Chanel decoration.”

What was not clear from WGACA’s websites and promotion, however, was that WGACA was not affiliated with Chanel and that Chanel had not, itself, undertaken any inspection or authentication of WGACA’s inventory.  Indeed, in its Complaint, Chanel challenged WGACA’s ability to guarantee the authenticity of the Chanel products it was selling, arguing that WGACA’s failure to authenticate Chanel products would harm Chanel’s brand by allowing low-quality knockoff products to erode Chanel’s reputation. That’s exactly what seems to have happened here.

While Chanel prevailed on all claims, the jury awarded damages based on its conclusion that 14 Chanel-branded handbags WGACA offered for sale—13 of which bore stolen Chanel Serial Numbers—were counterfeits, and that WGACA acted with reckless disregard or willful blindness in making the counterfeit sales. Separately, the jury also concluded that WGACA sold hundreds of Chanel-branded items, including display-only goods and giveaway items from fashion shows, that were not authorized for sale and had not passed through Chanel’s quality control procedures.

While luxury resellers have the right to resell genuine, pre-owned goods, this verdict reinforces that the First Sale Doctrine is not a free pass for use of third-party trademarks.  A  trademark owner can always enforce against use of its mark that creates the false impression of association or affiliation with the brand name.  And while resellers may accurately provide the name of a brand they are selling, the nominative fair use defense typically only protects against use of mark to the extent that is reasonably necessary to identify the product, not use of brand names and other indicia that suggest sponsorship or endorsement by the brand.

Perhaps more importantly, the verdict serves as a warning to resellers to be cautious in not overreaching in their efforts to make a sale. Indeed, resellers may risk liability if their own quality control measures are inadequate to identify and remove from resale non-genuine or counterfeit products—even in instances such as this where it appears WGACA might have had no way of knowing that at least some of the items it was reselling were not authorized or otherwise approved by Chanel for the market.  The problem is compounded when the reseller makes guarantees of authenticity, and crosses the line from nominative fair use to implying a business relationship between the brand and the reseller.

As the result in this case makes clear, brands would be wise to police the resale market and resellers should be careful authenticating products since selling counterfeit goods continues to be a risk not worth taking.