California Apparel News

Imagine the following scenario: You have established a newly capitalized apparel design and distribution company with a “unique,” cutting-edge product that has generated retail interest and orders. But soon after your product is on shelves, you receive a “cease and desist” order from an industry conglomerate on a particular pattern, or your mark, demanding you immediately pull all product from stores.

You are certain your design is original— yet your attorney informs you that holding ground and defending an intellectualproperty lawsuit against an industry giant— even if you are right—could be a businessending exercise.

Indeed, the biggest problem with litigation, no matter what kind, is the expense. The American Intellectual Property Law Association estimates the cost of a trademark-infringement lawsuit to be in the range of $700,000 to $1.25 million, just for fees and expenses. The loser frequently also pays damages, including royalties, lost profits and even the opposing side’s legal fees. To enforce intellectual property or defend against accusations is often enough to force a company out of business.

What are your options if you are involved in defending an intellectual-property lawsuit or going after an infringer of your intellectual property?

Ask yourself:

bull;Do you have the funds to defend yourself if you are sued for infringement?

bull;Do you have the funds to institute a lawsuit against an infringer without using operating capital or personal cash?

In most cases, a company’s commercial general liability insurance policy will not cover intellectual property. As a result, many well-established companies will attempt to defeat new competitors by challenging their intellectual property, rather than compete against them in the open market. Fortunately, though, there is an insurance solution.

Intellectual property–infringement insurance provides funds to help pay the fees and costs required to be successful in intellectualproperty litigation. There are two main types of coverage available: One, called “abatement” or “offensive” coverage, helps an intellectual-property holder enforce its rights against an infringer. The other, called “defensive” coverage, helps defend a company if it is accused of infringing someone else’s copyright. The defense policy also will pay for certain damages, if incurred.

Intellectual-property insurance is relatively inexpensive—especially considering the cost of a full-blown lawsuit. Individual policies covering minimum enforcement or defense limits of $100,000 start below $10,000 in annual premiums. The policies can provide limits up to $5 million and offer protection for patents and copyrights, as well as trademarks. Most growing firms choose limits in the $2 million range, with premium costs in the $25,000 to $50,000 range.

These types of coverage are of major importance to companies in the start-up category through the middle-market range of $200 million in revenue. As organizations grow beyond a couple hundred million, they generally can afford litigation, so they choose to “self insure” for the risk.

Other benefits of carrying intellectualproperty insurance are: bull;Your investors will feel safer if you have a policy to help protect their investment in your company.

bull;You will be in a stronger position to negotiate licensing deals.

bull;The pressure to settle rather than incur mounting legal expenses is reduced.

bull;You control the lawsuit and dictate settlement terms rather than the insurance company.

bull;Should the court award damages to your adversary, the policy will pay those damages up to the remaining policy limits.

A Primer on Intellectual Property

bull;Intellectual property refers to ideas—designs, brands, inventions, and the goodwill and reputation of a company. In the fashion industry, this translates to the competitive niche of a company’s product or brand. Intellectual property is traditionally protected by—or granted rights through—the institutions of copyright, patent and trademark. These established rights, however, are uncertain when applied to particular segments of the fashion industry.

bull;A copyright is technically the right to copy. It is granted for creative, intellectual or artistic forms (“works”). This is, by many legal opinions, in contrast to a “useful article.” Apparel is usually deemed to be useful by nature. It covers the body and provides warmth, protection and privacy. A distinctive neckline, unusual curve or ribbing, while creative and eye-catching, rarely warrants protection under copyright law. Jewelry and artistic patterns, which adorn clothes, and other “applied art,” are typically copyrightable.

bull;Patent law generally protects a new invention, process, machine or composition of matter. There are two types of patents: utility patents, which cover the underlying idea or function, and design patents, which protect its ornamental value. This “ornamental design” is defined only by drawings. It protects the novelty of a design. Unfortunately, in order to be patentable, both a utility and a design must be “novel” and “non-obvious.” This tends to limit the merits of patent protection for most apparel. One exception, however, has been in the athletic-shoe industry, in which competitors have used patent protection to their advantage. One of the biggest problems with a patent is the average of two years required to obtain one from the U.S. Patent and Trademark Office.

bull;Trademarks may offer the most viable protection for intellectual property in the fashion industry. A trademark is essentially the identifying factor of a product—a Gucci bag or a Ralph Lauren polo shirt. In both cases, the name of the source of the product is highly valuable. It conveys the reputation, goodwill and strength of the brand and distinguishes the product from competition. Trademark rights can be used in litigation to accuse competition of using confusing logos or names on similar products or of using the reputation of the accuser to increase sales

Robert S. Mahl is vice president/apparel-industry practice leader of Sander A. Kessler & Associates Inc., a Santa Monica, Calif.–based full-service insurance broker catering to an apparel-industry clientele.