Fashion Apparel Law Blog

In-FUR-mation Update: New FTC Enforcement Policy for Retailers

Sheppard Mullin — Tue, 05 Mar 2013 13:05:19 -0500

Fur was a number one pick this winter season, as seen in magazine editorials, designer ads and fashion shows, showcasing its popularity in collections around the world. Whether jacket, purse, parka or boots, the Federal Trade Commission (“FTC”) mandates that all fur products within its jurisdiction comply with the labeling requirements under the Fur Products Labeling Act (the “Fur Act”). The Fur Act governs the manufacture, advertising, selling, importation, transportation and distribution of any fur product in the United States, ensuring that any such product is not misbranded or falsely or deceptively advertised or invoiced. It is important for retailers to be aware of how to comply with the Fur Act and to be up-to-date on the new enforcement policies released by the FTC relating to the Fur Act and its related rules, one of which was issued in January of this year.

In an effort to protect consumers from deception and curb unfair competition in the marketplace, the Fur Act prohibits any fur product in any state from being misbranded or falsely or deceptively advertised. A fur product is considered misbranded if the label does not state (1) the names of the animal that produced the fur (as set out in the FTC’s Fur Products Name Guide), (2) the name of the manufacturer, and (3) the name of the country of origin of any imported furs; and if the fur product (4) contains used fur, (5) contains bleached, dyed, or artificially colored fur, or (6) is composed in whole or in substantial part of paws, tails, bellies, or waste fur. As of March 18, 2011, the FTC mandates observation of such label requirements regardless of the product value, pursuant to the Truth in Fur Labeling Act of 2010, as amended.

The Fur Act, as well as the Textile Fiber Products Identification Act (the “Textile Act”) and the Wool Products Labeling Act (the “Wool Act”), provide retailers with a method to avoid liability where retailers obtain a guaranty or continued guaranty in good faith from the applicable product’s manufacturer, certifying the manufacturer’s compliance with the provisions of the applicable statute; provided that the manufacturer resides in the United States. However, this safe harbor does not cover situations in which the product was directly imported from a manufacturer overseas.

Recognizing the importance of providing protection to domestic retailers that rely on foreign manufacturers’ guaranties, the FTC issued a new enforcement policy as of January 2013, which creates a defense for retailers who rely in good faith on foreign manufacturers’ representations regarding compliance with the Fur Act, Textile Act, and Wool Act. Pursuant to this new policy, the FTC will not initiate an enforcement action against a retailer in connection with the marketing or sale of a product, where the retailer: (1) cannot legally obtain a continuing or separate guaranty from the manufacturer, (2) does not embellish or misrepresent claims provided by the manufacturer, and (3) does not market the product as a private label product. However, it is important to note that the policy excludes retailers that knew or should have known the marketing or sale of the fur product would have violated any of the Acts, or any other applicable law, rule, or regulation.

Thus, the FTC’s new enforcement policy serves to alleviate some of the risk retailers face when selling products containing fur, particularly in light of the potentially large fines resulting from violations of the Fur Act. Moreover, it will allow for an increased reliance on manufacturers, whether domestic or foreign based, placing pressure on manufacturers to ensure that their fur (and textile and wool) products are properly labeled in compliance with applicable FTC statues and regulations.

Spring Cleaning and the H-1B Visa Cap

Sheppard Mullin — Tue, 05 Mar 2013 13:04:48 -0500

By Dawn Lurie

With comprehensive immigration reform on the horizon and the economy rebounding, the number of H-1B visa filings for foreign temporary professional workers is likely to significantly increase this year. American businesses recognize that to compete in the global economy, smart, competitively trained, and diverse talent is critical. In many industries, foreign workers, including H-1B degreed professionals, are an integral part of such a workforce. There are only a limited number of new H-1B visas issued each fiscal year, and how quickly they are utilized is tied to the economy and market demand. For the 2013 fiscal year, the H-1B cap was reached on June 11th 2012, five months earlier than in FY 2012 when it was not reached until November 23, 2011.

Click here to read the article.

"Reforming Retail: India Allows FDI in Multi-Brand Retail"

Sheppard Mullin — Thu, 29 Nov 2012 13:11:17 -0500

On September 14, 2012, the Indian government announced that it would relax restrictions on foreign direct investment (FDI) in multi-brand retail. India—a country that traditionally excluded foreign investment—opened its doors to global supermarkets, such as Wal-Mart and Tesco. While the decision still must clear bureaucratic hurdles, American retailers welcome the opportunity to capitalize on one of the world’s largest consumer markets. On November 27, 2012, India’s federal government indicated for the first time that it may be open to a vote in parliament on the issue.

The economic reform allows multi-brand retailers to invest up to 51% in local ventures. In order to gain access, therefore, retailers must partner with Indian entities. Nevertheless, the potential economic payoff of such a venture is substantial. Whereas once big box retailers formerly could sell indirectly only to smaller Indian outlets, they now have the opportunity to do business directly with Indian consumers. Economists estimate that the relaxed foreign investment barriers will create nearly $3 billion in market opportunity for foreign supermarkets in the next five years, and potentially $80 billion by 2021.

Certain big retailers already are availing themselves to India. Wal-Mart—which had been lobbying for such reform for over two years—will release plans for Indian expansion by the end of the year and could open its first stores within 18 months. Industry analysts expect that Wal-Mart will mimic the development it made in Mexico. Wal-Mart de Mexico, or Walmex, opened in 1997, and by 2003 was Mexico’s largest private employer. Though much of Wal-Mart’s expansion in Mexico was a result of independent factors, such as its close proximity to the U.S., analysts believe it remains a model for potential growth in India.

Multi-brand retailers in India still face several limitations. Most important is that the central government granted individual states considerable power. Each Indian state can decide whether or not to adopt the new economic policy; the cabinet’s approval was simply an enabling policy. To date, only ten states have elected to do so. Once established law, multi-brand retailers can only target cities populated by at least 1 million people. Further, foreign retailers must invest a minimum of $100 million, and at least 50 percent of the total FDI must be invested in back-end infrastructure within three years.

More generally, economists suggest that it will take several years and significant resources for retailers to solidify a footprint in India. Growth comes in small increments, as American retailers must assess regional demand and navigate cultural barriers. Other potential challenges, such as lack of real estate in the designated areas and an underreinforced infrastructure, will demand multi-brand retailers’ patience.

The decision to open FDI to foreign retailers has been met with considerable political backlash in India. Certain constituents of the governing party threatened to break their alliance while opposition parties called for nationwide strikes. India’s parliament adjourned for the fourth straight session this week as opposition members stalled proceedings, demanding a vote on FOI in multi-brand retail. The cabinet approved a similar economic plan last year, but reversed course under weight of such opposition. However, India’s economic stagnation and the steady rise in inflation of the rupee became far too great to ignore, forcing the government to follow through in overhauling its economic policies in September.

Fortunately, the domestic economic impact was immediate and positive: the Sensitive Index (Sensex) rose 443 points to a 14-month high on the day of the announcement, and the rupee went up 1.13% against the dollar. Moreover, additional bureaucratic obstacles have been avoided. The government announced that it will make amendments to the Agricultural Produce Marketing Committee (APMC) Act to enable more efficient connectivity between retailers and farmers. Also, the Reserve Bank—which had previously barred FDI—amended its rules to permit FDI in retail.

The potential for economic growth and profit in the emerging Indian market should remain alluring to major retailers. The current government’s commitment to change, highlighted by steps it has already taken to implement that change, stands firm in the face of opposition. Much of the success of the new policy, however, will rest on the individual states’ willingness to follow suit. These states will follow closely whether the entry of foreign competition will benefit the vast majority of Indians. The influx of retailers may negatively affect domestic traders, but Indian consumers should have a greater access to cheap goods, the lower middle class should attain well-paying jobs, and the local producers of goods should be able to bypass middlemen and sell directly to the retailers. Therefore, the mix of opportunity and activism make the retail reform a welcome sight on the global stage and a needed jolt to the economic policy paralysis in India.

Jovani Fashion, Ltd. v. Fiesta Fashions: Second Circuit Finds Dress Designer's Copyright Claim Weak at the Seams

Sheppard Mullin — Thu, 29 Nov 2012 12:58:35 -0500

On October 15, 2012, the United States Court of Appeals for the Second Circuit issued its opinion in Jovani Fashion, Ltd. v. Fiesta Fashions , Docket No. 12-598-cv, 2012 WL 4856412, holding that the prom dress artwork of fashion designer Jovani Fashions, Ltd. (“Jovani”) lacked copyrightable elements, and thus, could not be infringed by a competitor’s design. Though not a precedential decision, the opinion serves as both an important reminder of the absence of copyright protection afforded the fashion world and a streamlined instruction on the scope of and limits on copyrightable elements in works of fashion.

Appellant Jovani is a designer and manufacturer of women’s dresses, in particular evening dresses, gowns, and prom dresses. In 2010, Jovani obtained copyright registrations for ten catalogs that Jovani claimed showed artwork incorporated in dresses. Later in 2010, Jovani filed suit against several competing manufacturers and retailers, claiming that those manufacturers and retailers created and sold dresses that infringed Jovani’s visual art copyright registrations. One of the parties sued was eventual appellee, Fiesta Fashions (“Fiesta”). Jovani asserted that Fiesta infringed Jovani’s size, design, and arrangement of sequins and bead patterns on the bust portion of Jovani’s dress, the wire-edged tulles added to the lower portion of the dress, a ruched-satin waistband, in addition to the overall compilation, selection, coordination, and arrangement of all elements of the dress.

Fiesta moved to dismiss the complaint, arguing that Jovani’s copyright registrations only accorded copyright protection to two-dimensional images of dresses in catalogs, rather than three-dimensional dress designs, and that Jovani’s allegedly infringed dress was not copyrightable. The District Court (Judge John G. Koeltl) swiftly disposed of the first argument, explaining that “the registration of a catalog as a single work is commonly used to register three-dimensional copyrightable items pictured in the catalog, rather than merely the two-dimensional pictures themselves,” and noted further that the U.S. Copyright Office explicitly directs registrants to submit photographs when registering three-dimensional works, rather than that three-dimensional work itself. In analyzing Fiesta’s alleged infringement of Jovani’s dress, the District Court determined that Jovani’s design failed the established tests for physical and conceptual separability (explained at greater length below), and held that none of the dress’ various elements reflected the designer’s artistic judgment exercised independently of functional influences.

The District Court felt that given the item’s purpose as a prom dress, the design’s decorative or aesthetic qualities did not suffice to trump its utilitarian function of enhancing the wearer’s attractiveness. Additionally, the District Court noted that Jovani had conceded that the individual elements of the dress (such as the pattern of sequins) were not copyrightable in isolation, but Jovani instead argued that its choices, selection, arrangement, and coordination of the dress’ elements were in themselves copyrightable. Unpersuaded, the District Court stated that by admitting that the individual elements were not copyrightable, Jovani undercut any argument that those elements were conceptually separable from the dress. Finding that Jovani’s dress style could not be protected by a valid copyright, and, as a result, that there was nothing for Fiesta to infringe, the District Court granted Fiesta’s motion to dismiss.

On appeal, the Second Circuit (Judges Reena Raggi, Denny Chin, and Susan Carney) affirmed the dismissal of Jovani’s complaint, agreeing with the District Court that Jovani could not state a plausible copyright claim. The Second Circuit began its analysis by stating that it is well settled that articles of clothing are “useful articles” not protected by the Copyright Act (17 U.S.C. § 101, et seq.), despite Jovani’s contention that the design of the prom dress at issue was a combination of features (e.g., the arrangement of sequins and crystals, the satin ruching, the layers of tulle) that could be identified separately from and were capable of existing independently of the utilitarian aspects of the article. The Court explained that 17 U.S.C. § 101 has been construed to afford protection to design elements of clothing “only when those elements, individually or together, are separable -- physically or conceptually -- from the garment itself.” Noting physical separability could be shown where the decorative elements could actually be removed from the original item and sold separately without adversely impacting the item’s functionality, the Court explained that Jovani had not and could not allege that the design elements for which it sought protection could be removed from the dress and sold separately. In other words, removal of the sequins, or satin ruching, or layers of tulle would adversely affect the garment’s ability to function as a prom dress, “a garment specifically meant to cover the body in an attractive way for a special occasion.”

Similarly, the Second Circuit held that Jovani had not demonstrated or could not demonstrate conceptual separability. An element of a clothing item is conceptually separable when it invokes in the viewer a concept separate from that of the item’s “clothing” function and if its addition to the item was not motivated by a desire to enhance the item’s functionality as clothing. As the Court explained, for conceptually separability to exist, it must be evident that the designer exercised artistic judgment independent of functional influences, instead of as a merger of aesthetic and functional considerations. The Court stated that Jovani’s use of sequins and crystals on the dress’ bust, ruched satin on the dress’ waist, and tulle layers on the skirt did not invoke an idea separate from the clothing; those elements were used to enhance the dress as an item of clothing and “the aesthetic merged with the functional to cover the body in a particularly attractive way for that special occasion.” In other words, the sequins, ruched satin, and tulle layers enhance the idea of the dress as a dress, rather than any one of those items serving a distinct and independent purpose.

The Court proceeded to note that clothing, in addition to covering the body, serves a “decorative function,” so that decorative elements of clothing are generally “intrinsic” to the overall function, rather than separable from it. Decorative choices in clothing often merge with how and how much to cover the body. Using the dress at issue as an example, the Court stated that “a jeweled bodice covers the upper torso at the same time that it draws attention to it; a ruched waist covers the wearer’s midsection while giving it definition; and short tulle skirt conceals the wearer’s legs while giving glimpses of them.” Thus, the Second Circuit concluded that the aesthetic and the functional elements were inseparable in Jovani’s prom dress leaving Jovani without a viable copyright claim.

The Second Circuit’s decision, while not a groundbreaking decision in copyright law, certainly underscores the stark boundaries of intellectual property protection for fashion designs, and illustrates some designers’ frustration with the current federal copyright law as it pertains to fashion. But despite such frustrations, the current copyright statutory system attempts to deal with the complex and unique realities of the fashion world, one of constant invention and reinvention; one where past designs can be the new hot thing in a blink of an eye (or the turn of a season, at least). Some have argued that “genius” is often achieved only by standing on the shoulders of prior fashion giants and that a relative lack of copyright protection may serve as a more overall attractive motivation for fashion development than the potential alternative of designers sitting on protected yet underexploited designs. Others have called for a system which protects fashion designs and therefore encourages creation by protecting the results of a designer’s creative efforts in creating fashion designs.

FTC Issues Revised "Green Guides"

Sheppard Mullin — Thu, 11 Oct 2012 15:26:51 -0500

By Robert Magielnicki

On October 1, 2012, the Federal Trade Commission issued revised “Guides For The Use Of Environmental Marketing Claims” – the “Green Guides,” 16 CFR Part 260. The Green Guides originally were issued in 1992 and were revised in 1996 and 1998. The review resulting in the latest revisions began in November 2007.

The Green Guides set forth the FTC’s views concerning environmental claims and are intended to help marketers avoid making environmental marketing claims that are unfair or deceptive and thus violative of Section 5 of the FTC Act. The Guides are administrative interpretations of the law and thus do not have the force and effect of law. However, the FTC can take action under the FTC Act if a marketer makes an environmental claim that is inconsistent with the Guides.

The Guides apply to claims about the environmental attributes of a product, package or service in connection with the marketing or sale of such item or service to individuals or in business-to-business transactions. They apply to claims in labeling, advertising, promotional materials and all other forms of marketing in any medium, whether asserted directly or by implication.

The Green Guides consist of general principles, specific guidance on the use of particular environmental claims, and examples. They begin by reaffirming the FTC’s long-standing position regarding deceptive advertising claims:

A claim is deceptive if it is likely to mislead consumers acting reasonably under the circumstances and is material to consumers’ decisions.
Marketers must identify all express and implied claims that the advertisement reasonably conveys, and ensure that all such claims are truthful, not misleading, and supported by a reasonable basis before the claims are made.
A reasonable basis often requires competent and reliable scientific evidence consisting of tests, analyses or studies conducted and evaluated in an objective manner by qualified persons and are generally accepted in the profession to yield accurate and reliable results.

The Green Guides underscore the FTC’s antipathy to general environmental claims, such as “green” or “eco-friendly.” According to the FTC, such claims are difficult to interpret and likely convey a wide range of meanings. In many cases, such claims convey that the product has far-reaching environmental benefits with no negative environmental impact. “Because it is highly unlikely that the marketers can substantiate all reasonable interpretations of these claims, marketers should not make unqualified general environmental benefit claims.”

The Green Guides also provide that an environmental claim should specify whether it refers to the product, the packaging, a service or just a portion of the product, packaging or service. Qualifications and disclosures should be clear, prominent and understandable. This includes using plain language and sufficiently large type, placing disclosures in close proximity to the qualified claim, and avoiding inconsistent statements. Comparative claims should be clear and substantiated. With regard to third party certifications and seals of approval, the Guides warn that they may be an endorsement subject to the FTC’s Endorsement Guides and that their use must include the specific basis for the certification or seal.

The Guides also provide specific guidance, including examples, for a plethora of particular environmental claims. These include:

Carbon Offsets
Certifications and Seals of Approval
Compostable Claims
Degradable Claims
Free-Of Claims
Non-Toxic Claims
Ozone-Safe and Ozone-Friendly Claims
Recyclable Claims
Recycled Content Claims
Refillable Claims
Renewable Energy Claims
Renewable Materials Claims
Source Reduction Claims

The Green Guides can be found at http://business.ftc.gov.

Game On!

Sheppard Mullin — Wed, 26 Sep 2012 12:09:41 -0500

As companies are presented with the ever-challenging goal of achieving and maintaining brand recognition, many fashion companies are now attempting to engage consumers in both the real and virtual worlds. Gaming represents one non-traditional avenue that has undergone recent growth, as brands find value in connecting with existing and potential consumers through interactive online means.

Members of the fashion industry have historically utilized video games as a way to reach consumers. Some successful fashion and video game partnerships have included H&M and Maxis in connection with The Sims 2, Charlotte Ronson's fall 2009 feature in Nintendo’s Style Savvy, and Xbox’s collaboration with certain brands, such as Roxy, Quiksilver, and Skullcandy, to enable the function of stylized avatars.

Recently, forward-thinking fashion companies are looking beyond video games to explore the world of online gaming as a powerful marketing tool. Fashion Week Live, a Facebook game developed in association with IMG Fashion, is one example. Fashion Week Live provides its players with the opportunity to create and showcase fashionable looks and build a career in the fashion industry through various levels of the game. Similarly, this past summer Aldo launched Shoe Paradise, an online game and contest that involved an end-user guiding Aldo’s avatar through an obstacle course while collecting and trying on shoes, all in an effort to promote the brand’s spring/summer collection.

In addition to its marketing appeal, online gaming has also proven to be a valuable means of facilitating ecommerce. Whereas fashion-based games were once predominately designed for and marketed to young girls, now interactive platforms are increasingly aimed at an older age demographic with the specific goal of driving product sales. For example, Stylmee, a fashion game for the iPad that debuted this past spring, targets women ages 25 to 44. Stylmee offers a multifaceted platform with the interactive element of a video game on one hand, allowing end-users to create style boutiques and test their fashion knowledge, and the functionality of an ecommerce site on the other, allowing end-users to purchase real world versions of the items seen in the game.

Although an unlikely pairing, fashion and interactive games seem primed for success as the innovative use of online gaming for marketing and sales purposes continue to evolve. To discover the range of potential legal issues that surround the area of interactive games, check out Sheppard Mullin’s Law of the Level blog.

Second Circuit Digs Its Heels Into Louboutin Dispute; Finds "Red Sole" Trademark Protectable, But Limited in Scope

Sheppard Mullin — Wed, 19 Sep 2012 12:44:07 -0500

By Tyler Baker and Ted Max

On September 5, 2012, the United States Court of Appeals for the Second Circuit issued its long-awaited and highly anticipated decision in Christian Louboutin S.A. v. Yves Saint Laurent Am. Holding, Inc., Docket No. 11-3303-cv. The Second Circuit reversed the lower court decision, in part, holding that Christian Louboutin’s “red outsole” trademark was valid and enforceable, and affirmed in part, holding that such trademark protection was limited to uses in which the “red outsole” contrasts with the color of the remainder of the shoe. As a result, the appeal of Christian Louboutin (“Louboutin”) was not successful and the fashion atelier Yves Saint Laurent (“YSL”) was not enjoined from using a red sole as part of a monochrome red shoe. The ruling, deciding a novel and hotly debated issue of U.S. trademark law regarding aesthetic functionality, is a victory for both sides in some respects, yet certainly leaves the door open for future debate and lawsuits about the scope of the Louboutin mark’s protection.

Christian Louboutin is known worldwide for its signature red-lacquered soles which have come to be a symbol of high fashion, quality, and style in the realm of high-end women’s footwear. The United States Patent and Trademark Office (“USPTO”) issued a trademark registration and granted Louboutin trademark protection in the “red sole mark” in 2007 based upon a Section 2(d) Declaration demarcating the strength of the fashion world’s recognition of secondary meaning for the red sole trademark. In 2011, YSL introduced a line of YSL shoes which featured a single monochromatic color (meaning the insole, heel, and entire outside were all the same color). Believing that such a monochromatic red shoe would infringe its “red sole mark,” Louboutin brought an action and sought a preliminary injunction to prevent the manufacture, sale and distribution of the monochromatic red shoe, and brought claims for trademark infringement and counterfeiting, false designation of origin, and trademark dilution. YSL counterclaimed, in part seeking cancellation of Louboutin’s red sole mark on grounds that the mark was merely ornamental and functional, citing the doctrine of aesthetic functionality.

On August 10, 2011, Judge Victor Marrero of the United States District Court for the Southern District of New York denied Louboutin’s motion for a preliminary injunction against YSL. In his opinion, Judge Marrero held that a single color can never be protected by trademark in the fashion industry and that, as a result, Louboutin’s trademark was likely not enforceable. The district court ruled that in the fashion industry, single-color marks are per se inherently “functional” (that is, color cannot be used as a brand identifier because it serves significant aesthetic functions unique to the fashion industry), and that any such registered mark would likely be held invalid. Louboutin brought an interlocutory appeal challenging the district court’s application of the “aesthetic functionality” doctrine, and sought to reverse the decision denying that Louboutin’s red sole trademark was entitled to legal protection.

On appeal, the legal issue presented to the Second Circuit was “whether a single color may serve as a legally protected trademark in the fashion industry and, in particular, as the mark for a particular style of high fashion women’s footwear.” The Second Circuit concluded that the district court erred by holding that a single color per se can never serve as a trademark in the fashion industry because such a holding was inconsistent with U.S. Supreme Court precedent on aesthetic functionality and single color trademark protection. After a discussion of the history of both the utilitarian and aesthetic functionality doctrines, the Second Circuit stated that a “mark is aesthetically functional, and therefore ineligible for protection . . . where protection of the mark significantly undermines competitors’ ability to compete in the relevant market.” (Emphasis in original.) The Second Circuit reasoned that Supreme Court precedent did not sanction an industry-based per se rule that would deny protection for the use of a single color as a trademark, in this case, as it related to the fashion industry.

The Second Circuit then observed that, although the red sole mark was ineligible for trademark protection insofar as it would preclude competitors’ use of red outsoles in all situations, including YSL’s monochromatic use, the Louboutin red sole mark had achieved “secondary meaning,” and thus the requisite “distinctness” to merit protection, when used as a red outsole contrasting with the rest of the shoe. Thus, the Second Circuit reasoned that YSL’s use of red color on a monochromatic shoe did not infringe Louboutin’s red sole mark because the use of the red was not a trademark use.

The Second Circuit held that there was no reason why a single-color mark could not acquire secondary meaning in the context of the fashion industry and serve as a brand identifier if it were used “so consistently and prominently by a particular designer that it becomes a symbol, the primary significance of which is to identify the source of the product rather than the product itself.” Citing Louboutin’s substantial advertising and marketing expenditures over the years to foster goodwill in the red sole, and the successful fame and association of the red soles with Louboutin, the Second Circuit concluded that the red outsole had come to identify and distinguish the Louboutin brand, and thus was a distinctive symbol that qualified for trademark protection under the Lanham Act. However, the Second Circuit was careful to limit the mark’s protection to the bottom sole, explaining that the secondary meaning of the red sole mark did not extend to uses in which the sole does not contrast with the upper part of the shoe, e.g., a monochromatic shoe, stating that the Louboutin mark is closely associated with the contrast between the red sole and the upper sole. The Court of Appeals consequently instructed the USPTO to limit the mark’s registration to only cases where the red sole contrasts with the upper part of the shoe. The Second Circuit also stated that “either party may restore jurisdiction” to the Court “to consider whether argument remain or arise relating to this case by sending a letter to the Clerk” and that “[a]ny such proceedings will be argued to [the same] panel.”

The Second Circuit’s decision, while a landmark ruling in the fields of trademark law, fashion law, and to a certain extent, pop culture, leaves a number of questions unanswered. For example, where exactly is the line to be drawn between “contrasting” and “monochromatic”? At what point does a non-infringing monochromatic red shoe become an infringing contrasting shoe with a pink top and red sole? Such highly fact-specific questions may remain on the horizon so long as competitors seek to trade upon the market power and allure of the red sole trademark. If nothing else, the Second Circuit’s decision represents a reasoned compromise: on the one hand, rewarding a company that devoted years and millions of dollars into building a world-known fashion brand, while on the other, preventing that company from overreaching with its color trademark in an industry wholly dependent on the artistic sensibilities, creativity, and ingenuity of its designers.

FCPA Compliance Considerations for the Fashion and Beauty Industry

Sheppard Mullin — Thu, 30 Aug 2012 13:17:28 -0500

In recent years, the U.S. government has vigorously enforced the Foreign Corrupt Practices Act ("FCPA") against individuals and companies representing a variety of industries. Recent press reports suggest that entertainment companies may be the target of current SEC enforcement efforts, and the government is in the midst of a long-running investigation of Avon Products, Inc. Other companies in the fashion and beauty industry should consider how best to protect against violations.

There are a variety of FCPA compliance best practices that companies should follow, regardless of industry. Based on recent enforcement actions, however, and the unique nature of companies in the fashion and beauty industry, several key anti-bribery basics should be considered by any company in the industry:

Set the Tone at the Top. This is probably the single most important element of a successful FCPA compliance program. This is of particular importance in the fashion and beauty industry given that senior managers may be well known and appear publicly on a regular basis. When senior management consistently demonstrates its commitment to compliance, the commitment tends to permeate the enterprise.

Tailored Compliance Policies. It is a basic truth that an effective compliance program must be appropriately tailored to the organization. It needs to work. For companies in the fashion and beauty industry, especially when operating in China and other parts of the world where many companies are owned or controlled by the government, this means there need to be specific procedures related to entertaining government officials and properly recording for such expenses. It is important that those procedures reflect the fact that even small hospitality expenses, such as private fashion shows, may be enough to create potential FCPA liability.

Joint Ventures. Companies in the fashion and beauty industry should have specific procedures on the formation of joint ventures. Prospective partners should be reviewed through detailed due diligence, and obligations and responsibilities under any venture agreement should make clear that an anti-corruption violation constitutes a material breach of the agreement and grounds for termination. It may also make sense to train certain personnel of the venture partner on their obligations under applicable anti-corruption laws.

Third Party Representatives. As in many other industries, agents and other third party representatives for fashion and beauty companies can pose a significant compliance risk. Representatives typically are from the foreign jurisdiction in which business is being conducted, and may be more accustomed to local business practices, which may be questionable under the FCPA. Representatives also may feel detached from the company's compliance culture and program. In addition, even well-meaning representatives may not fully understand their obligations under applicable law.

An agent or other representative can present a significant challenge because of how frequently the representative is likely to interact with foreign officials, whether customers or regulators. To protect against liability, before engaging any representative, it is essential to conduct and document appropriate compliance due diligence. All compliance "red flags" related to a prospective (or existing) representative need to be addressed. Service and other agreements with representatives should include detailed compliance provisions to which the representative is bound. The company should maintain audit rights over the representative's books and records, and commission amounts should be set as low as possible – at the least, in line with local rates. In addition, compliance training should be provided to representatives whenever warranted.

Government Regulation. Certain aspects of the fashion and beauty industry are often highly regulated. This creates ample opportunity for officials to seek bribes or other improper fees in exchange for granting approvals that a company may need to operate successfully.

It is therefore important to be vigilant when dealing with regulators, including tracking representatives' dealings with regulators, to protect against improper payments made to navigate the regulatory process. For any payment made to a regulator, an official receipt from the official's department or agency should be obtained as proof that the payment was authorized under local law. To the extent a regulator requests a particular payment, no payment should be made without proof that the fee or charge being requested is in accordance with local law.

Training. Unless personnel are aware of the law and the company's compliance policies, even the best compliance program will not succeed. Training is essential. All relevant personnel should receive training in some form; personnel who encounter potential FCPA matters on a regular basis should receive in-person training. All personnel attending training should be expected, after training is complete, to have a basic understanding of the law and know about internal company resources, e.g., the general counsel or the chief compliance officer, to whom questions or concerns can be addressed.

In certain circumstances business people, after receiving in person training, should be expected to lead subsequent trainings in their offices. This is a way to invest the business side of the operation in the compliance process.

Monitoring. The goal of a successful compliance program is to both prevent and detect possible violations. While there will hopefully be far more of the former, the latter – possible violations – is almost inevitable at least on occasion. It is therefore important to have an effective means of monitoring. In particular, personnel should be expected to watch for possible compliance "red flags" and be obligated to report any such issues to the chief compliance officer, general counsel, or other senior compliance official. To the extent there are violations, mitigation steps will be necessary to minimize whatever damage was done and to protect against similar action in the future.

In addition to regular monitoring – a responsibility of all company personnel – the audit or legal department of the company should periodically engage outside counsel or other service providers to help develop and implement a more broad-based compliance audit. This will check both for specific problems and for deficiencies in the systems or policies that should be addressed.

In the current era of aggressive enforcement, a pro-active compliance strategy is an effective defense against potential problems. No compliance program is perfect, but ensuring steps such as those above are incorporated into your compliance program will help protect against violations and may mitigate them if – and when – they do occur.

Beauty and the Bunny

Sheppard Mullin — Thu, 16 Aug 2012 09:12:57 -0500

A wave of shock and unpleasant surprise is spreading amongst consumers of beauty products and cosmetics in most of the Western world as many big-name beauty brands are accused of going back to animal testing in order to fulfill the legal requirements of the cosmetics market in China. The fever to expand market share has hit broadly, as the reversal of years of progress in suppressing animal testing also affected high-end international brands that lost their "Leaping Bunny" logo, which ethical guarantee is overseen by the Coalition for Consumer Information on Cosmetics, and assures purchasers that their favorite beauty brand does not resort to animal-testing in the elaboration of its products.

Many companies had a perfect record until last year because they always claimed to resort to animal tests "only when necessary". However, most of the brands that have come under scrutiny have already seen their financial situation improve as they expand into China and profit from its emerging middle-class market, overcoming their desire to be bunny-branded. Indeed, in order to bring cosmetics to the 700 million potential female consumers in China - responsible for the 18 percent surge in beauty sales last year, reaching around $15 billion - companies have to comply with the Chinese legal requirement of animal testing for greater human safety.

Not all companies have put profits above principle: U.S. Urban Decay and U.K. Paul Mitchell both took a stand against this testing step back - the first opted for a cancelation of its plans to enter the Chinese market and the latter for a suspension of sales in China in 2011. Such techniques are designed, according to company executives, to put outside pressure on the Chinese government and provide an incentive for change.

Bunny-less companies have tried to justify their actions in the same way, arguing - as did Caudalie's founder Mathilde Thomas - that by operating within the country, they would be in a privileged position to foster progress in local legislation regulating animal testing. Unfortunately, companies agreeing to sell in China may not be the ones directly performing tests on animals, but they are still giving Chinese researchers the financial resources to do so since it is only a short hop away from actively funding tests that include using unsafe chemicals in rabbits' eyes or monitoring irritation on their skin.

This heated controversy has generated powerful reactions. It has become apparent that pressure is not likely to come from Chinese consumers, which makes the international campaign against animal testing even more necessary. The European Coalition to End Animal Experiments (ECEAE), the American Anti-Vivisection Society and the British Cruelty Free International have all openly stated their outrage. This then stimulated some non-complying companies to take steps in working with their Chinese counterparts towards implementing substitutive methods, not requiring animal testing. Specialized institutes such as the Institute for In Vitro Sciences have stepped forward to help Chinese researchers train and learn these new cruelty-free techniques. China has accepted this international help in training and grants as part of its five-year plan, recently developed by Chinese authorities.

Other countries have tried for years to tackle the problem of animal testing. In 1998, the U.K. banned the practice and paved the way for a larger E.U. initiative in 2003. The two-stage process was to prohibit first "acute" animal tests (e.g., lethal poisoning, eye tests, skin irritation tests, etc.), and then focus on the remaining tests. This second stage was set to come into force in March 2013, but the E.U. is now considering taking a leap backward and possibly postponing the full ban for 10 years - by use of the European Commission's small print right to revise the law. Similarly in the U.S., the Safe Cosmetics Act was introduced in 2011, but has not yet been adopted into law.

For now, charities are left with lobbying for ethical practices against China's attractiveness due to the size and weight of its market. The People for the Ethical Treatment of Animals (PETA) Foundation indicated that there were welcoming signs of progress in China, signaling that hope is kindled.

Original Sin: Complying with Country of Origin Laws

Sheppard Mullin — Thu, 09 Aug 2012 08:50:42 -0500

Congress recently introduced the whimsically titled bill, the “Team U.S.A. Made in America Act,” which would require the United States Olympic Committee to ensure that ceremonial uniforms for the Olympic team are assembled in the United States with fabrics manufactured in the United States. Regardless of whether clothing is made in or imported to the United States, current U.S. Federal regulation requires that clothing bear its country of origin designation. Currently, around 98% of all clothing for sale in the U.S. is imported.

Textiles claiming to be “Made in the U.S.A.” are regulated by the Federal Trade Commission (“FTC”) and the Lanham Act, while imported articles are regulated by the U.S. Customs Service (“Customs”). The country of origin requirements become confusing when a product undergoes many different manufacturing processes in different locations, consists of parts from many different countries, or both. For the manufacture of garments, the material from which the garment is made may be cultivated and harvested in one country, drawn and spun in another, and then woven, dyed or finished in any number of other places. For this reason, retailers should be aware of applicable law before a country of origin claim is affixed to any of its garments.

Section 304 of the Tariff Act of 1930 (19 U.S.C. 1304) requires that products and packaging imported into the United States be marked “legibly, indelibly, and permanently” to indicate to the “ultimate purchaser the English name of [its] country of origin…” When an imported product involves elements or processes from more than one country, the country of origin is the last country in which a "substantial transformation" took place. A “substantial transformation” is defined as any “manufacturing process that results in a new and different product with a new name, character, and use that is different from that which existed before the change.” Meeting this test is decided by Customs on a case-by-case basis, and Customs issues letters of guidance to manufacturers on the interpretation and application of the regulations it enforces. The FTC’s jurisdiction over foreign origin claims relating to products and packaging extends beyond that of Customs, even covering marketing materials related to foreign and domestically produced goods. Promotional materials for textile and wool products, such as catalogs and Internet copy, must state whether a product is made domestically, abroad, or both.

For a product to bear a U.S. country of origin label without limitations or qualifications, the product and all of its constituent parts must entirely originate, or substantially originate, in the U.S. Any company claiming that its product originates in the U.S. must be able to provide reasonable and reliable evidence for the claim. In examining a U.S. origin claim, the FTC will look at the percentage of manufacturing costs that are attributable to U.S. materials and processes, and also the extent to which any foreign countries played a role in the product’s manufacture. Additionally, the Textile Fiber Products Identification Act and Wool Products Labeling Act require that a textile include a “Made in the U.S.A.” label if the final product is “manufactured in the U.S. of fabric that is manufactured in the U.S.” By contrast, a textile or wool product partially manufactured in the U.S. and partially manufactured in another country must be labeled to identify foreign and domestic countries of origin.

Regulations similarly focus on the location of manufacture when determining country of origin for labeling purposes. Consider the example of a T-shirt that is made from American-grown cotton, but assembled in the Dominican Republic. Pursuant to Customs Regulation § 10.22, Customs Regulations (19 CFR 10.22), assembled articles are products of the country where the assembly occurs. Therefore the T-shirt’s country of origin is the Dominican Republic, although the company could affix a label to the T-shirt claiming that the T-shirt’s materials originate in the U.S.

The consequence of improperly labeling products is considerable. Failing to label a product correctly is considered fraudulent activity by the FTC. The FTC recommends that consumers contact their respective state’s Attorney General or Better Business Bureau to report mislabeling, and courts have found that state law claims for false labeling are not preempted by Federal law. Additionally, the Lanham Act enables a company’s competitors to assert claims against the company for false designations of a product’s origin.

With this newfound focus on promoting American-made products, it is important to note that the identification of a product’s country of origin to consumers is a well-regulated area. Moreover, there has been a resurgence of public interest in domestic textile manufacturing, as evidenced by the recent crowd funding success of “Flint & Tinder”, a startup retail company that promises consumers a quality American-made line of men’s underwear. The startup aimed to raise $30,000 and has received nearly $300,000 from donors to date. The Team U.S.A. Made in America Act and the crowd funding phenomenon both demonstrate that making apparel in the U.S. resonates with consumers. Studies have repeatedly verified the relationship between consumer perception of product quality and the perceived country of origin, and many consumer activist groups in the U.S. exist specifically to promote the purchase of domestically made products.

Therefore, whether the retailer is a startup funded by online investors or a major apparel brand, the specter of overlapping liability under Federal law and general U.S. consumer perception regarding products’ origination ensures that compliance with Federal regulations concerning the labeling of clothing is a sound investment.

Men, Makeup and Drugs

Sheppard Mullin — Tue, 10 Jul 2012 10:52:10 -0500

Men’s grooming and beauty products, namely cosmetics for men, continue to experience yearly growth. The forecasts of one research firm predict that sales of men's toiletries will hit $3.2 billion by 2016, up from $2.2 billion in 2006. Sales of men’s skin care products like facial cleansers, moisturizers and exfoliants grew more than fivefold from 1997 to 2009, to $217 million from $40.9 million. Increasingly, men are dabbling in concealers, moisturizers, masks, serums and a host of other cosmetic products that were formerly considered to be exclusively for women. Retailers have experienced the most success with cosmetic products for men that have masculine, but non-descript packaging. So while the marketing of cosmetics and beauty products for men is gaining traction and holds promise for new entrants, the legal challenges in bringing a new cosmetic product to market are complex and merit legal attention.

The cosmetics industry in the U.S. is regulated by the Food & Drug Administration (“FDA”). Under the Federal Food, Drug, and Cosmetic Act (“FD&C Act”) cosmetics are, “articles intended to be rubbed, poured, sprinkled, or sprayed on, introduced into, or otherwise applied to the human body . . . for cleansing, beautifying, promoting attractiveness, or altering the appearance.” This definition includes moisturizers, perfumes, lipsticks, fingernail polishes, eye and facial makeup preparations, cleansing shampoos, permanent waves, hair colors, and deodorants, as well as any substance intended for use as a component of a cosmetic product (but not soap, which is governed under different rules).

The FD&C Act also governs the manufacture and marketing of drugs. A cosmetic will also need to comply with the requirements for drugs if it is “intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease” and “articles (other than food) intended to affect the structure or any function of the body of man or other animals.” Under this definition, a cosmetic that addresses a malady, such as dry skin, or affords protection, such as SPF in sunscreen, will also qualify as a drug. By illustration, dandruff shampoos, toothpastes with fluoride, and deodorants with anti-perspirants are simultaneously cosmetics and drugs and therefore must comply with FDA guidelines pertaining to both.

Since the FD&C labels substances as cosmetics or drugs according to use, it is important to understand the principles that determine use. Claims about a product in its marketing materials may change the product’s classification from a cosmetic to a drug. For example, a product called “Line Away Temporary Wrinkle Smoother” was found to violate FDA regulations because its advertising claimed: “Line Away is not a face lift, not a treatment. It's a clear protein cosmetic. Contains absolutely no harmful chemicals, no hormones.” Line Away in fact was a solution of Bovine Albumen that formed a film when it dried on the skin. As the film dried, it tightened the skin as a mechanical side effect. Despite its purely mechanical effect that had no lasting impact on the structure of human skin, the court found that the product’s reference to protein “strongly reinforces the impression that this is a therapeutic product, the protein content of which has a tonic or otherwise wholesome physiological effect upon the skin itself.” While advertisers often engage in puffery, claims about a product that make it sound more traditionally therapeutic will transmogrify an otherwise wholly cosmetic product into a drug in the eyes of the FDA.

Assuming a cosmetic product avoids any complication from exhibiting drug-like uses or properties, it does not need to be approved by the FDA before it goes to market (with the exception of products containing certain color additives). Drugs, by contrast, must receive premarket approval through the New Drug Application (NDA) process or conform to a “monograph” for a particular drug category, as established by FDA's Over-the-Counter (OTC) Drug Review. Receiving FDA approval for drugs is a complex process in its own right and is outside the scope of these materials.

A cosmetic product must not be introduced into interstate commerce if it is adulterated or misbranded in any way. “Interstate commerce” applies to all steps in a product's manufacture, packaging, and distribution. Adulteration can include: bearing a poisonous substance; consisting in whole or in part of any filthy, putrid or decomposed substance; or being packed or prepared in a way that it could become contaminated with filth. Misbranding a product can include: false or misleading information or packaging; failure to follow labeling laws; or poor readability of required information. Cosmetic products must comply with labeling regulations outlined in Title 21 of the Code of Federal Regulations, parts 70-740. Any false or misleading statements on the label or the failure to comply with the labeling regulations will expose the supplier to liability for false advertising and any number of FDA enforcement actions. The agency may: request a federal district court to issue a restraining order against the manufacturer or distributor, seize the goods in question, or file criminal charges against a person violating the law.

Additionally, no cosmetic may be labeled or advertised with statements suggesting that the FDA has approved the product. The label must display the nature and use of the product, and a statement about the product’s quantity of contents. A cosmetic firm does not have to test the safety of any of its ingredients so long as it displays a warning on the product, disclosing its untested status. That said, a supplier is ultimately responsible for the safety of its products and any ingredients used in its products. Additionally, there are some ingredients that are specifically off limits for cosmetic use, and the FDA maintains such guidelines.

Selling cosmetic products en masse to men will remain a challenging but steady growth opportunity for the industry. Companies looking to enter this market must use caution in the marketing, formulation, and labeling of their products, lest their solely cosmetic product ends up in the regulatory thicket of the FDA rules governing drugs. In addition, in order to keep operations unblemished, companies looking to cash in on the men’s grooming renaissance should use care to avoid embellishments in their marketing claims.

If It's Neon, Should It Be On?

Sheppard Mullin — Fri, 29 Jun 2012 12:54:30 -0500

As summer is upon us, rebellious trend seekers can toss their black nail polish and opt for a shade of neon orange, green or pink. This season’s en trend nail polish includes a color palette of neon hues that are rumored to be illegal in the U.S.. Contrary to recent alarmist headlines, it is not illegal to physically wear shockingly bright neon nail polish. However, it may be difficult to locate a truly neon polish at your local beauty store, since nail polish that includes neon coloration fails to comply with FDA regulation.

Although cosmetic products do not require FDA approval, color additives contained in cosmetics must be submitted to the FDA for approval prior to reaching the U.S. consumer marketplace. To pass FDA scrutiny, the tested color additive must meet composition and purity requirements, and there must be a reasonable certainty that the color additive will not be harmful when the product containing such additive is used for its intended purpose. A color additive that clears these safety hurdles is issued a certification lot number, which enables it to be used in FDA-approved products for their respective, specified uses.

Approved color additives are comprehensively indexed in the Code of Federal Regulations with an accompanying detailed description that specifically outlines the color additive’s requisite chemical composition, temperature and proportion of ingredients. A true neon nail polish includes artificial color additives with distinct chemical compositions that do not pass the FDA test. One such additive is Yellow No. 5, which causes an allergic reaction in rare instances. Because of Yellow No. 5 and other similar additives commonly found in neon colorant, U.S. companies have chosen to refrain from investing the time and expense necessary to ensure FDA approval for the manufacture of neon nail polish. Thus, for those of us in the United States, the freshly painted neon colored nails we’ve seen on runways and streets alike are not likely neon at all, but rather a bright hue imposter.

While headlines claiming “if it’s neon, it shouldn’t be on” oversimplify the legal framework underlying the brilliant cosmetic trend of neon nail polish, there is a shade of truth to these colorful stories. The FDA has broad authority to enforce violations of its approval procedures that can dramatically impact a company’s sales through seizure and/or recall of goods, whether such action occurs during manufacture, sale, or upon U.S. entry at Customs. Thus, the prudent cosmetics enterprise will be sure to avoid running afoul of the FDA by including color additives in its products that are cleared for use when targeting the ever fashionable U.S. consumer.

Fashion Film Art Movement

Sheppard Mullin — Thu, 14 Jun 2012 11:44:28 -0500

By Victoria Lee and Ted Max

In this hyper-digital age, the designer brand's focus has gradually shifted from primarily print advertising media to reaching consumers through the Internet and many forms of social media with branded entertainment in the form of short fashion films. The fashion film trend pairs fashion brands with famous directors and actors to produce beautiful and easily-accessible short films, which feature the brand and highlight certain seasonal fashion designs or product lines. These films impact an advertising and marketing message while also appealing to consumers’ artistic sensibilities.

One recent example is the recent Prada short film entitled, "A Therapy” by Academy Award winning director Roman Polanski that debuted at the Cannes Film Festival on May 21, 2012. This three-minute film about a Prada-clad Bonham Carter’s therapy session with Sir Ben Kingsley playing the analyst was shown before the screening of a restored version of Polanski's 1979 picture Tess. Polanski described the short film as “sort of an anti-ad.” Polanski commented that he was given "total freedom" by Prada, observing: “The chance to dwell on what the fashion world represents nowadays and the fact that it is accompanied by so many stereotypes is fascinating and at the same time a bit upsetting, but you definitely cannot ignore it. It’s very refreshing to know that there are still places open to irony and wit and, for sure, Prada is one of them." Roman Polanski’s Prada short has averaged over 233,000 views per week on YouTube.

This trend has been growing in recent years. Shorts serve as strategic advertising vehicles because of their versatility and easy access and wide reach through the Internet on branded websites, sites such as YouTube, and through social media. Many fashion companies have recently showcased fashion short films or advertisements directed by famous directors. Academy Award winning director Martin Scorsese directed a short film for Chanel that was also used as an advertisement for Chanel's new Bleu de Chanel fragrance. The film featured Frenchman Gaspard Ulliel (of "Hannibal Rising") and a Rolling Stones song for the soundtrack. (Robert Darwell, Martin Scorsese Directs Television Commercial to Promote Chanel's Next Men's Fragrance, Fashion and Apparel Law Blog, Feb. 26, 2010, http://www.fashionapparellawblog.com/2010/02/articles/ miscellaneous/martin-scorsese-directs-television-commercial-to-promote-chanels-next-mens-fragrance/). Other prior Chanel advertisements have featured Nicole Kidman for Chanel Number 5 directed by Baz Lurhman and Keira Knightly for Coco Mademoiselle directed by Joe Wright. Gucci released a three-dimensional advertisement for its Gucci Guilty fragrance starring Evan Rachel Wood directed by Frank Miller of "Sin City” fame. The full "film" debuted at the MTV Video Music Awards. Recently, Zoé Cassavetes directed a short called "Hide and Seek" for which she took Louis Vuitton’s summer apparel designs on a romp through London. Sofia Coppola and David Lynch have directed advertisements for Dior's Miss Dior Cherie fragrance and Lady Dior handbags, respectfully; Inez van Lamsweerde and Vinoodh Matadin directed “Secret Garden,” which features models running through Versailles wearing Dior’s spring collection. Dolce & Gabbana has paired up with William Zanardi to highlight its 2012 spring and summer collection at a Milanese estate. Some other brands that have produced such fashion shorts are H&M, Christian Louboutin, Cartier, and Levi’s.

Negotiation of the contracts for these films are more complicated because the short films may be characterized as both a film and an advertisement. Typical experience with talent contracts alone may not suffice when the advertisement can be considered a motion picture. Due to this potential ambiguity, care needs to be taken to consider and understand how these differences may implicate different usages and rights negotiations.

@theForefront: The Celebrity Fashion Tweet

Sheppard Mullin — Wed, 02 May 2012 10:56:45 -0500

Perhaps the most remarkable feature of the current hyper-digital age is the ever-shrinking gap between the celebrity and everyman. Nowhere is this phenomenon more apparent than in the realm of the celebrity tweet. Twitter, the pervasive microblogging website, promises thrilling accessibility to prominent public figures, particularly in the entertainment realm. By providing seemingly unrestricted access in 140 characters or less, Twitter affords a “candid” glimpse into the day-to-day life of a celebrity that previously had been reserved for publicist-controlled edited interviews. Twitter purports to permit celebrity access that is both instant and raw, in form and in content.

From its inception in 2006, Twitter has become an important promotional vehicle for public figures and businesses alike. With followers of many A-list celebrities soaring well into the millions, the commercial impact of Twitter is undeniable. Recently, Madonna and Britney Spears traded genial tweets about one day reuniting for a performance in an exchange that might have been intimate had it not occurred in front of a Twitter audience of nearly sixteen million (their combined number of followers) – their conversation strategically coinciding with the launch of Madonna’s new "Truth or Dare" fragrance.

In addition to strengthening consumer loyalty, Twitter offers retailers a unique mass marketing tool to reach specific untapped demographics. Meanwhile, for celebrities, Twitter has heralded the arrival of a new endorsement revenue stream. The Kardashians have reportedly received thousands of dollars per tweet to endorse anything from Old Navy products to the services of ShoeDazzle.com, a fashion start-up whose affordable Shoe-of-the-Month business model is appealing to fans aspiring to attain a Kardashian-like lifestyle.

While Twitter may generate significant consumer awareness and business, it also raises important legal issues. For example, relying on the fact that the relationship between advertiser and celebrity is nearly indistinguishable, the FTC found that Twitter presented an unprecedented risk to consumers by way of deceptive advertising practices. Therefore, celebrities must comply with the FTC’s disclosure requirement, ensuring that their relationship with an advertising retailer is clear, even if such disclosure merely includes a hash symbol and the word “ad” at the end of their endorsing tweet such as "#paid ad", "#paid", or "#ad". Such a disclosure must be made when a celebrity endorses a product in exchange for compensation in any form, whether monetary or not. From a retailer’s perspective, this all but defeats the intrigue that once attracted fashion-marketing visionaries to utilize Twitter in the first place, turning away from the traditional path of discreetly providing celebrities with free products in the hopes their products would be captured in the following week’s tabloids. For a celebrity, the onus is, for the first time, on them to comply with FTC Endorsement Guide.

Despite the aforementioned marketing requirements, which may limit its potential, Twitter has dramatically altered business as usual in the fashion, apparel, and beauty sphere. In the transactional context, recent celebrity appearance agreements now contain clauses in which Twitter use is a negotiated deal point, requiring an attending celebrity to not only mention but to excitedly endorse an event, often with contractually-specified language and certain subject hashtags determined beforehand. Indeed, Twitter provides a new form of brand promotion through the use of celebrity that remains unparalleled to date. Perhaps the most evocative illustration of this power arrived at the 2012 Academy Awards, in the form of an Atelier Versace-clad Angelina Jolie, glamorous to the point of caricature, stylized and posing. The Twitter handle in homage to her look, @angiesrightleg, amassed 10,000 followers within its first hour.

The National Football League Decides to "Just Do It"

Sheppard Mullin — Mon, 09 Apr 2012 16:13:28 -0500

Though the news of Nike's exclusive deal with the NFL broke some time ago, the agreement will officially go into full effect this month and the look of Monday Night Football is about to change. Replacing adidas, this will be the first time that Nike, who was a NFL supplier in the mid-nineties and has maintained individual deals with players, will exclusively supply all 32 teams. The deal, for which Nike reportedly paid $1.1 billion dollars, covers the entire player's uniform including jerseys, belts, pants, socks and gloves.

Nike recently made some very innovative changes at the college football level and is hopeful to bring the same positive change to the professional arena. Major redesigns to the former uniforms are taking place and it was from the players that Nike got both suggestions and inspiration, for example many of the uniforms will feature a more formfitting design allowing the players better mobility. Earlier this year, Nike pitched each team methods of improving their jersey though some teams were unable to make many changes because of the NFL rule that states a teams jersey can only be changed every 5 years. For teams not bound by this rule, including the Seattle Seahawks, the players of the 2012 season will look noticeably different when running onto the field.

Fans will be able to buy the newly designed jerseys at the end of April, timed perfectly to coincide with the NFL draft. As of February 29th, Nike has already seen a 16% jump in apparel sales and this deal is estimated to yield Nike over $350 million dollars in profit. We have all heard the adage "the cloths make the man," and this fall we will see if Nike has found the key to the uniform making the football player.

Louis Vuitton Achieves Genuine Victory Over Flea Market's Phony Sales

Sheppard Mullin — Mon, 26 Mar 2012 11:52:29 -0500

By Tyler Baker

Luxury brand titan Louis Vuitton recently achieved a significant victory over counterfeiting of its designer products. In an action brought in the U.S. District Court for the Western District of Texas, Louis Vuitton sued the Eisenhauer Road Flea Market, its owner, Bruce L. Gore, and its manager, Patricia D. Walker, for contributory trademark infringement, alleging that the defendants had failed to prevent vendors from selling fake Louis Vuitton goods at the flea market. See Louis Vuitton Malletier v. Eisenhauer Road Flea Market, Inc., No. SA-11-CA-124 (W.D. Tex.). Louis Vuitton stated that counterfeit “LV” products were abundant at the flea market and that Louis Vuitton had given Gore and Walker sufficient opportunities to discipline their vendors that engaged in phony sales. Louis Vuitton alleged, notwithstanding this notice, that Gore and Walker chose to be “willfully blind” to such infringing activity. Gore testified that he warned market tenants not to sell counterfeit goods, only to have those vendors nonetheless engage in distribution of bogus items after they said they would not.

On January 12, 2012, a unanimous jury found in favor of Louis Vuitton, deciding that nine trademarks were infringed, and awarded $400,000 for each mark. On January 31, U.S. District Court Judge Harry Lee Hudspeth entered a judgment in accordance with the jury verdict which was, if nothing else, comprehensive in its scope of remedying the situation for the present and future. In addition to finding the defendants jointly and severally liable for $3.6 million in compensatory damages, the judgment also permanently enjoined the defendants from further acts of contributory trademark infringement with respect to the Louis Vuitton trademarks. Specifically, the defendants were ordered not to lease space to tenants whom the defendants know, have reason to know, or have been presented with credible evidence that are selling or distributing products bearing counterfeit Louis Vuitton trademarks. The defendants themselves also were banned from selling Louis Vuitton counterfeits and engaging in any conduct which would contribute, directly or indirectly, to counterfeiting of Louis Vuitton trademarks by flea market tenants. The Court’s order went further, requiring the defendants or their agents to conduct periodic inspections of the booths maintained by flea market tenants to guard against Louis Vuitton counterfeits, and to post signs at each market entrance warning lessees and the public that the tenants were not authorized to sell Louis Vuitton merchandise, and that doing so was a criminal offense. The judge also required that all future lease agreements for the flea market expressly prohibit the sale of Louis Vuitton counterfeits, and permitted Louis Vuitton representatives or agents to conduct unannounced random inspections during normal flea market business hours to search for Louis Vuitton fakes.

In response to the Court's order, the flea market accused Louis Vuitton of forcing the flea market to do the luxury brand’s job, i.e., enforcement of Louis Vuitton trademarks, and that the company had other means by which to police counterfeiting, e.g., by alerting law enforcement agencies or by pursuing the vendors directly in civil or criminal court. Louis Vuitton responded that the flea market was infested with counterfeit merchandise and that the defendants simply turned a "blind eye" to the counterfeits.

This case should send a powerful message to commercial landlords of flea markets who suspect or have been warned that phony designer merchandise is being sold on their premises. While Louis Vuitton noted that suing the flea market was an extreme measure taken only once such measures are deemed necessary, this case should serve as a warning that established luxury brands, such as Louis Vuitton, police their marks vigilantly against contributory infringement, whether it be in the physical world or cyberspace.

Louis Vuitton already secured an important victory against online contributory trademark infringement where the defendant provided web-hosting for numerous websites that sold counterfeit Louis Vuitton products. See Louis Vuitton Malletier, S.A. v. Akanoc Solutions, Inc., 658 F.3d 936 (9th Cir. 2011). In Akanoc, Louis Vuitton sued the defendant for contributory trademark and copyright infringement and counterfeiting after the defendant failed to end service for the infringing sites, despite eighteen notices of infringement from Louis Vuitton. The trial and appellate courts found the defendant liable for contributory copyright and trademark infringement because of the way it had guided web users to the infringing sites and exercised direct control over and monitored the websites. The Akanoc case is analogous to the Eisenhauer Road Flea Market case in that both cases demonstrate that neither the real world nor the world wide web are safe havens for trademark infringement.

IFRA Regulations Bring About a Change of Scent

Sheppard Mullin — Tue, 20 Mar 2012 17:51:07 -0500

We all remember the sweet scent of our first perfume and only need a simple whiff to propel us back to our youth. Studies show that scent memory is the longest lasting of all of our five senses, meaning you will always be able to instantly recognize the scent your grandmother wore when you were a child. But what if one day that perfume you hold so dear suddenly smelled slightly different? Recently, the perfume industry has become subject to stricter standards forcing longtime perfume makers to abruptly change their ingredient and formulas.

The International Fragrance Association (IFRA) was founded in 1973 in Geneva and its members create over 90% of the world's fragrances. The IFRA serves to regulate the perfume industry in order to promote the safe use of perfumes worldwide. Two years ago, IFRA restricted the use of oakmoss extract, found in several top selling men's and women's perfumes, after it was found to cause a rash for some consumers similar to poison ivy. This restriction is forcing perfume makers to overhaul the makeup of several well known perfumes, including fragrances by Dior and Lacoste. Many perfume makers are concerned that this will cause an uproar, with consumers claiming they will easily be able to tell a change in the scent that they have worn for years.

Opponents and proponents of the new IFRA restrictions fall within the classic divide in the perfume world. Those who oppose the ban see perfume making as an expressive art whose history extends back hundreds of years. To them, the ban significantly limits creativity and resources in creating new scents. Those who support the IFRA see the restrictions as a way to avoid health or public relations trouble that skin rashes and outbreaks could have on the $2 billion dollar perfume industry. They see perfume making in the global business sense, with a popular scent leading to an entire line of products.

Synthetic scents are nothing new to the perfume industry and today they make up the majority of components of most fragrances, but natural elements such as oakmoss serve to add richness to the scent. Problems can arise when synthetic chemical combinations try to replace the natural elements. Not only is it a complicated process to recreate fragrances, but it also allows others to easily analyze the formula and duplicate the scent. In an industry that closely guards the chemical make up of famous and successful scents as though they were state secrets, this poses a huge threat both creatively and financially. In order to combat this, perfume companies are now trying to mimic the individual natural scents which would make the chemical makeup of the perfume harder to detect and thus allow them to keep their formulations and ingredients secret. Unfortunately, this is a slow going process so most perfume makers are instead forced to work without the natural scent in order to protect the secrecy of their scents.

While some see these restrictions as a hindrance, others see it as a challenge to create new scents by using innovative scientific methods. Over time, consumers may adapt to the new synthetic smells and scents that seek to replace oakmoss or other restricted elements, but until then we may just have to get used to the fact that some of our favorite perfumes no longer smell the way we remember.

Battle of the G's Rages On: Gucci's $124 Million Trademark and Trade Dress Infringement Lawsuit Against Guess? Withstands Summary Judgment

Sheppard Mullin — Thu, 15 Mar 2012 16:44:26 -0500

By Shannon King

The multi-million dollar trademark and trade dress dispute between Italian fashion label Gucci and American designer Guess?, Inc. ("Guess?") marches on toward trial as Judge Shira Scheindlin of the United States District Court for the Southern District of New York largely rejected Guess?'s motion for summary judgment to dismiss Gucci's claims on February 14, 2012. The Court granted summary judgment and dismissed Gucci's claims for monetary relief on the basis of federal trademark dilution as to two designs but left the majority of Gucci's infringement claims untouched.

Gucci filed suit against Guess? and certain Guess? affiliates in 2009, claiming that Guess? was copying six of Gucci's registered and unregistered designs as part of an elaborate scheme to trade upon the GUCCI marks and trade dress. Examples are depicted below:

Gucci Shoe Guess? Shoe

Gucci seeks an accounting of Guess?'s profits on the alleged copycat products (estimated to be over $98 million) as well as damages in the form of a reasonable royalty (estimated to be $26 million). In its summary judgment motion, Guess? argued that Gucci's infringement claims based upon post-sale confusion failed as a matter of law because Gucci failed to proffer evidence that any purchaser actually bought an allegedly-infringing Guess? product instead of an authentic Gucci product in order to take advantage of post-sale confusion (i.e., that an unconfused purchaser bought a Guess? product in order to benefit from post-sale confusion with Gucci products). The Court rejected Guess?'s argument that evidence of actual confusion is required to prove infringement based upon post-sale confusion. Instead, the Court held that claims for post-sale confusion are subject to the standard likelihood of confusion analysis under the relevant Polaroid factors. In summary, the absence of actual confusion does not necessarily preclude post-sale confusion.

The Court also ruled that a reasonable inference could be drawn that Guess? acted in bad faith by "meticulously copying" Gucci's trade dress although Guess? recognized that consumers might confuse the two patterns. Based upon such bad faith evidence, the Court rejected Guess?'s arguments to preclude Gucci's claims for monetary relief on the basis of lack of evidence of actual confusion. The Court also rejected Guess?'s motion for summary judgment to preclude monetary damages on the basis of laches stating that such an equitable defense is fact intensive and not typically amenable to summary judgment.

The Court did grant summary judgment in favor of Guess? in connection with some of Gucci's trademark dilution claims. The Court applied the pre-Trademark Dilution Revision Act higher "actual dilution" standard in assessing claims related to two of the allegedly infringing marks first used in commerce by Guess? prior to October 6, 2006. The Court found that Gucci failed to provide credible evidence of actual dilution with respect to these claims and, thus, dismissed Gucci's pre-October 6, 2006 dilution claims. On February 21, 2012, the Court issued a clarification stating that while the lack of actual dilution prevented monetary relief as to such dilution claims, Gucci could still seek injunctive relief.

The final pre-trial conference in this case is currently set for March 13, 2012.

For a full copy of the February 14, 2012 opinion, click here. For a full copy of the February 21, 2012 clarification, click here.

Louis Vuitton Sets A New Standard In Federal Trademark And Copyright Law

Sheppard Mullin — Tue, 17 Jan 2012 15:33:14 -0500

By Alona G. Metz

In the recent landmark case of Louis Vuitton Malletier, S.A. v. Akanoc Solutions, Inc., 658 F.3d 936 (9th Cir. 2011),[1] the Court of Appeals for the Ninth Circuit held that a web-hosting company that owned and operated servers was liable for contributory copyright and trademark infringement when it failed to take steps to curtail alleged infringement committed by Chinese websites that used its servers. Louis Vuitton sued Akanoc Solutions, Inc. (“Akanoc”), Managed Solutions Group, Inc. (“MSG”), and Steven Chen (the owner of both companies) for contributory copyright and trademark infringement under the Copyright and Lanham Acts, respectively. MSG leased servers, bandwidth, and IP addresses to other companies, such as Akanoc, who then operated the servers and otherwise ran the business. Louis Vuitton alleged that some of Akanoc’s China-based customers directly infringed on Louis Vuitton’s trademarks and copyrights. Louis Vuitton sent the defendants eighteen Notices of Infringement documenting the infringements occurring on websites hosted by defendants, yet the defendants were unable to identify any action taken in response to the notices sent by Louis Vuitton and the websites continued to operate. Louis Vuitton alleged that defendants had actual knowledge of the website's activities, that defendants knowingly avoided learning of the full extent of infringing activities, and that defendants knowingly enabled the infringing conduct by hosting the websites and permitting them to display the counterfeit products.

A jury found that all three defendants were liable for willful contributory trademark infringement and willful copyright infringement. It awarded statutory damages on both claims for each of the three defendants. The trial court set aside the verdict as to MSG because there was no evidence that MSG did anything other than own and lease the hardware operated by Akanoc and Chen. However, it entered judgment against Chen and Akanoc and awarded statutory damages against each of them.

The Court of Appeals for the Ninth Circuit affirmed as to the issue of the defendants’ liability, but reduced the statutory damages award by half because a plaintiff can only recover one set of statutory damages where two defendants are jointly and severally liable. On the issue of liability, several of the Court’s observations in the opinion are noteworthy: First, with regard to the contributory trademark infringement claim, the Court noted that “websites are not ethereal; while they exist, virtually, in cyberspace, they would not exist at all without physical roots in servers and internet services. . . . Appellants had direct control over the ‘master switch’ that kept websites online and available.” Therefore, the servers themselves, as distinct from the infringing websites, were a “means of infringement” under federal trademark law. Second, with regard to both claims, the Court held that defendants' assertion, that "contribution to infringement must be intentional for liability to arise", was without merit. Rather, proof that defendants had actual or constructive knowledge that the users of their services were engaging in infringements or knowingly failed to prevent infringing actions is sufficient. Third, with regard to the contributory copyright infringement claim, the Court maintained that, as is the case with trademark law, "intent may be imputed" because of the knowing failure to prevent infringement and “there is no question that providing direct infringers with server space” constitutes a material contribution to direct infringement because this "substantially assists" direct infringement.

Neither side has petitioned the Supreme Court for a writ of certiorari. The deadline for filing is January 17, 2012. Given that this is an important precedent for third party liability for copyright and trademark infringement, it remains to be seen whether certiorari will be sought and what actions by web hosts will be considered sufficient to avoid liability where the hosted website is infringing.

[1]Ninth Circuit Decision

ZIPped Back Up: Williams-Sonoma Gains Federal Dismissal Of New Jersey Consumer Privacy Claim in Feder

Sheppard Mullin — Wed, 12 Oct 2011 07:19:50 -0500

In Feder v. Williams-Sonoma Stores, Inc, the United States District Court for the District of New Jersey joined the New Jersey Superior Court in weighing in on the issue of whether a retailer violates consumer privacy state law by requesting a customer's zip code at the point of purchase. Feder was brought by the same plaintiff’s lawyers and with claims similar to those in the state court case Imbert v. Harmon Stores, Inc.(Bed, Bath & Beyond). Imbert was decided last month, but without any written decision, and permitted that case to proceed past the pleading stage. The District Court in Feder, however, issued the first written opinion under the New Jersey statutes, finding that allegations that a zip code was verbally requested could not support a claim under New Jersey law.

Both Feder and Imbert involved plaintiffs suing under New Jersey’s Truth-in-Consumer Contract, Warranty and Notice Act (“TCCWNA”), alleging that a store’s requirement that customers provide their zip codes during a credit card transaction violates their rights under the TCCWNA. The TCCNWA prohibits a seller from "offering, entering into, giving or displaying a written consumer contract or notice that violates a clearly established right of the consumer." N.J. Stat. Ann. 56: 12-15. As a predicate for the TCCNWA claim, both Feder and Imbert relied on the Restrictions on Information Required to Complete Credit Card Transactions ("Restriction Statute"). The Restriction Statute prohibits a retailer from requiring a customer to provide "personal identification information" to complete a credit card transaction, thus providing the basis for violation of a "clearly established consumer right."

Senior District Judge Walls in Feder granted Williams-Sonoma's Motion to Dismiss, finding that the plaintiff failed to sufficiently allege conduct that violated the TCCWNA because she failed to identify a particular provision of a written consumer contract that violated her rights. Feder pled that the credit card transaction form constituted the written consumer contract. Judge Walls, skeptical of this assertion, reasoned that even if the form qualified as a contract, plaintiff's recorded zip code and verbal request for the same did not constitute a contract provision. Consequently, Judge Wales found that plaintiff failed to satisfy the elements of TCCNWA because "[t]he alleged requirement that plaintiff provide her zip code would only violate the TCCWNA if it was a provision of a written contract." Plaintiff also alleged that her rights were violated under the Restriction Statute -- not by the recording of her zip code -- but by the requirement that she provide her zip code. However, the Restriction Statute does not provide for a private right of action, and, as discussed above, a claim under Plaintiff’s proposed private vehicle for enforcement, the TCCNWA, failed.

Williams-Sonoma also argued that if the credit card transaction was considered a written consumer contract, the court must consider all terms of that “contract” including the point of sale signage at Williams-Sonoma stores expressly stating that when a zip code is requested it is used for marketing purposes, and that providing it is voluntary and is not a condition of processing the transaction. The Restriction Statute differs critically from California’s Song-Beverly in that New Jersey’s Restriction Statute only applies to information being “required,” whereas Song-Beverly also applies to a “request.” This issue was not presented in Imbert. However, since the District Court ruled on the TWNCCA, it did not need to reach this issue.

One additional anomaly between the Feder and Imbert cases is that in Imbert the state court permitted the plaintiff to proceed with an invasion of privacy claim. However, when presented with Williams-Sonoma’s Motion to Dismiss, Feder abandoned her invasion of privacy claim in her Opposition because the Motion revealed she had previously provided her contact information to Williams-Sonoma. Feder also filed a cross-motion for leave to file an Amended Complaint, which the District Court denied as futile.

Craig Cardon, Elizabeth Berman; and Sean Kirby of Sheppard Mullin Richter & Hampton LLP represented Williams-Sonoma.