- The RealReal reached a settlement for $11 million in cash to resolve a class action lawsuit brought by an investor that centered on the luxury resale platform's authentication claims.
- Terms of the deal, which include releases for defendants, were outlined in a stipulation before a federal court. It represents roughly 10.5% of the maximum potential damages plaintiffs could have received.
- The lawsuit was initially filed in November 2019. An amended complaint from this April alleged that The RealReal's authentication process "fell far short of its description," and investors were hurt as details of the process leaked out.
Launched in 2011, The RealReal's pitch to customers relied on a systematized authentication process, with the CEO saying there were "no fakes" on the site. Shortly after the company went public in 2019, CNBC cast a harsh spotlight on that process in a report that claimed "not everything is authenticated by an expert and employees work under strict quotas that lead to fakes being sold on the site."
CNBC's reporting, as well as internal documents, were cited in the class action, led by investor Michael Sanders. In the amended complaint, plaintiffs alleged only a small fraction of items, deemed at high risk of counterfeiting, were processed by The RealReal's "small group" of expert authenticators.
"The vast majority of items supposedly 'authenticated' by the Company were actually reviewed only by the Company's copywriters," the complaint states." These copywriters were low-wage hourly employees, often with little or no experience in fashion or luxury products. They received at best 1-3 hours of training on the immense number of products and brands they were expected to authenticate, and much of this training was focused on how to process the items for sale on the Company's website as fast as possible."
After the CNBC story broke, The RealReal's CEO hedged the "no fakes" language of the past in a message to customers, and in a statement to media the company stood behind its process. Last year, the company enhanced its authentication process with algorithms that score risk for items and consignors.
Today in securities disclosures, The RealReal says of its process: "We continue to invest and innovate in authentication. We believe we have the most rigorous authentication process in the marketplace."
Resolving the investor lawsuit allows The RealReal to close the books on at least one part of the drama that has hung over it since its initial public offering.
It has other challenges to manage, besides. RapidRatings metrics show The RealReal has suffered continuing financial weakness, exacerbated since the pandemic started. The company has posted significant net losses for each of the past three years and has an accumulated deficit of $532 million.
For the first nine months of this year, The RealReal's operating and net losses are trending yet higher than last year, which totaled out to be its largest loss of the past three years. Its total revenue for the most recent period has grown 53%.