Market spotlightState of the market
What is the current state of the luxury fashion market in your jurisdiction?
The luxury fashion market in the United States, long the largest luxury fashion market in the world, now vies with China for that title, with estimates setting sales revenues for the luxury fashion market in the US somewhere between US$20 billion and US$25 billion last year. In the past several years, a strong economy has driven sales, while tariffs and a strong dollar - which has a negative impact on purchases by foreign tourists - have presented challenges. Major market players include LVMH, PVH Ralph Lauren, Hugo Boss and Giorgio Armani, but relative newcomers like M Gemi, Goop and Everlane as well as smaller brands such as Drunk Elephant continue to disrupt the market. Further disrupting the market are the online-only retailers such as Amazon and ASOS, which provide a vast online platform for selling fashion products while collecting valuable consumer data and adopting evolving technologies, such as artificial intelligence and social media platforms, to spur additional growth. These technologies are themselves redefining the luxury fashion market in the US and abroad, with consumers demanding more personalised customer experience and greater access to their brands online, including social media and mobile shopping. And this trend towards the use of all things digital to consume luxury fashion shows no signs of stopping.
Manufacture and distributionManufacture and supply chain
What legal framework governs the development, manufacture and supply chain for fashion goods? What are the usual contractual arrangements for these relationships?
In the United States, development of designs is largely governed by federal statutes governing copyrights, trademarks and patents, which we discuss in greater detail below. In addition to the federal statutory framework, a retailer will enter into contracts with its designers and creative professionals to clearly provide for the ownership of designs and other intellectual property developed by the individuals in the course of their employment or services. A retailer’s development contracts should protect a brand’s confidential information and trade secrets, as well as include an assignment to the brand owner by the designer or creative profession of intellectual property created in connection with their work for the brand, and recite that such work constitutes a ‘work made for hire’ under the US Copyright Act.
Manufacturing of luxury and fashion goods is governed by statutory and common law considerations as well as contractual provisions. Statutory considerations include compliance with: (i) federal and state laws governing the materials used in manufacturing, such as the Consumer Product Safety Improvement Act of 2008 and state laws governing plastic content; (ii) state laws governing the sales of goods (such as the Uniform Commercial Code); and (iii) state and federal laws around sales and distribution methods. State laws are not uniform. Even the Uniform Commercial Code, despite its name, is just a general name for similar, but not identical, laws that have been adopted by the various states based on a common model. Some states, like California, have enacted relatively stringent laws governing issues from product composition to labelling to labour practices of suppliers. For example, if a brand sells products via an e-commerce platform in the United States, it is likely subject to various disclosure requirements under California state law, such as Proposition 65 (Prop 65) (requiring certain disclosures or warnings on packaging) and the California Electronic Commerce Act of 1984 (requiring certain disclosures to e-commerce consumers). The California Transparency in Supply Chain Act (CTSCA), which requires that large retailers and manufacturers provide consumers with certain disclosures with respect to steps they have taken to remove slavery and human trafficking from their supply chains, is triggered by doing business in the state and meeting a certain minimum worldwide income. Other states have enacted similar laws regulating their supply chains. In addressing these requirements, manufacturers and marketers of luxury goods generally comply with the standards of the most stringent jurisdictions.Distribution and agency agreements
What legal framework governs distribution and agency agreements for fashion goods?
Distribution arrangements are primarily governed by the specific terms of the contractual arrangement with a brand’s distributors, and not surprisingly, brands predominately structure their distribution agreements to drive sales and value. For example, a brand may grant distribution rights for a specific geography, for online versus offline channels, full price versus off-price, etc. Further, state laws can impose limitations on a manufacturer’s ability to terminate a distributor, although in the United States, state laws governing the termination of distributors are less stringent than in many other jurisdictions.
Agency is generally governed by common-law concepts in the United States, and agency relationships should identify the scope of the agent’s authority on behalf of the brand. However, agents or sales representatives are further protected by statute in many US states. Among other things, these laws may require brands to clearly describe and promptly pay a sales representative’s earnings and to set forth the terms of the arrangement in writing.
What are the most commonly used distribution and agency structures for fashion goods, and what contractual terms and provisions usually apply?
Luxury goods derive value in part from scarcity and brand reputation; therefore, exclusivity in distribution channels and brand protection are key. Luxury fashion goods are most commonly distributed to end customers through both online and brick-and-mortar channels. Further, brands may have their own retail operations through which they reach customers or may sell products through one or more third-party retailers.
When selling through third party retailers, it is important to include contractual provisions relating to exclusivity and brand protection. Some examples of contractual provisions that usually apply in luxury fashion distribution agreements include:
- grants of exclusivity for a particular retail channel (eg, brick and mortar versus online), market (eg, a particular geography) or segment of the market (eg, women’s apparel versus men’s apparel), or category of goods (eg, footwear, eyewear, cosmetics);
- restrictive covenants, which are closely related to grants of exclusivity, and include non-competition, non-solicitation and pricing protections;
- trademark or brand licences and licence restrictions;
- additional brand protection provisions including quality control mechanisms and audit rights, anti-dumping or disposal of goods provisions;
- terms relating to promotion (eg, obligations to devote specific amounts to marketing campaigns and to undertake particular efforts to market products); and
- sales targets or minimum volume requirements.
Do any special import and export rules and restrictions apply to fashion goods?
When a shipment reaches the United States, the importer of record (ie, the owner, purchaser or licensed customs broker) must file entry documents with Customs and Border Protection (CBP) at the port of entry. The importer of record must use ‘reasonable care’ due diligence in making entry. In addition, the entry must be accompanied by evidence that a bond has been posted with Customs to cover any potential duties, taxes and charges.
Entry of goods may be made by a non-resident individual or partnership, or by a foreign corporation, through a US agent. A foreign corporation in whose name merchandise is entered must have a resident agent in the state where the port of entry is located who is authorised to accept service of process.
A foreign corporation may issue a power of attorney to a regular employee, customs broker, partner or corporation officer to act in the United States for the non-resident employer.
All importers must ensure that products imported into the US are properly labelled to include the products’ country of origin in a conspicuous location, that any label appears in English, and if the labeling is obscured by packaging, that the information is also included on the packaging of the product. Finally, textile and apparel articles imported into the United States are required to be labelled with: (i) fibre content (there are specific rules for fibre names, such as pima cotton, or merino wool); (ii) country of origin; and (3) name of the importer, distributor, retailer or foreign manufacturer.Corporate social responsibility and sustainability
What are the requirements and disclosure obligations in relation to corporate social responsibility and sustainability for fashion and luxury brands in your jurisdiction? What due diligence in this regard is advised or required?
United States laws relating to social responsibility and sustainability fall into two main categories: those that prohibit or sanction certain practices and those that require disclosure.
There are relatively few laws impacting luxury goods that fall into the first category: laws prohibiting or sanctioning certain practices. Various federal and state laws regulate labour and safety practices with the US and prohibit the importation of goods produced by forced or slave labour outside of the US. The CPSA and Food and Drug Administration regulations (with respect to cosmetics) prohibit the use of certain materials. But more of these laws are expected, particularly at the state level, in coming years. Companies manufacturing in the United States should monitor laws working their way through state legislatures that, if enacted, will require the states to limit carbon emissions, necessarily putting pressure on manufacturers. Companies with a presence in the United States can also face liability under the Alien Tort Claims Act for human rights impacts that occur extraterritorially and throughout the business’s value chain.
More laws govern the disclosure of sustainability practices. For almost a decade, companies with securities listed on a US exchange have had to report on the use of certain minerals on the basis that such minerals originate in conflict zones. In recent years, the United States Securities and Exchange Commission has signalled a decreased interest in enforcing these reporting requirements, and the fashion industry has been among the least compliant. State laws like Prop 65 and the CTSTA also impose disclosure obligations. Companies that make sustainability claims are subject to federal and state unfair advertising laws. Fashion companies making such claims need to be aware of compliance and obligations and consider the systems that will have to be put in place to substantiate their claims. Disclosure of sustainable or responsible practices must be correct and supportable, as they are open to challenge by regulators and customers alike.
What occupational health and safety laws should fashion companies be aware of across their supply chains?
Fashion companies face particular challenges in complying with health and safety laws. Companies manufacturing in the US are subject to state and federal wage and hour and occupational safety laws. Lack of compliance with these laws has been the subject of numerous investigations and lawsuits, particularly in California, where much of the US-based luxury fashion manufacturing is done.
Because of the widespread outsourcing of manufacturing in the industry, much of it abroad, many fashion companies address supply chain occupational health and safety concerns through certifications, codes of conduct and brand standards. Although, as noted above, there are state and federal laws addressing the use of child and forced labour and US companies have been subjected to class action litigation in the US arising out of foreign safety and health practices, the primary drivers of fashion companies’ compliance efforts have been external pressure by non-governmental organisations, consumers and investors and corporate responsibility programmes. Several US companies have signed on to the Apparel and Footwear Supply Chain Transparency Pledge, pursuant to which participating companies disclose the location, ownership and other relevant information about all of their manufacturing sites. Many companies have recognised the commercial benefits of being able to promote socially responsible manufacturing practices. Any claims about responsible practices are subject to the Federal Trade Commission requirements (and similar state law requirements) that advertising and promotional materials be truthful, not misleading and, where appropriate, backed up by data.
What legal framework governs the launch of an online fashion marketplace or store?
In the United States, there is no singular or specific law or directive governing electronic commerce (e-commerce) by retailers, fashion brands or any other seller of goods or services via the internet. Rather, relevant US e-commerce law is drawn from the various federal and state laws that govern retail or consumer transactions, as well as laws relating to the digital sphere generally. Retailers considering the launch of an online marketplace should review applicable state and federal laws governing contract formation, unfair business practices and false advertising, labelling requirements, checkout and payment, gift cards, shipping and returns, warranties and customer communications. E-commerce retailers should also consider best practices and guidance drawn from enforcement actions taken by federal and state regulators and the outcomes of civil litigation brought by consumers.
Subject to local modifications, all 50 US states have adopted the Uniform Commercial Code (UCC), article 2 of which sets forth legal requirements applicable to contracts for the sale of goods. To satisfy the adequate notice requirement, e-commerce retailers should ensure that any transaction terms are clear and conspicuous to customers using the online marketplace. Generally, in order for a valid contract to be formed between an e-commerce retailer and a customer, the customer must have the capacity to assent and adequate notice of the key terms applicable to an offer. E-commerce retailers may rely on electronic forms of assent, such as online check boxes or click-through mechanisms, under the Electronic Signatures in Global and National Commerce Act (ESIGN).
A combination of state and federal consumer protection laws also affect the enforceability of e-commerce terms and conditions (such as those covering warranties, returns and other forms of customer recourse), which form the basis of a contract for the electronic sale of goods. In the US, the Federal Trade Commission (FTC) may take enforcement actions against e-commerce retailers who use terms that are likely to mislead consumers and affect their decisions. The prohibition against deceptive practices applies to all retail transaction terms, including warranties, return policies and advertising claims. E-commerce retailers should also consider statutory limitations on communicating with customers, including federal laws such as the CAN-SPAM Act and the Telephone Consumer Protection Act.Sourcing and distribution
How does e-commerce implicate retailers’ sourcing and distribution arrangements (or other contractual arrangements) in your jurisdiction?
E-commerce retailers with brick-and-mortar operations should ensure that contractual arrangements adequately account for sales in the in-person and online environments. Exclusivity terms and restrictive covenants in distribution agreements, for example, should be carefully drafted to avoid broadening or limiting the intended scope of the arrangement. Bifurcated frameworks for e-commerce versus brick-and-mortar sourcing and distribution arrangements may be advantageous for retailers in this respect. Differentiated frameworks allow retailers and manufacturers to allocate exclusive distribution rights between online and brick-and-mortar storefronts. A bifurcated framework also creates benefits for e-commerce retailers with both off- and full-price websites, such as excluding distribution rights for off-price websites alone or vice versa.
Likewise, sourcing arrangements can vary considerably in an e-commerce context. E-commerce retailers can take advantage of drop-ship sourcing arrangements, where manufacturers ship products directly to customers rather than to the retailer’s warehouse or brick-and-mortar storefront. Drop-ship arrangements both reduce supply chain responsibilities for retailers and offer potential legal benefits, such as reduced tax liability. E-commerce retailers should consider these varying arrangements and contractual frameworks to maximise operational efficiency while minimising the risk of legal liability or unintended outcomes.
While e-commerce retailers must adhere to the same sourcing and distribution laws as their brick-and-mortar counterparts, a retailer’s compliance with such laws may differ in an e-commerce context based upon the challenges of making disclosures in the digital forum, where space and messaging are dictated by the boundaries of digital sales pages. For this reason, e-commerce retailers should place product material disclosures clearly and conspicuously on the online product listing.Terms and conditions
What special considerations would you take into account when drafting online terms and conditions for customers when launching an e-commerce website in your jurisdiction?
The most important factors to consider when drafting e-commerce terms and conditions are: (i) which types of product are being sold online and to whom; (ii) how this product is made; and (iii) where the product will be sold. These factors inform which laws are triggered and corresponding disclosure requirements.
Where the product is a luxury good intended for personal, rather than commercial use, at the federal level the Magnuson-Moss Act requires disclosures regarding the warranty terms offered by the seller. Additionally, under the various state versions of the UCC, certain implied warranties are automatically included in any sale of consumer goods, unless the seller effectively and conspicuously states in the terms and conditions that the products are sold ‘as-is’. These implied warranties include the implied warranty of merchantability, the implied warranties of fitness for a particular purpose, title and non-infringement.
Some states have adopted statutes requiring that manufacturers provide certain warranties. E-commerce sellers should also note that terms and conditions that are particularly one-sided may be regarded as unfair and unenforceable under US law, especially if the customer does not have adequate notice of the terms. Finally, retailers consider including arbitration clauses and class action waivers in their terms and conditions for US customers given the litigiousness of the US consumer base. We note that at a high level, such terms are generally enforceable if they are not unconscionable (for example, imposing prohibitive costs on the customer or providing that arbitration must occur in a distant venue). E-commerce terms and conditions often also include a policy under the Digital Millennium Copyright Act.Tax
Are online sales taxed differently than sales in retail stores in your jurisdiction?
In general, VAT works in a similar way to normal taxation on the sales of goods. For sales taxes in the US, these applied when buying and having it shipped to the same jurisdiction (eg, if I buy something in NYC and have it shipped to a NYC address). It is also interesting to highlight that again because of the Organization for Economic Cooperation and Development’s framework for Base Erosion and Profit Shifting, many jurisdictions are thinking about introducing a digital tax. This is designed to tax companies that do not have a physical presence in a jurisdiction; so, for example, you could sell clothes accessing a US site to European customers. The idea is to charge businesses a flat tax based on percentage of sales in any jurisdiction for online sales.
Furthermore, when selling from one jurisdiction to another, customs and duties might apply (eg, one could buy a handbag from a US site and have it shipped to the UK, but if the value exceeds the limit (which for luxury goods is more likely) the customer would be subject to duties when collecting the item in the UK). In general, companies use a disclaimer when allowing shipment to other countries to state that the customer might be subject to duties and is the one to bear these costs. In some cases where the business has warehouses in different locations, the website acts as a billing entity, but the sale happens between the local entity that holds the stock and the customer, and, therefore, it is no longer an international sale.
Intellectual propertyDesign protection
Which IP rights are applicable to fashion designs? What rules and procedures apply to obtaining protection?
Despite several failed efforts to extend copyright protection specifically to fashion designs at the federal level, the most recent being in 2011/2012 with the proposed Innovative Design Protection and Piracy Prevention Act, there is currently no comprehensive protection afforded to fashion designs in the United States. Instead, various aspects of fashion designs are protected in the United States through an amalgamation of intellectual protection rights in the United States, including copyright, trademark, trade dress, design patent and patent rights, which may or may not overlap.Copyright protection
In general, US copyright law considers all clothing items, no matter how impractical, creative, or ornate, to be functional in nature, and thus not subject to copyright protection. Thus, the cut, colour, shape or dimensions of a particular garment - and the garment as a whole - are not protected by copyright law. Further, while sketches of fashion designs are protected by copyright under US law, copyright protection extends only to the particular expression of the design (ie, the sketch), not the underlying idea of the fashion design itself.
However, copyright protection may extend to particular aspects of a fashion design. For instance, fabric patterns or prints may be capable of copyright protection if they reflect sufficient original expression (ie, Hermès scarf designs). Patches or design features stamped on or woven into the fabric or textile of a particular garment or fashion item may also be subject to copyright protection if they are ‘conceptually separable’ from the underlying useful article.
Finally, purely decorative articles that have no useful function, such as jewellery, handbag clasps, belt buckles designs, etc may be subject to copyright protection if they are considered sufficiently original by the Copyright Office.Trade mark/trade dress protection
In the fashion context, trademark protection may extend to any logo, label or name. Thus, trademark protection is available to protect designer names (eg, Alexander Wang, Marc Jacobs) and brand names (eg, Chanel, Hermès), brand logos (eg, Polo Ponies, Lacoste alligators), and designer labels (eg, Wrangler jeans red tag). A particular colour (eg, Tiffany Blue or UPS brown) may also receive trademark protection upon a showing of secondary meaning by the trademark applicant; that is, evidence that demonstrates that the relevant consumers identify the colour in question with a single source of the associated goods.
Similarly, trade dress protection can be used to protect patterns, prints, single or multiple colours, specific product features, and even the overall design or configuration of a product, assuming that the product feature or design is not functional and the owner can demonstrate that consumers have come to recognise that feature or configuration as identifying the source of the goods. For example, Louboutin’s red-soles are subject to trademark protection, Hermès’ and Birkin’s configurations for their handbags are subject to trademark protection, as are Bottega Veneta’s distinct woven pattern, Louis Vuitton’s Épi weft-and-warp texture, and Louis Vuitton’s LV, Chanel’s CC and Dior’s CD monogram logos.Design patent protection
Design patents protect the purely ornamental or decorative features or aspects of functional, useful items. For example, the decorative hardware on handbags and the ornamental soles of shoes are two examples of items that have been protected by US design patents in the fashion world.Patent protection
Patents, in contrast to copyrights, trademarks and design patents, expressly protect new, novel, non-obvious, useful articles. Because most clothing items cannot really be considered ‘new’, patent protection generally does not extend to garments. The exception to this rule, of course, are fashion items that have some new useful function, such as high-performance fabrics that wick away sweat or regulate body temperature, or other protective gear such as hazmat suits, Kevlar, space suits, etc. Further, patent protection may be available to new, novel and non-obvious types of clasps, zippers or other fasteners. Finally, patent protection has historically extended to foundational garments such as lingerie and support items like Wonderbras and Spanx.
What difficulties arise in obtaining IP protection for fashion goods?
Each of the applicable types of intellectual property rights above has some limitations and drawbacks in terms of protecting fashion goods. As noted above, although copyright protection automatically inures upon creation of the work in a fixed medium of expression, the scope of copyright protection in the fashion design context is quite limited.
Trade marks and trade dress protection, while potentially unlimited in duration, is also somewhat restricted in scope, and often requires substantial investment in advertising and promotion, and a lengthy time on the market, to generate the degree of consumer recognition required to qualify for protection. This is particularly true for product configurations and single colour marks, which cannot receive trademark protection without first proving secondary meaning. Further, trademark and trade dress protection can be easily lost through lack of enforcement in the face of widespread copying - an issue common in the fashion world.
In addition to having limited application in the fashion world, patent protection is often expensive and time-consuming to obtain, with the process costing thousands of dollars and often taking years to achieve registration. Further, the duration of patent protection is finite - 20 years from the date of filing of the patent application. Design patents can be a more practical option for protection for key pieces in a fashion portfolio, given their lower cost and shorter period to issuance (several months rather than several years).Brand protection
How are luxury and fashion brands legally protected in your jurisdiction?
The names and logos of luxury and fashion brands are generally protected in the United States by trademark law, as discussed above. Because trademark law in the United States is based on use of a mark in commerce, a trademark holder need not obtain a registration to qualify a mark for protection. The US recognises the concept of ‘common-law rights’ derived from being the first to use a particular mark in commerce in connection with particular goods or services. Nonetheless, there are significant evidentiary benefits to obtaining a federal trademark registration, including setting forth a presumption that the mark is valid and protectable and empowering US Customs and Border Protection to block counterfeiting goods.:
Trade marks owners who rely on common law trademark rights are required to demonstrate priority, validity, exclusivity and protectability of the mark, the scope and extent of its use, the acquisition of secondary meaning, and the lack of functionality of the mark.
Fashion and luxury brands can also protect their names by acquiring the corresponding national domain names (ccTLDs, that is, .us), generic top-level domains called gTLDs (such as .com or .org) as well as new gTLDs such as .club or .vip or .fashion or .sucks, which incorporate the name or mark, as well as TLDs that include confusingly similar names or marks, even if they do not plan to use them, to prevent third parties from doing so.Licensing
What rules, restrictions and best practices apply to IP licensing in the fashion industry?
When licensing IP in the fashion industry, it is important to maintain the image and reputation that the brand has established. A licensor must strike a balance between protecting its most valuable assets and incentivising its licensee to pursue opportunities to gain market share for the brand. At the most basic level, a licensor should consider to whom it is licensing and whether the prospective licensee’s values align with the image and reputation of the brand; a thorough diligence process is advised. The scope of the licence grant should be narrowly tailored to prevent undesired use of the brand’s intellectual property. The licensor should consider whether to require the payment of a royalty and if so, how such royalty should be structured; a royalty should be reasonable and should not be a disincentive for the licensee to pursue sales of products making use of the licensed IP or to prioritise other products. Royalty calculations and payments should also be practical.
Brands should also impose reasonable brand protection mechanisms and ensure that they are afforded oversight over the licensee’s activities, including quality control provisions and audit and inspection rights, and anti-dumping or disposal of goods provisions. Thought should be given to the enforcement, prosecution and maintenance of the licensed intellectual property; these terms may vary depending on whether a licence is exclusive or non-exclusive, but generally the licensor should have the right to control IP enforcement activity and the goodwill generated from use of the licensed IP should inure to the benefit of the licensor. Further, thought should be given to the end of the licensing relationship, including with respect to transition, wind-down or sell-off periods, disposal of products bearing or making use of the licensed intellectual property, and the return or destruction of confidential information.Enforcement
What options do rights holders have when enforcing their IP rights? Are there options for protecting IP rights through enforcement at the borders of your jurisdiction?
Depending on the types of intellectual property protection in its portfolio, a rights holder may assert claims of trademark or trade dress infringement, patent infringement or copyright infringement in federal court to obtain both monetary and injunctive relief, in the event that enforcement is necessary.
Trade mark and patent owners also have the option of opposing the registration of infringing trademarks or patents before the Trademark Trial and Appeal Board and Patent Trial and Appeal Board, respectively. However, while an opposition before one of these administrative tribunals is generally quicker and less expensive than federal court litigation, successful opposition before these administrative tribunals will only prevent would-be infringers from obtaining registrations, it will not prevent them from using the mark or offering the product in commerce, nor will a favourable judgment result in any form of monetary remuneration.
Trade mark owners may also be able to protect their marks against online infringement (ie, use of a trademark in a domain name) by filing a Uniform Doman Name Dispute Resolution complaint against the infringer with ICANN (Internet Corporation for Assigned Names and Numbers, a global multi-stakeholder organisation that was created by the US government and its Department of Commerce), to get the domain name cancelled or re-assigned, provided the following conditions are met: (i) the domain name registered by the domain name registrant is identical or confusingly similar to a trademark or service mark in which the complainant (the person or entity bringing the complaint) has rights; (ii) the domain name registrant has no rights or legitimate interests in respect of the domain name in question; and (iii) the domain name has been registered and is being used in bad faith. This administrative proceeding is usually faster and quicker than filing a claim in federal court.
In the event that an infringer is actually counterfeiting a trademark owner’s goods, the rights holder may assert both civil and criminal claims under The Trademark Counterfeiting Act of 1984, codified at 18 US Code section 2320, The Anti-counterfeiting Consumer Act of 1996, and the Lanham Act, section 1116. The penalties for counterfeiters are quite steep and can result in fines of US$2 million (for individual) or US$5 million (for corporations) or imprisonment for up to 10 years.
Finally, trademark and copyright holders can also enlist the aid of US Customs and Border Protection to block or detain imports of infringing or counterfeit items once they have recorded their trademark and copyright holdings with Customs.
Data privacy and securityLegislation
What data privacy and security laws are most relevant to fashion and luxury companies?
Fashion and luxury companies are subject to a myriad of state and federal data privacy and security laws in the US. In the retail space, a number of states, best exemplified by California’s Song-Beverly Act, restrict personal information collection in connection with check and credit card purchases. A handful of states, again led by California, have required that companies with websites or apps have privacy policies with specified disclosures. California is again at the vanguard of increasing privacy regulation, with the California Consumer Privacy Act (CCPA) and associated regulations taking effect in 2020. The CCPA increases transparency requirements and gives consumers a right to opt out of sales of their personal information, while affording consumers new rights to access and delete their personal information.
The FTC uses its general enforcement authority over unfair or deceptive trade practices to police against potential misuse of personal data, as do state Attorneys General (AGs) under ‘Little FTC Acts’. This enforcement can implicate personalisation and advertising strategies that may rely on a wide array of information, such as location, biometrics, transaction data and supplemental information from third parties. The CAN-SPAM Act, Telephone Consumer Protection Act, and the FTC’s Telemarketing Sales Rule, along with state telemarketing laws, are also relevant to retailers’ marketing activities.
On the security side, the FTC frequently uses its unfair trade practice authority to police unreasonable data security practices that put consumers’ personal information at risk. A number of states also have enacted laws focused on ‘reasonable’ security for sensitive personal information, including payment card information, while a small number of states, such as Massachusetts, have developed detailed and specific data security requirements that companies must follow through a written information security programme. All 50 states have data breach notification laws that require notification to affected individuals where certain of their personal information has been compromised, frequently with reporting to state authorities. The Fair Credit Reporting Act mandates the truncation credit card information on receipts and appropriate disposal of information.Compliance challenges
What challenges do data privacy and security laws present to luxury and fashion companies and their business models?
Luxury and fashion companies are challenged by the resources required to stay abreast of increasingly complicated and varied state and federal privacy and data security laws. New consumer rights are upending the traditional ways of addressing privacy issues. Luxury and fashion companies thrive by understanding consumer sentiment and purchasing trends. Such information enables personalisation of services to a customer base that appreciates tailored services. The best way for luxury and fashion companies to achieve this understanding of their customer base is by collecting and analysing large amounts of data, including from third parties. These inputs are part of the ‘big data’ trend that enables better insights into consumers.
Similarly, norms around reasonable data security are constantly evolving just as threats to the security of personal information expand. As with privacy, keeping abreast of changes in legal requirements, evolving threats, and how to appropriately operationalise an information security programme requires ever more resources, in budget and personnel. While big data in some cases is the key to greater personalisation and a contributor to revenue, it simultaneously requires ever more devotion of resources towards creating and developing sufficient safeguards and an adequate security programme that recognises cybersecurity as an enterprise risk issue.Innovative technologies
What data privacy and security concerns must luxury and fashion retailers consider when deploying innovative technologies in association with the marketing of goods and services to consumers?
Dating back to the advent of radio and then television, luxury and fashion retailers have always leveraged new technologies to market products and services. Today, in-store sensors and Wi-Fi offer the potential to track consumers through stores to determine optimal traffic flows, facial recognition can help recognise existing customers and feed relevant information to sales associates and even measure a customer’s mood and sentiment, and artificial intelligence and machine learning offer the opportunity for incredible insights into consumer preferences based on big data sets.
New and increasing privacy regulation in the US can inhibit luxury and fashion retailers’ and their customers’ ability to benefit from such retailers’ use of these and other developing technologies. At least three states, most notably Illinois given its private right of action, have biometric privacy laws that require certain disclosures regarding collection and use of biometric information and affirmative opt-in before a retailer can collect it from an individual. Biometric data used for facial recognition technologies, when tied to an individual, is also considered sensitive personal information that triggers data breach notification laws in some states. Similarly, luxury and fashion retailers should be transparent about their data collection and use practices and any tracking. It is also appropriate to develop guidelines for using AI and machine learning to avoid discriminatory practices.Content personalisation and targeted advertising
What legal and regulatory challenges must luxury and fashion companies address to support personalisation of online content and targeted advertising based on data-driven inferences regarding consumer behaviour?
The CCPA exemplifies an evolving focus on business transparency about data practices and the individual control over his or her personal information. The CCPA upends online behavioural advertising models. For example, if a website owner enables third-party tracking cookies to operate on its site and those cookies contribute the retargeting of an individual with a brand ad on a third-party site, data is transferred across different entities in the ecosystem. Under the CCPA, the exchange of data about a California resident across third parties may very well be a sale of personal information by the website owner. This means that luxury and fashion companies may need, as of 1 January 2020, the CCPA effective date to have a ‘do not sell’ link on their websites that is able to limit recipients’ use of any data for reasons that are not merely to benefit the publisher. Luxury and fashion brands may not wish to signal to their target consumers that they sell their data.
Luxury and fashion brands do not merely need to develop CCPA compliance measures, but also strategies to engage with reputable third-party adtech companies. Using third parties that offer opt-outs in adherence with established industry self-regulatory regimes like the Network Advertising Initiative or Digital Advertising Alliance guidelines is responsible and appropriate. For CCPA compliance, brands should assess the Interactive Advertising Bureau’s (IAB) proposed California Consumer Privacy Act Compliance Framework for Publishers and Technology Companies (the Framework). The draft Framework is designed to help participants comply with the CCPA. It is yet to be seen how widely accepted the IAB Framework will be, but luxury and fashion brands should monitor its development.
Luxury and fashion brands engaging in targeted behavioural advertising should otherwise be considering how to leverage cookie banners or cookie management tools to help with CCPA compliance. It will also be important for luxury and fashion brands to carefully inventory their relationships with third parties operating on their websites and mobile apps and to transparently disclose those relationships and other data collection practices in their privacy policies.
Advertising and marketingLaw and regulation
What laws, regulations and industry codes are applicable to advertising and marketing communications by luxury and fashion companies?
The FTC has broad authority to prohibit deceptive advertising and other marketing practices, and unfair business practices. An advertisement is deceptive if it contains misrepresentation (or omission) that is likely to mislead a reasonable consumer. Historically, the FTC has relied on case-by-case enforcement to convey how it applies its authority. In more recent years, the FTC has published a series of guides that explain how its legal authority would be interpreted in a given area; including, ‘Green claims’ or environmental marketing, disclosing information via the internet, and the use of testimonials and endorsements to promote a product, as just a few examples.Online marketing and social media
What particular rules and regulations govern online marketing activities and how are such rules enforced?
Social media platforms provide dynamic and constantly evolving ways for luxury goods marketers to connect and create relationships with valued customers and prospective consumers. There are many obvious differences in how messaging is executed when comparing traditional TV, print and other conventional media versus popular social media platforms such as Facebook, Twitter and YouTube. Importantly, the consumer protection or deceptive advertising principles enforced by the FTC apply to social media although it can sometimes be challenging to determine how best to apply the FTC’s principles to a tweet, for example. The FTC has issued guidance and taken many enforcement actions in recent years, providing useful information on how the FTC applies its long-standing mandate to new forms of consumer engagement such as social media. For example, the FTC guidance on the use of testimonials only allows use of a testimonial if any claims conveyed can be substantiated for the typical user - a claim true only for the individual featured in an ad is not sufficient. The FTC also requires that a blogger, YouTube personality or other endorser disclose clearly a commercial relationship between the marketer and the individual highlighting a product on a social media platform. Thus, FTC guidance and recent enforcement actions should be considered part of the ‘rules of the road’ for brands advertising via social media channels.
Product regulation and consumer protectionProduct safety rules and standards
What product safety rules and standards apply to luxury and fashion goods?
Luxury and fashion goods are regulated by the US Consumer Product Safety Commission (CPSC) as ‘consumer products’. Some consumer products are regulated by category with specific labelling or safety parameters mandated. Products that are intended for children 12 years or younger are subject to a specific set of requirements. Certain classes of products must be tested, and must be accompanied by a certificate when imported or when manufactured in the US. Generally, when no mandatory or voluntary standard adopted by the CPSC exists, products must be safe and not pose a serious hazard based on foreseeable use or misuse. The CPSC’s website is an invaluable resource for gaining a sense of how the Commission operates and also provides detailed information on how specific products are regulated (www.cpsc.gov).
Perhaps the most significant is the legal requirement that a manufacturer, importer, distributor or retailer has a mandatory duty to report an unsafe product. The most common trigger is the existence of a ‘defect’ that may rise to a ‘substantial product hazard’, both are defined terms of art. It is important for consumer products companies to develop an internal monitoring system of consumer complaints or other reports that may suggest a product is potentially unsafe. Identifying and elevating appropriate information for a careful evaluation is essential to ensure ongoing compliance with the CPSC reporting requirements. The CPSC may impose substantial civil penalties when a company, after the fact, is determined to have failed to report in a timely fashion when it was required to do so.
Companies should be prepared to conduct a recall (when warranted) when they report to the CPSC. The CPSC has very specific parameters around a recall or other corrective action plan. The CPSC must review and approve such plans before implemented by a firm. The CPSC maintains a fast-track programme where the question of whether a product is defective is deferred when the company agrees to quickly recall the product (typically within 20 days of reporting).Product liability
What regime governs product liability for luxury and fashion goods? Has there been any notable recent product liability litigation or enforcement action in the sector?
There is no uniform product liability regime in the United States as to luxury and fashion goods, or any other particular industry’s products. Instead, each state has its own product liability law, some set forth in statutes while others through common law. Product liability claims are typically brought under negligence, strict liability or warranty theories. Additionally, almost every state has a consumer protection statute that aims to protect consumers from fraud and deceptive marketing and sales practices. Many state consumer protection statutes provide for enhanced penalties to be awarded to successful consumers, going so far as to award legal fees and punitive damages against manufacturers and others found liable under the state’s statute. Any entity in the supply chain, including manufacturers, retailers, distributors and importers can be held liable depending on the theory of liability.
M&A and competition issuesM&A and joint ventures
Are there any special considerations for M&A or joint venture transactions that companies should bear in mind when preparing, negotiating or entering into a deal in the luxury fashion industry?
The US has no local ownership requirements.
Companies entering into joint ventures or acquiring companies in the luxury fashion industry will want to conduct thorough diligence on the target’s intellectual property, ensuring that the target has clear rights to the brand and any relevant domain names. One of the risks of acquiring one of these ‘heritage brands’ is the potential decrease in value once the founder is no longer associated with the company.
In addition, one issue that often arises in the M&A context for luxury and fashion brands relates to the buyer’s right to continue to use the brand name where the brand is the name of a living person. Often, complex licensing structures must be put into place with respect to trademark and rights to publicity, particularly where these rights are acquired by a buyer and thereafter must be licensed back to the individual designer. A transfer of these rights also raises interesting questions regarding the individual designer’s ability to engage in new commercial ventures that would necessarily require him or her to appear in public and to use his or her name and likeness.
Other areas of focus for buyer due diligence include privacy and cybersecurity, advertising compliance (including social influencers), labelling and country of origin, supply chain and, if the target has significant US retail operations, real estate, employment and immigration and consumer finance.
Much of the M&A activity in the retail sector over the past several years has involved the acquisition of technology and online platforms, a trend that is expected to continue as brick-and-mortar stores face increased pressure and more manufacturers sell direct to consumers.Competition
What competition law provisions are particularly relevant for the luxury and fashion industry?
There are two principal antitrust issues in the US to which the industry should pay particular attention when it comes to proper distribution and pricing practices: (i) vertical resale price agreements between a supplier and a reseller; and (ii) vertical agreements that do not directly affect resale price, but could nonetheless harm competition in distribution channels. Specifically, minimum resale price maintenance (RPM) creates a floor on resale prices to promote dealer services by protecting minimum retail profit margins, whereas maximum RPM creates a ceiling on resale prices to prevent retailers from gaining unreasonable margins at the supplier’s expense.
Although both types of RPM agreements can be subject to antitrust review, minimum RPM agreements in particular could receive an elevated level of scrutiny - particularly when a supplier possesses sufficient market power, or other suppliers in the same industry also have instituted similar RPM agreements. Generally, federal antitrust laws have made RPM agreements less risky in recent years, because these agreements are no longer deemed per se illegal, but evaluated under a ‘rule of reason’ standard. In a rule of reason analysis, actual or potential anticompetitive effects must be balanced against any procompetitive benefits. In contrast, however, several states - including California and New Jersey - continue to hold minimum RPMs as per se unlawful. Therefore, it is important to analyse each RPM agreement to evaluate whether it still has the potential to harm competition in your particular industry under a rule of reason, and also ascertain whether certain state laws could continue to make your RPM agreements per se unlawful.
Aside from RPM agreements, a supplier could also enter into a range of ‘non-price’ vertical arrangements with its reseller, including, but not limited to, exclusive distribution, territorial or customer restrictions, and a refusal to deal with competitors, among others. Such restrictions could be seen as an attempt to make entry by other competitors more costly, time-consuming, and inefficient than it would have been in the absence of such restrictions. In general, these non-price vertical agreements raise less significant antitrust concerns than price-related agreements and are relatively common. Nevertheless, if a supplier or a reseller has significant power in its own market, antitrust due diligence should be performed to assess whether a non-price vertical agreement could foreclose a substantial portion of that market from actual or potential competitors. As a general rule of thumb, US courts rarely condemn vertical non-price restrictions when the resulting foreclosure is less than 20 per cent of the market.
Employment and labourManaging employment relationships
What employment law provisions should fashion companies be particularly aware of when managing relationships with employees? What are the usual contractual arrangements for these relationships?
Like most employees, fashion industry employees are generally employed ‘at will’, which means the employer and employee can terminate the relationship at any time with or without notice. At-will employment is governed by both federal and state labour and employment laws, which vary substantially across jurisdictions. That said, there are several employment issues likely to be of interest to fashion retailers.
State laws concerning the use of freelancers or independent contractors are constantly evolving. Relatively new laws in California, New York and New Jersey, for example, make it more difficult for fashion houses to engage freelancers (independent contractors) without classifying them as employees. In addition, a federal circuit court in New York recently held that a fashion employer had misclassified its ‘fit models’ (used by fashion houses to test the fit of clothing) as freelancers and should have classified them as employees.
Another US employment law issue that is somewhat unique to fashion companies arises when fashion houses seek to hire people who have a certain ‘look’. Such considerations are not per se illegal, but must be done carefully and tactfully so as not to violate laws that prohibit discrimination on the basis of age, sex, race or disability.
Fashion houses should also be aware that the relationship between them and their retailers-such as department stores that install brand-specific counters or ‘shop in shops’ -could potentially raise issues under the ‘joint employment’ doctrine, which could render one entity liable for the employment law violations by the other. Whether that theory applies is highly fact-dependent and depends on the level of control that one entity has over the other’s employees, but this ‘joint employment’ doctrine has been and can be used to bring a non-employing entity into court for employment claims such as unpaid wages, discrimination or harassment.
Finally, fashion companies should take note of enforceability issues with respect to restrictive covenants such as non-disclosure, non-competition or non-solicitation agreements. While non-disclosure agreements are widely enforceable, the enforceability of non-competition agreements varies: in some states, non-competition agreements are entirely unenforceable as against public policy; in others, they are enforceable but only if reasonable and narrowly tailored to protect legitimate business interests.Trade unions
Are there any special legal or regulatory considerations for fashion companies when dealing with trade unions or works councils?
In the United States, fashion industry employees are not typically represented by trade unions.Immigration
Are there any special immigration law considerations for fashion companies seeking to move staff across borders or hire and retain talent?
Fashion houses seeking to move talent across borders should be aware of the three most common visas that may suit their purpose.
The most basic of these is the H-1B visa. The H-1B visa is for individuals with advanced degrees who wish to work in a ‘specialty occupation’. Those with particularly extraordinary talent may qualify for a variant of the H-1B known as the H-1B3. This variant is subject to additional limitations. First, the barrier to entry is even higher than with an ordinary H-1B, requiring not only that the applicant be specialised, but that they be ‘prominent’ as well. Prominence means a ‘high level of achievement as evidenced by a degree of skill and recognition substantially above that ordinarily encountered . . . The person must be renowned, leading or well known’. Ordinary skilled and unskilled workers do not meet these criteria, and many models or other fashion-industry talent might not either. Moreover, the general H-1B visa category can apply to a wide range of fields. This means that H-1B3 applicants from the fashion industry compete for the same number of limited visas, with only 65,000 total H-1B visas available per fiscal year.
Subject to the highest evidentiary threshold of the three, the O-1 visa category is available only for persons of ‘extraordinary ability’ as demonstrated by sustained national or international acclaim. However, it is not subject to the same caps as H-1B visas.
Update and trendsTrends and developments
What are the current trends and future prospects for the luxury fashion industry in your jurisdiction? Have there been any notable recent market, legal and or regulatory developments in the sector? What changes in law, regulation, or enforcement should luxury and fashion companies be preparing for?
The US luxury fashion industry continues to be driven by the global trends of digitalisation, diversification, personalisation and consolidation. Luxury customers are increasingly willing to shop online, with e-commerce growing and the US shoppers contributing a substantial portion of the e-commerce luxury market. This has put new pressures on supply chains, as customers demand ever faster delivery. Further, the luxury fashion market is skewing more heavily toward younger and more diverse customers, and brands are adapting to the demands of a younger market. Generations Y and Z accounted for 47 per cent of luxury consumers in 2018. The efforts of luxury fashion brands to reach younger buyers are evident in their efforts to adopt emerging technologies, utilise social media platforms to drive growth and focus on sustainability and corporate responsibility. Luxury brands always offered a greater level of personalisation than was offered in the general market, but the general market trend towards personalisation, whether in the customisation of products, tailoring of product experiences or curating of a collection of products, is particularly pronounced in the luxury market. Finally, luxury brands are continuing to consolidate with luxury conglomerates continuing to acquire brands, independent brands continuing to scale through acquisitions and investment activities, and brands teaming up with e-platform providers or geographically complementary players.
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