The latest catwalk season is almost over and the new fashion trend appears to be slogans. Although people have used fashion to project statements for many years, the use of fashion to project political messages and voices of dissatisfaction with corporate entities via social media platforms and other mediums is now widespread. Indeed the recent protests against President Trump have resulted in the entertaining exercise of looking for the wittiest quips. On the other side of the coin, slogans made famous by brands or public figures may be re-hashed to project a different message. A favourite within Fox Williams is “Make Welsh rugby great again!” However, such activities are not without risk. If a particular slogan refers to a third party such as a famous individual or well-known company, it may be a breach of trade mark or other intellectual property laws. Slogans can be registered as trade marks if they are sufficiently distinctive – for example, JUST DO IT. Use of an identical slogan for goods which the trade mark is registered would infringe the trade mark. Further, a slight amendment may not avoid infringement as the use of an identical or similar mark in relation to identical or similar goods would also be infringement if there is a likelihood of confusion. The buck does not stop there – even if the slogan is clearly a protest or quip and therefore confusion may be unlikely, if the slogan has a reputation, the trade mark owner could claim infringement on the basis that the protest or quip is blurring, tarnishing or freeloading from the distinctive or reputable trade mark. It is not just slogans that can be protected by trade marks – a mark capable of graphical representation and which is distinctive can be registered, the most obvious being company names and names of individuals who use their names to offer goods or services. The same rules apply to use of these names as to slogans. So, what if a mark or slogan is not on any trade mark register? Unfortunately, this is not necessarily the green light to go ahead. If someone has generated goodwill, the laws of passing off can be used to protect it against a misrepresentation which may cause it damage. Goodwill is the benefit of a name, reputation or connection of a business – it is the attractive element which brings in custom. It can include celebrity or character image rights – for example, Rihanna was able to stop Topshop from selling t-shirts with a photograph of her without her approval. Rihanna was able to show misrepresentation because the Judge considered that the image gave a fairly strong indication that the t-shirt may be a product authorised by Rihanna herself when it had in fact not been. Trade mark and other intellectual property laws can be used to trump (no pun intended!) slogans in certain situations. However, this may not tactically be the top trump (again!!) card to play by a rights holder given the ease by which a negative backlash to an over-zealous approach could be spread via social media. Although, with reference to some David Bowie song titles, designers of clothing utilising slogans may care more about whether there is “Life on Mars” than third party IP rights, or be prepared to “Let’s dance” if faced with allegations of infringement, they should be aware that rights owners may be able to utilise IP laws to put them “Under pressure.”

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Duncan Jones Associate +44 (0)20 7614 2647 djones@foxwilliams.com

HMRC is going into a number of fashion businesses seeking to challenge the status of certain individuals ostensibly engaged on a self-employed basis. Arguably this should not be a surprise. Employment status is changing with the rise of the gig economy, public finances are under ever mounting strain, and the tax revenues have to come from somewhere. With apologies to Jack Nicholson, Something's Gotta Give. In this respect freelancers within fashion businesses present a relatively low hanging fruit to HMRC. HMRC argue that, in practice, the relationship between the fashion business and the individual is such as to indicate an employment relationship. HMRC then seek to recover from the fashion business the income tax and employee national insurance contributions (NICs) which they argue should have been withheld by the fashion business under the Pay As You Earn (PAYE) scheme from the amounts paid to the individual, and paid over to HMRC. They also look to the fashion business to pay over related employer national insurance contributions, together with associated interest and penalties. This can significantly increase the costs of remunerating the individual even where it is possible to recover the income tax and employee NICs from them (and in many cases such recovery is not possible). Not only that, but in certain circumstances, where the individual concerned has been VAT registered and has charged the fashion business additional amounts in respect of VAT for the services provided. HMRC have also sought to argue that the fashion business is unable to reclaim the putative VAT paid (or is required to repay any such VAT amounts already reclaimed). This is on the basis that the individual, as an employee, is not a “taxable person” for VAT purposes and therefore their activities are outside the scope of VAT. As such, any amounts in respect of VAT have been incorrectly charged and cannot legitimately be reclaimed by the fashion business as input VAT. Often it is not possible, or practicable, for the fashion business to seek to recover these amounts from the individual involved and they are simply left out of pocket. In order to mitigate the risks of such an HMRC challenge, a fashion business should:

Take steps to clarify the basis upon which an individual is being taken on. Do the circumstances really justify self-employment status?

Put in place appropriate documentation which accurately reflects the situation. Contractual documentation which does not bear any resemblance to the actual relationship between the fashion business and the individual will be ignored!

Re-assess the position on a regular basis as the relationship extends and evolves. An individual may initially have self-employed status, but this can change as the individual remains with, and becomes more integral to, the business.

Obtain contractual protections to maximise chances of being able to recover any income tax, employee NICs (and irrespective of recent developments concerning NICs!) or VAT amounts from the individual (though noting that this may still be difficult in practice)

Seek appropriate advice as soon as HMRC indicate that they are commencing an audit or investigation. Being able to respond in a timely and organised fashion to HMRC’s initial queries, and pre-empt the questions they might raise, can prevent an HMRC enquiry or visit taking an unwanted direction.

Emma Bailey Partner +44 (0)20 7614 2560 ebailey@foxwilliams.com

Social media is essential to the success of fashion brands. It enables direct contact with customers and the ability to craft a much more personal brand identity. Indeed with the rise of integrated sales on platforms like Facebook, in addition to publicity and advertising, social media has now become a major shopping channel in itself. This means it is more important than ever to understand your rights and restrictions when using different forms of social media. What can go wrong? Social media is an incredible tool and there are huge opportunities for the network effect to quickly share your brand far and wide. Fashion United analyses social followings on an annual basis and shows that the top ten fashion brands are usually spread fairly evenly between sportswear, High Street, and luxury. However, the benefits of social media also mean that negative messages and brand hijacking can both occur incredibly quickly. Recently we have seen examples of a viral video of negative treatment of customers (United Airlines), Twitter asking whether the CEO of United Airlines is going to blame the bunny for its own death, as well as the Twitter response to a poorly conceived advertising campaign (Pepsi). But giant bunnies don’t pop up a lot in everyday life. In practice, the more common issues tend to revolve around:

1. “parody” accounts which many customers believe is you;

2. “sucks” accounts where a user uses your brand name to throw shade on your business;

3. disgruntled former employees sharing sensitive or even confidential information;

4. a competitor hijacking your hashtag for a comparative advertising campaign; or

5. an intern using photographs (or other copyright works) on your social media account without getting your permission.

So what is to be done in the event of a social media crisis? Have you registered your brand as a trade mark? The more extensive your trade mark portfolio the easier it is to use your trade marks to protect your brand online. This is because most platforms will respond to take down requests where there is a trade mark owner anywhere in the world but some will look quite closely at the goods and services registered and may offer leniency to non-identical marks or purported parody accounts. It follows that it is essential for fashion brands to register their names and logos as trade marks as early as possible and for all relevant jurisdictions (usually the home market, other core markets, place of manufacture, EU, USA, and China).

If you have a hashtag which is strongly associated with you – even if it is one you only use for seasonal campaigns, consider registering the hashtag as a trade mark as well. For example, Lululemon has registered #TheSweatLife and Stefanel has registered #FeelMore. Even if you don’t think it is worth registering a campaign name, slogan or hashtag as a trade mark, make sure you run a clearance check before starting to use it. This should include a social media availability search to see if the name is available to be registered on your key social media platforms. You want to minimise the chances of an infringement claim. Once the name is chosen (or even when you are still deciding which account to use), make sure you have secured all social media accounts (Instagram, Snapchat, Facebook etc.) as early as possible. Even if you think that a social media platform is not going to be a core account for you. Consider registering it anyway as well as any obvious variations. It is quick and easy to register an account but time consuming and expensive to recover one. If conflicting marks appear following the trade mark or social media clearance search consider using a new name. In some circumstances it may be possible to buy the trade mark or account name. Trade marks are very helpful in terms of both stopping online infringement and obtaining verified status for accounts. Have you got a clear social media policy in place? It is never too early to prepare a social media policy. For more information on what a social media policy should include, please read our recent article. A social media policy can reduce the need to check every post and can actually give social media managers more latitude as there are clear guidelines in place as to what is acceptable. This should be accompanied by dedicated training to make sure the policy is actually read and understood. This should apply to both people posting to your official social media channels and employees who may represent your business on their personal social media accounts. The policy should be clear about the consequences for employees who breach the policy. It should cover issues such as what content can be used (ideally there will be a list of pre-approved images). Often photographs which are taken by external photographers for campaigns have a limited licence period. It is important that you ensure that these images can be used on social media indefinitely. Avoid any unnecessary risks Consider vetting all official posts prior to posting. Be careful about the use of third party bloggers or endorsements. Make sure that the blogger or endorser makes it clear that they have been paid (whether in money or products). On Instagram and Twitter the ASA encourages the use of #ad or #sponsored to identify these posts. Think carefully and take legal advice if you want to run a campaign which compares your brand or products to a competitor (or might allude to another brand).

Rosie Burbidge Senior Associate +44 (0)20 7614 2654 rburbidge@foxwilliams.com

What can go wrong? Social media has huge reach and can create viral memes or other content very quickly. However, with great power comes great responsibility. If social media is not properly monitored or controlled, it is possible to lose control of your brand quite quickly. Similarly, there is a big risk of individuals intentionally or unintentionally hijacking your brand name on social media. For example, the owner of the @johnlewis account on Twitter (a Mr John Lewis based in the USA) has to patiently explain to customers each year why he cannot help them with their enquiries. He is perfectly entitled to use that Twitter handle and, luckily for John Lewis the department store, Mr Lewis approaches the many people who mistake him with good grace and humour. At the other end of the scale, there are people who deliberately register variations of common account names (or in some cases get in there with the obvious account name first). They may sow further seeds of confusion by adding words like “official” to their biography or in the “about us” section. The sale of counterfeit goods on social media has become much more common in recent years. It is a particular problem on Facebook where many closed groups operate to sell counterfeit goods and hide infringing activities. What can you do? Without a registered trade mark, much of the following will be difficult to achieve. As mentioned in last month's Fashion Focus, trade mark registration is the key to comprehensive social media protection. Set up a social media monitoring programme – Ideally this will track both:

1. usernames (for trade mark infringement); and

2. social media posts (for trade mark and copyright infringement. For example, misuse of your photographs).

This programme should keep track of both people trying to trade off your name or other intellectual property rights such as photographs of your products and people involved in a deliberate strategy to disparage your brand on social media. There are various software tracking solutions although they come with a price tag. However, two low technology solutions are:

1. conduct regular (for example, weekly) searches on the main social media sites; and

2. include a reporting tool on your website and social media sites so that your fans can easily let you know if they identify any infringing sites.

Good documentation – in all cases, it is essential that you have good records of your rights and the infringing activity they have been involved in. In many instances, you will not need to rely on this and people will move on to new brands which do not put up as much of a fight. However, if you are dealing with a persistent infringer, full and accurate records of their activities are essential in pursuing more formal legal action. It is very easy for a user to delete social media posts and whilst it is possible to obtain historic posts from a social media

platform, this is a time consuming and expensive process which is best avoided if at all possible. Use the social media platform’s automatic reporting mechanism – (also known as filing a takedown notice). All of the main social media players have some form of semi-automated notice and takedown process. This involves an online form whereby you identify your rights (for example by means of a link to your product on your official website to prove copyright ownership or one of your registered trademarks) and the infringing page or username. It is even possible to use this process to remove a listing from Google’s search index. You need to be careful that all takedown requests are completed carefully and accurately as they are often published in ‘transparency reports’ (for example Google does this on a regular basis). Send a cease and desist letter – This is the first line of attack by a lawyer. It puts the infringer on notice of your rights, identifies why the other person’s activities infringe your rights and the consequences for the infringer of non-compliance. It is very common for cease and desist letters to be published online so even if you address it as private and confidential it may be widely circulated on the Internet. There are two approaches to cease and desist letters. In more sensitive circumstances, consider sending a relatively nice letter directly to the infringer. If this tactic has failed in the past, the issue is a particular concern for you or things have escalated to an extent that this is unlikely to be successful, ask your lawyer to write to them directly. It is wise to get legal input on both letters as if you over state your rights or suggest that you have a claim for trade mark infringement when you don’t you open yourself up to a legal claim for “groundless threats”. Nothing – in many instances, doing nothing may be the best policy. If a post has not gained much attention, it is likely to blow over with time. Indeed, if you engage too early you may turn a small grievance into a much bigger issue. This is the risk of automated systems. They do not necessarily pick up on the relative nuances of a situation and can lead issues to blow out of proportion if a standard approach is applied to all potentially infringing situations. Take home points As with most things in life, a plan as to how you will achieve something is more likely to result in success than when there is no plan. Accordingly, it is important that you plan how you are going to approach different types of infringement in advance – not all infringements are equal. Some are annoying but the follower numbers are low so will have minimal impact. Others may involve high profile or vocal bloggers who will publish anything you send to them on social media. It is therefore important that you carefully balance what you do and put a plan in place for dealing with each type of infringement. At a very high level, such a plan could include:

Rosie Burbidge Senior Associate +44 (0)20 7614 2654 rburbidge@foxwilliams.com

The GDPR will substantially impact fashion companies if they collect, process, or transfer EU individuals’ personal data. There is a lot that fashion companies can be doing to prepare for achieving compliance by May 2018, and in many organisations, HR is taking the lead. Read our ‘Top Tips for HR on GDPR’ below: Top tips for HR on GDPR

From 25 May 2018, the regulatory regime governing businesses use of data will change

substantially when the General Data Protection Regulation (“GDPR) comes into force.

What should HR be doing and how can we help?

There is a lot to do to prepare for the introduction of the GDPR. In many organisations, HR is

taking the lead in managing the process of achieving compliance by May 2018. As a

minimum, we would expect HR to be responsible for undertaking the seven steps set out

below. We can help with each stage of the GDPR preparation process, providing clear,

commercially pragmatic advice at all times.

What should HR be doing? How can we help?

Step 1 Generate awareness within your

organisation – make key stakeholders

aware of the task at hand and set up a

project team.

We can help HR to identify which

areas of the business and which

colleagues should take part in the

GDPR compliance project.

Step 2 Carry out an exercise to understand

what employment data the business

has, what the business uses it for,

where it is held and what third parties

are involved in processing it.

We can assist HR in undertaking a

compliance audit to understand the

employment data processes and

procedures currently in place and the

ways in which employment data is

currently used.

Step 3 Consider whether or not the business

is required to appoint a Data

Protection Officer (“DPO”) and if you

do, how will the role be resourced?

We can assist HR in advising on

what the DPO role will involve to

enable HR to determine whether a

DPO can be appointed from within

the existing workforce. We can also

assist with any DPO external

recruitment process by advising on

job specifications and the recruitment

process.

Step 4 Carry out a gap analysis to work out

what compliance steps are needed.

We can carry out a comprehensive

GDPR readiness assessment, with

gap analysis and recommendation to

help determine which business

processes need to be reviewed and

implemented.

Step 5 Review all relevant employment

policies, procedures (including

recruitment), employment contracts

and contracts with consultants and

services providers to make sure that

they comply with the new regime.

We can review data protection

clauses in contracts as well as

policies and procedures on data

protection, communications

monitoring, privacy and data

retention. We can also review the use

of data in recruitment and selection

processes.

Step 6 Prioritise, scope out and implement a

remediation programme.

We can help HR plan and apply

changes to data practices in the

workplace.

Step 7 Arrange training for staff on data

protection issues.

We can provide bespoke training to

HR and the wider workforce on data

protection as well as on the GDPR

more generally.

In addition to the above, we can also help with core data protection services by:

Reviewing international data transfer processes for international businesses;

Advising on handling, and responding to, data subject access requests; and

Advising on a data security breach of employment data.

Nigel Miller Partner +44 (0)20 7614 2504 nmiller@foxwilliams.com

Josey Bright Associate +44 (0)20 7614 2616 jbright@foxwilliams.com

Helen Farr Partner +44 (0)20 7614 2623 hfarr@foxwilliams.com

David Harford Associate +44 (0)20 7614 2604 dharford@foxwilliams.com

Q. What links JoJo Maman Bébé, Quiz, and Ted Baker?

A. Each of them have been in the news this month with a mention of the brand’s

concessions in the story.

A retail concession enables a brand to promote its products to the public within a broad retail

environment, typically a department store.

The store owner will require the brand to enter into a concession agreement. This covers the

commercial aspects, as outlined in our article, and generally provides the store owner with

significant flexibility. Employment issues, fit-out and insurance are further areas to consider.

Below are some of the issues which can arise under commercial, employment and property

laws and which brands need to consider.

The commercial relationship

From a commercial perspective, a concession agreement should cover issues such as:

the initial duration of the concession;

the services to be provided by the store owner;

advertising and displays;

indemnities;

termination.

But what the agreement covers and the extent to which the relevant provisions favour the

store owner will vary from store to store.

Generally, the concession agreement can be expected to provide the store owner with

considerable flexibility in terms of being able to require the brand to be relocated within the

store and control over how the concession is staffed. It is also the case that minimum sales

requirements are often included – the store will be looking to achieve a minimum return

based on sales per square foot or metre.

Unsurprisingly, a contentious issue can be the concession fee payable to the store owner. In

some instances this will be presented as a relatively low figure in which case, invariably,

there will be various add-ons related to the provision by the store owner of certain services

(for example, the removal of rubbish), the provision of utilities, and contributions to

promotions by the store owner. It is therefore important for the brand to know that it has

taken account of all payments to be made under the agreement and as to how the amounts

in question can increase over the duration of the concession agreement.

Equally important to bear in mind is that sales made in concession will flow through the store

owner’s accounting system and bank account before reaching the brand. This can have a

disruptive effect on cash flow.

Some store owners will require the brand to go on sale at the same time as the rest of the

store. It is uncertain as to whether this requirement constitutes an infringement of

competition law.

Employment issues

So far as employment law is concerned, it is necessary to take account of the store owner’s

ability to affect the relationship which a brand has with its employees working in the

concession.

It is possible that the concession agreement will enable the store owner to play an active role

in the recruitment of employees by the brand to work in the concession. This could be by

specifying the selection criteria or having a final say as to who is recruited.

Once recruited, the brand’s employees will need to comply with both the brand’s and the

store owner’s policies and procedures.

Although staff working in the concession are the employees of the brand, as a matter of

employment law, they could also be contract workers of the store owner. In turn, this can

result in their having claims for discrimination because of a protected characteristic (for

example, race, disability, or gender) against both the brand and the store owner. But the

store owner will usually require the brand to indemnify it for such claims!

Discrimination can also result from the inclusion in the concession agreement of a provision

which enables the store owner to require any of the brand’s employees who work in the

concession to be removed from the store.

Property law

As a concession holder, the brand is taking a licence to use a particular area in the store. It

is not entering into a tenancy agreement and therefore will not be protected under the

Landlord and Tenant Act 1954.

A fit out of the concession will be necessary in a way which is comparable to a retail

unit. The concession agreement may require the brand to undertake the fit out. In this

situation, the brand will need to check to ensure that it has the relevant rights of access at

the times required in order to do so. The alternative is that the concession agreement will

require the brand to contribute to be fit out undertaken for the brand by the store owner.

The concession agreement may require the brand to contribute to the store’s insurance

premiums. Whether or not it does, it is important for the brand to consider:

the extent of the cover provided for stock in a situation where title will not pass from

the brand to the store owner until immediately before the sale is made to the

consumer.

Insurance in respect of claims made by employees. Following on from the above

comments, whilst the store owner may require that the brand acts in a particular way

which results in a claim, the store owner’s insurance may not cover the brand.

Equally, it is important that the relevant insurance held by the brand is checked to ensure

that it extends to the concession.

Concession agreements can work well and do provide an alternative to other property

arrangements. But care does need to be taken so as to ensure that the particular terms of

the concession agreement make the exercise of taking the concession worthwhile.

Stephen Sidkin Partner, Chair of the fashionlaw group +44 (0)20 7614 2505 slsidkin@foxwilliams.com

Sales of athleisure products are sprinting ahead and fashion and sporting brands are

competing with one another to design novel products which allow consumers to be both

athletic and fashionable or provide some added benefit to the consumer such as comfort.

If a brand expends significant time and financial resources in developing such a product, it

will obviously want to prevent competitors from copycatting, which would clearly be

damaging. Given the importance of these products to the success of brands’ bottom lines, it

is not surprising that brands are resorting to Court action to protect them.

US law

Earlier this month, Lululemon filed a US court complaint against Under Armour alleging that

the latter’s range of sports bras infringed the former’s patents and trade dress. An example

of one of the patents and an alleged infringing bra is shown below:

UK law

The approach for protecting designs of athleisure goods is much easier and cheaper in the

UK. Designs can either be registered or unregistered and can protect the whole or a part of

the item.

To register a design, it must be new and have individual character – in other words it must

not create a sense of “déjà vu” in the mind of a regular user of such products. The registered

right lasts for a maximum of 25 years and gives the owner the exclusive right to use the

design and any other design which does not produce a different overall impression on the

informed user.

It is easier to rely on registered designs over unregistered designs as there is no need to

show that the alleged infringer “copied” the registered design, which can be difficult to prove.

However, for a number of reasons, it may be necessary to rely on unregistered design rights.

This allows the owner of an original design to prevent the reproduction of an identical or

substantially similar item. This right will last for 10 years if the design has been

commercialised. An original design is one which is not commonplace or not commercially

available in the relevant sector at the date of creation and there are exclusions such as the

fact that surface decoration or “must fit” or “must match” elements are not capable of

protection.

As well as UK design rights, it is possible to register EU design rights and rely on EU

unregistered design rights, although the duration of the unregistered right is only three years

and it is unclear what will happen to these rights following Brexit.

Take home points

A fashion brand should have in place a strategy to protect rights in key designs. This

strategy should include the following:

1. for a relatively small fee, key designs should be registered as they are almost always

easier and less costly to enforce against infringers – in addition, they send a strong

message to others in the industry;

2. if relying on unregistered design rights, keep all drawings and date them at the time

of creation to prove ownership and date of creation; and

3. designs are quick and cheap to register – sometimes protection can be achieved

within a matter of days.

How can we help?

We work every day with fashion brands to ensure their brand and products are protected. If

you would like more information then please contact us.

Duncan Jones Associate +44 (0)20 7614 2647 djones@foxwilliams.com

Why are we still concerned about dress codes in the workplace?

This should in theory be a fairly straightforward concept, however, the recent highly publicised case of the female agency worker who was sent home without pay because she refused to wear high heels tells us that companies can and do still often get it wrong.

Employers within the fashion industry often impose strict dress codes on staff under the guise of brand image. To take but one example, Abercrombie’s Look Policy (panned by the US Supreme Court in a 2015 decision), Hairstyle Guide and Closed Toe Shoe List (I kid you not!) all had to be toned down in the face of customer reaction, falling sales and lawsuits.

Under the Equality Act 2010, having an overly prescriptive dress code can result in claims of discrimination related to race, religion, sex or disability (amongst others).

The main difficulty for fashion brands is finding the right balance between projecting the necessary brand image and the risk of employees alleging discrimination. This is particularly the case with religious discrimination when employees wear or display signs of religious dress as part of their beliefs.

What does the recent case law say?

The European Court recently ruled on two cases where employees alleged religious discrimination:

In Achbita v G4S Secure Solutions, Ms Achbita was dismissed for wanting to wear a headscarf whilst doing reception work, as G4S had a policy which prevents the wearing of any signs of political, philosophical or religious beliefs by any customer-facing staff in their workplace. This was held not to be discrimination.

In Bougnaoui v Micropole, Ms Bougnaoui wore a headscarf and was sent to work at the premises of a client. The client objected saying that it had upset a number of its employees. Micropole as a result, asked Ms Bougnaoui to observe a policy of neutrality when dealing with clients. She refused and was dismissed. This was held to be direct discrimination.

These decisions appear to suggest that a specific policy of neutrality can be applied, provided it is the employer’s policy, consistently applied, and not as a result of a client’s wishes. Although these decisions are based on EU law and should technically override national UK law, they should be treated with caution in practice because both cases were instigated by employees based in Belgium and France, both of which have a history of secular views with different cultural and social norms to that of the UK.

A more balanced approach was arguably adopted by the European Court of Human Rights in the highly publicised case of Eweida v British Airways where BA’s aim of projecting a professional corporate image and promoting recognition of brand and staff was held to be legitimate. However, it did not justify prohibiting the wearing of a necklace with a cross, given that the cross was discreet and did not really detract from professional appearance.

What happens if employers get it wrong?

If an employee is dismissed as a result of refusing to comply with a dress code, it could result in claims of discrimination which could if successful entitle an employee to an injury to feelings award (of up to £40,811) and compensation for future loss of earnings (uncapped

but typically 6 to 12 months’ net pay). The employee may also have a claim for unfair dismissal if they have at least 2 years’ continuous service.

Even if an employee is not dismissed, they could still bring a discrimination claim which could result in an injury to feelings award. The potential damage to an employer’s reputation and the brand image the dress code was designed to protect as a result of any claim, whether or not successful, should not be underestimated.

Take home points

How can employers ensure their dress codes are not discriminatory?

All employees should be treated equally: dress codes should not be more onerous for one gender compared with the other.

Dress rules should be kept to a minimum to reduce the risk of discrimination.

Health and safety or the need for facial communication may justify some restriction. However, employers must ensure any restrictions have a legitimate aim and the restrictions are necessary to fulfil that aim.

If employers wish to adopt a requirement for a neutral appearance, they need to have good reasons and it should be applied to as few customer-facing roles as possible.

Prior to dismissing, employers should look for alternative non customer-facing positions for an employee affected by the dress rule.

Taking care at the outset when introducing a dress code will help protect the brand from unwelcome claims and potentially adverse publicity and damage to the brand.

Parissa Torabi Associate +44 (0)20 7614 2531 ptorabi@foxwilliams.com

In January 2017 Prime Minister May delivered the Government’s 12 point plan for Brexit. On 13 March 2017, the UK Government formally triggered Article 50 of the Treaty on European Union and so initiated the process of leaving the European Union and the start of the two-year negotiation period with the other 27 Member States of the EU. More recently, the Government has published a series of position papers for the purpose of its negotiations with the EU Commission. But what are the key aspects of the UK Government’s Brexit plan and the likely implications for fashion businesses? This guide:

sets out a commentary on the UK Government’s published plans for Brexit; and provides some practical steps for fashion companies.

The UK Government’s Plan for Brexit 1. Leaving the Customs Union “It is time for Britain to get out into the world and rediscover its role as a great, global, trading nation” The Prime Minister wants the UK to leave the customs union and to increase its trade with fast growing export markets. In practice this means the Government negotiating new customs agreements whilst seeking to maintain tariff-free trade with the EU. The fashion industry will be concerned that, in particular, deals with China, India, Vietnam and Bangladesh - key countries for production and manufacturing - are achieved. A deal with the US - an important export market - will also be crucial. Comment Most favoured nation clauses in existing trade agreements are likely to impact on the UK’s ability to make bilateral deals with various trading partners, and in any event trade deals will take time to negotiate. The longer it takes to negotiate new trade deals, the longer the UK’s period of uncertainty will affect businesses and increase speculation as to what will happen next. 2. Free trade with the EU “We will pursue a bold and ambitious free trade agreement with the European Union” This is confirmed by the Government’s position paper. The Prime Minister wants to negotiate a Free Trade Agreement (FTA) and customs agreement with the EU as soon as possible within the two-year negotiation period initiated by Article 50. The FTA could be similar to the Comprehensive Economic and Trade Agreement (CETA) between Canada and the EU. Comment CETA took seven years to negotiate. Each of the 27 Member States of the EU must agree on the terms of the FTA and the Prime Minister was adamant that “no deal for the UK is better than a bad deal for the UK”. It is therefore possible that no deal is achieved by the time the UK leaves the EU. In such circumstances, the UK’s trade with the 27 Member States of the EU would operate under the

World Trade Organisation’s (WTO) rules. These are legal ‘ground rules’ for international commerce by which members of the WTO (such as the UK) have agreed to trade. A core principle of the WTO rules is non-discrimination. This means that goods traded between the EU and UK, as well as between the UK and non-EU countries, would be subject to customs tariffs based on the WTO’s most favoured nation (MFN) rates. In addition, the UK will need to reach separate trade deals with each of the countries with which the EU has negotiated preferential trade deals (over 50 of which have been ratified or are awaiting ratification). Until it does so, the WTO’s MFN customs rates will apply, to the disadvantage of the UK fashion businesses. The final terms of a FTA with the EU and preferential trade agreements with non-EU countries will determine whether the free trade of fabric, textile and garments will continue between the UK, EU and countries with which the UK, through membership of the EU, had the benefit of preferential trade deals, or whether fashion businesses’ supply chain arrangements will be faced with increased tariffs and customs duties following the UK’s exit. 3. Rules of origin If the UK does not agree a FTA and a new customs agreement with the EU, British fashion companies will also be concerned that national rules of origin will apply to their products. Rules of origin refers to the criteria which determine the national source of a product. They are used by governments to decide which tariffs and import duties to apply to a product. Generally, the rules distinguish between products which are of single country origin (they have been sourced and produced in one country) and products which have been sourced elsewhere but sufficiently worked or processed in order to qualify as originating from the country from which they are exported. However, the practices with regard to rules of origin vary between different national governments. Comment Currently, as the UK is a member of the EU single market, fashion businesses which export their products from the UK are able to apply a “made in Britain” label to their products, even where they have been sourced from other countries. Their products will still be considered sufficiently “British” and can benefit from a reduced or zero rate of duty when exported to the EU and to non-EU countries with which the EU has preferential arrangements as to rules of origin. Following Brexit, how much of a product is produced in the UK could become very important to determine, having regard to customs duties and issues concerning rule of origin. Fashion businesses which currently use the UK as an entry point to the EU will need to rethink their supply routes and may choose to bypass the UK altogether. The customs checks which the UK Government would need to introduce in order to enforce the rules of origin would also present an administration cost and a burden fashion business may seek to avoid. 4. Immigration “Brexit must mean control of the number of people who come to Britain from Europe” The Prime Minister’s proposal means that all EU nationals seeking work in the UK will require a permit. The preference is towards highly-skilled workers and students. In respect of EU citizens currently residing and working in the UK, the Prime Minister is seeking a reciprocal deal to guarantee the rights of EU citizens in the UK and UK citizens in the EU. In a proposal before the EU Parliament she explained that EU citizens in the UK

would be able to obtain “UK settled status” if they have been legally residing in the UK for over five years. The UK Government has since published detailed proposals outlining how it intends to protect the rights of EU citizens in the UK and UK nationals in the EU. Comment Despite the UK Government’s published proposals, a deal is yet to be agreed with the EU Parliament. For UK fashion businesses relying on workers from the EU, restrictions on the ease of movement of workers may lead to shortages of labour, and consequently increased labour costs due to demand. This will have an effect on profit margins and operating budgets of fashion businesses. In addition, as Andrew Groves (fashion designer and Course Director for BA Fashion Design at the University of Westminster) has pointed out, restriction on movement could be career-limiting. He admitted that he has been advising his students who have been receiving job offers in the UK and has often pushed them to move abroad and knock on the doors of French fashion houses; he now fears that he will no longer be able to give that advice. 5. Competitive tax structures “We would be free to change the basis of Britain’s economic model” The Prime Minister included a veiled threat to implement new competitive tax structures in order to attract and retain businesses operating in the UK if it is excluded from accessing the EU single market. The UK already has one of the lowest corporate tax rates compared with other major economies such as Germany and the US. Changes to its economic model, which would create an even more competitive tax structure, could have a positive effect on foreign investments, all other things being equal. Comment The weight that this threat will have in the negotiations with the EU remains to be seen. If followed through, it could lead to a “race to the bottom” in which major countries seek to outdo each other by introducing further competitive changes to their tax structures. 6. Control of laws “Leaving the European Union will mean that our laws will be made in Westminster, Edinburgh, Cardiff and Belfast” The Prime Minister has impressed that Brexit will mean that the UK will control its own laws and the Court of Justice of the European Union (CJEU) will cease to have jurisdiction in the UK. Comment The fact that a UK based business is no longer required, as a matter of English law, to comply with EU law does not mean that EU law no longer applies to the UK business. For example, in order to continue trading with businesses in EU Member States, products will need to meet EU standards. It is therefore unlikely that product liability regimes, consumer protection laws, Working Time Regulations, and data protection laws will change. In addition, it remains to be seen what will happen in the case of pan-European intellectual property rights such as trade marks, designs and patents. In theory, in a post-Brexit world the UK Government would be able to give preferential

treatment to UK businesses and favour them over their EU counterparts. However, this scenario is likely to be viewed as counterproductive as EU Member States could potentially apply reactive measures to put the UK at a disadvantage. In addition, contracts which refer to EU laws will need to be reviewed as to whether the relevant law referred to will continue to apply. This will depend on the context and purpose of the relevant clause in the contract, and the commercial background. Practical steps for businesses 1. Financial implications Fashion businesses will need to consider the financial implications for their businesses if a free trade deal with the EU is not agreed, as well as the implications of the outcome of trade deals with non-EU countries. Commercial agreements being negotiated should be reviewed in the context of tariffs for import and export of goods to and from the EU which could apply after Brexit. The financial impact of trade arrangements with countries outside the EU, with which the UK will need to renegotiate tariff rates, should also be addressed. Supply and labour costs may therefore increase and fashion businesses will need to decide how to cope with the additional costs – can they be passed on to the customer? Will fast fashion business in particular be prejudiced? The issues arising from increased supply costs will very likely have a greater impact on emerging designers who source their materials from outside the UK and produce their garments in other EU countries. This could have a great impact on emerging designers but could potentially encourage a new “Made in Britain” culture where companies will be looking to source within Britain in order to avoid exchange rate differences. Costs may also be incurred where the restriction on movement of workers creates a shortage of workers and increases labour costs. 2. Commercial contracts Fashion businesses should identify their key contracts – do they provide enough protection in respect of Brexit; do they require renegotiating or amending? Contract termination dates should be checked, as contracts expiring before March 2019 may not need amending. Existing contracts which include material adverse change provisions should be reviewed insofar as if the financial impact from Brexit is sufficiently serious, it could trigger a right to invoke the material adverse change provisions in the contract. Steps may need to be taken to future-proof new contracts by including express provision for the financial impact of Brexit such as exchange rate variation and inflation clauses, and express provisions dealing with tariffs for imports or exports to and from the EU and additional customs procedures. New contracts which reference EU law will also need future-proofing by including an express provision for whether the EU includes the UK after Brexit. Contracts will also need to provide for modification or repeal of European legislation. The position remains uncertain as to what will happen to EU-wide registered intellectual

property rights, in particular to EU trade marks (EUTMs) and licences granted to cover such rights. It is unclear whether EUTMs will be enforceable in the UK, and whether the UK will decide to recognise an EUTM as if the UK was still part of the European Union. It could be the case that new UK trade marks will be created from the current EUTMs or there could be a reform to the whole EUTM system that would allow non-EU states to be covered by the unitary regime of EU trade mark rights. Given the uncertainty surrounding what will happen to current registered EUTMs, the same will apply to EUTM licences. Will such licences automatically cover the UK territory or will the terms need to be renegotiated in order to ensure full protection? Issues of enforcement may arise as the rules governing licences of UK trade mark licensees in the UK differ from those governing EUTMs. For instance, UK trade mark licensees (both exclusive and non-exclusive) have the right to bring proceedings in its own name, unless the licence provides otherwise. The position is different for licensees of EUTMs as such right is only available to exclusive licensees. Consequently, existing non-exclusive EUTM licences may not contain an express exclusion in respect of the right of the non-exclusive licensee to bring proceedings in its own name. 3. Operational issues Fashion businesses may wish to consider establishing EU based subsidiaries which could provide continued tariff free or reduced tariff access to the EU and could provide companies with flexibility depending on

the source of manufactured products; and the eventual nature of the trade deals the UK may be able to negotiate with the EU

and non-EU countries.

Supply chain arrangements may need to be reviewed and businesses may consider routing products through countries with more favourable tariffs. In doing so, the savings will need to be weighed against the additional time it will take in getting the product to its destination. Existing supply contracts may have strict deadlines with financial penalties for failing to meet them. New supply agreements will need to be flexible to absorb the impact of operational changes as a result of Brexit. 4. The industry’s response Despite the initial shock of the Brexit vote, Caroline Rush (chief executive of the British Fashion Council) has spoken positively about the potential impact of Brexit on the fashion industry as an opportunity for a thorough market and industry analysis and chance to focus on what is really important for the fashion industry in order to find the sources of potential growth. Robin Walker, the Minister for Brexit, also spoke at February’s LFW, emphasising how British fashion plays a fundamental role in the growth of the UK economy overall contributing £28bn and 880,000 jobs in the industry across the country. Lobbying for (i) tariff-free trade in the EU and (ii) the rights of businesses and individuals to work and stay in the UK are only some of the ways in which the fashion industry can ensure the post-Brexit world can work for the industry. Zero, or low, tariffs would allow for industry

growth and clarifying businesses’ and individuals’ rights of movement would ensure healthy competition by continuing to attract foreign talent to the UK. As Federico Marchetti (Founder of Yoox and CEO of YOOX Net-a-Porter Group) pointed out in his response to the June 2016 referendum results: “The reaction is more important than the issue”. Stephen Sidkin Partner, Chair of the fashionlaw team +44 (0)20 7614 2505 slsidkin@foxwilliams.com

One of the many troubling aspects of Brexit as far as the fashion industry is concerned is whether fashion items will have less IP protection following Brexit. To read our guide to Brexit for the UK fashion industry, please click here.

The status of existing EU rights

The concern is that EU trade marks, and EU registered and unregistered designs will no longer cover the UK after the UK leaves the European Union (likely March 2019). This could be problematic as an EU trade mark that does not cover the UK could leave a brand owner exposed if it does not have a corresponding UK trade mark. Similarly, EU design law covers surface decoration in fashion garments whereas UK design law does not.

In the latest development, the Commission’s solution to this issue is that all pre-existing EU rights continue to be covered, without additional change provided the UK passes a law to ensure that this is the case.

Comment

This is a very positive indication and should reassure the fashion world that the ticking IP time bomb will not be as deadly as first anticipated.

It also shows that the EU is willing to take a pragmatic and reasonable approach to ensuring the minimum amount of disruption to intellectual property rights as a result of Brexit. That said, the devil is always in the detail and whilst these are promising negotiating principles, there are still many unknowns such as:

(i) can UK based EU rights holders get a pan-European injunction from a UK court after Brexit?; and

(ii) is use in the UK sufficient to maintain an EU trade mark after Brexit?

We look forward to seeing how the UK Government responds.

Simon Bennett Partner +44 (0)20 7614 2522 sbennett@foxwilliams.com Rosie Burbidge Senior Associate +44 (0)20 7614 2654 rburbidge@foxwilliams.com

Matchesfashion.com recently sold a majority stake in the business to private equity fund Apax Partners. Matchesfashion.com is understood to have made choice investment in its technology and design aspects of its business, launching new services (including delivery within 90 minutes to London shoppers) and having a notable reputation for solid customer service. Arguably it has been ahead of the curve in terms of the online channel. Certainly Apax saw value in the potential to grow even further. Despite consequential controversies, Agent Provocateur was sold by 3i to Mike Ashley only after a bidding war with private equity house Lion Capital. There are also numerous reports that Burberry has rejected takeover approaches and Coach is said to be looking at M&A further to its strategic acquisition of the luxury footwear brand Stuart Weitzman. On the other hand, Sun European Partners has incurred certain financial difficulties since adding Jacques Vert to its’ portfolio. Better Capital acquired Jaeger in a deal worth £19.5M but failed to rectify the loss making business. It has since faced questions from creditors about the collapse of Jaeger. What is the case is that private equity tends to be more willing than trade buyers to stake money on developing fashion businesses. Private equity financing offers a lot to fashion including specific sector experience and international expertise. So what is it that attracts private equity to fashion? Whilst each deal is distinct, certain themes crop up regularly; •perceived structural inefficiencies within the brand; •over-rented real estate portfolios; •opportunities for acquisition of under-capitalised rivals. From the perspective of the target fashion business, investors whose exit horizon is at the longer end of the typical private equity model (5-7 years +) and who can bring sector-experience management to facilitate careful growth, are likely to be the most sought-after partners. However, for those brand owners thinking about selling part or the entirety of a company over the next 5 years, the application of Entrepreneurs Relief enabling business owners to pay a significantly lower rate of capital gains tax when disposing of shares held in a company may not be a guaranteed prospect. The UK could experience a change in government where apparent issues concerning business tax relief are top agenda items! It should also be borne in mind that there are inherent tensions between the traditional private equity investment model and the interest of fashion brands. Private equity investors often adopt process-and growth-focussed strategies which may not always fit easily with the traditions of cautious growth, exclusivity and creative freedom that inform the strategic direction of many luxury fashion brands. For example, whilst private equity funding can, on the one hand, facilitate rapid international expansion and fuel commensurately large returns to investor and investee, an expansion plan that is overly aggressive can risk significant damage to the brand. Despite these tensions, private equity investors are still able to move quickly and be in a position to deploy substantial resources of capital and expertise to restructure struggling businesses. Overall we are likely to continue to see opportunities for acquisition or consolidation both on the high street and in the luxury fashion market.

It can also start people musing about restrictive covenants. So when Paul Masters moved from Missguided to In The Style, Adam Chesters left Deckers to join Craghoppers, and Céline Larose jumped ship from Richemont to join Kiki McDonough, thoughts on all sides were likely to have turned to their contracts and the hold that their former employers may have over their freedom to compete. A recent Court of Appeal decision on restrictive covenants has created some consternation amongst fashion industry employers, and corresponding opportunities for their employees. The contract under consideration prevented the employee from being engaged, concerned or interested in a competing business. An injunction was granted, but was set aside by the court. So much so not very interesting – restrictive covenant judgments are two-a-penny. However, the court made two points that should be of concern to fashion industry employers, and are of potential benefit to employees seeking to escape from their covenants. First, the court said that the fairly commonly-used language of the non-compete covenant (“You shall not…directly or indirectly engage or be concerned or interested in any business carried on in competition with [employer]…”) prohibited the employee from holding shares in a competing business. It was therefore impermissibly wide and in restraint of trade. It did not matter that the employee had no intention of holding shares in a competing business; the mere fact that the covenant precluded that was sufficient to mortally wound the employer’s case. It is usual for such covenants to include an exception allowing the holding of shares in listed companies of, say 3 or 5 per cent. Not in this case. If your covenants include similar language and do not contain such an exception, there is a risk that they will be considered to be impermissibly wide and unenforceable. Is the traditional listed company shareholding exception mentioned above sufficient to confer protection for the employer, to render enforceable that which would otherwise be unenforceable? There is nothing in the judgment to indicate that shouldn’t be the case. However to further reduce the risk it is probably advisable for employers to have a more extensive exception, permitting limited shareholdings in private companies as well as in listed ones. Second, the court said that severance, the traditional means by which a court can “save” an unenforceable covenant by removing (or “blue pencilling”) offending words, can only be applied to single, standalone covenants. It could not operate within a single covenant, which must stand or fall in its entirety. Right or wrong (and subject to a probable appeal to the Supreme Court), this shines a very bright light on the structure of the covenants in a contract. A series of sub-covenants within one clause may result in the entire suite of covenants being lost if one element of one sub-covenant is considered to be unreasonably wide and therefore unenforceable. A series of separate covenants each within its own clause would likely result in only the single unenforceable covenant being lost but the rest surviving. This may sound like a distinction without a difference (and maybe on appeal the Supreme Court will concur), but based on the Court of Appeal’s decision the structure of an employer’s covenants could have far-reaching consequences for their enforceability. Of course, the safest solution to this potential problem is to ensure that your covenants are well-drafted and reasonable in scope in the first place, but this decision certainly provides employees with a couple more strings to their bows when defending a former employer’s attempts to enforce its restrictive covenants, and employers with food for thought.

Employers would be well-advised to review their restrictive covenants in the light of this important decision, to check that they include a provision permitting limited shareholdings in listed and possibly also private companies, always bearing in mind that aggregating the shareholdings of family members and other associates may be a wise additional step. And employees may also wish to review their contracts as part of their pre-move due diligence if they are considering moving to a competitor, to see if they might be able to make use of this decision should they subsequently come under attack from their former employer.

Mark Watson Partner +44 (0)20 7614 2506 mawatson@foxwilliams.com

What do you know about competition law? It is a reasonable question given:

a recent survey by the Competition and Markets Authority which found that 50% of fashion companies which took part in the survey stated that their knowledge of competition law was somewhere between not good and non-existent; and

a recent judgment by the Competition Appeal Tribunal which upheld a fine for information sharing imposed by the CMA.

It is also a reasonable question given that two months have passed since the CMA sent an open letter to fashion businesses which warned that price fixing and sharing information are illegal. However, recent discussions with our clients have highlighted that price fixing in particular is increasing.

It may be that the pressures on retail are resulting in an increase in price fixing. Alternatively, it may be regarded by brands as a way of responding to the issues raised by the growth of the online channel.

But such factors cannot excuse illegal conduct.

How does the CMA become aware of infringements? This can arise in a number of ways. Sometimes it is through market intelligence sources. In other situations past cases or complaints by third parties can highlight issues that require investigation by the CMA. Arguably, for those engaged in price fixing in the fashion industry, the most worrying source for a business is where a whistleblower (sometimes a disgruntled employee) has decided to avail itself of the leniency programme which exists in competition law by blowing the whistle on others engaged in illegal activity.

Price fixing is one thing. Information sharing is another. The CMA is concerned about businesses sharing information insofar as information sharing often leads to reducing if not eliminating price differentials and, as a result, competition. This was highlighted in the recent judgment of the Competition Appeal Tribunal where the party fined had shared its views on future prices as well as current prices at which it was selling certain products. In seeking to overturn the fine which the CMA had imposed, it argued:

1. that the information which it had shared was too broad to result in prices generally being adjusted in order to reduce competition.

2. exchanging information about prices was neither here nor there insofar as customers would often disclose prices to their suppliers in the hope of obtaining a better commercial agreement.

These arguments did not find favour with the Competition Appeal Tribunal. In particular, the fact that customers provided the same information was irrelevant. Information sharing by suppliers has the negative result of allowing business understandings as to pricing to be confirmed.

Given that it was not so long ago that five fashion model agencies as well as their trade association were fined in excess of £1.5 million for colluding about prices charged for modelling services, the second question is whether lessons have been learned?

Take home points

1. The UK has one of the most draconian competition laws of any country in the world. 2. A fashion business which infringes competition law can face:

a fine of up to 10% of annual turnover. unenforceability of infringing agreements. claims for damages by injured third parties. fines and imprisonment of up to five years for directors and senior managers

engaged in infringing activity. disqualification of company directors for up to fifteen years.

We are hosting our annual fashion law seminar on Thursday 23 November. If you would like to register your interest, please email events@foxwilliams.com.

Stephen Sidkin Partner, Chair of the fashionlaw team +44 (0)20 7614 2505 slsidkin@foxwilliams.com

Luxury brands are celebrating a landmark judgment of the European Court. In a case concerning Coty, the European Court ruled that a clause in Coty’s selective distribution agreement prohibiting authorised distributors from using Amazon to sell Coty cosmetics was lawful in principle. At the heart of the Court’s decision was the principle that discernible third party platforms (such as Amazon and eBay) detract from the luxury image of luxury goods. In contrast, non-discernible third party platforms do not. The Court pointed out that luxury brands have no contractual relationship with, for example, Amazon. As such, Amazon is not required to comply with Coty’s quality criteria which it has imposed on all its authorised distributors under the terms of its selective distribution agreement. In view of the Court’s decision, a luxury brand will be able to enforce a provision in its selective distribution agreement restricting the use by authorised distributors of discernible third party platforms for the resale of its luxury goods where:

the provision has the objective of preserving the luxury image of the goods in question;

the provision is laid down uniformly and not applied in a discriminatory fashion; and

the provision is proportionate in the light of the objective pursued. The Court’s decision can be expected to result in:

1. luxury brands which have suitable provisions in their selective distribution agreement enforcing those provisions in order to clamp down on authorised distributors using Amazon, eBay, and other discernible third party platforms.

2. Luxury brands which do not have such provisions in their selective distribution agreements looking to include such provisions as soon as possible!

3. Amazon, eBay, and other discernible third party platforms looking to have direct

contractual relationships with luxury brands in order to be able to continue to offer such brands on their platforms.

4. In the near future, an increase in the price of grey market products of luxury brands

as grey marketers look to fill the void which has been left on discernible third party platforms.

Stephen Sidkin was quoted in Drapers on this topic. If you are a registered user of Drapers online, please click here to read the article. Stephen Sidkin Partner, Chair of the fashionlaw team +44 (0)20 7614 2505 slsidkin@foxwilliams.com

Commercial skill and artistic flair are often strange bedfellows. A situation where the shareholder/managing director of a successful fashion brand wants to go in one direction whilst the shareholder/design director has other ideas is a regular occurrence. Existing tension between the two shareholder directors is often exacerbated by the belief – or lack of it – that further investment is needed.

With apologies to Jack Nicholson, something’s gotta give. This usually occurs when the managing director seeks investment and agrees that a third party invests money and receives 20% of the company. In the absence of legal advice there is not an agreement between the shareholders in place or bespoke articles of association. The designer feels affronted and disagrees with price at which the shares will be sold.

So what are the lessons to be learnt?

1. “In life, problems are solutions waiting for answers”

A very old cliché but often very true.

In a couple of transactions this year, there were problematic obstacles which could have prevented a potential exit strategy. For example, there was a concern about whether transferring assets out of the deadlocked brand company could be subsequently attacked as a transaction at undervalue. This is where an insolvency official has the right to review recent dubious transactions. After reviewing the assets of the company it was soon apparent that a transfer of the assets was not actually needed, as key customers/suppliers were more than happy to enter into new contracts with a newco rather than having their existing contracts transferred over.

2. Big Characters = Big Challenges

People often get very entrenched in shareholder disputes. Typical examples of these are when directors fall out with other directors or when shareholders no longer trust the board and the direction in which they are taking the company. Often the chief protagonists were initially friends, as well as business colleagues before, so the breakdown of the relationship impacts on several levels.

"Each story has two sides" and "principles are expensive things" are also truisms very relevant in shareholder disputes. Even if a client has a very strong legal position, it is often a case of being pragmatic and looking for common ground and trying to repair a relationship too. Sometimes even an apology will go a very long way to solving a dispute.

3. Carrot and Stick

Often a party can be wearing three hats (employee, shareholder and director) particularly if working for a close knit fashion brand. With a bit of creative thinking, an unhappy shareholder can be encouraged towards a settlement if pressure is applied in the right areas. A bunch of carrots could include:

a favourable tax rate (if entrepreneurs’ relief applies, tax should only be charged at 10% on a share sale);

a possible tax free payment in compensation for loss of office; a relaxation of restrictive covenantsnon-compete obligations; and

an agreed reference and press release (if required).

The sticks are often the reverse of the above with, for example, the threat of removal as a director/employee putting at risk entrepreneurs’ relief. If the company is in financial difficulties, unsurprisingly the threat of bringing in an administrator can have a galvanising impact. Time limiting or otherwise reducing the offer can sometimes also be an effective tactic.

4. Mediation but get the right mediator

If there is a shareholder’s agreement in place, there is often a dispute resolution clause requiring the parties to sit down to try and thrash out a resolution. Often there is an additional obligation to appoint a mediator to assist with the process. Mediators can work wonders in bringing parties together who were polar opposites at the start of the mediation.

On the flip side, there can be mediators who add no discernible value and waste valuable time struggling to understand entrenched positions. It is important that the professional advisors identify the right mediator for the particular set of circumstances and characters in question.

5. Use trusted intermediaries

Sometimes the deadlock can become so toxic that there is no ability to negotiate directly between the parties. In such circumstances, it can be effective for each side to appoint a trusted intermediary who is fully briefed and have a mandate to negotiate an exit from the company without all the emotional baggage also taking part in negotiations.

6. Read the small print

It is important that all the parties review the wording and understand key provisions in shareholders’ agreements and bespoke articles of association such as what consents are required to remove a director; deadlock resolution clauses; what are the quorum provisions for shareholder and director meetings; has the chairman got a casting vote etc.

7. Legal costs can take centre stage

Parties who have been previously arguing over the commercial running of the company can suddenly find another agenda added to their settlement discussions: who pays legal costs (particularly if particulars of claim have been filed)!

Costs can escalate rapidly and there are often legal considerations involved if the deadlocked company is asked to pay the same. Parties should take care that the legal costs do not overtake the value of any potential settlement. Settlement at an early stage obviously reduces this exposure.

8. Check the articles/insurance policy

Sometimes the dispute in question can arise as a result of the actions of a director (as opposed to actions taken by an employee or by a shareholder pursuant to his rights under a shareholders’ agreement). Often towards the end of the articles of association, there are indemnity provisions allowing the director to be indemnified by the company for his action. It may also be that the company has taken out a D&O insurance protection and a costs contribution is available under that policy.

9. Future proof your actions

Sometimes directors will commit to writing proposals that arguably are not in the best interests of their company's creditors or other shareholders. Often there is a misunderstanding that because communication is with the company’s lawyers, such emails will be deemed privileged and not be disclosed. This is not always the case. For example, if the company subsequently goes into insolvency, its appointed administrator/liquidator could legitimately request access to such emails as they are standing in the shoes of the company. Even if a proposal was not implemented, it could provide ammunition if the official is looking at the actions of the board in a wrongful trading, transaction at undervalue, or breach of duty case.

10. Find a way to settle

In post mortems after a deadlock has been settled, clients often express the wish that they wished they had found a way to settle the case at an earlier stage. It follows that getting the parties together (even if it does involve at first separate conference rooms), is always key. Thinking about the future, the wider impact on the brand (particularly if the brand is linked to a key person involved in the dispute) should be at the forefront of minds in such discussions. If a brand is damaged, any investment in the company housing such brand will also be damaged.

Having creative and proactive professional advisors looking to identify middle ground is also essential. They can help and hopefully assist in the early stages of a likely dispute before things escalate.

Sarah Carlton Associate +44 (0)20 7614 2537 scarlton@foxwilliams.com