Matryoshka Marketing

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We have all seen Russian matryoshka (nesting) dolls: open one and out comes another, and open that and you get another, and so on. When a fashion brand incorporates components from another brand into its finished product, it is rather the same thing, with a difference: although the brand covering the finished product is the brand that in all likelihood is the primary branding driver of consumer demand and the primary branding influence for consumer purchasing, that brand will not exist in isolation. It will be helped or hurt by the quality, function and aesthetic appeal of the brands of the constituent parts.

Perhaps the easiest place to see that at work is watchmaking. There are many more well-known watch brands than there are watch movement makers. Although most watch brands design and make their own cases, they often rely on others to make the most important thing in the package: the actual movement. If the movement is not working properly—if the watch is not keeping time—good luck trying to convince the consumer that all he or she really wanted was a well-designed bracelet with a watch-face for decoration. Typically, the maker of the movement is not even mentioned in advertising, on the product or in the accompanying instructions. Clothing, however, is a bit different since there are some key fabric vendors whose brands are considered important enough to drive sales, which is why garment makers are willing, if not eager, to place the Gor-Tex and Loro Piana trademarks on clothes made with fabrics bearing those brands.

All well and good, but a couple of key points should be considered:

First, no matter how you, the manufacturer, market the finished piece, you are helping build good will (and therefore value) in the brand of your supplier. Your vendor is the legal owner of that goodwill, not you. Your advertising will promote and otherwise benefit the vendor, which at times might also participate directly by adding its trademarks to the ads. All of that should be considered when entering into the agreement by which the vendor’s trademarks will appear on your fashion products. In addition, your vendor will likely require an agreement permitting it to exercise quality control over the use of its marks—which is again what the law expects—so be prepared to have the vendor involved in production in a way you might not typically expect from a supplier of components not displaying B2C branding.

The other key point to consider is that, even if the consumer is aware of the vendor’s brand and the vendor’s contribution to your finished product, the consumer will most likely hold your brand accountable for the performance of your product. Going back to the watchmaking example: ETA SA Manufacture Horlogère Suisse (a subsidiary of Swatch Group Ltd.) makes movements that go into a number of watch models made by Breitling SA, which is an unrelated, privately held Swiss company. Even a consumer who is fully aware of that fact is not going to say, “Hey, my Swatch stopped working!” in the (highly unlikely) event that his Breitling should cease to function—even though, in a purely mechanical sense, that is exactly what happened.

Just a few things to keep in mind when entering into supply contracts with important vendors.

Credit: Alan Behr


Designers Defending Their Names

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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

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Patent Falls In Spiderman’s Web: Are You Paying Royalties Unnecessarily?

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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


The Conformist

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Have you ever had the experience of going into a fitting room and trying on two of the same item in the same size, perhaps only in different colors, only to find that they fit quite differently—to the point that one might not fit at all although the other did? Production line manufacturing may be efficient, but no one ever claimed it to be an exact science.

No one expects the retailer to guarantee that every item sold under the same SKU will fit exactly like every other item bearing that SKU in the same size. But in fashion licenses, that kind of elasticity in expectations can become the subject of negotiation.

It typically plays out like this: the licensee agrees to provide pre-production samples to the licensor for approval. The licensor either approves or disapproves; if it disapproves, the licensee is often entitled to a second try, adjusting the style to suit the licensor’s expectations. Once the styles are approved, the licensee initiates production. More typically in the fashion business, the licensee contacts someone else, often half a world away, and tells him or her to initiate production.

The licensor may demand, in the representations and warranties section of the license (which has been the subject of this series of posts), that the licensee warrant that production models will not deviate from approved samples. If the licensee is careful, that may be qualified by adding in any material way or by breaking the force of terms like will conform by dropping in the forgiving qualifier substantially. But bolts of cloth from different batches can easily have variations, and sometimes the chosen buttons, snaps and other accessories run out and others need to be substituted; the list of potential deviations goes on. In a seasonal business such as fashion, where a handful of weeks can make or break a SKU, a style, a look, a collection or even an entire business, the date on which finished goods are to be sent to retail doors is hardly the time to get into an argument over whether something already bought and delivered does or does not substantially or materially conform to the appearance or other attribute of an approved prototype.

The first rule of warranties applies here as it does to all others: for the licensee, never make a promise that you cannot keep; for the licensor, never ask anyone else to make a promise that you can be reasonably sure he or she will not be able to honor. To avoid surprises, it is useful for the parties to think through, and to talk through, contingencies due to variations in manufacture and to consider adding to the license, as a defined term, exactly what they mean when they say something must conform to what has been approved. Even if something is completely non-conforming, alternatives such as sale into outlets or other lower end channels, or outside the territory, perhaps with labels removed, can sometimes work.

In the end, however, all licenses, like all contracts, rely more on the element of trust (and forgiveness) than lawyers can hope to draft into them. Simply, a well-written contract can get you a favorable result in court, but working with the right people is a good way to help stay out of court.

Here as with most else in licensing, the name of the game is cooperation. The devil, as they say, will always be in the details.

Credit: Alan Behr

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I Own It — I Mean, Really, I Do!

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In our exploration of the representations and warranties often seen in fashion agreements, we come to one that is at the core of licensing and distribution agreements, and it typically looks like this:

Fashion Company represents and warrants that it owns and maintains trademark registrations in the Territory [the scope of which should be clearly defined] for the licensed marks set forth in Exhibit A to this agreement.

Similar warranties can be made, as applicable, for rights to trade dress (which is an important trademark derivative for those fields, such as fashion, in which designs can be important assets) and in copyright and design patents. Those will be discussed in subsequent posts.

For trademarks, the important thing is to clarify what is actually being licensed. Scheduling the licensed marks, particularly if any involves specific colors, fonts, devices (logos) or other design elements in how they are presented, is very important because the warranty of ownership will apply only to what is specifically listed, and with trademarks, any change or variation in more than a “de minimis” or token amount may be deemed to have created a different mark—one that is not covered by the warranty.

Pitfall: licensees beware. Licensors may change their branding indicia during the term of licenses. If that happens, and the licensed trademarks are listed in the agreement, the new versions may not be covered by the contractual warranty. As an example, the mark FASHION COMPANY registered in the stylized form FASHION COMPANY will likely not be seen as the same stylized mark as FASHION COMPANY when used in the latter form. The license agreement should therefore be drafted to include any new versions of the listed trademarks within the definition of the “licensed marks”—and to require the licensor to give fair notice when any such changes in branding may be forthcoming. Financial issues concerning the costs of the changeover to the licensee can become the subject of additional negotiations.

Although due to the oddly backwards way in which United States trademark law developed (which is a long story in and of itself), it is not necessary to have a federal trademark registration to claim ownership of a mark in the USA. It is therefore common, and indeed usually prudent, for a licensee to insist on a warranty that the licensed marks have been registered for the specific goods covered by the scope of the license. Where things can get tricky is if such registrations have not yet been granted in the USA or in other jurisdictions in the territory covered by the license. The licensor may, in certain instances, be able to warrant ownership of marks that have not been registered (although it cannot so warrant ownership of the registrations themselves), or it may demand that it limit its warranty to those portions of the territory where it has registrations in place and is confident the use of the mark as licensed would go unchallenged. The business and legal risks, and the operational considerations implicit in partially encompassing warranties, should be carefully considered by both parties.

The key takeaway here is that, in the USA, trademark protection tends to be quite specific, exact and exacting. It is therefore prudent for the licensee to do due diligence to comfort itself that the licensor or other trademark owner’s warranty of ownership (and registration) is valid and accurate—because once you sign the agreement and start acting under it, you will likely be spending your money to make things happen, and no one likes throwing away money due to promises (that is, warranties) that cannot be honored.

Credit:  Alan Behr

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I Hereby Promise That You Are My One and Only-ish

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In our explorations of representations and warranties that are typical to contracts in the fashion business, we now come to one of the classics: the warranty that, by signing the contract, the party is not violating any other contracts it has signed. A typical such warranty would look like this:

Fashion Company represents and warrants that, by entering in to this agreement, it shall not violate the terms and conditions of any other agreement, arrangement or understanding to which Fashion Company or any of its affiliates is a party.

What is that about? Remember Mel Brooks’ The Producers (in any of its forms as movie, Broadway musical or movie of the Broadway musical)? The hero (loosely speaking) was Max Bialystock, a down-on-his luck Broadway producer who, with his accountant partner, tried to make a killing by selling far more than one hundred percent equity investment interests in his musical Springtime for Hitler. All he had to do to make the scheme work was to be sure that the show failed—which would not prove as easy as it first appeared.

If someone contractually sells interests in anything to different people so that they collectively have rights to more than all of what could have been sold, the seller has certainly made agreements that violate the terms and conditions of each of the sale agreements, resulting in a breach of this important warranty each time—if the seller was foolish enough to compound his problems by making such a warranty. Another all-to-common example: any Ponzi scheme or similar scam.

Surely, one of the most important places in the fashion business for such a clause is in a license agreement. The licensee needs to be very sure that the grant that it has received is valid and does not conflict with any grant made by the licensor to any other licensee; and the licensor needs to be equally certain that it is not granting conflicting rights to different persons. For example, if you are about to sign as the exclusive licensee for a brand in the “sportswear” category, would you feel that a license to another party for “activewear” violates your exclusivity? The answer, on those possible facts alone, is a resounding “maybe.” If you define sportswear broadly enough, even redundantly enough, to include, “all casual, active and athletic wear,” any license granted by the licensor to a third party for activewear would violate the warranty made to you for sportswear—and you would therefore have the basis of a claim and, if necessary, a lawsuit.

Here again, doing your diligence on your counterparty—and defining your terms—will go a long way toward making your contract into the protective blanket that you and your attorneys intended it to be.

Credit: Alan Behr

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