SECOND HAND LUXURY, FIRST HAND LEGAL ISSUES: THE LEGALITY OF LUXURY RESALE PLATFORMS

ABSTRACT

Luxury resale platforms are located in a particularly legally complicated area due to their intersection with sustainability, consumer demand and brand control. In general, the resale of genuine luxury products is allowed due to trade mark exhaustion principles, however, numerous potential legal risks may arise if the luxury product is altered, the condition of the product has been hidden from the initial buyer or due to the fact the resale platform misled the consumer regarding the authenticity or warranty status. This article will discuss the legality of luxury resale platforms as they pertain to Indian trademark law, and in so doing will consider Section 30 of the Trade Marks Act, 1999, passing-off principles, and the case law on parallel imports and post-sale prohibitions. Through applying the above legal framework, this article will conclude that while the current legal framework permits the lawful resale of authentic goods, the existing legal framework does not contain significant precision regarding regulating online resale practices, and in particular with respect to authentication claims made by luxury resale platforms and the marketing/advertising used by luxury resale platforms. Additionally, this article will analyse whether luxury re-sales are lawful only so long as there is transparency, accurate disclosure and non-misleading use of any trademark when supplying a resale platform with a good.

INTRODUCTION

Historically, luxury resale was not a prominent aspect of second-hand buying and selling until now. The growth of resale platforms allows consumers to sell and buy previously owned designer handbags, watches, shoes and clothing for multiple reasons, including economic savings, environmental conservation and accessibility.

Due to the recent influx of this growing segment, there has been a pressing legal question regarding how luxury brand owners can enforce their rights to sell authentic luxury products (that have been previously sold) without running afoul of the law; outstanding issues include issues concerning trademark infringement, passing off, and unfair commercial practices.

This matter is important because luxury brands create value not only by selling high-quality products but also because they provide exclusivity and control over how and where their products are sold, and how they are represented. Resale platforms disrupt this control by distributing goods outside of Authorised Retailers, in many instances making them appear like endorsed/certified products.

Accordingly, in India, this issue must be explored under the Trade Marks Act, 1999, with emphasis on Section 30 which reveals limitations on the Trademark Rights of the brand owner once a product has been lawfully sold, yet the act still provides for continued protection of the brand owner’s rights when there has been a material change to the product or the commercial statements made regarding the product are misleading and/or untrue.

According to this article, the resale of luxury items through a resale platform is completely legal and not illegal simply because the resale platform has branded/resale items on it. The primary issue regarding legality relates to how the reseller sources, authenticates, identifies and represents and/or displays the branded items sold or listed for sale on the resale platform. Reselling a legitimate branded item on a resale platform is largely defensible if the reseller does NOT alter the branded item, the reseller does NOT remove identifying characteristics from the branded item, or if the reseller does NOT exaggerate the authenticity of the branded item or falsely state that the item has the approval of the brand that originally sold the branded item. Therefore, the law does not prohibit resale. It strictly regulates the conditions under which the resale of luxury items is lawful.

BACKGROUND

Three connected concepts determine how and why luxury resale platforms operate within a legal framework: trademark exhaustion, passing off and consumer deception. Trademark exhaustion limits a trademark owner’s ability to control subsequent resales of trademarked products once these products have been lawfully placed on the market.

The main provision governing trademark exhaustion in India is Section 30 of the Trade Marks Act 1999; however, Indian courts have followed an exhaustion-based approach with respect to genuine goods.

Trademarks are not protected by a complete defence of exhaustion, as the defence becomes less robust when there has been a material alteration to the goods, where the goods have been repackaged, refurbished without the prior disclosure or sold in a manner that adversely affects the trademark owner’s reputation. This is especially relevant to the resale of luxury items because most resold and/or pre-owned luxury products are either authenticated, cleaned, repaired, restored, or sold without the original packaging and warranty. These commercial standards may be acceptable under any particular brand but could also expose the consumer to the risk of perceiving that he/she is purchasing new, authorised, and completely supported product(s) at the hands of the luxury retailer.

Passing off gives rise to an additional cause of action. If a reseller makes a false representation to a third party that his business has a connection with the brand which damages the reputation of that brand, trademark law allows the brand owner to sue.

This issue can arise in many ways, including through the use of platform names, descriptions of products by resellers or through other merchandising practices (such as using the term ‘verified’), and marketing that includes prominent references to trademarks.

Therefore, the legal framework of this area should not lead to any conclusions about the transfer of ownership. Resale of luxury goods involves a complex set of laws and regulations which govern lawful secondary markets and brands’ control over their identities as regards their respective trademark. The main objective of all parties involved in luxury resale is to determine whether there is a true relationship between an independent seller and the trademark of a particular luxury good, or whether there has been a misleading representation made regarding that relationship. This issue is amplified when it comes to internet-based sales, as digital representations of goods, algorithms that create search results for those goods, and rapid listing of goods make it difficult to distinguish between independent resale and retail sales that are authorised by the brand.

LEGAL ANALYSIS

According to Indian legislation, the Trademark Act of 1999 begins with Section 30. Section 30 allows trademark infringement claims not to apply where goods have been sold lawfully, and they are then resold within the marketplace, provided the physical condition of the goods has not been modified or altered. In relation to the luxury resale market, many platforms rely on arguments that they are simply ‘reselling’ original-branded products purchased from private sellers. Such a defence can work only if the condition of the goods remains original or genuine (in terms of how they appear) and are disclosed to be original/genuine (for truthful disclosure). This makes it important for prospective purchasers of luxury resale products to check each platform’s conditions before purchasing, as some platforms may have committed to providing ‘original/genuine’ luxury resale products, while others will not have given such a commitment.

The first legal question is whether the platform is, in fact, selling original/genuine branded products. If the answer is positive, then under trademark law, the trademark owner cannot normally block resale simply because the trademark owner wants to maintain exclusivity. Thus, the resale marketplace is consistent with the exhaustion doctrine. The trademark owner’s interest is not perpetual control over every downstream sale of and/or transfers of goods with the trademark, but rather that the brand owner is adequately protected from: (a) Deception; (b) Dilution; and (c) Using the trademark in confusion and/or in a misleading manner.

A luxury resale platform must tread cautiously in using such words as “certified,” “verified,” “approved,” or “guaranteed” because they may imply a relationship with the original, enabling them to be actionable as a misrepresentation if they are not specifically qualified. In addition, if an item does not have the original packaging, dust bags, serial tags, or warranty, then it must be explicitly disclosed by the platform. Failure to do so may render a legitimate resale an actionable form of commercial conduct, as it impacts the consumer’s ability to make informed purchasing decisions.

The other concern relates to the alteration or refurbishment of goods. When a good has been repaired, cleaned, or altered prior to resale, the reseller will need to assess and disclose whether the repair or alteration will materially impact the good. If it does materially impair or change the goods, the doctrine of exhaustion will apply to dilute the nature of the brand owner’s trademark rights with respect to the goods. This principle is especially relevant for handbags, shoes, and watches, as they are often refurbished and/or commercially necessary to refurbish. The issue is not whether to refurbish, but rather the failure to disclose refurbishment prior to resale.

The fourth area of concern is marketing behaviour. Resale websites for luxury brands utilise an enormous amount of the brand’s marks and images on their platforms in order to draw traffic from customers. While using a brand in this manner is not illegal by itself, the amount of visual content associated with a brand may create the appearance that the resale company is sponsored or affiliated with that brand. If this happens, the resale company could be faced with passing off claims, regardless of whether the product they sold was ever an authentic product.

Lastly, there is a lack of regulatory oversight. Indian trademark law was not designed with the online resale marketplace that exists today, and as such, does not have specific regulations around authentication, required levels of transparency for resale websites, or the use of brand-related online advertising by resale companies. As a result, the courts must rely on established principles of passing off and trademark infringement to enforce a rapidly evolving business model, as opposed to a more traditional one. While this allows for the law to adapt to new methods of business, it also creates significant levels of uncertainty.

CASE LAW DISCUSSION

Kapil Wadhwa vs. Samsung Electronics Co. Ltd. (Delhi High Court, 2012) is among the paramount Indian authorities on parallel imports of legitimate world-class Samsung merchandise. The ruling of this case indicates that, in relation to Indian Trademark Law, International Exhaustion is recognised as a principle, and as such, does not permit the Trademark Owner to stop the reselling or importing of legitimate products solely because they were originally sold outside of India. The relevance of this ruling to luxury reselling is that the Indian Trademark Law does not extend to provide the Trademark Owner with some form of perpetual control over the sale of a resold good. The true significance of this case lies in the concept of genuine goods legally being distributed in the marketplace, where they do not mislead customers regarding their origin, warranty, etc.

Effacement of trademarks and reconditioned products has also been addressed in recent decisions of the Delhi High Court regarding resale and impairment. The Court noted that where the Original Trade Mark is removed from the Reconditioned Product, and the Product has been materially modified, or sold with inadequate disclosure, the defence of exhaustion will no longer apply. The findings in these cases have much significance for luxury resale companies that recondition handbags, shoes or accessories before placing them on their luxury resale platforms. The conclusion is that although lawful resale can only occur if the identity and condition of the product are maintained accurately throughout the resale process.

Another case that provides a helpful comparative benchmark is Louis Vuitton Malletier v. My Other Bag, Inc. (U.S., 2nd Cir. 2016). This case is not an Indian case; however, it is relevant for our purposes here because the court found that parody and non-confusing use of a luxury brand’s trademark does not constitute actionable trademark dilution. The relevance for luxury resellers is that the court emphasised the importance of confusion and the commercial impression (visual representation) associated with trademarks. Therefore, this case supports the broader notion of trademark law that protects against misleading associations, but not against every use of a luxury trademark.

Together, these cases suggest that courts generally recognise and support lawful downstream commercial activities in genuine goods that are manufactured by reputable companies; however, they require honesty in marketing and advertising of goods to consumers (in terms of what is being sold). This general approach seems to parallel the legal issues created by luxury resellers.

CRITICAL ANALYSIS

While counterfeiting can generally be controlled through current law, the existing framework doesn’t provide clear standards of conduct for resale intermediaries, so it is difficult to determine which intermediary is legitimate.  This gap in the law allows courts to make enough room for preventing consumer fraud, but it does not provide clear written rules for how to prove that something is authentic, for how to refurbish, for how to brand a business through a platform or for how to disclose information about a company to consumers.  As a result, whether something is legal frequently depends upon litigation (after the fact) instead of determining if conduct is legal before an act occurs.

Another issue is the disparity in bargaining power between large luxury houses that can aggressively litigate, monitor their items for sale online, and enforce their brand’s image, versus small resale companies that may not have the economic resources to know what constitutes lawful referencing as opposed to unlawful referencing.  This disparity can lead to uncertainty in the law and significant commercial risk for small businesses in responsible secondary markets, which can contribute to sustainability and increase access to consumers.

There’s a legal distinction to be made between the sale of unaltered or unmodified products to consumers and those sold under the same or similar label after they’ve been altered or modified substantially. Additionally, the resale of refurbished products is neither illegal nor unethical; rather, it supports the circular-economy-building process. Therefore, consumers should be provided with adequate notice as to whether they are purchasing an authentic or refurbished product. Therefore, legal requirements regarding notice should not merely be recommendations to the seller but rather should have legal consequences for the seller selling without adequate notice.

The law should also strive to foster a marketplace for goods traded in circular economies while continuing to protect the reputation of brands. This can be done through additional requirements regarding the platform’s level of accountability; the establishment of uniformity in disclosures made by platform users; and more explicit treatment of authentication issues arising under both trademark and consumer law. The standards provided for in the Indian legal framework are somewhat less extensive than those that exist in countries with mature resale environments (including, but not limited to, issues related to misleading affiliation and improper post-retail representation); however, they have been developed reasonably well for resale in the luxury goods sector.

CONCLUSION

Luxury resale websites do not violate the law simply because they sell authentic used branded merchandise. In India, legal resale of authentic items generally has protection against trademark infringement based on the principle of “exhaustion” (i.e. a trademark owner can only prevent a previous owner from selling goods within the same jurisdiction if the goods were substantially changed, damaged or misdescribed after the original sale).

Based on this case law, the primary issue regarding the legality of luxury resale is less about whether the resale occurred, but more about how the resale occurred. The key legal protections in sale transactions (for both buyers and sellers) in luxury resale transactions are based on (1) obtaining goods from an uninvolved seller or market; (2) accurately disclosing the physical condition of goods before selling them, (3) correctly using trademarks throughout the resale process; and (4) accurately authenticating the goods sold in a way that does not mislead consumers. Courts and lawmakers should continue to protect resale markets as long as they can assure that no customer will suffer confusion and no brand will be unfairly exploited by its goodwill.

REFERENCE(S):

1. Trade Marks Act, 1999.
2. Kapil Wadhwa v. Samsung Electronics Co. Ltd, Delhi High Court, 2012.
3. Section 30, Trade Marks Act, 1999, India Code. (Indiacode)
4. Commentary on exhaustion and refurbishment under Indian trademark law. (Obhanmason)
5. Passing off principles under Indian trademark law. (Registerkaro, Depenning)
6. Louis Vuitton Malletier v. My Other Bag, Inc., 2^nd Circuit, 2016. (Forbes)
7. Recent analysis on luxury resale and trademark risk. (Thefashionlaw)
8. Analysis of the first sale doctrine and trademark resale issues. (Bonalaw)