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.
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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?
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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
As we noted in an earlier post, one of the most familiar teams in fashion is the designer and his business manager, such as Yves Saint Laurent and Pierre Bergé. There are also design teams such as Domenico Dolce and Stefano Gabanna. (Taking the role of the “suit” in that family business is CEO Alfonso Dolce, who is Domenico’s brother.) If it is essentially just two of you at first, little, if anything, may end up in writing, but as your business expands, that kind of relaxed approach will become impossible to maintain. If roles and, just as important, compensation, are not formalized, misunderstandings and disputes are likely to arise. The law being about nothing if not the prevention of disputes and their resolution, we always advocate the preventative approach: set things up to prevent troubles from the start, so that they don’t jump out at you from a bend down the road—and make doing business either unnecessarily difficult or completely impossible.
Start with the form of your organization. Although it is legally possible, to a point, for two or more people just to announce they are a business and to operate as an unorganized general partnership, that is rarely a sound approach. Every partner will immediately become, and remain, personally liable for everything the business does and for its financial problems—all of them, whoever among the team may have caused them. You can make things a bit easier for yourselves by putting it in writing, but what you put in writing is critical, and it makes sense to organize in a way that limits personal liability. Keep in mind that the word partner, which has a precise legal definition, is thrown around indiscriminately these days to mean any pairing, from companies doing business together to people in love. In a general partnership, however, the old-time definition of partner applies: a co-venturer who is personally on the hook, for whatever he or she is worth and then some, for whatever debts and other liabilities the business may incur.
To prevent that from happening, two generally preferable organizational structures are available for new businesses that intend to engage in designing, manufacturing, distributing or selling fashions or accessories: the corporation and the limited liability company. They are both roads that lead to the same good end: if the business is conducted properly, its owners generally are immunized from personal liability for the actions of the company. Which organization form works better for you is a question that your legal and tax advisors will help you resolve at the time of organization.
For both forms, however, there is an important doctrine of law that has to be considered, and its consequences need to be avoided: “piercing the corporate veil.” It is every bit as brutal as it sounds. The “veil” of limited liability is “pierced” and you end up personally liable for the debts of the business, legal judgments against it, and so on. The easiest way for that to happen is for a business owner to use the company as a “mere instrumentality” for himself or herself, for example, using the business’s checking account to pay for personal obligations or otherwise comingling business and personal funds. You say you would never do that? Good. Now look over your shoulder and ask if your co-venturer is as careful in the segregation of business from personal affairs as you are. If that is not the case, it may be a good time to get the company’s attorney involved and do a business practices compliance review.
We never said that getting along is easy to do.
Credit: Alan Behr
So much has been written and said about partnerships. Who can forget these one-liners?
“In business, if two partners always agree, there is one partner too many.”
(Or words to that effect.)
“In all of love, one kisses and the other presents the cheek.”
(Generally speaking, of course.)
Both of these snatches of wisdom mean the same: when two or more people get together for anything, one of them ends up calling the shots, sooner or later.
Providing love advice falls outside the job description of the writers for these reports. (Not that we might not try our hand at it anyway when the mood overcomes us.) The point is that, in business, key roles and responsibilities need to be divided among venturers.
Business law is best practiced when the lines of communication between counsel and client are open and readily accessed. However partners may choose to organize themselves (whether as a general partnership, as a corporation, as a limited liability company, or as a non-entity or entity joint venture, to name several popular options), someone should become the prime liaison with outside counsel. If there is a legal department, that is easy: it will be one or more in-house lawyers. But in all other cases, howsoever the business is put together and operates, your lawyers need to be involved, and you will need someone to own the responsibility to communicate regularly (and proactively!) with your lawyers—even if that lucky someone happens to be you.
We are not suggesting that only one person speaks with lawyers. Business is rarely that simple. But we do note that the relationship tends to function smoothest when a skilled person within the organization who is sensitive to the legal issues that arise in the fashion business serves as the primary point of contact with counsel. So—should you be that person, and if not, who should? Ask yourself if you tell your marketers that, worst case, the lawyers can be brought in about potential problems with trademark rights for a new brand a day or two before its nationwide launch. Or consider if you occasionally suggest something such as “The contract looks fine—just sign it.” If so, you are obviously decisive and focused, but your future as legal liaison is not looking very promising—because you are potentially causing the business to run at an unacceptably high level of legal risk, and you are already announcing that you are not yet prepared to make adjustments to prevent that from happening in the future.
When people commit to do business together, they typically bring different talents and strengths into play. The most obvious example in fashion is the designer who pairs up with the business person (or as so many in my family were known, the garmento) who gets the product out the door and brings in the money. The person who is the liaison with the lawyers should be the one who understands that the legal ounce of prevention is worth the proverbial pound of cure and who can also most effectively communicate company needs to counsel and interpret and implement what comes back in response—from comments on contracts to regulatory compliance, and to litigation strategy and beyond.
It has been said that it is more fun to do business as a team than alone and that partners when truly complimentary can create and run businesses of exceptional strength. Just make sure that one of you raises his or her right hand and volunteers to stay in regular contact with counsel. Your partners will thank you for it.
With that simple but important consideration now chiseled in pixels, in our next series of posts we will offer reflections on what the law says about your rights when you team up with others.
Credit: Alan Behr
Tips to Help Avoid Adverse Claims and Protect Your Company
in the Event of a Lawsuit
It is axiomatic that a successful business in the fashion industry requires close attention to detail and countless hours of work. While the threat of potential litigation should not be at the forefront of management’s thoughts, here are some tips to bear in mind to reduce your potential future exposure and to place your company in a better position to defend itself in the event it is faced with a lawsuit or a potential lawsuit:
- Notify your Insurance Carrier. If you are served with a Summons and Complaint, or are threatened with a lawsuit, notify your insurance carrier. If you fail to timely notify your insurance carrier it may deny coverage, and the company could be stuck with otherwise avoidable out-of-pocket defense and indemnification costs.
- Implement and Enforce an Anti-Harassment Policy. An affirmative defense may exist to protect the company from vicarious liability for certain sexual harassment/discrimination claims based upon actions by supervisors and co-employees if the company implements and enforces an anti-harassment/discrimination policy; exercises reasonable care to prevent and correct promptly any sexually harassing discriminatory behavior; and the employee unreasonably fails to take advantage of any preventative or corrective opportunities provided by the employer or to avoid harm otherwise.
- Two Company Representatives Should Participate in Disciplinary, Evaluation and Exit Interview Meetings With Employees. Many employment claims (or issues that may give rise to employment claims) can stem from a disciplinary meeting, employee evaluation or exit interview, when a company representative (whether the H.R. director or an immediate supervisor) informs an employee of job concerns, performance issues or that employment is being terminated. It is advisable for the company to have two company representatives at those meetings to be better able to confirm or deny what transpired (to avoid a “he said she said” scenario) in the event of a subsequent claim by the employee.
- Careful! Emails Are Not Private. Once a lawsuit is underway, the company will likely be required to turn over emails (or entire accounts) that may be relevant to the subject-matter of the lawsuit. So, the next time you send a personal email from your work account, be mindful of its content, especially if you don’t want some lawyer, like myself, reading about your personal life. Conversely, lawyers either prosecuting or defending a case are always looking for the “smoking gun.” So, before you click “Send”, make sure you are comfortable that, if a lawsuit arises, your email will not be the “smoking gun” that an opposing lawyer may be seeking.
- Keep Accurate Time Records of Non-Exempt Employees. It is not only statutorily required for employers to do so, but is critical to the defense of a Fair Labor Standards Act claim for unpaid (or underpaid) wages, to accurately keep and maintain time records of all non-exempt employees. If the company maintains accurate and orderly time records on a daily basis, you will not be in the position of having to scramble (or spend countless hours) compiling these crucial documents for your defense or trying to defend against an employee’s claim without potentially crucial documentary evidence.
- Avoid Spoliation Claims Arising From Destruction of Surveillance Videos. Sometimes a claim for spoliation will be made if relevant evidence has been intentionally or negligently destroyed. This can arise not only from the destruction of documents, but also when video surveillance captures relevant footage which is not retained. A possible defense here would be to ensure the company has thoroughly documented and enforced a recycling and retention procedure relating to the company’s surveillance.
The list above is generally focused in my practice areas of litigation. It is not intended to be, and in fact is far from, a comprehensive list. Each point merits its own blog post, which will likely follow in the near future.
Credit: Kathryn T. Lundy
Kathryn is an associate in Phillips Nizer’s Litigation Department and Labor & Employment Law Practice.
Some retailers have embraced the strategy of opening a large number of small stores rather than focusing on a few flagships. Advantages include minimizing the chance of significant economic loss in any given location and increased exposure on a national level.
One drawback to this strategy is that, with the greater number of leases to be negotiated, there is an attendant possibility of large legal fees. The retailer could, with justification, believe that, since the rent is small for each location, the legal fees should be similarly modest.
However, the retail tenant’s counsel cannot be any less vigilant in negotiating these store leases. That is because certain types of liabilities can be very costly, no matter the size of the store or the amount of the rent. Those liabilities generally arise from problems with the physical condition of the store.
Landlords come in all sizes and shapes, and often different negotiation strategies are called for depending on who is on the other side of the table. But there is one thing all landlords have in common: they want the tenant to accept the premises “as is” and be responsible for all physical problems within the demised premises. “You have inspected it,” they will say, “or if you haven’t done so, you should do so at once.” But by the very nature of the small store strategy, the tenant is opening in locations where it is unfamiliar with local laws and may not wish to undertake the expense of hiring local architects and expediters to inspect and report on real or potential problems at each location.
Typically, the tenant retailer knows it will have to do work to prepare the store for its occupancy, but the tenant will likely also be unwilling to accept responsibility for any major construction needed to prepare the space for its occupancy. One would imagine that landlords would feel the same way, but often that is not the case. Even if we leave aside landlords who wrongly seek to conceal defective or environmentally unsafe conditions and look at honest landlords, we find that it is not uncommon for them to worry about their buildings being consistently up to code. Even if the building was in full legal compliance at the time of original construction, laws change, and repairs and replacements over time may not be in compliance with the updated code. The big fear is that, when a retail tenant applies to have its plans approved for its leased space, the building department will return with a laundry list of upgrades that are essential to bring the entire building up to code.
Retail tenants must anticipate and respect that fear, and savvy tenant counsel should be able to handle the concerns of the landlords with sensitivity (and often creativity) to help the landlords overcome their fears. The solutions that arise in these situations, when parties cooperate and reasonable compromises are made, can be mutually beneficial. But one thing is certain: the goal of counsel for the retail tenant is to do what is reasonably necessary to help keep costs both predictable and under control.
Credit: Steven J. Rabinowitz
Steve is counsel in Phillips Nizer’s Real Estate Law practice.