I Hereby Promise That You Are My One and Only-ish

Agreement-Torn

In our explorations of representations and warranties that are typical to contracts in the fashion business, we now come to one of the classics: the warranty that, by signing the contract, the party is not violating any other contracts it has signed. A typical such warranty would look like this:

Fashion Company represents and warrants that, by entering in to this agreement, it shall not violate the terms and conditions of any other agreement, arrangement or understanding to which Fashion Company or any of its affiliates is a party.

What is that about? Remember Mel Brooks’ The Producers (in any of its forms as movie, Broadway musical or movie of the Broadway musical)? The hero (loosely speaking) was Max Bialystock, a down-on-his luck Broadway producer who, with his accountant partner, tried to make a killing by selling far more than one hundred percent equity investment interests in his musical Springtime for Hitler. All he had to do to make the scheme work was to be sure that the show failed—which would not prove as easy as it first appeared.

If someone contractually sells interests in anything to different people so that they collectively have rights to more than all of what could have been sold, the seller has certainly made agreements that violate the terms and conditions of each of the sale agreements, resulting in a breach of this important warranty each time—if the seller was foolish enough to compound his problems by making such a warranty. Another all-to-common example: any Ponzi scheme or similar scam.

Surely, one of the most important places in the fashion business for such a clause is in a license agreement. The licensee needs to be very sure that the grant that it has received is valid and does not conflict with any grant made by the licensor to any other licensee; and the licensor needs to be equally certain that it is not granting conflicting rights to different persons. For example, if you are about to sign as the exclusive licensee for a brand in the “sportswear” category, would you feel that a license to another party for “activewear” violates your exclusivity? The answer, on those possible facts alone, is a resounding “maybe.” If you define sportswear broadly enough, even redundantly enough, to include, “all casual, active and athletic wear,” any license granted by the licensor to a third party for activewear would violate the warranty made to you for sportswear—and you would therefore have the basis of a claim and, if necessary, a lawsuit.

Here again, doing your diligence on your counterparty—and defining your terms—will go a long way toward making your contract into the protective blanket that you and your attorneys intended it to be.

Credit: Alan Behr

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Oil, Economics and the Fashion Industry

CrowdedShoppingMall-Escalators

I’m not an economist; I’m not even a market watcher. In fact, my stock picks notoriously underperform the Dow and the S&P. So, a January 3, 2015, article in The New York Times by Nelson D. Schwartz about dead shopping malls and how they reflect the nation’s economy should not have captured my attention. But it did, as did the www.deadmalls.com website referenced in the article.

Mr. Schwartz theorizes (with abundant support) it is a clear reflection of the national economy that many A-rated, high-end flagship malls that cater to the wealthy are thriving, while mid-level malls with stores like Sears, Kmart and J. C. Penney as their anchors that serve the working class falter. It’s just another testament to the widening income gap between the haves and the have nots.

Mother-ToddlerDaughter-ShoppingBut that may be changing. Gasoline prices have dropped significantly in the past five months. According to the U.S. Energy Information Administration, the average price for a gallon of gas on March 16, 2015, was $2.45. It was even lower at the end of January, just above the $2 a gallon mark, but it’s still much lower than it was last year, when gasoline prices during the summer hovered around $3.70 a gallon.

What does this mean for the fashion industry? Up to now, the economic recovery has disproportionately aided the wealthy, so it’s no surprise that thriving malls are those that serve the wealthy while dying malls are those that sell to the working class. But with the drop in gasoline prices, working families (at least those whose jobs are not tied to the oil industry) suddenly have some money left over after filling up their tanks. That means that many working class families should have something extra to spend on what would have been an indulgence until very recently, and some of that will be spent on new clothes and accessories.

My completely unscientific expectation (and I reserve the right to be wrong), therefore, is that fashion companies and retailers that focus on middle income brackets will experience a little bump from first (and hopefully second) quarter 2015 sales. Whether this trend will continue into the second half of 2015 and beyond is anyone’s guess, and my crystal ball remains broken. But worldwide overproduction of oil, if it continues, would keep gasoline prices down, and would leave more money in the wallets of many families. That could lead to a little rally for big box retailers and their suppliers.

I’m rooting for an improved economy for everyone.

Credit: Jeremy D. Richardson


Can I Use the Photographs? (Part 2)

You’ve hired the photographer and have a written agreement that makes you the owner of all photographs taken.  But if you think nothing could go wrong now, you may not have thought of everything.  Attention must be paid to what is in the photographs themselves.

Through the Viewfinder of an Old Medium Format CameraThe scope of copyright extends to many two and three dimensional designs.  So, if you manufacture useful products made from a fabric that has been lawfully made by, or with the permission of, the design’s creator, then you are entitled to publish photographs of those products.  The key words here are “lawfully made” and “with permission”.  Claims of copyright infringement in fabric designs are a growing problem. But this is not the only danger.

Outdoor urban settings, featuring graffiti, murals, or sculptures, also can produce claims.  Ask Just Cavalli or the US Postal Service.  Just Cavalli is confronting a suit in California by graffiti artists, who claim their work was copied on Just Cavalli’s apparel designs.  And the United States Postal Service has to pay millions to the sculptor of the Korean War Memorial for using a photograph of the sculpture on a stamp.  Both the graffiti and the sculpture were protected by copyright.  Therefore, any use of them without permission in a photograph, including as a cool setting for your fashion, would be infringing.

Props and “set decoration” have also generated litigation.  Rug and quilt patterns, crib mobiles, stuffed animals and dolls can enjoy copyright protection and their designers have brought suits when they have been used without permission in films and advertisements.  So take care that the adorable baby modeling your clothes is not holding a protected toy or other prop that you didn’t create.  Even items such as lamps can be protected by copyright, if they include sculptural forms which could exist independently.

Finally, while you want your photographer to be the next Richard Avedon, it is not a good idea to copy the composition of a famous photograph.  That too can be copyright infringement.

Credit: Helene M. Freeman

See previous post…”Can I Use the Photographs? (Part 1)


I Promise, Therefore I Am

DeliverOnYourPromises

In our series of posts about representations and warranties we have recently explored the nature and purpose of the “reps and warranties” clause—to use familiar legal shorthand. We now will examine some common representations and warranties in fashion agreements. For convenience, in these posts, we will use warranties to reference both representations and warranties—terms that, as a practical matter, are functionally equivalent in any event.

First, keep in mind that, when lawyers and fashion business people read the same contract, they rarely read the same clauses with particularity. In a fashion license, for example, it is quite typical for the business people to read the grant of rights, promotional obligations and financial clauses—and that may well be about all. The lawyers, meanwhile, are absorbed to the point of obsession over the warranties and the related indemnities clauses—because those terms can determine who wins and who loses, and for how much, in any litigation concerning the contract. So please forgive your lawyer for going OCD over the warranties; he or she is just doing the job the way that nature intended.

The typical first warranty is an affirmation of a party’s existence. That may seem rather unnecessary: if someone is signing the contract, would that not mean that the signatory exists, for that reason alone? The answer is no. Except in those rare cases of a person signing on behalf of his or her sole proprietorship or a partnership in which he or she is a general partner, the person signing is doing so on behalf of an entity that has a separate, albeit fictive existence. Corporations and limited liability companies, that is, are in effect virtual people. They have many of the rights (such as making money) and duties (such as paying taxes) as real people, and they do it without corporeal existence. These “persons” under business law are liable for what the real people who act on their behalf do for them, but those real people, whether employees, equity holders or other participants are, except in specific cases, not personally liable for the acts and omissions of the entity they serve or represent.

In the United States, the entity can only be such a legal “person” by being formed under the laws of a particular state, and it can only trade consistently within another state by being granted the right to do so. And you guessed it: each state involved extracts various fees and taxes for being the virtual location, in whole or part, of the premises and activities of the fictional person. For that reason, the entity will often be called upon to give a warranty that it has done all that is necessary to maintain its existence. The reason is that, if it has not done so, there may literally be no party able to perform under the terms and conditions of the contract that apply to that entity. A typical, if somewhat long form of a warranty of existence looks like this:

Fashion Company represents and warrants that it is a corporation duly organized and existing under the laws of the State of New York, is authorized to do business in the State of California, and has paid all fees, taxes and governmental charges in connection with the foregoing.

In short: the party making the warranty is affirming that it exists and can do business as promised—and that it is current on its obligations to those governmental authorities that grant those allowances. It is a simple promise to make, but it is just about the most important promise that one business entity can give another because, if it is wrong about any of that, it may not even be an entity capable of making any promises at all—in a contract or otherwise.

In contractual due diligence, it never hurts to investigate independently by checking with the databases of the governmental authorities in question that those promises are accurate. That is because, as cynics and pragmatists everywhere remind us, for some out there, “Promises are meant to be broken.”

Credit: Alan Behr


No Guarantees In Life But Plenty In Contracts

Contract to sign

I was buying yet more consumer electronics of questionable utility (everyone needs a hobby) when the salesman recommended that I take the extended warranty. I told him no. As he was trained to do, he then launched into a grave speech about how badly I would be burned if what he had just sworn was the finest piece of technology in its class turned out to be complete crap—but only after the expiration of the manufacturer’s warranty. I explained, as I always do, that I have consistently refused extended warranties and have already won the bet: if all the consumer electronics of questionable utility that I buy from now until the end of my stay on earth should indeed turn into junk during the term of the extended warranties that I will likewise recklessly decline to purchase, I will have saved so much money from all such prior refusals that I will still come out ahead.

Warranty: In a consumer context, it is often the next most important thing (after the brand itself) that gives a potential purchaser confidence in what he or she is about to buy. In a legal context, however, the word has a more demanding set of meanings attached to it.

The clause we are discussing is typically headed “Representations and Warranties.” There has been some debate on what the distinction between a representation and a warranty might be (outside the context of insurance), if indeed there is one: Some believe that this is another of those situations in which lawyers have two words to describe the same thing and, afraid that one might be found incorrect, shove both of them into their contracts. (That is a form of the legal practice commonly known as “belt and suspenders” drafting.) About the best distinction between representations and warranties that has been made comes from the Section of Business Law of the American Bar Association: “Representations are statements of past or existing facts and warranties are promises that existing or future facts are or will be true.”

The main point is that, whatever you call them, the contractual form of what can loosely be called a guarantee is a statement of facts given for the other party to rely upon in agreeing to the covenants in the contract that govern the relying party’s conduct. If the party providing the warranty misstates the facts, grounds have been given for claims of misrepresentation and for breach of warranty.

In upcoming posts, we will explore the implications of that for agreements in the fashion, accessories and related businesses.

Credit:  Alan Behr


Designers: Should You Sell Your Business? (Part 2)

fashiondesigner-glasses_sketchbook

From Mom ‘n’ Pop Into A Real Company

You took the plunge and decided to go into the fashion business. Once you’d taken a couple of seminars, read “Accounting for Dummies”, let your bookkeeper set up your system, and actually listened to his advice, it wasn’t as hard to get started as all that. All you needed was an endless supply of money and the ability to function on an average of 3 hours of sleep nightly. With a little help from your friends you were able to get your samples made, and you found an agent who set you up in a group showroom. As long as you didn’t pay yourself anything, you were able to cover your costs and survive on two meals a day.

In this your third year in business, you have taken enough orders to assure a positive cash flow, absent the occurrence of some unforeseen disaster. In fact, your accountant’s projections anticipate enough extra cash to make some important additions to your team, should you need them. There was that flattering editorial piece in a top fashion magazine that you didn’t have to pay for. With the PR coup, additional orders are practically in the bag, but you don’t know how you will be able to deliver on time. Your greatest dream is quickly becoming your worst nightmare. Your profits may be healthy, but what about you?

Should you sell your business before it overpowers you? You have reached the first real crisis for most growing young companies. Yours is a problem of success. Just as you don’t quit acting when you finally get a call-back, you don’t sell your business just as it begins to take off. This is the perfect time for bottom-feeders to pick up a bargain from an overworked and frustrated founder – one who may not think herself capable of repeating the feat anytime soon, while the truth is that you can no longer do it alone. You need help.

The moment the designer realizes that her company requires the support of experienced, seasoned managers is the point at which many newly-minted entrepreneurs make the grave error of getting out when they should be digging deeper. Those who choose to sell at this juncture focus on having shown that their concept can indeed turn a profit. Those who don’t sell figure that if this is what they can do when running their company by the seats of their pants, just think what could be achieved with the assistance of knowledgeable, professional management.

You are one of the fortunate few able to prove the commercial viability of your concept. Now is the time to shape your company, to make it become the most important design that you have ever created. See whether you can picture the business in 5 years, then in 10. You should be looking for the best financial officer you can find, someone familiar with the industry who will do everything you hate to do and will do it much better. Now is when you find that person who knows how to execute and produce your designs in quantities that you can only imagine, and who will get the product fabricated and delivered to your customers when their shipments are due. This is the stage at which you identify and hire that individual who understands your market and who can work with the press as easily as she can work with distributors.

Should you consider selling your business to the bottom-feeders, or should you be designing a management team for the future?

Credit: Stephen D. Kramer

See previous post…”Designers: Should You Sell Your Business? (Part 1)


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