For the final installment of The Costs of Starting a Fashion Brand, we look towards what any label will inevitably experience — legal matters. Whether it’s to do with a case where another brand has manufactured products in an extremely similar nature, or even the small details such as registration, people often find it difficult to navigate the legal minefield. Without professional knowledge of legislation and everything it entails, it would not do this part justice if it weren’t from a qualified legal practitioner. We invited Chad Jordan from Moheb Guzman & Jordan Law Firm to provide his insights in the matter, as well as a number of notable names within the industry such as Guillaume Philibert of Filling Pieces and Laurence Chandler of Rochambeau.
Words by: Chad Jordan
The mind of a creative individual is a constantly churning machine. An aspiring fashion designer’s motivation is to pair the right fabrics with the correct color palettes, combined with the precise fit in order to make a wearable work of art. However, as the designer puts the final touches on his latest screen print or stitching his last thread, he is rarely concerned with protecting his design from malicious imitators or opportunistic bootleggers. The brand builder is normally too busy mapping out inventive marketing plans to be worried about potential lawsuits that may threaten their business and livelihood. Granted, the mundane details of paperwork, filing fees and timelines do not stimulate the imagination. Nevertheless, if the fashion designer was armed with the accurate legal knowledge and preparation, he would sleep better knowing he was equipped to handle whatever obstacles were in his way.
Conversely, approaching the legal aspect of starting a brand does not have to be for the sole purpose of warding off illicit situations. Rather, one can approach the task of educating themselves on the legal side of the industry as a way to fully take control of your brand. In other words, the more one knows about all aspects of their brand, the more ability one has to control all possible outcomes, legal or otherwise.
What you may come to realize is that a large amount of fashion law comes from the aspect of identification. Since designing and branding is seen as an art form much like music, several disputes in fashion initiate from “first-in-time” disagreements. Therefore, it is important to know how to register your business as a legal entity in order to protect your company, assets and ideas. Furthermore, the business structure dictates how you and your company will pay taxes and collect profits.
Legal Business Structure
The first step is to classify what kind of brand and business structure that you will have legally. This makes an enormous difference because this will determine how your business will be taxed, how you can raise capital, how your business will be run, and ultimately, how an opposing person can sue you or your business. The following legal business structures are the most commonly used in the fashion industry:
Sole Proprietorship — a sole proprietorship is not considered a separate legal entity. However, it’s important to know that once an individual starts selling their goods and promoting their brand, they become a sole proprietor under the law.
What does this mean? If you are behaving like a business owner by selling goods and receiving profits from those goods, you are personally liable for all debts, losses and lawsuits that come your way (this is also true for a general partnership, in which two or more business owners are equally liable for debts, losses and lawsuits). This means if you are sued, the opposition can go after your personal income. Therefore, individuals who put their items in the stream of commerce seek to protect themselves and their business by registering their business in the following ways.
LLC – LLC is the acronym for Limited Liability Company. LLCs are created and regulated by the local laws and rules in which the business operates. LLC combines the personal liability protection of a corporation and the “pass-through” entity of a partnership.
What does this mean? Essentially, the owners of the LLC are not personally responsible for business debts and liabilities. This means if your company is ever sued in the course of business, generally an opposing force can only go after the funds of the company and not you personally, with some exceptions. Similarly, “pass-through” entities mean all income of the LLC is passed through to the owners of the entity. Therefore, an owner must pay taxes on their share of income.
Considering the flexibility of the LLC, it is easy to see why so many upstart businesses (including clothing brands) choose this legal business structure. However, some disadvantages can emerge from choosing this type of entity, including a reoccurring franchise tax and difficulty raising capital for an entity other than a corporation.
C Corporation – Much like LLCs, C Corporations are created and regulated by local laws and rules in which the business operates. The difference between LLC and C Corporation is that an LLC has owners and partners while a C Corporation has owners and shareholders. The shareholders in the corporation invest a certain monetary amount in the business and are protected from personal liability and debts, up to the amount they invested. Furthermore, the C Corporation is taxed separately from its shareholders.
What does this mean? Basically, if the C Corporation is sued in the course of business, the shareholders are only liable for the amount of money that they used to invest in the business. The C Corporation is subject to what’s referred to as “double taxation,” this means that the C Corporation must pay taxes on the monetary amount it took in that year. However, the shareholder must also pay taxes on the income that they took in from the corporation.
Brands and clothing companies typically choose this option when other individuals chose to invest in their company. These shareholders can simply be investors, who reap the benefits of profits or the ability to manage the business. However, the tax disadvantage and the common cliché of “too many cooks in the kitchen” tend to dissuade upstarts from choosing this option.
S Corporation – An S Corporation is very similar to a C Corporation with one major difference. The S Corporation does away with the highly criticized “double-taxation” of the C Corporation. Therefore, the shareholders are merely taxed on the income or losses from the corporation. The S Corporation does not have to pay an additional tax.
Nevertheless, the S Corporation has more restrictions than a C Corporation or an LLC. For example, S Corporations can only have 100 shareholders; shareholders can only be U.S. citizens and can only have one type of stock. Therefore, S Corporation upstarts are typically narrowed down to brands that have one singular purpose, which can only be carried out in the United States.
Legal in Action
Nobody likes to have their hard work and efforts copied, but what’s the balance between pursuing legal action versus let it slide as it’s not worth it?
Guillaume Philibert (Filling Pieces)
We’ve had tons of experiences where brands copied our silhouettes 100% under a different name. This just happens but we have a strong legal team, so we succeeded in stopping them.
Besides direct copies, of course it also happens that brands are redoing our colorways of past seasons. Even in Amsterdam, there are brands that are very much inspired by what we do, but I see this as a compliment. We started in 2009, there weren’t a lot of independent footwear brands back then. Now you can find new brands almost everywhere. For some reason it became easier to start your own footwear brand.
Tim & Dan Joo (Haerfest)
It is good practice to patent and trademark where necessary to protect the integrity of the brand. However, to fight every battle over knockoffs is just not worth it. For us, time and money is better spent working on our latest and greatest, versus squabbling over legal matters. People are going to steal and copy a great idea no matter what. The only true defense against this is the agility to pivot to the next big thing.
Ouigi Theodore (The Brooklyn Circus)
Having good lawyers on your side that you can afford and keeping a close eye on what can be really damaging or what’s petty. Very good question, the industry needs better regulation.
Terrence Kim (IISE)
We’ve actually found an exact copy of one of our bags but at the end of the day, I know they aren’t able to match the quality, and more importantly, the story behind our brand. Our version is also made with natural dyed fabrics and that’s not so easy to replicate.
Brandon Svarc (Naked & Famous)
We found fakes in Korea and found a lawyer there to threaten the company who was selling them online. They immediately stopped and so it was worth the small cost. Another time, we found fakes in Thailand, but the fakes were so shitty that it was actually funny and we did not consider any legal action. Plus it was in a giant Thai flea market so who the hell were we gonna sue anyways?
Rav Matharu (Clothsurgeon)
I don’t think there is much you can do – look at the high street, some are richer then the fashion houses they copy. We have been replicated quite a lot but just take it as a compliment, we are always evolving and trying to create new product.
We have had to take measures to protect our intellectual property but luckily nothing too serious. There are pitfalls to any success in life and the more recognition we gain, the more imitators there are, and we’re doing our best to manage any possible threats in a professional manner. At the end of the day, we’re just chasing our dreams and doing what we love — creating, skating and staying gold.
Laurence Chandler (Rochambeau)
It comes with the turf and you have to pick your battles. We have experienced at the smaller scale, where we saw the designer of a well-known label attend our show and then a season later, completely mop one of our prints to recently one of the biggest brands in the world take a hand-technique we had been working on. They released it before us because they had the infrastructure to be able to move faster. It comes with the territory and while it never seems to feel like a compliment, the important thing is to not get caught up in the negative and keep it moving.
Have you had any experiences where the legal fees were too much for what was to be pursued?
Luckily this hasn’t happen thus far. Knock on wood!
Tim & Dan Joo
For sure, our past experiences arose from trademark issues with other countries, who shall remain nameless. The problem typically involves trolls who want to be paid for essentially stealing a part of your brand. It’s easy to get pulled in but again, it is not worth it, money and time-wise. We’ve learned the best practice is to always keep proper documentation of all your intellectual property.
We haven’t taken any legal action as of yet.
Not exactly, but it’s the overseas legal issues that frustrate us the most. We are used to having a proper judicial system in USA and Canada. Good luck reasoning with a trademark official in The People’s Republic of China.
Taking a copyright dispute to court is incredibly expensive and can be very risky. Fortunately, a stern letter does the trick more often than not.
The Costs of Starting a Fashion Brand is a six-part series that explores the business aspects of building brands from the ground up. It looks into the intricacies and many of the behind-the-scenes happenings that makes up what the brand is, from formulating business plans to hiring staff, to production costs and distribution. We asked a diverse number of figures in the industry such as Guillaume Philibert of Filling Pieces, Brandon Svarc of Naked & Famous, Benny Gold and more for their experiences on how they managed to develop their respective brands to what they are today.
- Chad Jordan