I have been fielding questions from the press and colleagues about the bankruptcy of Toys “R” Us and its challenge to stay in business after shutting many stores in the chain. A leading question, typically asked with evident nervousness and need for reassurance: “It couldn’t happen this way in the fashion business, could it?” The answer: it could and it has. Some points to consider:
The Toys “R” Us model was to put familiar, heavily advertised brands into large stores for one-stop toy and game shopping. That worked in part because children see toy advertisements and play with friends’ toys with such regularity that “shopping” is often simply a matter of picking up what they have requested (over and over) and then fending off enough impulse purchases at least to give the illusion of parental control over the process. Trust me on this: I have an eight-year-old.
And trust me on this as well: pushing a shopping cart through large, undifferentiated corridors, plucking brand-name toys off shelves, is not an adult-friendly experience. Contrast that to the flagship Hamleys shop, which has cleverly positioned itself on London’s Regent Street, in easy walking distance from both my tailor and shirtmaker. Eager, helpful people are constantly demonstrating products, which is how, on my latest visit, I got two wafer-thin model airplanes for £10 that broke up on first crash landing and a coin-trick magic set I haven’t quite got the hang of yet—though I’m working on it. Yet it was a fun visit, which is quite the point. Just as important for the chain, a large portion of its merchandise is private label, which makes part of what they sell both exclusive and retailer-branded. If you want it, that is, you have to go to Hamleys, and when you bring it home, the name on the product reminds you from whence it came.
Providing a quality in-store experience and building a brand through exclusivity and desirability are very much points for any fashion retailer to consider. There is no benefit in falling back on the familiar mantra: “We are working to enhance our presence online.” Consider what, if anything, is unique about the Toys “R” Us website that would bring you there first instead of to Amazon. A certain segment of the population still wants to walk into shops, and what you provide online, at least in the near term, will be seen as an extension of what you provide in-store. Private label is still largely a bricks and mortar play, and it is often a very necessary one to reinforce the power of a brand and to build and hold onto customer loyalty. Private label has so far not had the same impact on fashion websites as it has in-store, in fair part because it is quite challenging to recreate the kind of storytelling experience that the best store brands provide in real space. (Is there any doubt, when you are in an Hermès shop anywhere in the world, that you have entered the Hermès world—one of chic sophistication, style and even, around corners framed by carefully arranged displays, a touch of mystery?) A website can support that experience, but so far, at least, cannot fully replicate it.
So the lesson for fashion retailers is simple: make them want it, and make them want to come in to get it. Which is to say, the lesson is what you already knew. Major bankruptcies are like traffic accidents. You drive slowly by, saddened by the damage; and, although you surely already knew that driving safely is a must, the experience brings the message home with great force.
Credit: Alan Behr
Recently, the Federal Court of Appeals for the Ninth Circuit upheld an injunction issued for the benefit of members of the Kardashian family against their cosmetic products licensee.
The Kardashians had terminated the license agreement due to the licensee’s alleged failure to pay royalties, among other alleged breaches. The licensee continued to exploit the license and sell products bearing the Kardashian trademarks, asserting, among other things, that “the Kardashians’ termination of the license agreement was invalid because the Kardashians breached the license agreement first . . . .”
The district court found for the Kardashians, holding, unremarkably, that a licensee has but two options when faced with a breach of the license agreement by the licensor: “First, the licensee can consider the contract terminated and stop performance. Second, the licensee can instead continue making royalty payments under the license agreement, continue using the trademarks, and then sue for damages. Regardless, the licensee cannot both stop paying royalties but nevertheless continue using the trademark.”
Although the options presented to a licensee by the district court decision are seemingly reasonable, they can present real risk to the licensee. For example, if the licensee had made significant investments and engaged a large staff to support the licensed business, terminating the agreement and closing down the licensed business not only will put any number of people out of work without advance notice, but also may result in defaults under the licensee’s banking arrangements and the loss of its entire business, thus giving rise to consequential damages potentially far in excess of any award for actual damages to which the licensee may be found to be entitled. Under the district court decision, the licensee’s option in these circumstances would be to continue the licensed business and bring an action against the licensor for damages, with the attendant relationship issues potentially adversely affecting performance, while continuing to make royalty payments with no guaranty that the licensee’s damages can be recouped, even after years of expensive litigation.
There is another quite unremarkable statement in the decision, which, although not in any way undercutting the ruling, may give some guidance as to how a licensee may attempt to protect itself in circumstances like those that the Kardashian licensee alleged it was facing. The court wrote, “like all contracts, trademark license agreements are governed by general principals of contract law.”
Among the most wonderful aspects of our contract laws is that the parties can, in effect and with few limitations, create their own law as to their rights and obligations under almost any circumstances. Accordingly, a licensee familiar with the Kardashian case might look to create a contractual structure whereby it would not have to pay royalties in the event of a significant breach by the licensor or, more realistically, a contractual structure by which it would not have to chase the licensor, at great expense, to recoup royalty payments in order to continue to exploit a generally valuable license agreement.
It is not uncommon to see license agreements in which the licensor has included a right for the licensor to set off amounts due and owing to it by a licensee against any outstanding payment obligations it may have to the licensee. However, even if a licensor would be willing to make this provision bilateral, these provisions are objectively problematic because they cannot be reliably drafted to prevent with certainty a party from merely alleging that the other owes it money in order to trigger the clause (unless, of course, a claimant party is required first to obtain a final judgment as to the amount allegedly owed, which brings us back to the problems with option number two). A better and more objective protection would be to allow the licensee to put its payments of royalties into escrow, with an obligation to take some formal legal action in accordance with the license agreement’s arbitration or litigation provisions before, or reasonably soon after, it notifies the licensor that the escrow account has been established. Assuming that the licensee establishes in the proceeding that it is entitled to damages, the escrow fund, even if less than the damage award, will be available to be applied toward the satisfaction of the judgment. It also is possible that establishing an escrow account and making payments into the escrow account will help relieve at least some of the tensions arising from awkward efforts to work together while the parties are adversaries in court or in an arbitration and perhaps even salvage the relationship after the legal action has ended.
Credit: Jonathan R. Tillem
I once insisted to my colleagues that it really is nothing to write a blog post: you can do it while waiting in the checkout line at Whole Foods.* Although that has proven overly ambitious, I was indeed standing in that very line the other day when a customer laboriously explained to a cashier about how another market had developed biodegradable non-paper bags, how her cooperative apartment building simply disposed of the Whole Foods bags without recycling, and in general how unrealistic it was for Whole Foods to expect anything good to come out of its use of paper shopping bags. The cashier, a very young woman, clearly had not been expecting, on punching in that morning, to debate sustainability with a stranger; she took the woman’s payment and gently encouraged her to move on.
Why did the loquacious customer decide that a cashier was the right person to address shopping bag policy at a company with 91,000 employees? I reflect on that because I am sometimes approached by people in the fashion business in the hope that I will introduce them to others who can help them in their careers. Young designers want me to introduce them to retailers. Entrepreneurs at start-ups want help in meeting financiers, and financiers want me to introduce them to the owners of thriving businesses and distressed businesses. Sometimes, I can accommodate them, but because lawyers tend to rub elbows with other lawyers and with executives who need (I did not say want) to speak with lawyers, doing so is not commonplace for use. My contacts are therefore what you would expect from a fashion lawyer: people who have devoted at least part of their work lives to dealing with contracts, governmental filings and lawsuits.
There are many different areas of expertise and specialties in the fashion and luxury goods businesses. And there are also many layers of responsibility. We all know that, but when you want something enough, it is easy to forget—and to hope that whoever you can easily get hold of is the right person to meet. Before approaching an organization, it is always a good idea to learn as much about it as possible, first to know about what it wishes to reveal about itself, second to know what it expects next to achieve, and third, and perhaps most important, to know who is the gatekeeper for the topic you are hoping to bring to the fore. Your lawyer can sometimes indeed be a resource. We have access to databases and we do know useful people. So we may have the right contacts for you—or we may not; it all depends on what you want and on those old but eternally important variables: good timing and good luck.
We have come a long way in gaining quick access to information from the days when, at the insurance company where I once worked, the people in charge of investments made sure to own one share of every corporation listed on the New York Stock Exchange, just to be able to receive the annual report. But that information and so much more is now readily available online—which of course means you do not need anyone else to look for you, as long as you know where to look. It is when the devil arrives with his proverbial details that lawyers can sometimes help—as can accountants, consultants and all the other professionals who absorb the time and money of business people everywhere. It is just part of the game, but it is a game we should all know how to play.
* Because I know I will be asked, as was the case with this post, the best time to catch up with your blogging is while waiting for your eight-year-old to soak himself and everyone nearby in a water-gun fight at a very wet playground.
Credit: Alan Behr
When Presidential Security Interferes with Revenue
and the Customer Service Experience
In the words of a troupe of Britons, first heard long ago, “And now for something completely different.” This post is a transatlantic collaboration, co-authored by members of the fashion and real estate law practices of Phillips Nizer LLP, of New York City, and Fox Williams LLP, of London. The firms address the same legal question from the perspective of New York law, in the segment authored by the Phillips Nizer, and English law, in the segment authored by Fox Williams.
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The secondary residence of U.S. President Donald Trump is located in the eponymous skyscraper that bears his name located in an area of Upper Fifth Avenue in New York City, at the apex of the most important and most expensive shopping district in the Western Hemisphere. Prized retail space can be found in the building and in surrounding properties. This is not the typical environment for establishing a security cordon for the protection of the President of the United States.
If President Trump continues to maintain Trump Tower as a secondary residence and working office (as he had done while President-elect), we can surmise that protective and preventative measures that have been in effect for weeks, will continue. Anyone brave enough to attempt to enter the still-cocooned retail spaces will receive a quick course in world-class security. You have to talk your way past federal and local law enforcement officers to get into Gucci, which is in Trump Tower but accessible by the street, to say nothing of what you need to do to get into the building’s atrium for the chance to score a latte at Starbucks. In short, the conversion of Trump Tower into “White House North” has not been good for business for any tenant who is not named Trump.
New York City and State Law
The retail tenants may seek ways to mitigate their losses. The law and most leases, however, are not particularly sympathetic to this type of economic collateral damage, which typically falls under the category of “consequential damages.”
As a general rule, a tenant’s choice of remedies when things go wrong in a lease is to seek an abatement of rent, or to seek to cancel the lease. Lost profits are considered speculative by the courts and are almost never awarded in cases involving commercial leases. Most commercial leases have specific prohibitions against the award of lost profits.
One possible alternate claim would be for what is known as “constructive eviction.” That happens whenever something within a landlord’s control substantially interferes with the use and enjoyment of the leased premises. The catch here is that it has to be something the landlord does or fails to do; in the case of the President, however, the security is not his own but that of the United States government, working closely with the New York City Police Department.
Many leases provide that, if access to the premises is thwarted or impeded by fire or other damage, rent will be abated. For those leases, there could be support for the claim that the extraordinary event of government restraint on access forms the basis for an abatement of rent.
New York courts have held that a party may be relieved from its duty to perform whenever an unforeseen event has occurred that destroys the underlying reasons for performing the contract. The argument that the United States Secret Service and the local police have turned your block into the Maginot Line is not a familiar one, but it could, at least in theory, gain traction if damage is shown to be acute enough.
Finally, there is always a claim against the government—but that is probably pushing it a bit. Whenever property is taken from a private individual by the government under “eminent domain,” there must be payment of just compensation. There is an exception to the rule that provides that there is no compensation when a taking is due to the exercise of “police power.” An example of police power is the right to damage or destroy private property (without compensation to the owner) when such an act is necessary to protect the public interest. If you want to know what that means, watch the next time someone parks an expensive car in front of a fire hydrant when a blaze has started and fire fighters arrive with their axes.
In short, there is no clear way, through the use of litigation, for retailers caught within the security cordon or even just outside it to seek redress. However, the President is nothing if not a deal maker, and as a sage old lawyer once suggested, “If you don’t ask, you don’t get.” It cannot hurt to contact the landlord and practice your take on “the art of the deal.”
The position under English law has differing aspects (and certainly uses a different legal language) but is similar. It is true that this could be an issue that is unique to the circumstances in which these retail tenants find themselves, but it raises issues pertinent to landlords and tenants in both jurisdictions. One can easily envisage similar circumstances in London, for example, affecting footfall to tenants’ retail stores and outlets, be that at the instigation of the state, or from other sources. What if a prominent politician or other VIP took offices in Regent Street or Bond Street? What if state security demanded establishing a similar cordon for some other reason, one that interfered with the tenants of prime retail space in the capital?
In English law, the concept of a tenant (as opposed to a landlord) seeking to “cancel” or “determine” a lease is almost unheard of without the agreement of the landlord (for example, a surrender or a break clause). Whilst English contract law has well-established principles of breach of a contract leading to its termination, this does not translate well to the realm of landlord and tenant law, where a tenant is seeking to terminate the lease (this is not the case with the landlord, who can usually seek to forfeit the lease in the event of a tenant’s breach).
So, with this avenue all but closed to tenants, they would usually need to focus on the terms of the lease itself to seek damages or a court order that the interference must stop.
Like our U.S. colleagues, English lawyers would express doubt as to whether the concept of rent abatement can apply to these facts. For the reasons given above, where an English lease contains a rent abatement – or “rent cesser” – clause, that clause normally relates to circumstances in which the property in question is damaged or destroyed (usually due to circumstances for which the landlord is insured) only to the extent that it is uninhabitable. If that is the case, the rent will not be payable whilst the property cannot be occupied. It might be stretching matters too far (without specific wording in the lease) to extend this well-established concept to fit these facts. Trump Tower (or the hypothetical English equivalent) is not a property that is damaged; it is the access to it that has been compromised.
If this offers little comfort to tenants, there are two further (and largely overlapping) English law concepts that might assist. English law has long recognized that landlords must not “derogate from their grant” and the obligation to allow the tenant “quiet enjoyment” of the property. If proved, they entitle a tenant to sue the landlord for damages.
The former principle states that, in granting the lease, the landlord has agreed to confer certain benefits on a tenant, and should not do anything that substantially deprives the tenant of those benefits. The latter requires the landlord to ensure that there is no interference with the tenant’s possession and enjoyment of the property itself.
English cases on the above where tenants have succeeded, have included erecting advertising billboards obscuring the tenant’s premises, alterations by a landlord that discourage passers-by, and causing noise and disruption by way of building works adjacent to the tenant’s property.
So, it would appear that English tenants might be better placed in these circumstances than their U.S. counterparts. However, as in America, tenants are likely to run into the same problem they would encounter had they set up shop on Fifth Avenue instead of Regent Street: is the presence of such high security something instigated (or even sanctioned) by the landlord, or is it a matter of national security, out of the hands of whatever corporate vehicle happens to own the freehold of a given retail unit? The unfortunate truth is likely to be that the security presence is not the ‘fault’ of the landlord, and thus, the landlord cannot be said to have violated either legal principle.
Tenants may therefore find themselves, as in America, caught between a rock and a hard place: a landlord who is ‘not at fault’ and a rent abatement clause that does not do enough to protect their interests. Perhaps one for English tenants’ lawyers to think about too when drafting leases of high-end retail and fashion outlets in the busiest and most desirable of the U.K.’s shopping districts.
Credits: Steven J. Rabinowitz
Steve is counsel in Phillips Nizer’s Real Estate Law practice.
At Fox Williams, Liz advises on a broad range of commercial property transactions, both freehold and leasehold, including property management, investment acquisitions and disposals, secured lending, property finance, general landlord and tenant issues. Tom is a property litigator, and heads up the firm’s Real Estate dispute resolution practice.
Visit the Fox Williams Fashion Law Group website at www.fashionlaw.co.uk.
Phillips Nizer would like to thank Liz and Tom for providing a non-U.S. perspective on this very interesting, and in this instance, extremely unique and unusual circumstance in real estate law affecting the landlord-tenant relationship.
The new year had arrived and ski season was approaching, so on a rainy morning, I brought my graphically red Bogner ski pants to Jeeves (the dry cleaner, not the P. G. Wodehouse character) for cleaning and repair. Carrying, as I nearly always do, a Leica film camera under my suit jacket, I stopped on Madison Avenue to take a photo when my Noctilux lens slipped free from its bayonet mount (a first for me), and tumbled toward the sidewalk of East 65th Street. It gained momentum, plunging downward until it landed safely atop a damp Hefty bag full fluffy, uncollected New York trash. That was a good omen for the start of the year.
Back to Jeeves: those ski pants, too Euro for Vermont but spot on for Courchevel 1850, where I had last been, and St. Moritz, where I was next heading, had been soiled due to the consequences of poor form (crash!) and, for good measure, had been sliced just above the ankles like red apples for my son’s school lunch box (due to over-zealous ski edge sharpening). The solution of Jeeves, following the cleaning, was to armor plate the inside bottom part of the legs with leather overlays that coordinated with the pants. The next time a sharp edge hit them, little or no damage should be done, all without loss to Euro styling.
The moral of the story, and not just for photographers and skiers, is that you need to be ready for when things go wrong. Sometimes, good luck will deliver a solution (a beneficent pile of garbage) and sometimes, you will just have to absorb what happens and make the best of it later (with a little bit of leatherwork). In law, luck can happen as well. The adversary who has a winnable case against you decides, just the same, that it is not worth the trouble to sue you back to the stone age. The respectable couple who own the classic six coop within the best school district falls behind on payments and is obliged to sell under market to a family sure to pass muster with the socially and financially conservative board. (Just trust me on that one.)
Good luck is lovely. It cannot, however, take the place of sound legal and business planning. Transactional lawyers, the ones who draft contracts, are the bringers of good luck. If they do what they should, you might well not need litigators, who, as was Jeeves for a pair of ski pants, are there to try to make things right when contracts go wrong. The problem is that, all too often in the fashion business, people think that luck will come without the help of lawyers and so they simply sign a long, attorney-drafted agreement handed to them by the other party, hoping everything in it really says what it is expected to say. Sometimes it does, just as it is theoretically possible that, the next time you drop something quite valuable, it will fall safely onto a stuffed Hefty bag. For small matters, going without an attorney often carries a low enough risk to be worthwhile, but when the stakes increase, so does the risk and so does the likelihood that bad luck will have bad consequences. So here is a refreshed old tip for a nice new year: feel lucky, but when the stakes in a deal are high, lawyer up. Good luck comes most often to those who plan ahead.
Credit: Alan Behr
Whether you call it shoplifting or shrinkage and the people tasked with stopping it the house detectives or the asset protection department, and regardless of what new technology you put into place, if you are a retailer, stealing is a problem that will never go away. When I was in high school, back in New Orleans, I worked weekends and summers at the department store my family owned and operated (and long since shuttered). I got to see firsthand the extent of the problem—which was harder to track in those days before electronic inventory controls. The manager of my department was arrested for stealing a pair of Mickey Mouse suspenders from the warehouse. He had been collared by the four-man security team brought in to replace the aging and quite ineffective store detective. During a big three-day sale taking place over a long summer weekend, as the junior and surely least valuable member of our sales team, I was relegated to sitting in the men’s fitting room, watching for thieves. All I got for my trouble was the chance to alert security to the customer who thought that the fitting room stall belonged in the men’s bathroom and had used it accordingly. That incentivized me to petition for repatriation to the sales floor and, just to be sure my position did not revert, I became the top sales person of my department during the next three-day sale.
Jump some years ahead, and now I find myself working with clients in retail on the law of asset protection. There was the time I had to work with the manager and assistant manager of one department store branch that was being sued for assault and false imprisonment by an alleged shoplifter who claimed he had been injured in his apprehension. The plaintiff appeared at the first hearing on crutches, and justice being as slow as it is, by the time the second hearing came around, he was practically pole vaulting with the things, which his lawyer, who could now hardly catch up with him, obviously told him to keep using in an effort to garner sympathy and a favorable settlement.
It was frustrating to our client, but none of that has changed much. You still need to be sure that you work with counsel to know what you can and cannot do in pursuing, approaching and ultimately challenging a suspected shoplifter. There are rules about that, and they vary from state to state. Just as an example, in New York you need to show that the suspect took possession of the item with an intention to make off with it. If you are found purposefully trying to sneak out a T-shirt by wearing it, give your lawyer a call; but if you tuck the T-shirt under your arm while paying for something else and mistakenly head out with it, you are guilty only of absentmindedness.
As long as retailers work very hard to create demand for what they sell, and as long as objects of desire hang and lie in public view, shoplifting will be a problem. As with all other problems that are certain to occur, it is always best to have policies and procedures in place and to make sure that the individuals charged with being the first line of defense—the sales staff—are thoroughly briefed on what to do. It is prudent to have counsel and the security team conduct periodic joint seminars with sales and security personnel. As with everything else in the law, the proverbial ounce of prevention will alleviate the need for the more than typically expensive, when it comes to litigation, pound of cure.
Credit: Alan Behr