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The Online Sale of Designer Goods — A Quick Overview for the Payments Industry

designer goods

Here at G2, we get a lot of questions about the online sale of designer goods to US consumers. For example: Who can legally sell these goods online? Are online consignment shops legal? When boarding a merchant, how can I tell if the website sells counterfeit goods or the real thing? To help answer these (and other!) questions, we thought it might be helpful to provide a quick primer regarding intellectual property (IP) issues involving these products.

 

Who can legally sell designer goods online?

Designer goods may be legally sold by:

  • the rightsholder (usually the designer);
  • authorized resellers who have a contractual relationship with the designer; and
  •  after the product has been lawfully purchased once, any reseller.

The rightsholder is typically the company that made the product. For example, Adidas is the rightsholder of Adidas shoes and apparel. The rightsholder may also include anyone that the rightsholder has licensed. For example, Cadbury has licensed its IP rights to Hershey in the US, although it produces its own chocolate internationally.

An authorized reseller contracts with the rightsholder to sell the designer product. These contracts typically grant the authorized reseller permission to use the rightsholder’s trademarks to advertise the goods. For example, Bergdorf Goodman, Bloomingdale’s, Jeffrey, Neiman Marcus, and Saks Fifth Avenue are the authorized resellers of Chanel fashion products in Manhattan. Why is it important to purchase products from an authorized reseller? One important reason: products sold by an authorized reseller are covered by the manufacturer’s warranty.

Finally (and perhaps most importantly): After a product has been lawfully sold the first time, the intellectual property rightsholder no longer has IP rights over that specific physical item. This means that resellers may legally sell branded products that have been lawfully sold at least once. This is known as the “first sale doctrine” or “exhaustion” doctrine.

 

What is the “gray market”?

The “gray market” is a term used to describe goods purchased or sold legally, but outside a manufacturer’s intended chain of distribution. Gray market goods are often purchased in a foreign country (at a lower price) and then resold in the United States. In the US, it is not illegal to sell gray market goods (although rightsholders dislike this practice because it can cause reputational harm and negatively affect revenue). Large discount businesses have been known to sell gray market goods.

There is a notable exception to the first sale doctrine that allows rightsholders to pursue claims against unauthorized resellers: if a product is being sold as new and “genuine” by an unauthorized reseller, the item cannot be “materially different” from the version sold by the rightsholder. If a product is “materially different” but sold as new then the rightsholder may have a claim under trademark law. The theory is that “material differences” create consumer confusion between the rightsholder’s product and the altered product, which results in a loss of the trademark owner’s goodwill. Courts take a broad view when determining whether differences are “material.” See, e.g., Michigan Telecommunications and Technology Law Review, A Material World: Using Trademark Law to Override Copyright’s First Sale Rule for
Imported Copies.

 

Who can legally use brand names and logos?

An authorized reseller’s distribution agreement typically includes the right to use the brand name and logo for marketing purposes.

An unauthorized reseller can use a brand name to factually describe the product it is selling; however, that same unauthorized reseller violates the law if it uses a brand name in a way that misleads the public. Often, this deception may be as simple as creating a belief that the reseller has a business relationship with the designer brand (i.e., that the reseller is an authorized dealer).

 

How about “inspired by” items?

The phrase “inspired by” generally limits trademark liability, as it serves to highlight that the product is not the brand owner’s. However, “inspired by” does not let an online merchant off the hook from other forms of intellectual property claims specific to the product. If the product is substantially similar to its designer “inspiration,” then it is very possible that there may be a cause of action under copyright, patent, or design patent law.

Please note: Not all “knockoffs” are violative. Some knockoffs might imitate a designer product without infringing on any IP rights. This can happen when the original product cannot be protected under the law. For example, items of clothing (e.g., a dress, shirt, or shoes) are typically not copyrightable because they are considered “useful articles.” However, design features that can be separated from the useful article can qualify for copyright protection. See, e.g., Star Athletica v. Varsity Brands, 137 S.Ct. 1002 (2017).

 

Can individuals sell their own used designer items?

Yes. It is legal to sell one’s own used products. However, individuals cannot use a designer’s copyrighted advertising or improperly use the designer’s trademark. Online businesses that sell pre-owned designer goods (e.g., online consignment shops) are also operating legally, unless they knowingly sell counterfeits or improperly use a designer’s trademark or copyrighted advertising.

 

How common is the sale of counterfeit goods online?

The online sale of counterfeit goods is rampant. The Government Accountability Office purchased 47 items from third-party sellers on popular websites; manufacturers confirmed that 20 of the 47 items purchased were counterfeit.

 

When boarding a merchant, how can I tell if the merchant sells counterfeit goods?

Unfortunately, it is often difficult to determine whether a product is counterfeit and only the rightsholder can confirm, with 100 percent certainty, that a product is genuine or counterfeit.

The following indicators may be used to analyze whether a product is counterfeit or legitimate: (1) negative reviews regarding the online storefront (although businesses with positive reviews also sell counterfeits); (2) use of high-risk online marketplaces; (3) spelling mistakes; (4) lower prices (although counterfeit goods may be sold online at similar price points as genuine products); (5) recently registered domain names; and (6) overuse of words like “genuine,” “real,” “1:1,” and “authentic.” In addition, certain brands are at higher risk of being counterfeited, including Gucci, Louis Vuitton, Chanel, and Balenciaga.

G2’s Persistent Merchant Monitoring Solution helps keep IP infringing merchants out of your portfolio. To find out more, contact us at info@g2llc.com.

 

See how our solutions can help you.

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