Protecting the Confidentiality of Your Key Suppliers
Posted: October 20, 2015 Filed under: Business Law, Cases, Federal & State Laws, Intellectual Property | Tags: manufacturers, manufacturing, New York law, non-compete agreements, trade secrets, unfair competition Comments Off on Protecting the Confidentiality of Your Key Suppliers
A case that was decided last year by the New York Supreme Court, Kings County, illustrates the importance of protecting the confidentiality of proprietary supplier and manufacturing sources.
In this case, a wholesale distributor of off-price apparel engaged an employee to assist the distributor in sourcing merchandise from overseas manufacturers. The distributor and employee made a number of trips to a South American country where the distributor sourced merchandise through a business broker who provided introductions to local apparel factories.
After a few years, the employee left the distributor to work for a competitor that began to place orders for merchandise with these same factories through the same broker.
The distributor subsequently brought an action against the employee and the competitor for unfair competition claiming that the identity of the broker and associated factories constituted trade secrets, which the employee misappropriated for his own and the competitor’s benefit.
Under New York law, a former employee may generally solicit a business’s customers, so long as the employee is not bound by a non-compete agreement, does not solicit the customers while still employed by the business and does not rely on customer information that was wrongfully obtained or which constitutes a trade secret. The courts have applied a similar standard when evaluating whether the identity of a company’s suppliers may be treated as a trade secret, often also considering whether the company had exclusive arrangements with those suppliers.
In determining whether information is a trade secret, New York courts frequently apply a six factor analysis:
- the extent to which the information is known outside of the company;
- the extent to which it is known by employees and others involved in the business;
- the extent of measures taken by the company to guard the secrecy of the information;
- the value of the information to the company and its competitors;
- the amount of effort or money expended by the company in developing the information; and
- the ease or difficulty with which the information could be properly acquired or duplicated by others.
The court ultimately decided the action in favor of the employee and competitor, determining that the identity of the broker and the associated factories were not trade secrets. The distributor did not establish that the broker or the factories had promised to or did, in fact, sell exclusively to the distributor and did not show that the identities of the broker and the associated factories were confidential. The distributor also failed to provide evidence that it had undertaken great effort in discovering the factories, in establishing a business relationship with the broker or in keeping the identities of the parties secret.
The lesson here is that businesses that depend on key suppliers should not rely on trade secret protection alone to protect these relationships. Instead, they should take steps to identify as proprietary that information which they wish to protect and should enter into appropriately tailored non-compete and non-solicitation agreements with their employees that are designed to prevent them from disclosing or otherwise taking unfair advantage of such information of which they become aware during the course of their employment.
Credit: R. Brian Brodrick
Brian is a partner in Phillips Nizer’s Corporate Law and Securities & Private Placement Practices.
When The CEO Must Go
Posted: October 13, 2015 Filed under: Business Law | Tags: American Apparel, apparel, bankruptcy, Bill Gates, business, CEO, Dov Charney, fashion, Made in the USA, Mark Zuckerberg, Ralph Lauren, receivership, retail, Steve Jobs Comments Off on When The CEO Must Go
The bankruptcy and attempted reorganization of American Apparel demonstrate not just that fashion is a risky business but also that, in bad times as well as good, it brings into play some unique considerations. First among those is that fashion businesses tend to arise from the unique vision of one or a very few individuals. That is true as well for tech startups, but except for a few software geniuses (such as Mark Zuckerberg), entrepreneurial masters (such as Bill Gates) and brilliant marketers (such as Steve Jobs), once a tech business gets going, skilled replacements are relatively easy to find.
That is not the case when the founder and guiding light of a fashion business is also its chief designer. As even well-established brands have demonstrated, bringing in a new designer who understands a brand’s signature looks and who can add his or her own vision while somehow keeping all that fresh (and keeping loyal customers purchasing) is not an easy feat.
The situation at American Apparel was ironically even more complicated because much of the trouble started when its founder, Dov Charney, was forcibly removed. More of a businessman than the creator of a signature style (American Apparel was all about ever-cool basics made in the USA), he dominated the company. He made a failed effort to return; and while everyone involved focused attention on that, the business lost its vision and too many of its customers, and then slid into receivership. That might have happened anyway, but the disruptions caused by the long-running Charney episode may well have been the tipping point.
It all serves as a reminder that, in fashion, getting a clear and effective legal structure into place as early as possible, with understandable methods and procedures for personnel transitions and successions, could potentially be a business-saver. True, Ralph Lauren, that grand warrior for American gentlemanly style, simply and graciously stepped aside as CEO of his company, letting the business keep running, apparently seamlessly, from there. But legal planning is not about expecting the best; it is, unfortunately, about hoping for the best while planning for the worst. And when it comes to fashion and the people in fashion, that is nearly always a prudent way to go.
Credit: Alan Behr
Designers Defending Their Names
Posted: September 22, 2015 Filed under: Business Law, Intellectual Property, Licensing, Menswear, Transactions, Womenswear | Tags: brands, Catherine Malandrino, designers, Elie Tahari, Halston, Jacqueline Kennedy, Joseph Abboud, Karl Lagerfeld, Men's Warehouse, Ralph Lauren, Roy Halston Frowick, trademarks Comments Off on Designers Defending Their Names
If you are interested enough in fashion to be visiting this page, I cannot tell you anything new about Roy Halston Frowick, better known as Halston. He was unique in many ways, starting with the fact that he launched his career with a single piece: the pillbox hat that Jacqueline Kennedy wore to John F. Kennedy’s inauguration as president, in 1961. (The fact that Mrs. Kennedy was also wore a Halston pillbox while sitting in the car next to the president as he was assassinated, in Dallas, led to the style going out of fashion in the blink of an eye.) By 1983, Halston’s company, Halston Limited, was owned by Norton Simon, Inc. Unless Halston had agreed to all that at some point, the likely explanation was that there had been no form of what lawyers call a non-assignment clause in place in the relationship that Halston, the man, had set up with the owners of Halston, the brand. In any event, within about one year, Halston was no longer designing for Halston Limited. He died in 1990, a man without his own name in design. Once that disassociation occurred, Halston, the brand, which still exists, has a life of its own, and it has since changed hands seven times more.
Catherine Malandrino recently filed a lawsuit against Elie Tahari and others, claiming she was wrongfully deprived of rights under a deal by which she sold her brand (and, for all intents and purposes, her professional name) to a company controlled in part by Tahari, which employed her as its creative director. Malandrino had only minority representation on her new employer’s management committee. She alleges that her co-venturers and others routed around her in subsequent dealings, damaging the brand and failing to compensate her as agreed. Although the complaint is passionately composed, it does not directly address what appears to be the underlying issue: Malandrino and her representatives did not provide, in the agreements she signed, the kind of contractual protections that could have reduced or eliminated many of the alleged wrongs and that would have given her final say as to what was and was not a Catherine Malandrino creation.
On a happier note there is the long, circular tale of Joseph Abboud. His eponymous menswear line debuted in 1987. His name was registered as part of trademarks that he licensed to a joint venture in which he took an interest through a corporation he owned. He then sold off his equity interest and worked as a consultant to the company that now exclusively owned his name in the fashion business—until creative differences caused an abrupt. Abboud tried to start a new brand called “jaz,” making it known in the trade that he was the designer. In the lawsuit filed by the company that owned the Joseph Abboud trademarks, the court ruled, “Abboud is permanently enjoined and restricted from using her personal name to sell, market, or otherwise promote, goods, products, and services to the consuming public.” In all, a humiliating result for one of my favorite menswear designers. Several sales of branding rights and changes in price point later, man and brand were effectively reunited; in 2014, Abboud became chief creative director at Men’s Wearhouse, which is the current owner of the Joseph Abboud brand and trademarks.
And we must not forget that there are many success stories. Karl Lagerfeld is still a walking brand, regardless of whatever house for which he has already has served or may yet serve as designer. Ralph Lauren’s name is owned by his company, which is public and so owned by many shareholders—but he has set up everything quite nicely and is surely not losing sleep worrying about whether he will still be designing under his own name.
The message: every good designer is either a good business person or should work in close company with someone else who is just that—and every good business person watching over a designer’s name should have a lawyer nearby who knows what to do to keep the designer and his name permanently in each other’s company.
Next: we will show a bit of how that works.
Credit: Alan Behr
See previously published related posts:
Patent Falls In Spiderman’s Web: Are You Paying Royalties Unnecessarily?
Posted: July 7, 2015 Filed under: Business Law, Cases, Federal & State Laws, Intellectual Property, Licensing | Tags: contracts, copyrights, court cases, fashion, Kimble v. Marvel, license, licensees, licensors, litigation, Marvel Entertainment, patents, Spiderman, Steven Kimble, U.S. Supreme Court Comments Off on Patent Falls In Spiderman’s Web: Are You Paying Royalties Unnecessarily?
While the Supreme Court’s recent healthcare and marriage equality rulings garnered a lot of attention, there was another decision at the end of the Court’s term that may be more meaningful to the business of fashion – Kimble v. Marvel Entertainment, the Spiderman patent litigation. Steven Kimble secured a patent for a Spiderman toy that shot the character’s “webs” from a hand. Marvel, owner of the character, purchased the patent to resolve a claim of patent infringement, promising to pay royalties on sales of the toy.
The popularity of the toy outlived the twenty-year patent term. Under a fifty-year-old Supreme Court decision, the obligation to pay royalties under a contract ends when the patent term expires, even if the agreement contains no termination date. Court decisions have applied the same rule to copyright licenses and assignments.
The Spiderman case called for the Supreme Court to reconsider the rule and permit the continued collection of royalties as provided in the contract. Although conceding that the fifty-year-old case might have been wrongly decided, as a number of courts and commentators have noted, the Court declined the opportunity to overrule it. Instead, it advised that, if the rule is to be changed, it is up to Congress to do so. Spidey is now free to cast his web without writing any more checks.
The decision is a reminder to licensors that patent and copyright rights do not last forever. In contrast, trademarks last as long as they are used and protected and trade secrets last as long as their secrecy is maintained. Joining a license for patents and copyrights with related trademarks or trade secrets can be a good way to maintain royalties after the patents and copyrights have expired. Licensees, on the other hand, should periodically investigate whether they are paying royalties under patents or copyrights that may have expired.
Credit: Helene M. Freeman
Welcome to Designer Hell, No Name
Posted: June 23, 2015 Filed under: Accessories, Business Law, Intellectual Property, Menswear, Womenswear | Tags: brands, Damien Hirst, designers, Lucian Freud, Michelangelo, Pablo Picasso, trademarks Comments Off on Welcome to Designer Hell, No Name
The applied arts, including fashion, stand in service of utility. There is no l’art pour l’art (art for art’s sake) even if you are talented and even if you are French. A useful object made beautiful, fun or even compelling is still something you can use, and things that can be used are objets de commerce, first and foremost. That is one of the reasons, as we have discussed in these postings (and surely will again) that the law treats fashion, jewelry and accessory designs—and related objects such as perfume bottles and lipstick cases—differently from how it treats paintings, sculptures and photographs. All art follows commerce, and artists do not quit their day jobs if they are not commercially successful, but when it comes to fashion, commercial success remains rather the point. If you are a designer and do not believe that, ask your retailers and financial backers if they disagree.
The first and perhaps most personally compelling fact of that distinction between what the law considers design to be versus how it treats fine art is that, although the artist can never lose his name—there was only one artist who could paint a Pablo Picasso and only one artist who could chisel out a Michelangelo—it is possible for a designer to wake up one morning and find that, professionally, his name is no longer his. To his mother, he may always be, “My son, Martin, the designer,” but the clothes bearing his name might be designed by someone else—perhaps someone he does not know, or perhaps even someone whose work he finds indifferent or just plain terrible. Even worse, should he wish to continue designing clothes, he may have to do it under a different name.
The reason for that is because the name is not merely a name; it has become a brand. And brands can be sold, along with the trademarks that represent them, and the goodwill that those trademarks generate and perpetuate. (An artist’s name can also be his brand—but the art market has not yet accepted the idea that, say, Lucian Freud could have sold his name on retirement, for use in connection with fine art by Damien Hirst.) When designers sell their trademarks, therefore, they are, to the fashion world, effectively selling their names.
If the price is right, that may be a great idea. Sometimes, however, regrets follow. In posts to come, we will show what has happened and can yet happen when designers lose control of their own names.
Credit: Alan Behr
To Plan or Not to Plan
Posted: May 19, 2015 Filed under: Business Law, Real Estate | Tags: landlords, real estate, retail, retailers, stores, tenants Comments Off on To Plan or Not to Plan
In most cases, a new store tenant will require work to be done to make the premises suitable for its purposes. As a rule, a landlord will insist that no work can be done without prior approval. That puts the prospective tenant on the horns of a dilemma while negotiating a lease: if an architect is hired to design the plans while negotiations on the lease are ongoing and the lease is not ultimately signed, time and money invested in the premises will be lost. If the plans are not prepared, however, the opening of the store may be delayed as the landlord goes through the approval process, or worse, the landlord forces the tenant to change the plans. The result: the tenant may not get the store it wants on the date the tenant needs it.
Whether or not to advance the money for plans is always an individual consideration, depending on the relationship with the landlord and the time pressure to open the store.
Even if the tenant prepares the plans and the landlord approves, there is still the issue of getting the approval of the local authorities. Estimating the time that it will take to get approvals is crucial in calculating when the store will open. Without that information, planning for seasonal inventory can be thrown off, with potentially serious business consequences. Ideally, a tenant would have a contingency in every lease for cancellation if the plans are not approved by the authorities. However, it can be difficult to get landlords to agree to that in good measure because of an inability to predict what plans the prospective tenant will submit and what the official reaction to them will be.
However, if the plans are already completed and approved, the municipal authority will likely have someone who would be willing to meet with the tenant’s architect to give an indication of whether there will be problems and to provide an estimate of how long the approval process might take. In some cases, the government representative would also be able to alert the tenant as to any existing problems in the building, especially if the landlord has not been cooperative. It is, therefore, often a good idea to pay a visit to the local building department once plans are completed and approved.
Credit: Steven J. Rabinowitz
Steve is counsel in Phillips Nizer’s Real Estate Law practice.
