Addressing Fashion’s Intellectual Property Conundrum

Susan Scafidi in The Business Of Fashion, July 26, 2011

Media Source

LONDON, United Kingdom — When reports first surfaced in March about the striking similarities between Proenza Schouler’s PS1 bag and Target’s Mossimo Messenger, the discomfort within the fashion industry was palpable. What was particularly troubling was that Jack McCollough and Lazaro Hernandez, the design duo behind Proenza Schouler, had a longstanding relationship with Target.

Indeed, in 2007 the designers debuted their capsule collection for Target, part of which they agreed to re-issue for the 2011 spring season. So to make matters worse, when the Target story broke, the alleged knock-off was sitting alongside the re-issued Proenza Schouler for Target pieces, lending a quasi-legitimacy to the offending Mossimo Messenger bag.

Speaking with BoF, Proenza Schouler chief executive Shirley Cook said the impact was deeply felt. “Our relationship [with Target] was based on trust, so of course the [revelation] was particularly upsetting,” she said. “We were attracted to working with Target because we really respect it as an upstanding company, so seeing our product knocked-off in store cut close to home.”

Copying is endemic in the fashion industry. But the effects are particularly acute for emerging designers for whom every sale counts. “The damage actioned by knock-offs is twofold,” noted Gary Assim, partner and intellectual property specialist at London law firm Shoosmiths. “Firstly it robs the designer of the proceeds from the sale of his or her product, which will often have been the result of a considerable research and development investment,” he said. “In addition, it denies the designer the rightful recognition as the original creator.”

While Ms. Cook declined to disclose whether the company is taking legal action against Target, she emphasised that Proenza Schouler is serious about protecting its intellectual property: “For sure, this is something which is very important to us. We are fortunate to have had very knowledgeable people around us from the start, so we are very aware of our rights.”

But how can emerging designers protect and better capitalise on their creative IP? “Intellectual property law offers a raft of rights to fashion designers,” continued Mr Assim. “Some of these will arise automatically, such as copyright, while others require registration, such as trademarks.”

Like the rest of Europe, the UK affords protection to three-dimensional fashion creations through a relatively straightforward design rights system. In practice, designers register a design right for particularly iconic, carry-over pieces that meet the dual requirements of novelty and distinctiveness, while relying on an automatic unregistered design right for other pieces that display the statutory level of originality.

But taking legal action on the basis of alleged infringement can be an onerous process. In the case of an unregistered design, the right holder must present a clean chain of evidence which is not always easy to establish. Moreover, the financial burden is considerable. If the cost of applying for an injunction — typically between £30,000 and £50,000 — is not enough to dissuade an emerging designer from taking action, the unpredictability of the damages system might very well seal the deal. For instance, under UK law an unsuccessful claimant can be held liable for two-thirds of the defendant’s legal fees, meaning that an unfavourable ruling could be a crushing financial blow for a fledgling brand.

In the US, the design patent system has high application costs, long procedural timeframes and an unusually high standard of invention, which means that fashion designers are left unprotected and vulnerable against increasingly bold copyists.

In recent years, the Council of Fashion Designers of America (CFDA) has been campaigning to redress this imbalance and has lent its vocal support to the Innovative Design Protection and Piracy Prevention Act (IDPPPA), a bill that seeks to introduce design protections similar to those which exist in the EU.

Susan Scafidi, professor at Fordham Law School and director of the Fashion Law Institute, emphasised that the IDPPPA, in particular, offers “important protection to fashion designers who struggle to realise return on their creative investments, particularly emerging and independent designers.”

Mr. Hernandez and Mr. McCollough of Proenza Schouler were the latest designers to take to Capitol Hill, arguing that designers should not have to compete with copies of their own work. The industry is watching the proposed legislation with baited breath. But for the time being, the situation in the US is fraught with difficulties, particularly for emerging designers.

“The reality is that taking someone to court is not so easy and super expensive for many new designers,” said Ms. Cook. “If players like Louis Vuitton and Gucci have their hands full protecting their IP then what chance does a young designer have?”

Perhaps the answer is to be found in how emerging designers leverage their intellectual property rights. Entering into brand category extensions and licensing deals provides an ideal long-term platform for additional revenue streams, often at advantageous margins. But these activities typically require high levels of capital expenditure and management oversight.

By contrast, collaborations with mass retailers like Target and H&M give younger brands a unique model with which to easily reap the benefits of their IP, while establishing a contractual relationship with the retailers, which gives designers an easier recourse against retailers in the event of design infringement. Of course, the potential financial upside of these collaborations is also a big draw. To wit, the original Proenza Schouler for Target collaboration reportedly generated $20 million in retail sales within a two-month window, according to Ms. Cook.

But this only shows the importance of recognising creative IP rights as financial assets. “The problem is that generally, there is not enough awareness about intellectual property in the fashion industry and designers will typically become interested in their IP rights only once things go wrong, or perhaps when an investor comes in,” said Tahir Basheer, whose legal practice at London law firm Sheridans focuses on the management, exploitation and protection of intellectual properties across media, entertainment and fashion.

“IP rights are not just about protection against copying,” continued Mr Basheer. “Instead they may be viewed as performing a more subtle function, identifying the creator of content. By adopting an approach more akin to that taken within the media and entertainment industries, fashion brands can reach that next level of sophistication whereby they are strategically managing their IP rights distinctly from their commercial operations.”

“This type of set-up is completely commonplace among [more established] fashion brands,” said Hugh Devlin, a consultant at London solicitors Withers and an advisor to the luxury sector. “Nowadays, it would be foolish for anyone to still have their IP and trading company in the same vehicle, because of course things can go wrong with a trading company.”

Essentially, this mechanism allows the owners of a fashion company to hedge themselves against commercial risk while protecting their firms’ creative IP, ensuring the future strength of their brand identity. In this respect, by appreciating intellectual property rights as stand alone financial assets, the company can better safeguard its primary source of competitive advantage.

Often details of this type of arrangement are disclosed once a company decides to seek external sources of financing — whether through an IPO, a strategic partner or an institutional investor. “Increasingly, investors will insist that the separation be in place,” said Mr Devlin, noting that “of course, investors are hoping they will end up with a stake in the IP vehicle, while designers will be wanting to hold on to that and license it in perpetuity to the trading company.”

It’s time that emerging brands recognise the economic benefits provided by intellectual property law. Indeed, correctly administering intellectual property rights from the very early stages of structuring a business is one of the most effective ways to ensure they are adequately protected and financially exploited down the road.

Ceci Guicciardi is a consultant and writer focused on the interplay between brand, commerce and IP protection in the luxury fashion industry.