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Fashion Law Blog

An Interactive Discussion on the Business of Fashion

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

Posted in Fashion Intellectual Property, The Business of Fashion

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.

Follow me 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

 

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

Posted in Fashion Intellectual Property, The Business of Fashion

I don’t know about you, but this summer has been a whirlwind! I can’t believe that the Fashion Law Project’s Summer Intensive starts this Thursday!

In case you don’t know about the Fashion Law Summer Intensive, it is a Fashion Law “bootcamp,” meaning we provide you with a lot of instruction (29 hours!) over a nine day period. This year, it is titled From Basics to Billions: How to Launch and Grow a Fashion Brand.  We will be presenting a Fashion Law 101 unit, which is a condensed version of the Fashion Law class that is the cornerstone of the Fashion Law Project’s Fashion Law concentration as well as a unit on brand building.  Cool, right?  If you want more details, I have written about the Fashion Law Project’s Fashion Law Summer Intensive here and here.

Fashionlaw1crop

So why I am writing about it again, you ask?

Well, everything is all set:

  • presentations submitted;
  • menus planned;
  • field trip confirmed;
  • speakers lined up; and
  • graduation dinner organized.

All that’s left is for you to get here so I can start teaching. I feel like a kid on Christmas Eve or better yet, dressed and sleeping in my new school clothes the night before class starts! So true to form, I had to share my excitement with you. :)

For those of you who can’t make it, Loyola is offering a streaming option with MCLE credit so you can join us from the comfort of your own home. Or you can follow along on twitter here or here.  And, you know I will blog about it afterwards.

For those of you joining us, can’t wait to meet you!

xoxo

Staci

 

Fashionable Thought of The Day

Posted in Fashionable Friday, The Business of Fashion

With the instant gratification available in today’s digital world, I see many who balk over the notion of hard work towards a long-term goal. For those of you who know me, you know that patience is something I have to work hard at, so while I am good at planting seeds, the waiting for results part is excruciating. So, when I saw the following, I thought it worth posting:

Never give up on a dream because of the time it will take to accomplish it. The time will pass anyway.

– Oprah Winfrey

xoxo

Staci

 

Fashionable Friday

Posted in Fashionable Friday, The Business of Fashion

This quote was in the signature block of a client email I received yesterday and it resonated with me.  So, of course, I need to share it with you:

The greatest pleasure in life is doing what people say you cannot do.

~Walter Bagehot

To this day, I still feel like an underdog.  It wasn’t so long ago when I was told could never be a “Fashion Lawyer” as there was no such thing.  Well, who’s smiling now?

What are you working hard at this summer? Remember, if you set your mind to something, it can be accomplished. I believe in you!

xoxo

Staci