If You Build It, They Will Come…Maybe

New Fashion Boutique Store Owner

All too often in fashion start-ups, planning about how and in what way the business will pursue its financing needs does not get the attention it deserves.

Are you prepared to borrow against your personal credit lines and credit cards in order to meet cash flow demands? Does the business have a realistic shot at surviving the initial stages without sacrificing your home or life savings? Do you have a wealthy uncle? In reality, many businesses have a tough time getting the necessary capital to build an expensive e-commerce platform or manufacture that first line, so initial capital is critical.

Depending on the type of business, there are essentially two tracks: (1) the “slow and steady” approach through a combination of one or more of the following: bootstrapping, “friends and family” money, “rewards-based” crowdfunding, organic growth, and factoring; or (2) the “hockey stick” growth approach through angel investors, venture capital or family office funding. The former are far more commonplace, while the latter tends to be utilized by a select few technology-focused fashion companies with the potential to “disrupt” large markets. Keep in mind that venture capitalists typically expect to see a few seasons of sales before funding and, even if they invest, may not re-up when the business needs additional investment dollars. Bank financing is more commonly utilized by established fashion companies, so it is not realistic to count on this type of financing option during the early stages.

Being realistic about your business’s prospects and gauging the optimal approach towards financing are essential to the viability of the business model. For a company that could have a national or international footprint and can scale rapidly, sitting back in slow-growth mode may actually hurt the business in terms of lost opportunities or the item becoming unfashionable or obsolete before getting to market. Conversely, companies that rely too heavily on friends and family investment, for example, may deter angel or venture capital financing.

Another important consideration is the manner in which financings are structured, as well as whether equity compensation will be used to incentivize employees or consultants. Founders love to keep control and the issuance of equity interests typically erodes that control. On the other hand, debt instruments are senior to equity for repayment. You can expect debt holders to require repayment directly out of cash flow. So, although the same control issues are not present when using “straight” debt financing, there is often an increased risk that the business could fall behind or even become insolvent.

In either case, a fashion company will want the initial capitalization from the founders to be sufficient to sustain the company for at least the first year or major milestone. The planning beyond that initial stage is equally important so that the company can be in a position to grow, rather than experience a business interruption, be forced to pivot, or worse. For companies that realistically believe venture capital financing is possible, the initial equity issuances and treatment of intellectual property rights should be done in a way that minimizes issues and puts the business in the best position possible to get funded.

Credit:  Christopher J. Kula

Chris is counsel in the Corporate & Business Law and Securities & Private Placement Practices at Phillips Nizer.


Patent Falls In Spiderman’s Web: Are You Paying Royalties Unnecessarily?

Spiderman

While the Supreme Court’s recent healthcare and marriage equality rulings garnered a lot of attention, there was another decision at the end of the Court’s term that may be more meaningful to the business of fashion – Kimble v. Marvel Entertainment, the Spiderman patent litigation. Steven Kimble secured a patent for a Spiderman toy that shot the character’s “webs” from a hand. Marvel, owner of the character, purchased the patent to resolve a claim of patent infringement, promising to pay royalties on sales of the toy.

The popularity of the toy outlived the twenty-year patent term. Under a fifty-year-old Supreme Court decision, the obligation to pay royalties under a contract ends when the patent term expires, even if the agreement contains no termination date. Court decisions have applied the same rule to copyright licenses and assignments.

The Spiderman case called for the Supreme Court to reconsider the rule and permit the continued collection of royalties as provided in the contract. Although conceding that the fifty-year-old case might have been wrongly decided, as a number of courts and commentators have noted, the Court declined the opportunity to overrule it. Instead, it advised that, if the rule is to be changed, it is up to Congress to do so. Spidey is now free to cast his web without writing any more checks.

The decision is a reminder to licensors that patent and copyright rights do not last forever. In contrast, trademarks last as long as they are used and protected and trade secrets last as long as their secrecy is maintained. Joining a license for patents and copyrights with related trademarks or trade secrets can be a good way to maintain royalties after the patents and copyrights have expired. Licensees, on the other hand, should periodically investigate whether they are paying royalties under patents or copyrights that may have expired.

Credit: Helene M. Freeman


Welcome to Designer Hell, No Name

Levi-Strauss-Co-Label

The applied arts, including fashion, stand in service of utility. There is no l’art pour l’art (art for art’s sake) even if you are talented and even if you are French. A useful object made beautiful, fun or even compelling is still something you can use, and things that can be used are objets de commerce, first and foremost. That is one of the reasons, as we have discussed in these postings (and surely will again) that the law treats fashion, jewelry and accessory designs—and related objects such as perfume bottles and lipstick cases—differently from how it treats paintings, sculptures and photographs. All art follows commerce, and artists do not quit their day jobs if they are not commercially successful, but when it comes to fashion, commercial success remains rather the point. If you are a designer and do not believe that, ask your retailers and financial backers if they disagree.

The first and perhaps most personally compelling fact of that distinction between what the law considers design to be versus how it treats fine art is that, although the artist can never lose his name—there was only one artist who could paint a Pablo Picasso and only one artist who could chisel out a Michelangelo—it is possible for a designer to wake up one morning and find that, professionally, his name is no longer his. To his mother, he may always be, “My son, Martin, the designer,” but the clothes bearing his name might be designed by someone else—perhaps someone he does not know, or perhaps even someone whose work he finds indifferent or just plain terrible. Even worse, should he wish to continue designing clothes, he may have to do it under a different name.

The reason for that is because the name is not merely a name; it has become a brand. And brands can be sold, along with the trademarks that represent them, and the goodwill that those trademarks generate and perpetuate. (An artist’s name can also be his brand—but the art market has not yet accepted the idea that, say, Lucian Freud could have sold his name on retirement, for use in connection with fine art by Damien Hirst.) When designers sell their trademarks, therefore, they are, to the fashion world, effectively selling their names.

If the price is right, that may be a great idea. Sometimes, however, regrets follow. In posts to come, we will show what has happened and can yet happen when designers lose control of their own names.

Credit:  Alan Behr


The Blogger Blogged

Alan-Behr-Ralph-Lauren-Purple-Label-NYSocialDiary2015

As everyone knows, lawyers have far too many stellar qualities to enumerate here. We have a sense of humor. (Who can forget, after all, the priceless nugget of wit that goes: “What do you call one hundred lawyers on the bottom of the ocean?” Answer: “A good start.”) We are sure there must be just as many good ones about chiropractors, occupational therapists and entomologists.

And lawyers are media stars. Whenever an attorney is convicted of a felony in the line of duty, doesn’t it always make headlines? Lawyers are also highly respected for their assertiveness, as knows any lawyer whose application to rent an apartment was mysteriously and inexplicably denied.

But who knew that lawyers could also be fashion trend-setters? So it appeared from a blog several months ago, in which the author of this blog was blogged. The post was in the form of a column about accessories worn by attendees at the charity benefit held on the opening night of an antiques fair.

The site is New York Social Diary, in which David Patrick Columbia, combining the roles of Edith Wharton and Henry James for an earlier generation, chronicles the real life moments that those earlier writers drew upon for much of their fiction. The blogger in the guest column was Alison Minton, a friend and queen of New York style, who reports for the site on accessories. In my debut as a fashion icon, you can clearly see the Ralph Lauren necktie and pocket square that were the objects of the author’s attention, along with a fair bit of the Henry Poole bespoke suit that they accented and almost none of my face. As my earlier appearances in New York Social Diary and elsewhere have shown, that omission was no loss at all to the reader. It did, in this instance, force all attention on not who I am but on what I had chosen to wear in the expression of who I am. It demonstrates in pictorial form that what each of us holds as our personal style is both a part of us and an abstraction of us. We are what we wear, but what we wear is also a part of us and a metaphor for how we wish to be perceived.

It also reminds me that, as someone who will on occasion take this forum as a soapbox on which to stand and proclaim what is and is not good style, acting as a fashion authority is uniquely hard work. A theater critic need not act or direct; an art critic is not expected to paint or sculpt; but we all wear clothes. A style critic, therefore, is always in danger of being held accountable for his or her own style success and failures. (And we all have both, to be sure.) This line of work is not for the faint-hearted—but neither is any job in fashion and accessories. Would any of us have it any other way?

Credit: Alan Behr


The World’s Worst Accessory

I used to think that accessories add style in greater proportion to their expense and relative size. Then came three bouts of sciatica (due in part to too much sitting in one place on intercontinental flights in the service of fashion), meniscus surgery on the right knee and the doctor’s assurance that the left knee will soon need it as well. In all cases, I was on a cane until things sorted themselves out; as temporary as those experiences were, they have convinced me that a cane is absolutely the world’s worst accessory. Guys—if you must have a cane, wear a jacket and tie as often as possible and try to keep an erect posture. Doing that at least got me the occasional compliment of looking “distinguished,” which I learned is actually a euphemism for “a man past his prime who manages to keep up appearances.” And don’t ever accept the standard-issue hospital cane. Formerly, a cane was indeed a fashion accessory. When I was young, my parents, who could walk just fine, had an antique cane collection—as a décor item, I suppose. I bought my cane at a midtown Manhattan tobacco shop. The handle is shaped like a mallard’s head. It became known to my small boy as “Daddy Ducky,” and he would take to stomping it around the foyer, saying, “Quack, quack, quack,” until Daddy could gently get Daddy Ducky out of his hands.

Why is a cane so bad? Consider this incident, which is not atypical: I was standing in the Lexington Avenue bus, on my way to work. (When cane-less, I prefer to walk, and quite briskly at that.) An attractive, stylishly dressed woman seated nearby saw me and smiled. The bus came to its next stop. Her accessories defined her style: Her Hermès scarf seemed to carry her up like angels’ wings. As she rose onto her blue Ferragamo pumps, the MK medallion on her handbag swayed, and the air was spiced with her perfume. She smiled at me again with what I could see now were blue, alluring eyes—and politely offered to give up her seat to me and stand until she reached her stop.

Distinguished my ***. If there is indeed a next time for the services of Daddy Ducky, I’ll take cabs.

Credit: Alan Behr


To Plan or Not to Plan

modern and fashion clothes store

In most cases, a new store tenant will require work to be done to make the premises suitable for its purposes. As a rule, a landlord will insist that no work can be done without prior approval. That puts the prospective tenant on the horns of a dilemma while negotiating a lease: if an architect is hired to design the plans while negotiations on the lease are ongoing and the lease is not ultimately signed, time and money invested in the premises will be lost. If the plans are not prepared, however, the opening of the store may be delayed as the landlord goes through the approval process, or worse, the landlord forces the tenant to change the plans. The result: the tenant may not get the store it wants on the date the tenant needs it.

Whether or not to advance the money for plans is always an individual consideration, depending on the relationship with the landlord and the time pressure to open the store.

Even if the tenant prepares the plans and the landlord approves, there is still the issue of getting the approval of the local authorities. Estimating the time that it will take to get approvals is crucial in calculating when the store will open. Without that information, planning for seasonal inventory can be thrown off, with potentially serious business consequences. Ideally, a tenant would have a contingency in every lease for cancellation if the plans are not approved by the authorities. However, it can be difficult to get landlords to agree to that in good measure because of an inability to predict what plans the prospective tenant will submit and what the official reaction to them will be.

However, if the plans are already completed and approved, the municipal authority will likely have someone who would be willing to meet with the tenant’s architect to give an indication of whether there will be problems and to provide an estimate of how long the approval process might take. In some cases, the government representative would also be able to alert the tenant as to any existing problems in the building, especially if the landlord has not been cooperative. It is, therefore, often a good idea to pay a visit to the local building department once plans are completed and approved.

Credit: Steven J. Rabinowitz

Steve is counsel in Phillips Nizer’s Real Estate Law practice.


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