Exclusivity vs Antitrust: The Hermès Birkin Bag Lawsuit Unveiled

Hermès was recently hit by a lawsuit filed by two customers from San Francisco for violation of unfair competition and antitrust laws, especially concerning the Birkin and the Kelly bags.

The infamous bags have long been a symbol of wealth and exclusivity, thanks to the women who had given them their names: Jane Birkin and Grace Kelly. These two icons embodied the Hermès style and allowed the brand to expand its legacy and prestige worldwide to this day.These bags are meticulously crafted by expert artisans who spend at least 18 hours on each piece, which carries a unique code indicating the year it was made, the workshop where it was crafted, and the artisan responsible for its creation. This is the main reason why, at the time of release, the Birkin bag was around 2.000 dollars. As of today, the price has increased by 14% per year; the cost of a “standard” Birkin bag is around 10.000 dollars, while others that feature crocodile leather or diamonds, can retail at around 200.000 dollars.The worthiness of the bags is the result of the allure that Hermès has crafted and the idea of exclusivity and elusiveness that has spread around the brand. To keep alive the myth that legitimates the high prices of the products, Hermès uses several strategic tools that brought the two Californian customers to file a complaint. In the first place, the accused selling practice consists of refusing to disclose the amount of Birkin and Kelly bags produced in a year, but mostly by selecting who can buy them, compelling the customers to buy other ancillary products, such as other leather goods, scarves, and home gadgets, in order to create a “sufficient purchase history” to become loyal customers who deserve access to this exclusive market.

As just said, these play-hard-to-get tactics are the basis of the class action proposed in the Northern District of California by two Hermès customers, Tina Cavalleri and Mark Glinoga, who are now challenging the iconic brand’s sales practices, particularly concerning its highly coveted Birkin and Kelly bags. The plaintiffs seek a class certification, an injunction preventing Hermès from continuing to engage in the practices set forth in the complaint, and an award of monetary damages.

At the core of the lawsuits is the allegation that Hermès has engaged in anticompetitive practices, the claim is based on the principles of the Sherman Act and of the Cartwright Act.The Sherman Anti-Trust Act (1890), proposed in a period of widespread public hostility toward corporations that affected consumers with high prices on essential goods, was enacted to control concentrations of power that reduced economic competition. It does so by narrowing trusts, monopolies, and cartels.It is divided into three key sections: the first one defines and bans specific means of anti-competitive conduct, the second one is about results that, by nature, are considered anti-competitive, and the third one extends these directions to the District of Columbia and U.S. territories.Moreover, the plaintiffs also brought the claim under Californian law, where the Cartwright Act (1907) represents the Californian counterpart of the Sherman Act and of the Clayton Antitrust Act (prohibits mergers and acquisitions considered harmful to competition).The Cartwright Act prohibits the “combination” of resources by two or more persons to restrain trade or commerce or to prevent market competition.While the Sherman Act prohibits only restraints of trade, the Cartwright Act is more detailed. It includes price fixing, group boycotting, market division schemes, exclusive dealings, price discrimination, and the ill-famed practice of tying, object of the accusations toward the Maison.

According to the lawsuit, the plaintiffs argue that Hermès practice of requiring customers to purchase ancillary products before being eligible to buy a Birkin or a Kelly bag results in “tying”, which refers to the sale of a product (the Birkin or Kelly) being conditional on the purchase of another separate product (other Hermès good). “Most consumers will never be shown a Birkin handbag at Hermèsretail store,” the lawsuit says. “Typically, only those consumers who are deemed worthy of purchasing a Birkin handbag will be shown a Birkin handbag (in a private room).”If we further analyze the contest in which this controversy is settled, the lawsuit might also shed light on Hermès’ intricate sales dynamic, which reportedly includes a commission structure that incentivizes sales associates to promote ancillary products over Birkins and Kellys given that, they gain commission on any product (1.5% on non-Birkin handbags and 3% on other ancillary products) but for the two elusive bags on which they do not obtain any percentage.This practice, the plaintiffs argue, not only restricts access to the bags but also indirectly coerces customers into spending more on other items, potentially violating antitrust laws.Therefore, the controversy extends beyond the bags themselves, touching on Hermès’ broader market strategies and the luxury retail landscape. Moreover, allegations also suggest Hermès’ tactics may contribute to maintaining its status and pricing power within the luxury market, potentially at the expense of fair competition and consumer choice.

Hermès currently has to overcome the allegations substantiated by the two Californian customers, and Maison’s defence may hinge on demonstrating the legality of its sales practice and the absence of a genuine monopoly in the luxury handbag market: also, the absence of a formal policy outlining minimum spending requirements makes it challenging to prove that ancillary products are being forced on buyers and facilitates Hermès attempts to dismiss the claims made by the plaintiffs; thus, this legal case poses intricate challenges for the plaintiffs and the likelihood of the plaintiffs substantiating their claims remains highly uncertain at this juncture.

The outcome of this case remains uncertain, mainly because judicial treatment of tying arrangements has shifted over time. In the 1940s, the Supreme Court released opinions displaying scepticism towards tying. For example, in International Salt Co., Inc. v. United States, the SupremeCourt held that the company’s business practice of forcing its customers who lease industrial machinery to buy salt from only them is a violation of antitrust laws. The court reasoned that the likelihood of a salt monopoly was “obvious” because the “volume of business affected” (annual sales of salt used in the machines were about $500,000) could not be said “to be insignificant or insubstantial.” In Standard Oil Co. of California v. United States, the Supreme Court stated that “[t]ying agreements serve hardly any purpose beyond the suppression of competition.” However, in 2006, the Supreme Court “rejected” its previous dicta that tying serves “hardly any purpose beyond the suppression of competition. Besides the courts’ increased tolerance toward tying practices, the plaintiffs face additional hurdles. Their case centers on Hermès’s “tying policy,” which is more complicated than depicted by the plaintiffs.

As this case progresses, it promises to offer insights into the delicate balance between luxury branding and antitrust allegations and stands to impact other luxury brands’ sales and marketing strategies, particularly given the prevailing legal landscape, which appears to prioritize antitrust scrutiny.Moreover, this controversy may have broader consequences, as it will concern not only the U.S. but also Europe and its established fashion industry since the legislation has enacted in recent times several acts that implement antitrust measures.Specifically, article 102 TFEU, which prohibits abusive behaviour by companies that have a dominant position in the market, can be seen as the Sherman and Cartwright Act’s counterpart.Article 102 TFEU claims that detaining a dominant position in a market is not in itself illegal, as long as the company ensures that its conduct does not misshape competition. Furthermore, the article especially lists several abusive practices that can be considered illegitimate, such as: imposing unfair purchase or selling conditions; limiting production; applying dissimilar conditions to equivalent transactions; and making the conclusion of contracts subject to acceptance by the other parties ofsupplementary obligations. The latter may be considered as the case in point that fits best the case analysed and Hermès’ conduct.Hence, the realisation that the outcome of this controversy might produce a ripple effect also in Europe and express its consequences also within the European antitrust legislation, especially the TFEU, which concerns all European markets that dismiss the abusive behaviour of its components.

CC: Erika Seidita, MariaSole Milani