Designing Within the Law

A Q&A with Silver & Freedman attorney Greg Weisman on protecting trademarks and launching a line within the limits of the law

Attorney Greg Weisman is currently a partner with Century City, Calif.–based Silver & Freedman and chairs the firm’s Apparel Practices Group. Weisman, who began his career with the now defunct Reinis & Reinis, has been advising clients in the apparel business for almost a decade. His clients include wholesalers, retailers, dye houses, converters, contractors, jobbers, showrooms, designers, individual executives and consultants within the apparel industry. Among them are Paris Blues Inc., American Apparel Inc., BCBGMaxAzria, C&C Cos., Chan Luu Inc., True Grit, Freshjive, BC Ethic, Eileen West and Sole Technology Inc.

California Apparel News Manufacturing Editor Claudia Figueroa met with Weisman to discuss some common legal issues apparel companies are up against.

This year we’ve seen some instances of breach of contract, when a valuable player from one apparel company joins a competitor. What are some of the common issues that apparel companies must deal with when employees leave to work at a competing company, particularly designers and executives? What can you do to prevent them from sharing information about your business?

The concept of executives jumping ship, particularly designers or more creative types, is always a hot topic of dispute within the apparel industry. It happens all the time. There are several precautions employers can take during the employment relationship to protect themselves. Unfortunately, if the right steps haven’t been implemented during that time, there is little that can be done.

Individuals have a right to make a living, and California—of all the 50 states—is the most notorious proponent of an employee’s right to change jobs. In fact, it is recognized as a “fundamental public policy” of this state by the courts. It is well-known in California that, with certain exceptions such as when an individual is selling an ownership interest in a business, a “covenant not to compete” after the employment relationship ends is unenforceable.

But the typical scenario is rarely that simple. What if the company is based in another state? What if the contract contains language saying some other state’s law applies? What if “trade secrets” are involved? What if the departing employee is also an officer or director of the former company? Not so easy, all of a sudden. These issues have been hotly contested in the courts, and, not surprisingly, the court’s decisions have not been uniform. The law in this area is constantly evolving, and it would be prudent for any employee to check with counsel before making such a move and for an employer to discuss with counsel its aftermath.

Do you mean that covenants not to compete have no real value?

Even though post-termination covenants not to compete are largely unenforceable in California, courts have held that “non-solicitation” provisions, in some situations, can be enforceable. The cases interpreting these legal doctrines are inconsistent and very factspecific.

Sometimes it comes down to how damaging or egregious the conduct was, whether the customers were commonly known to all or considered trade secrets of the former employer, and what efforts the employee took to set up his new business while he was still on the clock with the former employer, which is a particularly disfavored practice.

Are there any areas within the apparel industry that could be considered trade secrets and thus enforceable?

Unfortunately, determining what constitutes a trade secret is open for debate, although the stealing of a Rolodex, the downloading of computer files (or emailing them to a remote computer) and other similar “takings” of tangible items have been held to be actionable by the former employer, while the simple memory of a phone number or address of a customer that is otherwise easily found by the employee has been held to be fair game. Also, most companies believe that all customer information is a trade secret. However, those cases typically depend on the ease by which that information could otherwise be obtained. If, for example, a company sells products only to four major national retailers and their location information were available in the phone book and not otherwise kept a secret, it is unlikely that that information would be deemed a trade secret. Conversely, if a firm sources all of its leathers from an obscure factor y in the Eastern Himalayas that no one would ever have heard of, that information may be a trade secret, especially if the company employed reasonable means to keep that information a secret.

As you can see, advising clients in this area is difficult, and most apparel companies are frustrated that lawyers cannot give them a black-and-white answer about these problems because one simply does not exist.

What can be done to prevent valuable information from leaving with a departing employee?

While the law is quite employee-friendly in California, there certainly are measures that an employer can take to minimize these risks, and he should consult with company counsel to discuss how to effectively implement them before it is too late.

Some measures that could be taken by a firm to prevent its former employees from causing damage on their way out [include]:

bull; Draft written employments with key personnel—including non-solicitation, trade-secret and other similar provisions.

bull; Take reasonable measures to keep sensitive information confidential, such as stamping “confidential” on each printed page, limiting computer access to those with valid passwords, requiring that such data be limited only to those that have a need to know and destroying the data after a certain amount of time.

bull; Establish a formal “exit interview” as part of company policy with regard to every departing employee, whether such employee resigns or is terminated, so that company property can be promptly returned and employees can be reminded and cautioned about their possible exposure for trade-secret misappropriation if confidential information is used by them at their new firm.

bull; In certain circumstances, it may be appropriate to draft and send a letter to the employee’s new employer warning that such employee may be bringing trade secrets of the former employer to them and cautioning that use of any such trade secrets may subject the new employer to liability. In the case of a designer, such designer will likely have information concerning that firm’s designs, styles, fits, silhouettes and colorways for the upcoming season or year. To the extent that that information is not yet out at market, that information can constitute a trade secret and the new firm may not use such information to its advantage. Unfortunately, as most in the business know, once the styles are at market, unless they contain an otherwise protectable element of intellectual property (such as a copyright or trademark) they are fair game.

What are some of the legal issues startups need to be aware of?

I probably hear from three or four new start-ups each week. The primary advice that I give them is they must budget for legal services as a component of their operational costs—even from the get-go.

Some important legal issues start-ups should be aware of include proper permit and license procurement, establishing the business entity structure, incorporating the company and establishing trademarks early on.

bull; A company may have a hot idea for a new denim line and even a backer ready to throw some money at production. However, most start-ups do not realize that they need to obtain a license from the California Department of Labor Standards Enforcement in order to cause the manufacture of those goods. In consulting with an attorney to obtain that information, all the different labor and employment issues facing garment companies, such as joint liability, the seizing of hot goods, etc., can be addressed. Education of the client of the potential pitfalls is critical to avoid expensive problems down the road.

bull; Most companies get going on a handshake or a deal signed on a napkin, and that is very dangerous. Concepts of percentages, voting rights, stock issuances, etc., are complex legal issues that are too important to sweep under the rug, as they often are at the beginning. Small companies are often desperate to get going, and promises to “take care of” an investor or vendor “when the money starts coming in” are as sloppy and potentially disastrous as they are shortsighted. Issues such as investor rights and capital structure need to be clearly established early on to avoid costly problems down the road.

bull; Though most vendors, lenders and landlords will typically still require personal guarantees from new start-up corporations, it is important to begin the process of liability limitation at an early stage. There is simply no good reason to wait. In fact, in addition to the inherent problems of placing personal assets at risk, incorporating later can have adverse tax consequences on those given stock for “sweat equity” because the stock basis has gotten much higher. More important, counsel should be consulted to discuss exactly what the concept of “liability limitation” means in this context. Many do not understand that it only applies to certain corporate liabilities and that if the requisite corporate formalities are not met, liability protection can be lost.

bull; Most start-ups seek an attorney because they want to obtain registration for a mark that they are already using. This afterthought thinking is dangerous because the selection of a trademark and corresponding search are critical in choosing a mark that will keep you out of trouble. Unfortunately, it is safe to say that most “good marks” have been taken and there are very few English words left that would permit an attorney to be able to give advice that such a mark was completely free from the claims of another party. Trademark law is extremely complex and dynamic, and careful guidance must be made to navigate how one proceeds.

Sometimes, especially with weak or more descriptive trademarks, registration may not be the best alternative. Obviously, attorneys wish their clients to choose strong marks, such as a made-up word or name, but that rarely turns out to be the case. It’s amazing that in an industry that is so creative there could be such a lack of creativity when it comes to choosing a trademark. As an example, I was shocked the other day that even with the well-documented existence of the labels William B., Agnegrave;s B., Arden B. and Frankie B., I read of the emergence of no less than three new “B” labels in the past six months.

Is there any other advice that you would give to start-up companies?

Start-ups would be wise to invest in the creation of written employment agreements with their executives and consultants, salesrepresentative agreements—which are required in several states—and showroom agreements, distributor agreements, contractor agreements and certainly any kind of licensing, joint venture, sourcing or manufacturing agreement with another entity. Again, the key is to provide for a legal budget from the get-go because a little bit of preventative medicine now will keep you out of a very expensive lawsuit later.