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.


Resolutions for the New Year—and a Thought About the Old

By: Alan Behr, Phillps Nizer Partner and Fashion Law Practice Chair

About 2020 we can only say what the videogame hero Duke Nukem would sometimes offer when things turned out badly for him: “This sucks.”  If you work for a company that rents evening attire, you have probably felt that more often than most by now; but if you work for a company that supplies Amazon with cardboard boxes, you may to be feeling just fine, thank you.

For 2021, many of us, whatever our employment, have resolved to make it a better one simply by going somewhere (just about anywhere) and, once there, doing something (just about anything).

For lawyers, the expectations are mixed.  Word on the street is that, now that families have spent so much more time with each other—sharing living and working quarters in a way not experienced on such a scale in the West since before the Industrial Revolution—there should be one clear result: divorce lawyers can expect a banner year.

Fashion lawyers are not the subject of any predictions made with similar certainty, but a few notes are worth considering when reviewing what to address with fashion counsel this year:

  • Perhaps your brand has undergone changes, such as if you have started making facemasks and PPE in workrooms once devoted to T-shirts, or if you have stopped producing ballgowns and switched to Zoom-friendly blouses.  If you intend for those new products to stay in your line, it is time to consider updating your trademark registrations to reflect those expanded uses of your marks.
  • Did you increase your online presence?  Great.  All the more reason to work with counsel to update the terms of service, privacy policy, returns and exchanges policy, and any other practices or procedures under which you operate your website.  Remember, your terms of service constitute a contract with your online visitors and purchasers, and they, along with the other “legals” on your site, should be written with the same care you would use for a license, lease, or any other legal agreement that you might conclude with what is now called a “wet” signature on the dotted line.
  • There are special requirements to consider carefully with counsel if you have started offering purchasers the opportunity to review your products and services on your own website.
  • Did you expand your relationships with influencers, endorsers and celebrities?  There are rules and recommended structures for conducting those relationships that should be discussed with counsel.
  • Needless to say, it is a good time to doublecheck your insurance coverage, the force majeure clauses in your contracts (as in, do you see the word pandemic anywhere?), and whether your lease allows you to sublet space you might not need if more members of your workforce will be working from home in whole or part going forward.
  • And the workforce itself: You can cause yourself needless legal uncertainties if your employment policies no longer reflect the realities of your workplace.  How will employees document the hours spent working from home?  And what happens now if you have provided all along that your work hours are, say, nine to five, with an hour for lunch, but your people working from home are routinely taking off midday to get the kids settled in with homework and playdates and then finishing up the workday after dinner?
  • What about your policies concerning office equipment for use in the home—everything from laptops to sewing machines for making muslin samples?  They may also need to be updated, along with protocols for internet and email security.

That is just a partial list.  The main thing to remember is simply this: whenever a business experiences changes as dramatic as those that the late and not lamented year 2020 brought on or accelerated, the legal circumstances under which the business operates very likely have changed as well.  A legal refresh is therefore a prudent move—one that should be made without delay.


Savile Row, the Ungrateful Rescue Dog, and Other Useful Connections

By: Alan Behr, Phillps Nizer Partner and Fashion Law Practice Chair

Alan Behr at home, working remotely

The inexplicable year 2020 was marked by technology connections that curiously spun into the fashion business worldwide.  It is easy to point to the new Zoom wardrobes people have been buying online as a good example, but consider for a minute some far more circuitous connections:

On New Year’s Eve, a friend sent me a Facebook page showing the Staatsoper of Vienna, one of the world’s preeminent opera houses, displaying across its Neo-Renaissance façade an enormous lighted sign that sequentially spelled out “DANKE FUER NIX” (thanks for nothing).  Just a couple blocks away, deep in the storage room of the Hotel Sacher, where I was supposed to be in March, but where I indeed never arrived, lies my latest suit from Henry Poole & Co. of Savile Row, London.  Karen, a wise member of the tailor’s staff who, in more rational times, needed only to keep me from again mucking up my VAT refund forms, had sagaciously asked if I really wanted her to send out the suit (in Savile Row parlance, a single-breasted dining jacket, waistcoat and trousers in dark grey pinhead worsted) for me to collect in Austria.  I said no worries, send it, please, and I even remembered to pack the suspenders (I mean, of course, braces) to hold it together when I arrived.  Needless to say, the suitcase was never locked shut.  It next turned out that the law firm I was to visit in Vienna was among the first establishments in Central Europe to have a COVID-19 outbreak—and there went my visit.  And so, my suit sits comfortably in its box, along with the newly published book I had ordered on the history of Henry Poole (the oldest tailor on “the Row”), and there went as well my last chance of the decade to have original Sachertorte.

That had earlier come to mind when a neighbor’s dog, a rescue animal with emotional problems, charged at me and sank her fangs into my right kneecap, tearing open the sturdy denim of my Levi’s 511 jeans.  The owner offered to pay for my pants.  As I managed the bleeding, I explained that was the least of it, and lucky her that I had just changed out of a Henry Poole suit.  The tech connection continues from there: while going for my tetanus shot, I asked for a COVID-19 test, and it came back positive.  For reasons not clear to anyone, I spent a lucky quarantine completely asymptomatic, but that gave me plenty of time to reflect on all that and to consider future posts I hope to provide.

For now:

Tailors such as Henry Poole depend on foreign trade.  (Well-dressed London men remain ubiquitous, but there simply are not enough of them to keep all the houses going.)   For the tailors, even more so than for me, not being able to travel internationally was an enormous disruption—one that, without concessions from landlords and others, could prove ruinous.  As reported in The New York Times, most of the properties on the Row are owned by a single landlord, The Pollen Estate, just under four-hundred-years old and therefore mercifully able to think long term.[1]  It gave the houses the rent accommodations necessary to hold them over until business improves.

We have seen similar prudent arrangements made in New York City where landlords who see the bigger picture and, if permitted by their lenders—which sometimes have a say in the matter and which also have to think in broader terms if their own customers are to remain viable—have been similarly forgiving.  Accommodations can take several forms, including forgiving late payments, stretching out due dates for payments, abatement of rent for a period of time, permanent reductions of rent, and allowing tenants to sublet or to surrender all or a portion of rented space (sometimes in combination with the foregoing or in exchange for lengthening a lease term).

Despite rumors to the contrary, the practice of law can sometimes be a satisfying experience, and it has been a particular joy at the firm to help our fashion clients and so many others navigate through the perfect storm brought on by the pandemic.   

And so, our suggestion to the fashion community at the start of a new, and let’s please hope, better year: retrieve that lease you signed and have a good look.  Work with counsel and make sure that you understand what it says about your options when things might go wrong.  And while you are at it, have counsel do some digging on your landlord to find out how it responded to tenant problems during the pandemic.  As always with commercial law: what you understand now, when things are relatively quiet, can only benefit you later—when, after all, who can tell?


[1] Norges Bank Investment Management (the sovereign wealth fund of Norway), holds a majority interest in The Pollen Estate.


Retail in Germany: Collateral Damage of the Pandemic

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.[1]  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.


[1] 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.


Pop-Up Stays Up

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.

The Location

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.

Term

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.

Permitted Use

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.

Maintenance

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.

Conclusion

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.


Business Insurance in the Face of COVID: Riot Protection

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.