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Fashion Law Blog

An Interactive Discussion on the Business of Fashion

A Colgate Map to “Circumventing” Retail Price Restraints

Posted in The Business of Fashion

The confusion over the Leegin case is legion.  Leegin[1] is a 2007 Supreme Court Case which was supposed to unloose price restraints.  This was and remains of critical concern to the fashion community.   Classically a design house may have multiple channels of distribution in addition to its own vertically integrated stores. There may be franchise or license relationships; shop in shop agreements under joint ventures; sales to specialty boutiques; as well as department stores.  In each, aside from the vertically integrated model, a designer is rightfully concerned about the pricing of its goods by third parties.

Before Leegin, setting or stipulating a minimum re-sale price was per se illegal.  Going back to a 1911 case, Dr. Miles Medical Co. v. John D. Park and Sons, 220 U.S. 373 (1911), vertical price agreements between a manufacturer and distributor or as commonly known Resale Price Maintenance Agreements or RPM,  were deemed unreasonable as being the equivalent of horizontal price restraints which were the basis of cartel formation. So, since 1911 it was a presumptive,  per se,  violation of Section 1 of the Sherman Act to establish RPM agreements.[2]   However Leegin made headlines because the Supreme Court shifted ground and declared that going forward vertical price restraints would no longer be per se illegal but would be subject to a rule of reason analysis. So it was anticipated that there would be an efflorescence of RPM in franchise and distribution agreements. That has not occurred and the question is why, if indeed Leegin opened the door to RPM?

The primary misconception arising from Leegin  is that  subjecting an agreement between a manufacturer and distributor to the rule of reason will ineluctably result in a finding for the manufacturer. That pre-supposes that under a rule of reason analysis RPMs could never be deemed an unreasonable restraint of trade.   But there is always the possibility, again even under Leegin, that one could find material adverse restraints of trade in an RPM.  RPMs could result in manufacturer and retailer cartels; the former by assisting manufactures in identifying price-cutting manufacturers who benefit from the lower prices they offer and the latter by retailers conspiring to fix prices and then securing RPMs to enforce the same. Most obviously, dominant manufacturers or retailers could use RPM to enforce the status quo and avoid changes in distribution models and forestalling the entry of competitive retailers. Even if it is safe to say that after Leegin the prevailing analysis is that at least on the federal level, subjecting an RPM to the rule of reason would result in a finding that it was not an unreasonable restraint of trade and therefore enforceable, there remains the threat of a finding of unreasonable restraint of trade.

Further upon this supposed Leegin clarity was cast the shadow of state anti-trust laws which were too often overlooked. Certain states have declared RPM to be per se illegal, such as New York, Illinois, Michigan, Maryland, and California. This created a chequerboard hodgepodge of different standards and rules.

Confusion is the main theme of the day.   New York under its anti-trust law, the Donnelly Act still tries to enforce bans on vertical restraints. However, in Tempur Pedic[3] the state lost and Tempur Pedic was not deemed in violation of the law. The court found that section 369-of the Donnelly Act did not prohibit minimum retail price maintenance agreements. However this should give little comfort: if any presumption would apply that should be the State will look for an opportunity to enforce the Donnelly Act against RPM.

Further in contradistinction to New York, in People v. Bioelements, Inc.[4], the California Attorney General obtained a consent decree against Biolelements for its attempt to maintain RPM agreements.  Maryland actually adopted a statute[5] after Leegin which makes RPM (as to minimum as opposed to maximum pricing)  per se illegal.

So for now the prudent designer would avoid RPM so as not to unnecessarily divert resources to litigation with an aggressive state’s attorney general.

If we stopped at this juncture the designer would have no ability to protect its  brand image and full service retailers from free riding on the internet. However the Colgate doctrine gives some guidance as to what can be done.  In United States v. Colgate & Co. 250 U.S. 300 (1919) a unilateral declaration, in contradistinction to any downstream agreements with retailers, that Colgate would not conduct business with those selling below manufacturer’s suggested retail price was not deemed a restraint of trade since there was no “agreement.” Colgate acted unilaterally.  The Colgate doctrine is good law and opens one door to the designer.

A designer can also adopt a minimum advertised price (or MAP) policy which like Colgate is a unilateral deceleration, with no downstream agreements, prohibiting advertising a sales price below manufacturer’s suggested retail price.  The theory is if you cannot advertise a price it does a retailer little good to discount since it will not be able to drive business to its store(s) based upon the discounted price. Moreover in the public domain there is no dilution of brand image.

A cautious yet salutary approach would be to adopt a Colgate policy in combination with a MAP. This was the strategy adopted by Tempur Pedic.  The company combined a Colgate declaration with a MAP policy.[6]  This is a reasonable course of action to take when dealing with the possibilities opened by Leegin and  the conflicting  realities of the checquerboard maze of state law.   Finally, as an ever evolving area of the law any such Colgate-MAP policy should be frequently revisited to ensure any necessary adaptations are made on a timely basis.


[1] Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007)

[2] To be clear the vertical restraint concept before Leegin encompassed both minimum and  maximum  pricing since Albrecht v. Herald Co., 390 U.S. 145 (1968).  The concept was that unrestricted maximum pricing would channel sales to large distributors thereby evolving into a minimum pricing scheme. This was overruled in 1997 See State Oil v. Khan, 522 U.S. 3 (1997)

[3] See People v. Tempur-Pedic International, Inc., 400837/10 (N.Y. Sup. Ct. N.Y. County filed Mar. 29, 2010)

[4] People v. Bioelements Inc., File No. 10011659 (Cal. Super. Ct. Riverside County, filed Dec. 30, 2010)

[5] See Md. Code Ann., Com. Law. § 11-204(A)(1) (2009)

[6] A good MAP policy would specify that the  polices only apply to advertising, it is unilateral and should be in plain English.

Louis Vuitton and Damier: Inherent versus Acquired Distinctiveness in the European Union

Posted in Fashion Intellectual Property, The Business of Fashion

When a Louis Vuitton (“LV”) trademark, duly registered in the European Union, is subject to a declaration of invalidity and therefore cancelled, it is a worthwhile exercise to determine what went wrong; a legal post mortem. This is not a question of schadenfreude for a respected brand and design but a question of what went legally awry and how to avoid any mistakes identified by the European General Court (“EGC”).

A Community Trademark is a unitary trademark for the EU as constituted at the time of trademark application and for subsequent accession countries. On September 18, 1996, LV filed an application to register as a Community Trademark its famous, but as we shall see not distinctive, checkerboard design. At the time of the LV application, there were 15 constituent units of the EU and today there are 28. The application was granted by the Office of Internal Harmonization (“OIHM”) on August 27, 1998. Eleven years later on September 28, 2009, Nanu-Nana of Germany intervened to have the application declared invalid, in effect to have the OIHM overruled, and to cancel the trademark registration.

The EGC on April 21, 2015, affirmed the decision of the OIHM’s First Board of Appeal to grant the declaration of invalidity. While the decision itself may not have surprised (or disappointed) many observers, the breadth of the decision was stunning. Simply put, the EGC gave no succor to LV’s claims that the checkerboard as used by LV in connection with leather goods was either (a) inherently distinctive or (b) had acquired distinctiveness through use.

The findings on inherent distinctiveness, was conventional. The EGC focused on identification of origin or source and asked fundamentally a simple question: does the brown and beige checkerboard, with the weft and warp structures, have inherent distinctiveness? While the court appears to have placed a greater burden of proof on three dimensional marks as opposed to marks based on a graphic or word element, it did so for good reason. The average consumer is most likely to associate a product source with a word or logo as opposed to a shape or design. Particular designers may have a look and feel, the consumer will always have a reservation of doubt as to who or what is the actual producer of a particular product unless it is blatantly spelled out via words or unique graphics.

It is possible to perceive that underlying this analysis — as evidenced by the broad language of the findings — was a distrust of using trademark law to protect a design. The EGC was borderline insulting to the LV trademark. The design was deemed to be “basic and commonplace”; there was no “notable variation” in relation to conventional checkerboards; and probably most damming the design was no different from other checkerboard designs due to its great “simplicity.”

The EGC unequivocally held, although as a composite trademark of several possible distinctive elements, when viewed in its totality, it was not distinctive; if it’s not distinctive it cannot stand as an identifier of source. While the EGC did appear to protest too much, clearly it felt comfortable enough that LV did not carry its burden of proof that as of the date of its application the checkerboard was not distinctive enough to differentiate LV sourced goods from others.

The second claim presented a more prosaic issue: from the time of the application to the date intervenor Nanu-Nana appeared, did LV acquire the requisite distinctiveness by mere use? The door was wide open for the EGC to find for LV. Article 52(2) of EU Regulation No. 207/2009 specifically states that even if registration was erroneously granted by the OIHM for a trademark lacking inherent distinctiveness, would not be subject to invalidation, cancellation, if it had acquired distinctiveness through use. As noted above the time period of use was eleven years. It is safe to say, via a neutral term, that the checkerboard in tan and brown with weft and warp structures was and is an iconic design; but for the EGC even 11 years of continued, open, notorious and EU wide use was insufficient to sustain acquired distinctiveness .

Evidence of such use may include the amount of market share, the intensity, breadth and long standing use, the amounts invested in promoting the trademark, surveys showing the proportion of relevant persons identifying the trademark as being from a particular source, statements from chambers of commerce and opinion polls. LV submitted 8 exhibits worth of evidence as well as a survey. The exhibits showed what one would expect namely extensive, continued and consistent use.

The post mortem shows the EGC laser like focus on the issue of acquired distinctive use. LV appears to have erred in connection with the above mentioned evidence by claiming that it reflected “increased” inherent distinctiveness as opposed to “acquired distinctiveness.” Clearly not the cleanest of arguments and yet the same would not ordinarily cause a court to turn its back from such clear evidence of acquired distinctiveness.

The court also argued that of the 15 member nations of the EU at the time of application there was inadequate proof of acquired distinctiveness in Denmark, Portugal, Finland and Sweden. Since the Community trademark is a unitary mark the acquired distinctiveness argument must carry in the jurisdictions of the EU existent as of the time of the original application. The court held there was inadequate evidence to support the claim in Denmark, Portugal, Finland and Sweden.

The EGC also took LV to task over the quality of its survey stating it was faulty since it covered consumers of luxury goods and not the “average consumer” in the EU. This is on its face a stretch. The average consumer to have relevance must be the typical consumer in the particular channel of distribution.
While often times reading opinions in much like reading tea leave for future guidance, it is clear that the EGC did not merely hold against LV, it created significant hurdles to using trademarks to protect a design. The checkerboard is iconic but should a design be elevated to a source identifier no matter how iconic? While many have focused on what appears to be the technical flaws in LV’s position as identified by the court, the strategic message is simply that designs have significant and material hurdles to be afforded trademark status and the various attempts to elevate design to trademark are facing pushback.

Co-tenancy Clauses in a Lease for a New Mall Construction

Posted in The Business of Fashion

In the fashion world, we are constantly being approached by landlords and brokers anxious to bring our brands into the mix of their stores in a Mall. A Mall is a unique situation whereby the marketing of your brand is sublimated to the greater whole of the Mall; if the Mall is a success your store supposedly will also be a success. But this sublimation leads to a fundamental conundrum; when does the marketing for the Mall in toto, inclusive of brands that may be not on the same level as your own, detrimentally affect the good will of your brand? If the answer is that the marketing and demographics of the Mall are oriented towards a customer not willing or able to patronize your brand, except on an aspirational level, entry into the Mall will be a negative; both in terms of return on CapEx as well as dilution of the Brand.

This seems obvious enough as far it goes. You or your agent walk the Mall, review the occupancy, request representations as to sales per square foot and voila, we know if it’s a fit. However, what do you do if you are approached for a space in a new Mall construction? Obviously the developer and its agents will try to prove that your brand is not only a good fit but on the flip side they will use your brand to entice others into the Mall. One could say a virtuous cycle…unless the cycle is broken by misrepresentations of potential tenancies.

To ensure that your brand will be a good fit and not the anchor in the marketing process a Co-tenancy clause is an insurance policy to keep the cycle virtuous. While each Co-tenancy should be calibrated to the particular project there are the proverbial seven (7) deadly sins—when someone is not shall we say fully forthcoming– to consider.

First, the list. You will want to make sure that the Landlord lists as potential co-tenants the main brands that seduced you to enter into the Lease negotiations in the first instance. Since this is a moving target, there may be a list of ten (10) from which the Landlord has to secure say five (5) to (7) signed leases before you are obligated to commence operations.

Second, from the list there may be your anchors; the Brand(s) that must sign leases otherwise you would not proceed. Usually it is one (1) or two (2) and may include a major anchor. But the reasoning is obvious: you do not want your Brand to be the linchpin leveraged for success. Since your Brand positioning is sublimated to the Mall it must be insulated by having core co-tenancies in sync with your own.

Third, timing. When do you have to start spending money on construction, immediately in anticipation of the projected Grand Opening Date or only after the landlord has signed a minimum number of the co-tenancies? Clearly you want breakpoint so your CapEx is not wasted. But this can be ameliorated by…

Fourth, a tenant improvement allowance, the TI. TIs are common enough but are more aggressively promoted in new mall projects. Depending on the size of the store and importance of the Brand full build out costs inclusive of hard and soft costs are negotiable. If the landlord is bearing the cost then timing is ameliorated except you will have to float the costs pending proof of completion.

Fifth, quality of the purported leases. This is the tricky part, how does one ensure that the signed co-tenancy leases are “real” leases. Are they short term pop ups, licenses or leases with favorable kick out provisions? In effect you want to make sure that even if for the Grand Opening Date the co-tenancy requirements are technically met, they reflect true commitment commensurate with your own lease term; if not the value of the co-tenancy clause is totally vitiated. So to hedge, you would require that the co-tenancy leases meet certain standards; as a simple example they must be for terms of no less than five (5) years without a kick out provision. An early kick out provision on favorable terms to the co-tenant is merely an option not the commitment commensurate to insulate your risk.

Sixth, location. The mere fact that the co-tenancy requirements are met does not mean you have immediate value if the brands are located on a different levels, or areas of the Mall. If your brand is in the North 2nd floor of a Mall and your co-tenants are in the South 1st floor the traffic for your co-tenants are unlikely to accrue to your benefit.

Seventh, what happens if the co-tenancy is not met even colorably by opening day. Termination? Probably not. The remedy should be to go to percentage rent only until the co-tenancy is met with a drop dead date of between 12 to 18 months. If the co-tenancy is not met by the drop dead date then tenant usually has the right to terminate.

New projects can be exciting and economically incentivized since the developer is highly motivated to secure tenancies. But the devil is in creating the traction and making sure you are not alone in the vanguard of the developer’s project. A carefully crafted and modulated co-tenancy clause while not a panacea to an inductive analysis of the merits of the particular project, can be a safety net to ensure the economic viability of your shop.

Flash Post: Fashion Entrepreneur Karen Tai of OnePointSix featured on Forbes.com

Posted in Fashionable Friday, The Business of Fashion

Recently, Fox Rothschild client Karen Tai (CEO; OnePointSix) was featured in Forbes’ Designer Spotlight!

Ms. Tai, who launched OnePointSix about a year ago, has reimagined an entire ready-to-wear collection of stylish and sophisticated office-appropriate dresses, blazers, skirts, pants, and coats.

Her garments focus on proper fit, figure-flattering cuts, high quality materials, and subtle, yet sophisticated details, like double top-stitching, color panels, discreet pockets, and more.

Congratulations Karen on your current and future successes!

Gray Market Goods: The Ninth Circuit Court of Appeals’ Recent Opinion In Favor of Costco

Posted in Fashion Intellectual Property, The Business of Fashion

Dana S. Katz writes:

Gray market goods are typically defined as authentic items sold by an unauthorized retailer.  This often means that the goods are imported and sold outside the normal distribution channels, without the brand owner’s consent.  As a consumer, you may have seen gray market products (high-end or luxury items offered at steep discounts) in your local bulk retailer or discount warehouse shopping stores.

In Omega S.A. v. Costco Wholesale Corp., Case Nos. 11-57137, 12-56342 (9th Cir. Jan. 20, 2015), the Ninth Circuit Court of Appeals recently decided a dispute arising from Costco’s unauthorized sale of Omega watches to its members in California.  Omega manufactures luxury watches in Switzerland and distributes them around the world through its network of authorized distributors and dealers.  In 2003, Omega copyrighted its “Omega Globe Design” and began selling its Seamaster watches bearing this copyrighted symbol.  That same year, Costco and Omega discussed the possibility of Costco carrying Omega watches but the parties never came to any agreement, and Costco was not authorized to sell Omega watches.

Regardless, in 2004, Costco purchased 117 Seamaster watches bearing the Omega Globe symbol on the gray market.  On its second round of appeal, the Ninth Circuit upheld the lower court’s decision in favor of Costco.  Here, Costco obtained the watches as follows:  Omega sold the watches to one of its authorized distributors abroad.  Unidentified parties then bought the watches and sold them to a company in New York.  Costco acquired the 117 Seamaster watches from this New York company and proceeded to sell 43 watches to its members.

The Ninth Circuit’s decision was based primarily on the first sale doctrine under a recent United States Supreme Court decision, Kirstaeng v. John Wiley & Sons, Inc., 133 S.Ct. 1351 (2013).  Under the first sale doctrine “once a copyright owner consents to the sale of particular copies of work, that same copyright owner cannot later claim infringement for distribution of those copies.

In Kirstaeng, the Supreme Court determined that the first sale doctrine applies to copyrighted work made abroad in a lawful manner.  Based on Kirstaeng, the Ninth Circuit explained, “Omega’s right to control importation and distribution of its copyrighted Omega Globe expired after that authorized first sale, and Costco’s subsequent sale of the watches did not constitute copyright infringement.”  Omega at 7 (citing Kirstaeng, 133 S.Ct. at 1366).  The Court conclusively ruled, “copyright holders cannot use their rights to fix resale prices in the downstream market.” Omega at 7.

Although Omega authorized the initial sale of its watches, it never approved the importation of the watches into the U.S. or Costco’s ultimate sale of the watches to its customers, and yet, the Ninth Circuit found in Costco’s favor under the first sale doctrine because the first sale was authorized by Omega.  The Ninth Circuit’s decision could have much wider implications to the import of gray market goods into the U.S.; however, the saga continues. On February 9, 2015, Omega filed a Petition for Panel Rehearing and Rehearing En Banc and only time will tell whether Omega will obtain any relief from the Ninth Circuit’s ruling.

The Ninth Circuit’s opinion can be found here.


Dana S. Katz is an associate in Fox Rothschild’s Philadelphia office. Follow her on Twitter for interesting legal news and updates @danasichelkatz

Design Law Change Streamlines Process for Protecting Designs Outside of the U.S.

Posted in Fashion Intellectual Property, The Business of Fashion

Currently, U.S. applicants looking to pursue protection of industrial designs outside of the United States must file individual applications in each jurisdiction where protection is desired. Depending on the number of applications, this can be both a time consuming and costly process. However, this process will soon become more efficient for applicants.

The United States Patent and Trademark Office (USPTO) announced on February 13, 2015 that the United States has deposited its instrument of ratification to the Geneva Act of the Hague Agreement Concerning the International Registration of Industrial Designs with the World Intellectual Property Organization (WIPO) in Geneva, Switzerland. This is the last requirement for the United States to become a Member of the Hague Union, which will take effect on May 13, 2015.

After this date, U.S. applicants will be able to file a single international design application with WIPO or the USPTO to obtain protection in multiple jurisdictions. This new process will streamline the filing of international design applications, and has the potential to result in significant cost savings for applicants. Under the Hague system, applicants can register up to 100 designs in over 62 territories with the filing of a single international application.

The USPTO will soon publish the Final Rules governing USPTO processing and examination of international design applications filed pursuant to the Hague Agreement in the Federal Register. The agreement implementing legislation for the Hague Agreement in the United States and the USPTO’s Final Rules are expected to go into effect on May 13, 2015.


Brienne Terril is a senior associate and member of the Fashion Law Practice at Fox Rothschild. She regularly advises manufacturers, retailers and entrepreneurs on the creation, exploitation and protection of their intellectual property assets. Brienne also helps clients leverage their intellectual property by negotiating and structuring transfer, licensing, manufacturing and distribution arrangements.

The Virtue of a UPC Code for Brand Protection

Posted in Fashion Intellectual Property, Licensing, The Business of Fashion

A brand is a brand is a brand…or so it would seem. Purveyors of fashion understand the allure of a brand in connection with sales.  While knock-offs are ubiquitous and virtually a religion in the United States, apparel which is branded with a recognized label has a greater cachè and commands both prestige and better pricing.  The trademark serves not only to identify the source of the garment but the quality and standards associated with the trademark.  So when a consumer opts to buy a branded product as opposed to a knock off, there is an implied guaranty of certain quality standards associated with such a brand.

Licensing brands and ancillary thereto franchising have become integral to the growth and breadth of a brand’s expansion.  Because of the consumer’s understanding, a licensor who engages in naked licensing can lose its trademark.  A naked license is one in which the licensor does not retain or enforce quality controls.  The reason should be obvious, if a trademark is indeed to represent a value associated with the brand, a diminution due to lack of controls makes the brand at best deceptive.

Failure to maintain quality can lead to claims that the licensor granted a naked license which is a defense against trademark infringement. The antithesis occurs when one imposes quality controls and seeks to enforce the same. Under those circumstances the courts will seek to enhance the remedies available to a trademark holder, such as granting an injunction against the sale of grey market goods, an equitable remedy, which would otherwise be unavailable.

The courts will look to three (3) key factors in determining if a license constitutes a naked license; all of those factors pivot on the issue of quality. First, did the brand owner retain the right to determine quality standards?  Second, even if the brand owner retained the right to exercise control over quality, did he in fact exercise the control, or did he just sit back. Third, was there a reasonable reliance to rely upon the licensee to maintain control?

The first and third quality factors in determining a naked license are obvious. However the exercise of control is what often trips up the licensor.  What steps should a licensor undertake to maintain control?  Zino Davidoff (“Davidoff”) exemplifies the extent to which some manufacturers will go to protect quality and as a concomitant the added value to the brand by doing so.

In Zino Davidoff SA v. CVS Corp., No. 07-2872 (2nd Cir. 2009), Davidoff sued CVS due to its removal of uniform protect code (“UPC”) symbols form Davidoff packaging for its Coty licensed “Cool Water” fragrance packaging.  This UPC code permitted Davidoff to protect against both diversion from the specified channels of distribution and from counterfeiting.  The Davidoff UPC contained information regarding each unit including where and when it was produced, ingredients used and distribution path.

Davidoff restricted Coty’s rights of distribution to maintain the luxury, prestige reputation of “Cool Water”.  CVS was not part of those channels of distribution. So when Davidoff discovered CVS was selling  “Cool Water” packaged goods,  it sent a cease and desist letter.  Eventually CVS agreed to cease selling goods that were known to be counterfeit.  However, since the UPC codes had been removed but the genuiness was not in doubt, CVS argued it should be allowed to sell off its remaining, legitimate inventory.  On its face this appears reasonable since no one disputed the Cool Water goods being sold in CVS were genuine, Coty produced goods.

Davidoff pivoted the dispute to trademark infringement. Relying on Warner-Lambert Co v. Northside Dev. Corp., 86 F.3d 3 (2nd Cir. 1996) which held that a trademark holder was entitled “to an injunction against one who would subvert its quality control measures upon a showing that (i) the asserted quality control procedures are established, legitimate, substantial, and nonpretextual, (ii) it abides by these procedures, and (iii) sales of products that fail to conform to these procedures will diminish the value of the mark”, the Court in Davidoff held the removal of the UPC code which qua  quality control measure to prevent harm to the brand’s good will and reputation, resulted in trademark infringement entitling Davidoff to an injunction against the CVS sale of the goods, again even though those goods were genuine.  Further Davidoff did not have to prove injury just the risk of injury.

By using a UPC as a proactive measure to protect the quality of its brand, Davidoff was able to secure an injunction against CVS for trademark infringement. By moving aggressively to promote, retain and defend the quality of a brand, one is rewarded beyond avoiding the issue of a naked license. The brand holder is rewarded for its vigilance by being granted remedies such as an injunction against the sale of non-counterfeit goods. The court recognized the inherent contradiction to on the one hand require a licensor to protect the quality of its brand or otherwise be deemed a naked licensor and to withhold the remedies which would enable the licensor to protect its brand and control its licensees. The take away is that creative qualitative enforcement of one’s branded products is not only smart business practice but also leverages equitable and legal rights.

The Future of Wearables

Posted in The Business of Fashion

At the 2014 FashInvest NYC Capital Conference (www.fashinvest.com), I moderated a panel on the future of investment in wearables. Wearables is a broad concept covering clothing and accessories (as well as actual physical applications such as tattoos) incorporating or embedding computer and advanced electronic technologies. It is clear to me that a revolution in wearables is coming.

For 2015, wearables will exponentially grow in popularity.

What is also clear, is that wearables have tremendous potential for use in the work environment. Furthermore, investors understand technology and business applications much better than fashion so I would expect we will see a lot of activity in the business wearables space. For example, smart glasses will improve productivity, expedite communication between management and employees and make the human resources process more seamless. Smart bracelets will be worn by employees to monitor their whereabouts in factories and offices

Wearables will also increase in use in the healthcare industry as wearables will be used for a myriad of purposes-from diagnostics, gamification, fitness, hearing, etc.

We have seen this winter, a burgeoning consumer wearables product offering, such as smart jewelry and smart watches with a variety of functionality and improved design. Designer wearables are starting to appear on the market and will only increase.

The key issues for wearables companies will be:

Functionality: Does the wearable provide a use that we want and need?

Price: Is the product appropriately priced?

Style: How will fashion designers impact the wearable technology we will be wiring?

Privacy: How will employees and consumers allow their personal information to be used?

As we advise venture-stage wearable companies as well as established fashion companies and business services providers, we are looking at how the business owner can protect their intellectual property, raise capital and expedite their product to market.

Intellectual property protection is critical for both established and venture-stage wearable companies. Wearables can be protected in various ways, including design patents, utility patents and trademarks. My partner Janet M. MacLeod, Ph.D., Esq. recently obtained a patent for a client in the wearables space.

It is going to be an exciting 2015!

Do You Need an Investment Banker?

Posted in The Business of Fashion

The life arc of a fashion company is subject to usual and conventional patterns.  Inspiration and creativity is the starting point and focused on the look, image and aspirations of talented individuals, a/k/a designers.  Around the designers a brand is born.  The designers produce signature collections to build brand identity.  Friends and family money is raised to fund fabric acquisition, product distribution and hopefully some salaries.

After that initial stage and the brand has traction an over-the-horizon view will envision the proverbial exit vehicle…tuck in, public offering, reverse merger and so on.

In the middle falls the shadow.  The brand has traction, distribution targets are met, prestigious doors are opened, EBITDA (hopefully) is hitting the bottom line but yet the fashion company is precarious or at an inflection point.  The conundrum is faced by the timing issues of seizing the moment to push the arc of the trajectory and possibly exit first round investors or to grow conservatively, organically, incrementally retaining control and hoping the brand value follows the foreshadowed arc of accomplishment.

At this stage the fashion company will likely be introduced to, or solicited by, investment bankers.  Some welcome this approach as a sign that the hard work of brand development is on the cusp of financial recognition.  But the usual question I receive is so what is it that an investment banker can do for me? Is an investment banker just a glorified broker?

Actually no.  An investment banker has several functions.  It can be the  middleman between the fashion company and the buying public; it raises capital and functions as an underwriter, securing commitments from mutual and pension funds and the like.

The investment banker also advises on mergers and acquisitions, advising the fashion company on such matters as business valuation, negotiation, pricing and structuring of transactions, as well as procedure and implementation.

Personally I have found the process with investment bankers to be a critical component for a fashion company ready to take on new investors, strategic partners or to acquire other targets. There is a necessary reality check as to valuation, to have a perspective on valuation beyond the application of a multiple to EBITDA. Maximization of value cannot be achieved without knowledge of the market as a whole and which targets, be they family offices, private equity firms or strategic.  The good investment bankers are worthy and invaluable strategic partners to extract maximum value.

Of course investment bankers are paid for their services.  While everything is negotiable there are some patterns including minimum retainers and variants on the Lehman Formula including Double Lehman and Double Percentage Lehman. For this the investment banker will take the fashion company from the start of due diligence, to preparation of a teaser, confidentiality agreements, information memorandum, target identification and solicitation, preparation for the target examination and the negation of a letter of intent.

Surprisingly, I have often been asked why do we need investment bankers in an age of public dissemination of information whereby valuation screens and target identification is readily accessible via the Internet. My usual response is that such a process is similar to one using WebMD® to diagnose and treat oneself.

But for reasons beyond economics, clients have been moving to a new model for the mid-stage equity raises.  On the proactive side clients have asked Fox Rothschild to prepare them for the process; clean up otherwise basic or fundamental matters due to budget constraints or mere lack of prioritization are then brought to the fore. An examination of corporate practices, tax optimization, potential tax issues arising from transfer pricing, employee practices and handbooks and even basic corporate records and state qualifications.  Call this the corporate check up and remediation.  Before commencing the process, how will an outsider view the company?  In this process we want to look our best on our first date, and not wait for the multiple rejections before putting on our best garb.

Thereafter we move to the critical commitment stage. We are not ready to jump to the teaser or information memorandum stage. Now we need a vendor due diligence, the “VDD”.  The VDD will be prepared by an external firm of accountants. Multinational companies will use a major firm such as KPMG®. The VDD will be a a micro detailed examination of the company. It will include an overview of the structures, key employees, key policies, tax optimization strategies employed, potential tax liabilities and basically serve as a foundation for monetization optimization.  The VDD is an integral component when not using and investment banker.  It gives a potential target the comfort that should it begin the process of acquisition, the costs of such process will not be wasted because of unknowing  (or gasp, knowing!) soft representations by the fashion company.

Then we draft the teaser which should be, in my opinion, a one-page highlight of the brand, its top line numbers, number of doors and other critical data.  The teaser at this stage does not identify the fashion company.  The key issue now is the validity of the assumption that an appropriate target can be identified to match up the fashion company with a partner, strategic or financial. This is art as well as science.  The degree of confidence may be affected by the personal knowledge and experience of  attorneys, accountants, public relations advisors as well key executives of the company.

If interest is expressed a non disclosure and confidentiality agreement will be drafted and executed by those interested in receiving both the information memorandum as well as the VDD.

If further interest is expressed after preliminary meetings, a process later may issue outlining the fundamentals of an expression of interest and/or a letter of intent.

While I have undertaken the role to shepherd the process without an investment banker, my first advice is to let each professional play its appropriate role. The only time I am enthusiastic about disintermediation the investment banker is if the client is at the stage where we would be dealing with investment bankers at the end of the scale whereby the function is more of a broker. If a quality house is not available then there are good reasons to control the process internally. But in the end each brand, each entrepreneur is different with varying needs at different stages of development and therefore must be evaluated on a case-by-case basis.  Feel free to contact us if you have questions regarding your next equity raise.

It’s Almost Over: From Basics to Billions: How to Launch and Grow a Fashion Brand @LLS_FashionLaw’s Summer Intensive

Posted in The Business of Fashion

Hi everyone. I know I have been quiet the past few days, but I hope you have been enjoying the pictures on facebook and twitter showing what the participants in Loyola Law School’s Fashion Law Project’s Summer Intensive have been up to. It has been an amazing experience getting to know all the participants and I am sure we will all be in contact for years to come.

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Today is #Day8. Tonight’s class will be the culmination of “pod 2″ where the participants become the teachers and get to present their own brand! I am so excited to see what they have come up with. (and you know I will be sharing pictures, so follow along on twitter here or here or on facebook here.)

For those of you who couldn’t join us, the various classes will be available for downloading starting next week. We will also be posting summaries of each day’s activities, so be sure to check back soon.

Enjoy the last day of July! Talk to you soon.

xoxo

Staci