Coach sues city of Chicago over counterfeit bags * Lawsuit says fake bags sold at city market * Chicago says initiated a policy of investigation By Jonathan Stempel Ny, May 21 (Reuters) - Coach doesn't want the City of Big Shoulders to allow vendors to place knockoff bags on people's shoulders. Coach Inc (COH.N), the producer of leather handbags and other goods, sued the town of Chicago now for allowing the sale of vintage coco chanel goods at the New Maxwell Street Market, about two miles (3.2 km) southwest from the downtown Loop. Based on the lawsuit filed on Wednesday in Chicago federal court, Coach sent an investigator towards the market last Aug. 9 and found several of the more than 300 vendors selling "counterfeit Coach products in plain view." Fourteen days later, working with Chicago police, the investigator returned and purchased a fake $18 "Coach" handbag from one booth along with a fake $24 "Chanel" handbag from another booth, the lawsuit said. Both vendors were arrested and 351 fake coco chanel earrings Coach products put together at their booths, it said. Coach said Chicago has ignored its demand it halt the illicit sales, which have continued into 2010. Saying it's suffered "irreparable injury," Coach is seeking $2 million of damages per violation, punitive damages, an injunction halting the improper sales and other remedies. Melissa Stratton, a spokeswoman for Chicago's law department, said the town has not been served using the lawsuit, but is starting an investigation into Coach's allegations. Many luxury goods companies sue to safeguard trademarks and prevent counterfeiting they say damages their reputations, confuses consumers and reduces sales. Net sales for chanel handbags totaled $3.23 billion in its last fiscal year. In March, Coach sued Kmart Corp, one of Sears Holdings Corp (SHLD.O), for selling luggage it said looked too much like a pattern it trademarked. That lawsuit was filed inside a federal court in New York, where Coach is based.