By: Lena Fleischmann, a German law student and a Referendarin at Phillips Nizer LLP.
The coronavirus pandemic has taken a particularly harsh toll on many fashion brands and retailers. Since stay-at-home orders were enacted in mid-March, the pandemic has accelerated the demise of major companies that were already in trouble as Germans (and their wallets) stayed home. More and more companies have been filing for bankruptcy, key among them fashion brands and retailers—most notably brands that had little to counter the remarkable advance of online retailing and the success of fast fashion providers such as H&M and Zara.
From the country’s largest chain of department stores, Galeria Karstadt Kaufhof, which filed for insolvency under a plan to close dozens of stores, to Tom Tailor, which received a bailout from the German federal government, well-known German names in the fashion industry are facing the twin challenges of changing shopping patterns and public-health lockdowns with the same mixed success of American brands. In April, the popular women’s fashion company Hallhuber sought rescue in what is known in Germany as a protective shield procedure. (That proceeding, which also was used by Galeria Karstadt Kaufhof, is approximately the same as a Chapter 11 proceeding in the USA.) The Esprit fashion group announced at the beginning of July that it would close around half of its approximately one-hundred branches in Germany as part of its realignment. Around 1,100 jobs were to be cut.
According to a current industry survey, sales of products in Germany in the fashion trade from January to June were thirty-five percent below those in 2019. The online sales of retailers with large physical operations were typically less than ten percent of their total turnover—a presence too lean (even after accelerated expansion) to provide complete relief for many of them in the current crisis. There is an expectation of a further wave of insolvency proceedings and bankruptcies in the German fashion industry in the coming months.
There are cultural and lifestyle consequences to all this. Until the pandemic, major German cities had retained lively central shopping districts that had formed a core strength of retail sales. Major store closings have raised concerns about city centers growing deserted. “We run the great risk that traditional shopping malls that have shaped our inner cities for many decades will go bankrupt” warned Josef Sankjohanser, the president of the German Trade Association.
To determine if an insolvency filing is required, a struggling company must examine its liquid funds and its current liabilities on a certain key date. Liquid funds include available cash, credit lines and receivables. Which of those non-cash items may still be so included in the calculation of assets, and at what point the collection of a receivable may no longer be expected with certainty, are difficult to determine in a generalized matter; much depends on the facts of the individual case. The one constant is that, if a German company cannot demonstrate that it can meet ten percent or more of its current liabilities within three weeks, it is deemed insolvent. According to the applicable statute (§ 15a I 1 InsO), entities that meet that test must file for insolvency. It is important to understand, however, that they are not considered bankrupt, which is distinguished from insolvency in Germany. Although bankruptcy denotes a final end to business activity and is a procedure (with criminal liabilities for certain wrongdoings), insolvency in the economic sector is a declaration of a precarious business status.
According to § 15a I 1 InsO of the insolvency statute, entities must file for insolvency if they fail the statutory indebtedness test. The rule is universally applicable whether a company is organized as GmbH (limited liability company), AG (public limited company), registered cooperative, or UG (small limited liability company). If the company has met the threshold inability to pay its debts, the directors could be liable to prosecution for delay in filing for insolvency, § 15a InsO i.V.m. §§ 17, 18, 19 InsO. In Germany, such delays in filing cases are about 11.5% of all white-collar criminal cases.
In view of the crisis, the Covid-19 Insolvency Suspension Act (COVInsAG), an emergency federal law, provided changes in German insolvency law through March 31, 2021, giving companies facing financial problems due to the pandemic greater leeway in avoiding forced insolvency filings.
The future of the fashion business in Germany remains as uncertain as it does in the rest of the world. The key questions will be the same: When will it all end? And when it does end, how will things be different? After all, the suspension of the obligation to file for insolvency is only a temporary measure to combat a global crisis, not a long-term solution to the changes in retailing that have challenged stores throughout the world.
 Many German cities have pedestrian zones where people can leisurely walk through the city center, strolling from one shop window to the next without having to deal with automobile traffic. These zones aim to provide better accessibility for pedestrians, to enhance the amount of shopping and other business activities, and to improve the overall urban experience.
By: Tin-Fu (Tiffany) Tsai, guest author. Reprinted with permission from: Entertainment, Arts and Sports Law Journal, Spring 2020, Vol. 31, No. 2, published by the New York State Bar Association, One Elk Street, Albany, NY 12207.
When Kenneth Cole first showcased his new line of shoes in his friend’s trailer under the disguise of a production company during Market Week in the ’80s, it was meant to be a temporary alternative to a pricey showroom. Nowadays, displaying products in an unconventional store setting for a limited time period—pop-up stores—is more than a preliminary solution, but rather a game-changing retail strategy. This is because pop-ups not only create a sense of excitement but also help the retailer reshape its real estate planning.
Maintaining leases is tricky for retailers, especially in the retail apocalypse era where they struggle to adjust to shifting shopping habits and exponential e-commerce growth. One of the takeaways from the recent bankruptcies of Barney’s and Forever 21 is that expensive leases can drain a retailer, no matter at which end of the spectrum it sits. This is why more and more landlords and tenants are drawn to the pop-up concept, which provides more flexibility in the retail network with lower costs and risks. Landlords see pop-ups as a revenue source for what could be vacant properties as well as a chance to vet tenants for potential long-term leases. Tenants are able to gauge market reaction towards their products and test the feasibility of the store locations. Bridging the gap between brick-and-mortar and online platforms, the pop-up arrangement, though not a brand new idea, has already become a pillar of the retail landscape.
Fashion brands are constant players in the pop-up game. Tiffany & Co.’s signature blue box just added men’s collection at its first men’s pop-up on 5th Avenue. Chanel launched an all-red pop-up displaying limited-edition beauty products in midtown New York. Louis Vuitton’s neon green downtown Manhattan store, presenting Virgil Abloh’s Fall 2019 collection, was just one out of a hundred pop-up arrangements last year. While companies such as Appear Here, Storefront, and Popuphood facilitate the process, brands should factor the unique implications that come with pop-ups.
Lease or License
Two options dictate the legal framework of pop-ups: leases or licenses. Essentially, the difference between the two is that a lease grants the tenant an exclusive and irrevocable right to possess the premises, whereas the possession right is not absolute and can be revoked at will under a license. As a result, a landlord under a lease has to go through the often costly and time-consuming court proceeding to evict a tenant, while under a license using self-help is usually sufficient. After the Housing Stability and Tenant Protection act of 2019 was enacted, ousting a tenant with a lease will be even more difficult and unpredictable as the court proceeding is prolonged and the court has more discretions. Since pop-up deals tend to move fast, a license can be a simple way to document the legal relationship between parties as compared to a lease. Nevertheless, both parties should be mindful that the court will look at the substance rather than the name of the documents when deciding the nature of the tenancy.
Instead of thinking about who their neighbors are, brands should focus more on their customers’ lifestyles when selecting the store locations. Gucci’s pop-up with Dapper Dan in Harlem reflected the recognition of the cultural significance of the region. A database was created as a result of Introduction 1472 passed by the New York City Council in 2019, also known as the “storefront tracker” bill, may be useful for storefront searches as it provides information on the vacancy status, lease terms, size, and economic activities of the stores.
During events like Fashion Week brands face high competition when establishing a temporary store. Since time is of the essence, the delivery date of the premises should be spelled out. A tenant may wish to terminate the lease immediately without penalty when occupancy does not go as planned. Besides the right to terminate, the right to renew can be crucial from a tenant’s perspective should the business profitable.
Rent and Operating Expenses
Rent and operating expenses in a pop-up arrangement are usually fixed as they are determined in advance. The purpose of this structure is to align with the short occupancy period since time is too limited for the landlord to reconcile expenses later. An alternative is for the rent to be calculated as a percentage of sales, which should be carefully defined. Additionally, the prepayment of rent upon the tenant’s occupancy is fairly common as a way to mitigate the risk in rent collection given the quick time frame of pop-ups.
The pop-up arrangements should set forth the permitted use in detail, like the hours of operation, so that the tenant’s intended use is well-covered. A landlord should ensure that granting certain use to pop-up tenants will not interfere with the exclusivity rights of existing tenants, especially those of anchor tenants. Revisiting and modifying the use provision under current leases can be beneficial for landlords who intend to utilize the pop-up model more in the future.
Delivery of Premises
In addition to asking the tenants to accept the property “as is,” landlords typically offer no tenant allowance given the short life circle of pop-ups. To maximize the time, it is recommended to start the process of getting necessary approvals and permits early on. The incorporation of certain indemnity language in the pop-up arrangement can be effective in balancing the risk of potential violations and the speed of pop-up deals.
Considering the limited resource it has under the pop-up arrangement, a tenant should conduct a complete inspection of the property or cap the repair costs before taking on the responsibility of maintenance. Furthermore, the landlord’s representation and warranty confirming that certain system is in good and working conditions will be helpful in limiting the tenant’s responsibility for repair.
The retail apocalypse can be a chance for civic innovation and community reform. The pop-up model provides one solution, which bears a mission to attract customers’ attention and help brands stay relevant. Creative use of real estate is the key component of the unique in-store experience that customers crave. Yet, how to keep customers engaged without causing “information fatigue” will be another challenge, particularly when pop-ups become a common element of the retail landscape. Pop-ups can take various forms—stand-alone shops, department store booths, or even virtual pop-ups on-line—but no matter what the form, the brand who plays it smart is the one to stay.
Tin-Fu (Tiffany) Tsai has in-house and law firm experience both internationally and in the U.S. Currently, Tiffany leads the legal department of Arris Properties Group LLC, a New York-based real estate development company, and advises on various transactional and litigation matters. Her practice concentrates on financing, acquisitions, leasing, licensing, as well as real estate litigations. She is a 2015 graduate of Columbia University School of Law and a 2008 graduate of National Taiwan University, the top one law school in Taiwan. As the new Co-Chair of EASL’s Pro Bono Committee, she hopes to leverage her international background and connect art professionals with legal practitioners as well as law students who are interested in exploring the creative world.
By: Isabel Malmazada, Phillips Nizer Summer Associate
In the midst of the COVID-19 pandemic in the United States, the unspeakably horrible death of George Floyd in Minneapolis sparked heartfelt protests around the world. Unfortunately, vandals and looters used those protests as an opportunity to damage property and steal from retail premises. Some large businesses shrugged this off with public announcements sympathetic to the protesters and statements that their losses were not as important as the call for justice.
However, many of the losses were not suffered by large businesses. In Minneapolis, at least 220 buildings have been set on fire. In New York City, Soho, the downtown shopping district, was continuously looted over several days, with many stores ransacked and destroyed; and in the Bronx, small businesses run by African and Asian immigrants, already straining to survive due to the lockdown, were looted of everything of value. In Atlanta, rioters stampeded the CNN headquarters building and looted the Lenox Square Mall. And so it went around the nation.
As the dust settles, the owners of damaged and looted businesses will have to face the extent of destruction to their property and the loss of revenue on top of what they experienced due to the pandemic. Recovery for any or all of these losses under policies of insurance will depend on what coverage was in effect—and on how courts will rule.
In general, damage to buildings and personal property is covered under BOPs and CPPs. Riots may or may not be a “named peril” in property policies. If rioting is excluded as a named peril in the policy, then it could be included under an “all-risk” policy since those are broader. Damage to company vehicles is often covered under an optional comprehensive portion of an auto insurance policy that would provide reimbursement for damage to vehicles and their contents caused by fire, falling objects, vandalism or rioting.
Furthermore, business interruption insurance protects a business in the event the business suffers physical damage that prevents it from operating. If it is unable to operate due to property damage from rioting, then such an insurance policy should cover its lost revenue.
As with all business insurance policies, the carrier must be notified of the claim within a specified period of time. Therefore, prompt policy review and communication with the insurance company must be a high priority, even while trying to do what is necessary to deal with and recover from the effects of lockdown and riot.
By: Isabel Malmazada, Phillips Nizer Summer Associate
Since the beginning of the COVID-19 crisis in March, most states have decided to shutter non-essential businesses to stop the spread of the virus. Businesses were closed for months, leaving employers and employees with lost revenue and lost income. If the shuttering of a business was due to forces outside of the business owner’s control (as in the case of a government-ordered lockdown), may a business be covered by its insurance policy? As with so many legal questions, the answer is: it depends.
General liability insurance and property insurance do not cover forced closures due to pandemics or civil ordinances. However, if a business also had business interruption insurance or civil authority insurance, it may be protected. Business interruption insurance generally covers certain losses in the event the business suffers physical damage or loss that prevents it from operating. Businesses that had to close due to COVID-19 contamination concerns may be able to seek coverage for the period of time necessary to decontaminate the premises, dependent upon the terms of the specific policy. Civil authority coverage allows a business to recover losses in the event that a civil authority issues an order that closes the business or prevents normal daily operations. The period of coverage begins with the civil authority order that restricts access to the business and ends when the order is lifted or after a specified period of days has elapsed, whichever occurs first.
As always, the language of each policy is critical. Some policies explicitly cover pandemics. For example, the Wimbledon Tennis Tournament paid $1.9 million per year for a pandemic insurance policy since 2003 following the SARS outbreak. This entitled it to a $141 million payout following the cancellation of its tournament this year. However, many businesses are not so fortunate. Many insurers have taken the position that COVID-19 claims are not covered, even for businesses that had bought additional protection, either because there has been no physical damage to property or because the policy expressly excluded coverage for viral contamination, or because the policy did not expressly include viral contamination as a covered event.
Since the COVID-19 outbreak, members of Congress have requested insurance companies to cover COVID-related losses under business interruption policies. State legislators in New Jersey, New York, Ohio, Louisiana, and Pennsylvania have also proposed legislation that would require insurers to provide some coverage for losses due to COVID-19. However, the National Association of Insurance Commissioners, comprised of insurance regulators from all fifty states and the District of Columbia, urged Congress not to take action that would require insurers to cover COVID-19 business interruption claims under policies that exclude coverage for communicable diseases. Legislation that tries to expand coverage obligations of insurance companies would likely be challenged as unconstitutional under the Contracts Clause of the Constitution, which prohibits states from enacting legislation that impairs contractual obligations.
Now is an optimal time for all businesses to review their insurance policies and determine what coverage is available and see if such policies expressly address losses caused by viruses. The lawsuits have already started. A key issue being litigated is whether there is “property damage” from COVID-19 contamination and whether an insured “physical loss” includes the inability to use property safely. The difficulty is that business interruption policies are generally written to cover obvious physical damage, like destruction from a natural disaster. Therefore, it is unclear if a virus will meet the threshold requirement of “property damage.” A business owner must establish physical damage to his or her property from a communicable disease or contamination. May this burden be met if the business is near a hospital, airport, or nursing home and the business owner shows that someone with COVID-19 was on his or her premises and thus “contaminated” the premises with said virus?
Insurance policies are contracts and are interpreted as such. Whether a particular policy will provide coverage will depend upon the actual language of the policy and the specific circumstances giving rise to the claim.
By: Isabel Malmazada, Phillips Nizer Summer Associate
The COVID-19 pandemic has turned the business world on its head. Now more than ever, with the pandemic still at large and the civil unrest ongoing in the country, businesses and insurance companies will be reviewing their policies closely and determining if a business has insurance coverage, and the extent of such coverage. Commercial insurance is designed to protect businesses, both small and large, against events that may cause a loss of revenue. However, the extent of coverage and the willingness of an insurance company to cover a loss depends on the type policy issued and the details of that policy. It is therefore important to understand the different type of insurance policies that are available to business owners.
A business owner policy (“BOP”) is a general type of commercial policy targeted towards smaller and medium sized businesses. It combines both property and liability coverage under one policy. A BOP offers general liability insurance, which protects against liabilities such as customer injury and damage to property of others at physical locations. A BOP also covers commercial buildings and movable property owned by and used for the business itself. If a business owner wants broader coverage, he or she will need to purchase additional policies.
One option is a commercial package policy (“CPP”). A CPP is a customized package comprised of two or more business insurance coverages bundled together. It allows a business owner greater flexibility in tailoring the coverage to his or her specific needs. A typical CPP will contain property and liability coverage similar to a BOP, but may also include automobile coverage, crime protection insurance, and inland marine coverage. Auto policies protect business vehicles and drivers; crime insurance covers property crimes such as theft, burglary, and robbery of money, securities, stock and fixtures by employees; and inland marine covers items in transit.
Each one of these specific add-ons will increase the total annual premium paid by the insured. Smaller businesses in particular may therefore be tempted to decline some of this additional coverage. However, as the pandemic and the recent civil disturbances have shown, during times of serious crisis, business owners need coverage for all types of situations. These include, for example, potential destruction to retail properties or to the business’s vehicles resulting from rioting or demonstrations.
Commercial insurance is often customized to meet the specific needs of large businesses. These businesses usually have their own risk management departments dedicated to evaluating the cost of insurance coverage in relation to analyses of the potential accidents and losses, recommending and implementing preventive measures, and devising plans to minimize costs and damage should a loss occur.
The pandemic and the civil unrest are unforeseen circumstances, which affect many small businesses disproportionately compared to bigger businesses. Larger businesses have more capital and more comprehensive insurance policies that enable them to work through these difficult times more successfully. Many small business owners have learned to their dismay that they were not adequately covered, which will inevitably prevent them from reopening, while many larger businesses will more easily absorb their huge revenue losses and survive.
By: Candace R. Arrington, Phillips Nizer LLP Associate
“The question comes to us in a case involving handbag fasteners,” writes Justice Gorsuch in the introduction to the recent Supreme Court ruling in Romag Fasteners Inc. v. Fossil Inc. et al.
On April 23, 2020, the Supreme Court resolved a long-standing split in opinion among federal circuit courts of appeal as to whether a finding of willfulness in a trademark infringement case is a prerequisite to an award of profits. Simply put, the Court concluded that proof that a mark was infringed — even if the infringer’s conduct was inadvertent — is sufficient for the trademark owner to collect the profits earned from the infringing conduct.
Romag produces magnetic snap fasteners commonly found on purses and leather goods. Fossil makes a vast array of fashion accessories, ranging from handbags to watches. Years prior, Romag and Fossil entered into a licensing agreement for the use of Romag’s fasteners on Fossil handbags. Subsequently, Romag discovered third-party companies making Fossil products were using counterfeit Romag fasteners – and Fossil did nothing to prevent the use of the counterfeits. Romag sued Fossil for trademark infringement under the Lanham Act, 15 USC §1125(a) for false designation and won. Following Second Circuit precedent, the federal District Court of Connecticut refused to award Romag with Fossil’s profits because, although Fossil was held to have infringed, the court did not find that it did so willfully. Romag appealed to the United States Court of Appeals for the Federal Circuit, which affirmed the District Court’s ruling. The Supreme Court reversed the Federal Circuit, declaring that willful trademark infringement was not required for profit disgorgement.
In its decision, the Supreme Court said that it was strictly relying on the plain language of the Lanham Act. The Lanham Act speaks explicitly about the required mental states of liable actors in a number of its provisions but not in §1125(a).
Justice Gorsuch, in writing the unanimous decision, noted that he does not want to “read into statutes words that aren’t there,” reasoning that Congress did not mistakenly omit a willful requirement for a profit award under Lanham §1125(a) after repeatedly specifying such a test in other provisions of the Lanham Act.
The most popular hot take on the Romag ruling is that it will lead to a spike in lawsuits. Some commentators and law practitioners have expressed concerns that the Supreme Court did not provide a “bright line rule” as to the method by which to award damages. For now, it remains uncertain whether the decision will increase profit awards because each legal determination is still very fact dependent.
It is easy to see how the ruling could lead to an increase in fashion disputes, especially those against parties identified as counterfeiters. Hopefully, the threat of heightened damage awards will serve as deterrence to future infringements.