Zegner Opts for Popular SPAC IPO

Shopper watches window of Ermenegildo Zegna store in Vienna

By: Brian Brodrick, Phillips Nizer Partner

Ermenegildo Zegna N.V., a world-renowned Italian luxury fashion group, has completed its previously announced “going public” business combination with Investindustrial Acquisition Corp. (NYSE:IIAC) (“IIAC”), a special purpose acquisition corporation (SPAC) sponsored by investment subsidiaries of Investindustrial VII L.P.  The shares of the newly combined company started trading on the New York Stock Exchange on Monday, December 20, 2021 under the ticker symbol “ZGN.”

Zegna was founded in Trivero, Italy in 1910 by Ermenegildo Zegna.  The company was in its third generation of family ownership and operation at the time of the initial public offering (IPO).  It is internationally recognized for the distinctive heritage of craftsmanship and design associated with its Zegna and Thom Browne brands and the noble fabrics and fibers of its in-house luxury textile and knitwear business.  Zegna designs, manufactures, markets and distributes luxury menswear, footwear, leather goods and other accessories under the Zegna and the Thom Browne brands, as well as luxury womenswear and childrenswear under the Thom Browne brand.

The transaction delivered approximately $761 million in gross proceeds (before transaction expenses and the repurchase of shares from the controlling shareholders), consisting of $169 million cash from IIAC’s trust account (after redemptions), a fully committed $250 million private offering (which, in light of strong investor demand, was upsized by $50 million versus the original target amount), $125 million from the additional backstop private offering previously announced, and approximately $217 million in a forward purchase agreement with Strategic Holding Group S.à r.l., an affiliate of IIAC’s sponsor (“SHG”).

According to a statement released by the company, based on the transaction value, the merged entity is expected to have an initial enterprise value of $3.1 billion, an initial market capitalization of $2.4 billion and will be well capitalized.  The Zegna family will continue its long-term stewardship of the company through an ownership stake of nearly 66%.

Although all indications are that the IPO was carried out in a manner worthy of the Zegna brand, the vehicle chosen for the process, the SPAC, has recently drawn regulatory attention.

A SPAC is effectively an inactive company that offers securities for cash and places substantially all the offering proceeds into a trust or escrow account for future use in the acquisition of one or more private operating companies.  Following its IPO, the SPAC will identify acquisition candidates and attempt to complete one or more business combination transactions; the company will then continue the operations of the acquired business as a public company.

SPACs first appeared in the 1980s but have gained accelerating popularity in recent years, especially since 2020.  SPAC sponsors generally raise money in IPOs for future acquisitions of other private companies.  Because finding acquisition targets can take time (typically two years), the cash raised (typically $10 per share) is held in a trust while the sponsors search for a target.  After the SPAC completes a merger with the target company, the privately held target company becomes a publicly listed operating company.  This last step of creating the listed successor company is referred to as a “de-SPAC” transaction.

A SPAC is required to keep 90% of its IPO gross proceeds in an escrow account through the date of acquisition.  The SPAC should complete acquisitions reaching an aggregate fair market value of at least 80% of the value of the escrow account within 36 months.  If the acquisitions cannot be completed within that time, the SPAC must file for an extension or return funds to investors.  At the time of de-SPAC transaction, the combined company also must meet stock exchange listing requirements for an operating company.

According to statements released by the staff of the Securities and Exchange Commission (SEC), over the past six months, the United States securities markets have seen an unprecedented surge in the use and popularity of SPACs.  The SEC has noted a number of concerns about the increased use of SPACs in IPOs, including risks of excessive fees, conflicts of interest, and sponsor compensation.  It has also identified risks of reliance on celebrity sponsorship and baseless hype, and the sheer amount of capital pouring into the SPACs.

The staff at the SEC has announced that the agency is continuing to look carefully at filings and disclosures by SPACs and their private targets; the staff has announced proposed guidelines for increasing such disclosure.

For Zegna, so far so good.  For SPACs in the broader marketplace—this is one of those situations in which time will tell.

The Story of the Iconic I ❤ NY T-Shirts (and more)

By: Phillips Nizer Partners: Alan Behr, Charles LaPolla, Andrew Tunick and Intern: Yann Rimm

Those of you who remember New York City from the late 1970s do not need anyone to tell you that the City has changed drastically since then.  Back when New York City experienced its all-time high crime rate that helped frighten away tourism (and residents), the City desperately needed help.  Overheated municipal spending in prior years and other factors led to serious financial problems.  In 1975, President Gerald Ford denied the federal assistance requested in order to stave off a potential filing by the city for bankruptcy.  Two years later came one of several power blackouts to strike the city, but this one created opportunity for massive looting that resulted in 4,500 arrests.

At about that moment, however, the New York State Department of Economic Development (NYSDED) began its program to make the City more desirable as a place to live, work and visit.  And that is how the I ❤ NY logo mark was born.  It was designed for free by Milton Glaser, the graphic designer already famous for a Bob Dylan poster and many other works.  He was recruited by William S. Doyle, the deputy commissioner of the New York State Department of Commerce.  The design was an immediate success, helping keep the campaign going far longer than what was initially anticipated to be a duration of only a few months.  Using a reference to New York City as the “Big Apple” dating from the 1920s, the New York Convention and Visitors Bureau, as it was then known, began again promoting the city as the “Big Apple”—and the revived nickname stuck.

By the time that the COVID-19 pandemic had disrupted travel everywhere, New York City had become the most-visited city in the United States and the eighth most visited in the world.  According to NBC News, the Big Apple is also the world’s most photographed city.

Perhaps because the individual elements of the Glaser logo are common, it is a frequent misconception that the Glaser logo is in the public domain.  However, the overall logo mark was in fact registered in 1989 by the NYSDED as a service mark in Class 35 for, “promoting the state of New York as a tourist attraction and enhancing its economic development.”  But that has not stopped a large trade in knockoffs, even within major tourist centers in Manhattan.  

There is some indication in media articles that NYSDED was lax in the past about preventing uses by others of the “I❤NY” logo mark.  However, in recent years, the NYSDED has sent about two hundred cease-and-desist letters annually.  Many of the alleged infringers claim to have not been aware that they were using a registered mark.  In 2009, a coffeeshop owner who had “I [coffee cup] NY” tattooed onto his hand reproduced the image from the tattoo on his storefront.  That earned him a cease-and-desist letter from the NYSDED, an action which is indicative of the aggressiveness with which the NYSDED has recently policed the marketplace in an effort to prevent what it believes are infringements of its logo.  The NYSDED has also opposed several trademark applications by entities applying for the “I❤” symbol in combination with other place names such as Santa Barbara, San Francisco, New Orleans and New Jersey—to name a few.

Those accused of infringing the I❤NY logo may ask if it should remain a registered trademark or if it is now diluted to the point where it has lost its distinctiveness.  On the other hand, in at least one trademark opposition proceeding, NYSDED has taken the position that the mark has become famous as a result of long-term exclusive use, advertising and promotion.  If this position is upheld, it would help to blunt any claim that the “INY” logo mark cannot be enforced against others who use “I” formative marks for goods or services unrelated to those for which NYSDED uses its logo mark.  In such event, NYSDED could assert that another party’s mark dilutes the distinctiveness of the “INY” logo and prevent others from using or applying for a similar mark even if the use of the other party’s mark has nothing to do with promoting tourism.

Although there is no doubt that the “INY” logo has been widely exposed to the public, the question of its distinctiveness is nuanced: a mark is distinctive when the public readily accepts it as identifying a particular source.  

In its notices of opposition against other “I❤” trademark applications, NYSDED has stated that I❤NY is synonymous with New York State.  However, an issue remains whether a survey would support a claim that most people associate the logo with a single source of goods and services or simply as an expression of love for New York by the user of the logo.  

Interestingly, the French have addressed an effort to register and claim exclusivity with respect to the designation IParis.  A French trademark registration for this designation was obtained by the company France Trading, which used the registration as the basis for opposing an application by Paris Wear Diffusion for the mark Paris Je t’ (which translates literally as Paris Iyou) for T-shirts.   In its response, the applicant challenged the validity of the opposer’s registered mark as being generic and non-distinctive, and the Paris Court of Appeals agreed.  The case ultimately made it to the highest French court, the Cour de cassation, where the opposer argued that the use of IParis on the T-shirts was distinct enough because the T-shirts were labeled as products of  France Trading.  However, the court found that argument to be insufficient because the identifiers on the T-shirts did not readily identify the source at first glance.  In other words, under the reasoning of the court, if the owner needed a label stating the source of the product to justify its distinctiveness, the logo did not fulfill the very purpose of trademark registration.  

The reasoning of the French court is clearly not consistent with U.S. trademark law which authorizes the source of the goods and services to be unknown or anonymous.  It is, however, consistent regarding its reluctance to protect merely ornamental marks.  In particular, the French court noted that the targeted clientele of the IParis T-shirts were mostly tourists visiting Paris and that when customers buy these clothing articles, they do not think, “Hey, look at me I am wearing an authentic France Trading” shirt but rather, “Hey, look: I made it to Paris.”  The French court therefore found that “the average consumer will not perceive the logo as identifying a source but merely as decoration.”  This finding is consistent with EU case law (see, Windsurfing v Boots, CJEU May 4th 1999, where the Court found that the name of a geographic location can be registered as a trademark so long as the public associates the mark with the owner and not the place) according to which, even if a mark looks worthy of registration on paper, it is ultimately the public perception that matters whether it can be protected as a trademark.

The chances of the same outcome ever happening in the United States with respect to NYSDED’s “INY” logo mark is probably low considering its strong presumption of validity stemming from its registrations as well as NYSDED’s strong case for acquired distinctiveness.  As a result, we can all continue to New York—within the limits of the law, of course.

How the European Union Tries to Protect Fashion Designs

By: Yann Rim, Phillips Nizer Intellectual Property Intern

Being home to Paris and Milan, the European Union (“EU”) has every reason to draft its laws to protect fashion designers and their works with particular care.  An efficient way of protecting fashion designs is through the Unregistered Community[1] design, which protects design works without requiring any registration process for a limited period of three years (instead of the five years of protection, with renewals, given to registered designs[2]).  As the fashion industry often depends on short-lived, seasonal designs, many designers have concluded that the burden of going through the registration process each season is not worth the trouble.

However, design law is not the only way to protect fashion designs.  In fact, a fashion design can also be protected by copyright.  The EU has set ground rules regarding the interaction between copyright and design law. One could expect that it would be extremely difficult to set such rules for twenty-seven jurisdictions with local laws and rules that differ considerably for cultural or historical reasons, but that has long been the challenge of a united Europe in so many different ways.

For example, Italy and Germany grant copyright protection to fashion design works on the condition that the work be of superior artistic value pursuant to the scindibilità principle in Italy and the Stufentheorie in Germany.  In contrast, France does not require such a showing of artistic value because a 1793 statute prohibits imposing such a requirement. The French rationale is that, if superior artistic value were to be considered in granting copyright protection, the judge would effectively act as an art critic or, at the very least, expert witnesses would have to be called to testify on the question of superior artistic value, thereby enabling art critics to influence copyright law in unforeseeable ways.

So how does the EU deal with such differences?  In the Cofomel case (Cofemel v G-Star Raw, C-683/17 – Sept 12, 2019), the Court of Justice ultimately chose to follow the French rule and held that, if the law of a member state were to require a showing of some sort of “aesthetic” value for a design to be eligible for copyright protection, that would contradict the requirement of objectivity (as to taste and art) as mandated under EU law.  The Cofomel case had been initiated by the highest Portuguese court, which asked the Court of Justice if it should be inferred from Article 2(a) of the InfoSoc Directive[3] that member states are not allowed to interpret the word “work” in conformity with their own copyright law definitions.  The answer was “Yes.”  The notion of work in Article 2(a) is an independent EU notion that is not subject to interpretation by member states.  Therefore, EU courts are not bound by the states’ own interpretation of the word work and will disregard any national requirement that a work have superior artistic value for it to receive copyright protection.  As a result, EU law can be said to prohibit member states from denying copyright protection to designs that meet the requirements for copyright protection – including designs other than registered ones (subject to Article 17 of the Design Directive).

That raises a theoretical question: would a fashion designer in Milan–whose work does not qualify for copyright protection under Italian law–have to move to Paris to benefit from French copyright law?   Fortunately, the answer here is “No.”  In the Flos case (CJEU Jan. 27, Flos SpA v Semeraro Casa e Famiglia SpA, C-168/09), the Court of Justice held that, although unprotected under Italian copyright law, the work in dispute was entitled to protection under EU copyright law regardless of which jurisdiction is the base of its designer.

Ironically, the single standard in examining eligibility for copyright protection has given rise to the double protection of fashion design works – by copyright law and design law – because if a work satisfies the EU requirements for copyright protection, the protection is granted regardless of its use as protectible a fashion design.  However, double protection means that there are two statutory tools available; for copyright purposes, the work is still subject to the three-step test for protection.  That test emerged by treaty (known commonly by the acronym TRIPS) permits restrictive measures: 

  • in certain special cases,
  • that do not conflict with the normal exploitation of the work; and
  • that do not unreasonably prejudice the legitimate interests of the author/rights holder.

In a way, that test is similar to the concept of fair use in the United States in that it gives leeway for a judge to decide what counts as a legitimate use of a copyrighted work in the absence of explicit permission.  For a minority of French academics, a European law of fair use can be inferred from the test.  However, the EU is not ready to do so at this time.[4]  The Court of Justice is apparently trying to avoid the effects of liberal and often unpredictable interpretations of copyright exceptions such as the fair use exception has seen in the United States.

Nonetheless, the Court of Justice did get some inspiration from the American fair use doctrine in the Nintendo case (CJEU Spt. 27 2017, Nintendo Co. Ltd v BigBen Interactive GmbH and BigBen Interactive SA, Joined Cases C-24/16 and C-25/16). There, the court defined the concept of “citation,” stating that Big Ben (a video game accessory seller) was merely “citing” Nintendo’s work in order to explain how to use its products on a video game console.  The court therefore concluded that Big Ben’s use of a protected graphic design owned by Nintendo in order to explain or demonstrate the use of its accessories with Nintendo products was a legitimate, non-commercial use and did not constitute copyright or design law infringement, even without prior authorization from Nintendo.  

It is clear that the Court got this idea from the fair use and fair dealing concepts of US law.  Although the EU does not formally recognize a broad judge-made exception to copyright and design law protection, the Court of Justice was still willing to create an exception in order to tidy up its own law.

What that potentially means is that, when considering protection of designs in Europe, start your analysis at the EU level and work down from there to the individual national legal systems that may be involved.  And, as with so much of design law worldwide, be prepared to expect the unexpected.

[1] The EU was formerly known as the European Community

[2] Council Regulation (EC) No 6/2002 of 12 December 2001 on Community designs

[3] Directive 2001/29/EC of 22 May 2001 on the harmonisation of certain aspects of copyright and related rights in the information society, also known as the InfoSoc Directive.

[4] F. Pollaud-Dulian, The dragon and the white whale : three steps test and fair use, in Intellectual Property in Common law and civil law, Elgar publishing 2013, p. 158

With Style and a Touch of Normalcy

By: Alan Behr, Phillips Nizer Partner and Fashion Law Chair

The best words in any language were long ago vaccinated against easy translation.  I am German and I still struggle to explain Gemütlich in simple terms.  In my lumbering study of Italian (my pandemic at-home challenge), I came across sprezzatura, which can be roughly translated as a refined and carefully executed appearance of effortlessness.  If you see a man wearing perfectly coordinated clothes with every appearance of somehow having just thrown them on before leaving home—that’s sprezzatura.  (Rest assured: he spent a lot of time working on making it look like he spent no time at all.)

The look and the philosophy behind sprezzatura have characterized Neapolitan tailoring for generations. The result is a vibrant, instantly recognizable style that has been given a tactile presence by brands such as Mariano Rubinacci, E. Marinella, Kiton and the distinctly charming and playful Isaia.  Trademark law is about the legal protection of brands, and brands are about nothing if not story: the best trademarks tell stories, inviting you into joining in the telling of those stories by your patronage of the brands behind them.

I was reminded of that by Jason Green as we sat in the comfortable parlor portion of a sales floor of the Isaia boutique on Madison Avenue in New York, sipping espresso.  He opened by explaining that the brand’s distinctive logo represents the red coral of the Mediterranean—formed, according to myth, from the blood of the gorgon Medusa after she was beheaded by Perseus, her body thrown into the sea.  People associated with the brand wear the coral logo on lapel pins, and by custom, whenever they are asked for the meaning of the device, they present the one they are wearing to the questioner.

That touch of branding whimsy is right for our times, noted Mr. Green.  “My sense is that what is taking place in the mindset of people coming out of one of the most turbulent periods in recent history is a pent-up exuberance for the return of life as normal, he added.  “In my view, there will be a powerful resurgence in sartorial expression, which, at its basis, means that you want to feel great—to leave behind whatever is connected to this challenging period and reclaim something joyful that was taken from us for too long.”  That has brought on a resurgence, somewhat unexpectedly, of wedding wear and evening dress.  You may not always wear a suit to the office, but a hand-tailored Neapolitan jacket (the buttons haphazardly fastened in homage to sprezzatura, of course) may well be your first no mask/no worries treat for yourself.

As with other brands, Isaia has spent this quiescent period reaching out to its best customers—visiting their homes and offices, giving them as close personal attention as possible.  “It is big-box retailing that is dragging,” added Mr. Green.  “Big boxes struggle with that due to their size and the intrinsic geography of that business.”  In short, if your core business involves selling essentially the same inexpensive things on racks and online as your competitors, you can find yourself struggling to differentiate yourself enough to increase market share.

The trend toward specialized service will continue even in e-commerce, said Mr. Green, a channel often thought of as the nemesis of the personal touch.  “We are moving away from that broad platform of selling a catalogue of styles online to something that literally takes place within the confines of a text, something personal delivered in a beautifully curated point of view—not a global transmission but an opportunity for an individual edit.”

What is the biggest problem facing luxury retailing?  Mr. Green was quick to reply, “A shortage of good talent.  High caliber people who know how to treat your customers well are not afraid to move around if given the chance, so much of what we do is nurture our talent.  The same is true in the high-end auto and restaurant businesses.”

From a legal point of view, it comes down to protecting your brand and your trademarks, making sure your employment agreements are fair and up to date and, above all, approaching legal issues with the understanding that luxury retail has gone from being mostly about goods to being mostly about service.

Sustainable Fashion on a Global Stage

By Candace R. Arrington, Phillips Nizer Associate

The 2021 G7 Summit, hosted in Cornwall, England earlier this month, generated eye-catching headlines about COVID-19, Brexit, and even Kate Middleton’s bejeweled bracelet originally worn by Princess Diana.  Annually, heads of state from Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States meet to strategize around global issues.  This year, one of the issues addressed by the G7 was the hot topic of sustainability in fashion. 

Sustainable fashion is an initiative to reduce the fashion industry’s impact on the environment by focusing on the development and implementation of sourcing, manufacturing, and logistical processes with lower environmental impact.  Sustainable fashion includes the use of natural materials, recyclable fabrics, and biodegradable supplies.  

The potential benefits are clear.  The fashion industry is estimated to account for 10% of greenhouse gas emissions each year.[1]  New York City alone discards almost 200 million pounds of clothing every year.[2]

The fashion designer Stella McCartney, the Prince of Wales, and some of the world’s most powerful executives gathered at the G7 along with world leaders to discuss climate change. 

The G7 is not the first international body to tackle sustainability in fashion.  In 2019, the United Nations launched the UN Alliance for Sustainable Fashion, joining global fashion stakeholders to tackle ecological and social responsibility.  During the 2020 World Economic Forum in Switzerland, the Global Fashion Agenda, alongside Asos, Nike, and H&M, published a guide containing suggested plans to improve the environment.  

Laws and policy proposals concerning sustainability in fashion are appearing more frequently around the world.  The Swedish Fashion Council cancelled fashion week in 2019 to focus on sustainability initiatives such as taxing chemicals used in the manufacturing process.  France’s Grenelle II Law mandates that any garment sold in France provide details surrounding its carbon emissions or its carbon footprint.  The French President, Emmanuel Macron, has called upon François-Henri Pinault (the CEO of Kering) to help implement environmental initiatives in the luxury fashion and textile industries.

Sustainable fashion is often linked with ethical fashion, which is a similar advocacy framework that aims to reduce human rights violations such as the use of child labor in the manufacturing process.  For instance, the California Transparency in Supply Chain Act requires businesses to ensure that their supply chain is free of suppliers and manufacturers that engage in slavery and human trafficking. 

Although efforts to combat child labor have broad bipartisan support, there is an ongoing tension between the benefits of sustainable fashion and the concern that it will add expense to the manufacturing and distribution process, disrupt existing supply chains, and in some cases restrict options in the use of fabrics and other materials.  On one hand, the Environmental Protection Agency has received pressure to regulate fashion in a manner more broadly akin to how it monitors the oil industry.  Conversely, environmentalists in the United States have received pushback from fashion businesses that argue an aggressive approach to sustainability will be both restrictive and detrimental to the domestic market.  A successful push for greater sustainability in fashion will surely require a convergence of stakeholders across multiple sectors in government and business; but in the end, as with all of fashion, it will come down to one deciding factor: if the public buys the clothes, it will be a success.

[1] Chan, Emily. “15 Things Everyone Should Know About Sustainable Fashion.”  Vogue.  April 19, 2021. https://www.vogue.co.uk/fashion/article/sustainable-fashion

[2] Wagner, Lindsey. “How to Get Involved in NYC’s Sustainable Fashion Movement.”  Capalino.  April 15, 2019. https://www.capalino.com/how-to-get-involved-in-nycs-sustainable-fashion-movement/

Collateral Damage from the Retail Bomb

By Alan Behr, Phillips Nizer Partner and Fashion Law Chair

Photograph Copyright © 2021 by Alan Behr

We noted in a recent report in The New York Times of a husband and wife, both in their sixties, whose company owned a Connecticut warehouse in which Brooks Brothers had stored fixtures, displays and props.  As a byproduct of the bankruptcy of that signature purveyor of American style, the entire lot was abandoned in their care, leaving the couple with a warehouse full of trunks, mannequins, racks, Christmas trees and more—instead of rent that had been the primary source of their personal income.  The lowest bid they received to haul it all away was just shy of a quarter million dollars—a sort of Storage Wars or Baggage Battles in reverse.

The sad fact is that, when retailing—which is about little if not the flow of goods—goes wrong, things will get stuck somewhere.  If you are left in possession of boxes of new-with-tags crew-neck cashmere sweaters, you might, with some effort, come out ahead, but not everything can be that easily monetized.  It is like musical chairs, and whatever you might say about possession being nine-tenths of the law, if you end up possessing things you did not want or, worse, find difficult to sell or even give away, you can end up suffering collateral damage in a battle lost by someone else.

For warehouse owners, whose contracts are normally both detailed and favorable to their legal position, a useful preventative, wherever permitted by law, is to insist on more upfront rent and perhaps a further deposit (directly or in escrow) of a reserve for hauling away abandoned property.  If apparel is what travels through your possession, a good idea is to remember that fashion is about speed: generally, the longer that goods stay anywhere, the harder they will be to resell in bulk.   That may not be as true for classic items such as those typically sold by Brooks Brothers, but the Connecticut warehouse held no merchandise or anything else for which a few eBay postings would provide quick relief.  True enough, Christmas trees may not go out of style—but consider what you might have to do to move along whatever you end up possessing should something go wrong in the chain of distribution in which you find yourself but one vulnerable link. 

It is often said that commerce is powered by capital and initiative, but the fuel that moves it along is optimism.  Lawyers are, by nature, worriers, and we should not allow our warnings of “but what if” to hinder the good works that will arise from a positive point of view.  But having a good exit strategy never hurt even the most optimistic of field commanders, and the same is true whenever goods enter into the stream of commerce.