Design & Luxury

What is this all about?

Hermès International and Hermès of Paris, Inc. (“Hermès”), are well-known for their highly sought-after handbags, including the Birkin® bag. Earlier this year, two individuals filed a class action lawsuit against Hermès alleging several anti-competitive violations. Specifically, the lawsuit asserts that the way Birkin® bags are sold, which is what, in many respects, makes them exclusive and sought after, is illegal.

How do you get a Birkin® bag?

According to the assertions of the lawsuit, Hermès Birkin® handbags are not available for purchase through any Hermès website, and are often not available for purchase at Hermès retail brick-and-mortar stores, except upon request and only if the customer meets certain criteria. Before a Hermès consumer will be offered the opportunity to purchase a Birkin®, the consumer must first build-up a significant profile by maintaining a certain spending level at Hermès through the purchase of other Hermès products. More exclusive limited edition Birkin® bags may be even more difficult to obtain without first spending a substantial amount of money on other items. This marketing strategy has taken social media by storm with several Instagram® influencers confirming the difficulty in obtaining a Birkin® even if the customer has the ability to pay for it.

So what’s the problem?

Limited edition products (i.e., those with only limited production) are common across many types of consumer goods, and customer loyalty programs that offer discounts and exclusive access to specific goods and services seem near ubiquitous in retail, so what exactly is the issue with the Birkin® sales technique?

The lawsuit claims that one of the provisions of the Sherman Act—a Federal law passed back in 1890— aimed to preserve free and unfettered competition in part by prohibiting certain arrangements that place a restraint on trade or commerce in the United States. One such prohibited restraint is “tying arrangements.” Generally, an illegal tying arrangement is an agreement by a selling-party to sell one product, here the Birkin Bag (the “tying product”), only upon the condition that the buyer also purchases a second product, here other Hermes products (the “tied products”), or at least agrees not to purchase the tied product from any other supplier. Although some forms of tying arrangements may be permitted, the law is generally triggered if the seller has substantial market power in the tying product. The lawsuit also alleges violation of the California Unfair Competition law, which is broader in prohibiting unfair and unlawful business conduct, among other things. Some illegal tying arrangements have involved selling a patented tying product (i.e., a product that consumers are unable to obtain from any other supplier, thus granting the seller clear market power) along with (typically unpatented and less desirable) tied products from the patent holder. This arrangement has been specifically characterized as providing an unfair extension of the patent right to the unpatented tied products because, effectively, the patent on the tying product is used to stop purchases of the unpatented tied products from other sources.

According to the Plaintiffs in this case, Hermès “implemented a scheme to exploit [their] market power by requiring consumers to purchase other, ancillary products from Defendants before they w[ould] be given an opportunity to purchase a Birkin[®] handbag.” The case asserts that the Birkin® bag is a tying product and the supplementary goods, which must be purchased to obtain access to the tying product, are the tied products of an illegal tying arrangement. Basically, the suit asserts that the very exclusivity of the Birkin® bag, which makes it so desirable, gives Hermès market power and creates the problem.

Product exclusivity and the generation of limited editions may allow a company to increase its prices or desirability based on a simple supply and demand analysis, but the Hermès case presents the question if the offering for sale of certain products to an exclusive list of persons who are selected based on their purchases of other goods is allowed. While this case is in its early stages and Hermès recently filed a motion to dismiss, there is a legitimate concern within retail, and specifically the luxury retail space that derives value, in part, on the exclusivity of its products, that sales of limited edition products only to selected customers could open the door to liability to those who cannot gain access to such products.

If you have any questions regarding the potential impact of this case, or would like to know more about how the law around tying arrangements could affect your business, please contact one of our Design & Luxury or Intellectual Property attorneys.