When Just the Licensor is Not Enough

magnifying glass with trademark icon

Companies often place their trademarks in a separate subsidiary or affiliated company. And then, sometimes, rather than being the direct “licensor” of the trademarks, the owner will enter into a master license with another subsidiary or affiliate. Use of a master licensor/licensee structure is appropriate from an operational perspective if the sole business of the trademark owner is to own the trademarks, since it therefore would be unable to provide the services normally required of the “licensor” under any of the various license agreements it hopes will be consummated.

Just as a licensor should require representations from a guarantor of its licensee’s obligations and should seek to bind the guarantor to many of the restrictions imposed on the licensee, sometimes parties receiving licenses (technically, sublicenses) from master licensees will think to ask for various representations from the master licensor/trademark owner, such as those relating to the rights and authority of the master licensee, to the absence of grants of conflicting rights to any third parties, etc., and some of these sublicensees will think to bind the trademark owner to some of the restrictions imposed on the master licensee under the sublicense agreement, particularly in regard to honoring whatever exclusivity rights may have been granted to the sublicensee. But most sublicensees will not think to protect themselves against the potentially adverse effects of changes in the master license agreement itself. For example, if for some reason the master license is terminated during the term of the sublicense agreement, the trademark owner should be bound to substitute itself or a successor master licensee as the (sub)licensor under the (sub)license agreement. And similarly, the customary “binding on successors and assigns” provision of the sublicense agreement should be expanded so that, if ownership of the trademarks is transferred during the term of the sublicense agreement, it is clear that the sublicense agreement is binding on the new trademark owner; and it would not hurt also to bind the trademark owner to be required to cause the new trademark owner to agree that it (or its master licensee) automatically will be substituted as the (sub)licensor under the (sub)license agreement upon the closing of the transfer of the trademarks.

Credit: Jonathan R. Tillem


Don’t Try This In Your Own Home

Fashion designers working together on an outfit in design studio

We have been meditating in these posts (here, here and here) on some of the problems that arise when two or more people start and run a new venture. Many of the issues that arise are common to all businesses, but when it comes to fashion—especially fashion good enough and fresh enough to build a brand from scratch—the question of talent moves to the forefront. Whatever else the business might do, if it is going to succeed, someone involved with it right from the start is going to have to be either very talented or very lucky. (You will soon know if it was just the latter because, as things move along, talent tends to repeat itself and luck does not.) In its simplest form, whether in design, execution or just in knowing how to buy, talent is what you see when inspiration finds a means of expression.

Luckily, like a roast lamb with a robust Bordeaux and a fish salad with a chilled Riesling Spätlese from lovely parts of the Pfalz (just beyond where I own a turnip field with a unique terroir), talent in fashion pairs well with talent in business. It is a paradox of American life that, in a country obsessed with prospering in business, managers are not considered “talent.” But that is exactly what they are. If being able to run a business were not a question of talent, and if it did not require a truly deft intelligence and plenty of self-confidence, artists, philosophers and humanities professors would be running the Fortune 500.

Whether starting up or expanding is the question, however, no one is of greater importance, at least at that moment, than the person known in show business as “the money.” Seed capital can come from the venturers’ pockets (if deep enough), friends and family, crowd funding, banks and others, but as dramatized for effect on television in programs such as Shark Tank, money comes at a price—often one that appears disproportionate to the commitment made. You may well bristle at the thought of surrendering a healthy portion of the equity in your business to someone whose contribution is little more than writing a check, but that person knows all too well that without him or her, your dream enterprise will remain just that. (And think about it for a minute: do you really want that person providing guidance for your fall/winter collection? Maybe it is better if your investor is the strong, silent type.)

So sometimes, when it comes to handing out equity, you have to give until it hurts. On the other hand, mathematics tells us that equity interests can never total more than one hundred percent, so if you shell out ownership percentages in exchange for cash, advice, goods or services, keep in mind that your control ends when more than half the equity belongs to other people.

Whatever you do, always understand this: all divisions of that magic one hundred percent must be carefully documented. You have heard the expression “Don’t try this at home.” That applies double for anything commercial or financial, such as equity participation that has a legal effect. In our experience, few things have been more painful to read than important documents with binding legal effect that were written by non-lawyers who deceived themselves into thinking that they could save the money and do it themselves.

Life is too short to prove to yourself why you decided not to practice law: when legal issues come into play—as they will from day one—it is always best, for the calm and confidence of all, to bring your lawyer into the process. If you are a designer, think of it this way: would you let your lawyer design your wardrobe for you? Turn that around, and now you know why he or she does not want to see you writing your own contracts.

Credit: Alan Behr


What Chanel and Kleenex Have In Common

Chanel-Words-BoardedStoreFront

When Chanel filled the back cover of WWD with an advertisement that was nothing more than black words on newsprint—without a perfume bottle, a skirt suit or even Karl Lagerfeld anywhere in sight—you knew that the topic was serious. The ad was an open letter directed to “fashion editors, advertisers, copywriters and other well-intentioned mis-users of our Chanel name.” It reminded them that CHANEL stands for the designer Coco Chanel, the signature perfume and the company’s other products, and that, “CHANEL is our registered trademark…”

And right they are. There are major brands that are virtually nothing other than trademarks. Run as design studios, they own no factories, and at least under US law, often have little hope of securing legal protection for the exclusive rights to their most successful designs. The good will, which for them is the core of enterprise value, is in the trademarks that identify the source of the products marketed under their brands and by which the public and trade recognize their goods.

The easiest way to dilute or otherwise damage a mark is for the owner and others to misuse it. That is why Chanel insists that a jacket not be called “a CHANEL jacket” unless Chanel makes it. Another easy way to lose a mark for goods is for it to become a generic term, which can start to happen when it is misused as a verb when applied to the goods of others, as in (to use Chanel’s hated examples), “Chanel-ed” and “Chanel’ized.” The ad closes the way you would expect by a piece that, by necessity, is a mild scold—by blaming the lawyers.

Kleenex-Tissue-BoxChanel is right, and even its lawyers are right. So are the lawyers for Xerox, who have been after writers for decades to knock off saying, “Go xerox it” or, just as bad, calling a rival maker’s photocopier a “Xerox machine.” They would rather that you say instead, “Go make a photocopy on the Xerox machine” or, even better, “let’s trade in that clunker of a photocopier for an authentic Xerox brand device.” As that example shows, the price of popularity of a trademark is that it comes to symbolize not merely a single source but an entire product category, which could cause the owner actually to lose exclusive rights to the mark. Other beneficiaries of this happy dilemma are KLEENEX, for facial tissues, and, in the UK, HOOVER, where it is often misused as a verb for operating any vacuum cleaner, as in, “Get your bum off the sofa; I’m going to hoover the floor now.”

Should any trademark for your fashion brand become so well known that it brings to mind an entire product category, you should consider doing what Chanel has done—get the word out that your trademark belongs to you alone and that it identifies you as the exclusive source of your products. To help achieve that goal in day-to-day usage, always use your trademark as a proper adjective, as in, “For my birthday, honey, I’d just love a little trinket, nothing more—say, a Chanel watch.” Your mark should never to be used as a (lower case) noun as in, “I had such a chanel moment today,” (when being admired while walking the dog in a Nike tracksuit). And it must never be used as a verb, as in, “Go chanel your look with a counterfeit Gucci purse.” (The two wrongs in that sentence do not make a right.)

Trademarks last as long as they are used and protected. Use yours well.

Credit:  Alan Behr


Say What You Mean, Mean What You Say

ForkInTheRoad-Decide

As we have discussed here, fashion is about nothing if not intellectual property, and most fashion intellectual property is comparatively easy to copy or emulate without great expense. If you have any success at what you do, the odds are fairly good that someone, somewhere on the planet will come out with what you believe to be a brand or product that infringes on your proprietary rights.

You will then have come to a fork in the road. The failure to take action to protect your rights may be used against you later. In the case of trade dress, for example, your silence may be used as evidence of everything from a showing that you suffered no lasting harm to the de facto abandonment of the right to the exclusive use of the trade dress. On the other hand, if you send out a strong cease and desist letter with a clear threat to sue for non-compliance but do not follow up in a reasonable time with a lawsuit should the recipient not comply, you may be deemed estopped (barred) from filing your lawsuit at a later date. That is why cease and desist letters typically threaten the “possibility” or the “potential” of the initiation of litigation—to avoid being estopped by the failure to carry out an explicit, promised remedial act.

Perhaps even worse, if you send a cease and desist letter that is strong enough to make the recipient fear an imminent lawsuit, and if the recipient believes it was within its rights to use the intellectual property that you claim infringes, it may make a preemptory strike. It would do that by filing a declaratory judgment action, asking a court to declare that what it has done was in fact lawful. To use jargon, when you have been so “d.j.’ed,” you have lost the “race to the courthouse door,” possibly to a “forum shopper.” For example, having been ready to sue in New York, where you are located or where you believe the law is favorable to your position, you may find yourself defending an action on the other coast in a court chosen by the plaintiff because it is near to its home base or in the belief that the law there is more favorable to it.

So there is an art in knowing when to send a cease and desist letter and what the tone and the content of the letter should be. As you may remember from your days on the playground, consider the advice you got never to make a threat you are not prepared to carry out and, of course, never to play the bully—because you just do not know what may come back at you.

Credit:  Alan Behr


Designers: Should You Sell? (Part 1)

Sign-BusinessForSale

Over the years, many designers have been referred to us because they are considering the sale of a part or all of their business. This is probably the most difficult issue that a designer/entrepreneur will face during the life cycle of his or her enterprise.

Not only is this a highly emotional decision, perhaps akin to having a grown child move away, but no two businesses are so similar that what is a successful path for one will prove not to be a terrible mistake for the other. This seems to be especially true in the world of fashion. It is a world unto itself in which a television guest appearance by four lads from Liverpool or a news photo of a group of students demonstrating in army fatigues can instantly render what was in great demand on Wednesday completely unsalable by Thursday.

Because the bulk of my own practice involves France and French businesses, and given that Paris has been a world fashion capital since the word “fashion” was first coined, I will begin the discussion of whether and when a business should be sold with examples of two French companies, each built around a short-lived fashion fad, separated by 150 years. In many ways these companies appear to have been identical. I leave it to the reader to decide whether an offering to sell all or part of the business of one would have had the same results if attempted with the other.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

When I first began traveling regularly to France, almost overnight there arose a chain of boutiques that dressed a generation of adolescents – for at least several months. The company’s products had touched a nerve with the public, but I couldn’t fathom why. The name of the fashion line was . . . UCLA! I asked my French friends what the label meant to them. Their response was: You know, it’s American – “OOOKLAH.” Of course, once I told them that “UCLA” meant “University of California at Los Angeles,” their sweatshirts looked somehow different to them. Clearly the company needed to supplement its product line. Setting aside the potentially destructive effect of trademark infringement issues, was this a business that could have been sold or that might have attracted investors?

For a comparison, let’s travel back to the year 1824. As a demonstration of amity and to promote understanding between two great nations, the Ottoman Viceroy of Egypt took it into his head to present Charles X of France with a giraffe. The giraffe had to be transported to Paris at great expense in both time and money. Many mistakes were made, but then, the giraffe in question was the first to have been seen on the European continent in three centuries.

Zarafa, as she was called in her homeland, was forced to walk north to the headwaters of the Nile in Sudan where she was transferred to a barge. After completing her river cruise to Alexandria, she then boarded a ship to cross the Mediterranean for Marseilles, becoming quite ill during the crossing. The hike through the French countryside from the Riviera to the Capital was not much easier, and she suffered greatly from the colder climate. In the end, Zarafa made it to the zoo in Paris, where she became the toast of the town, ultimately surviving there for 18 years.

The smart set was soon dancing to tunes about Zarafa, and giraffe-shaped hats were all the rage, as were dresses with a giraffe motif. Unlike the makers of UCLA-wear, those who fed this fad knew exactly what they were doing; there was indeed an identifiable market for giraffe-inspired fashion in Paris at the time. Was this business the product of savvy entrepreneurs? Did it have any more or less appeal to potential investors than UCLA? Didn’t it need to focus upon product development as well?

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

These examples both demonstrate that fashion can be as capricious as it can be profitable. Would you rather run and then sell the UCLA business or the giraffe business, and if so for either, would you know when in the cycle it would be best to try? Or would you plan for long-term success after analyzing what about either business has staying power and could support the inevitable changes to the fundamental product lines?

We will examine these questions and others in future blog entries.

Credit: Stephen D. Kramer


Sharpen Your Pencils

Fashion Designers Having A Discussion

We continue now with our reflections, posted earlier (here and here), on the legal and business issues that arise when a fashion business is formed and run by two or more venturers:

You and a colleague have decided to start a new fashion business. It is best to get in writing from the start what it is you intend to do together. A non-binding but useful method is the business plan, which is typically put together to help raise funding for the venture. There is an art to creating a business plan—it has to look earnest and solidly researched, the opportunity made clear and the plan to exploit it both correct and workable. In short, it has to read like an invitation to join in executing a winning strategy. And it should be a good read. (A business plan is, after all, narrowly directed advertising.)

To start, sit down together and write out thoughts about what it is you want to accomplish. You may be surprised with what comes out. We have seen otherwise promising working relationships break up over disputes about direction and vision that could have been detected early on. You may both have agreed that handbags will be your launch product only to find, as you compose your thoughts and turn them into a plan, that you have come to believe that destiny will take you quickly into women’s scarves but that your colleague favors branching out slowly and, even then, straight into small leather goods. You will both want to have all of this buttoned up before you drop the plan onto the desk of a potential investor—or anyone else.

Beyond the business plan comes the need to document organizational responsibilities. These are private matters at first, but because they become part of both legal documents of the company and even the “culture” of your organization, they are of greater long-term importance. For example: in the event of a dispute over that or any other issue, which of you will have final say or what mechanism would you both deem to be fair to resolve the problem and move on? (If your partner is your sister, you can perhaps conference in Mom, but in most new ventures, things are rarely that simple.)

If the form of organization you choose is the limited liability company, you have a clear opportunity to set that down formally all important terms in the grounding document for the company, the operating agreement. If you choose instead to form a corporation, keep in mind that it all starts a bit differently: in the absence of an express written agreement to the contrary, majority rule is the default option. That is, the principal of one share equals one vote applies, and all power goes in the end to whoever, alone or in combination with other shareholders, controls over fifty percent of the voting shares. If no one will have a majority holding, and because you likely will want to have clear rules on more topics than just voting rights, you will be well advised to enter into a shareholders agreement. The operating agreement or the shareholders agreement should deal with all that you mean to make effective about the operation of your business—because, as your lawyer will tell you, an unwritten promise is not worth the paper on which it was not written.

However you do it, the starting point is the same: sharpen your quills and start writing—and keep at it, with counsel and advisors brought in where required—until you have created documents worthy of your best college term papers. The grade of “A” you get as a result will be reflected in the operation of a well-run and profitable business.

Credit: Alan Behr


Follow

Get every new post delivered to your Inbox.

Join 74 other followers