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
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
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)“
You hired the photographer to take pictures of your products, store, showroom or event. You would think that if you paid for the photographs and told the photographer what to shoot, you’d be entitled to use the images however you wanted. But you might be wrong.
Photographs are protected by copyright. Commissioning the creation of photographs and paying the photographer to take them does not give you ownership of the copyright in the photos. Under the copyright law in effect since 1978, the photographer owns the copyright in the photos. In the absence of a written agreement to the contrary, the party hiring the photographer acquires only the prints purchased and a non-exclusive right to use them for a particular purpose.
Photographers are often hired to take photographs, based on a cost estimate, without legal formality. The only writing that may change hands is the photographer’s invoice, which is duly paid, without examination of anything except the price. Pre-printed terms and conditions on the reverse side of the invoice commonly indicate the photographer retains any rights that are not expressly granted and may limit use of the photographs. If you acquire only the right to use the photographs in a catalogue, to cite just one example, you may not be able to use them in advertisements, or on your website, or on packaging, without further permission from the photographer.
And that’s not all. Not only can you not use the photos without the photographer’s consent, but also photos taken at your expense can be licensed by the photographer for use by others. Most professional photographers pursue additional income by licensing their photographic images for use in newspapers, magazines and books. Only a written assignment of copyright or exclusive rights can prevent the photographer from allowing others to use the photographs.
The consequences of not using a written contract to secure ownership of commissioned photographs can be especially severe when the relationship ends. Wal-Mart Stores and the Walton family learned this lesson when the local photographers’ studio that had photographed Wal-Mart and Walton events for over forty years closed. Their photo archives were put up for auction by the photographers’ heirs, along with the copyrights in the images. The Walton family and Wal-Mart Stores found themselves in litigation in an effort to obtain the photo archives for their museum, litigation that is still on-going.
Credit: Helene M. Freeman
I have mentioned here before that the necktie is the only discretionary piece of a typical man’s daily outfit. Women may have a multitude of choices, but dressing a man is really quite simple: whatever the day and whatever the occasion, it is pants, shirt, shoes, and if it is cool outside, a sweater or jacket. Add a belt or suspenders, the almost obligatory underwear and some nearly as almost obligatory socks—and there you are. If you consider that style is what starts to happen the moment that taste transcends practicality, the necktie is the one item in the daily male outfit most amenable to becoming a statement of personal style. With the advent of business casual—that international license to look innocuous in the very environment in which you should most stand out—neckties of course have become optional for business and therefore have been routinely discarded by many men. With the long-hoped-for rise in male awareness about fashion, however, perhaps that will soon reverse. Think of the possibilities: you may once again walk into a business meeting or sit down with friends at a restaurant without staring at a rainforest of wiry hairs protruding through the V of an open-collared shirt and may actually, dare we hope, find yourself staring at something worth seeing. Remember, I said before that neckties have no protective function, not that they are functionless.
Credit: Alan Behr
The U.S. Copyright Office delivered a Christmas present to the creative industries: The third edition of the Compendium of Copyright Office Practices. Unlike its predecessors, the third edition is not merely a set of instructions to the Copyright Office staff for administering the registration and recordation functions of the Register of Copyrights. The new version is intended to provide guidance to applicants for copyright, as well, setting forth what is and is not copyrightable and identifying who is entitled to claim copyright ownership.
Fabric and jewelry designers will find its lists of non-copyrightable subject matter and its examples of the distinction between copyrightable and non-copyrightable designs instructive. While the Compendium reflects significant judicial decisions, collected in a table of authorities, it also ventures into areas that have been considered unsettled.
This is particularly apparent in the section devoted to the copyright in websites. Insofar as the Register of Copyright is concerned, the format, layout and “look and feel” of a website are not copyrightable; but the content—text, photographs, audio and audio-visual works—are copyrightable. The website creator may have a copyright in the collection or compilation of these materials, consisting of their selection and arrangement, even if it has not created the contents. If the website’s terms of service require a user to convey “exclusive rights” in user generated content, uploading by the user of his or her content to the site will entitle the site to claim ownership of the copyright in the content. But the Copyright Office does not make registration easy. It requires the users who authored the content to be identified by name in the application for registration. If there are too many to name all, the application should list several authors and indicate the number of additional authors and the staff of the Copyright Office may ask for a more complete list to verify that the identification of authors of user-generated content has been maintained by the site owner. And any registration for the content on a website will pertain only to the particular version submitted with the application, so new matter added after registration will not be covered by the prior registration. Although it may be made available for display throughout the world, a website is considered an “unpublished work”, unless downloading or sharing of content is authorized.
The Compendium does not have the force of law and the Copyright Office has frankly stated that it has addressed unsettled areas in the hope that its reasoning will be considered persuasive should the issues be presented in future cases. But the Compendium does control how the Copyright Office will address applications for registration and a review of its provisions will assist applicants for copyright in avoiding common problems that can impede registration. It is readily available on the Copyright Office website, www.copyright.gov, and each chapter can be downloaded or accessed separately as a pdf.
Credit: Helene M. Freeman