David slays Goliath, David dies too

Alternative title:  Contracts aren’t an insurance policy pt.2

Somewhat depressing but it must be said (again): don’t stake the health and viability of your business on a contract. Today’s case history makes the point that even if you have a great contract and even prevail to win an ensuing lawsuit over breach of contract, you can still lose.

In this case, it wasn’t a contractor copying a designer client (it almost never is) it was a designer who copied their contractor. Specifically, it was the venerable house of Chanel who copied a design submitted under spec by World Tricot, their knitting contractor; the latter sought redress in the French courts. It went like so:

[Colle (the principal of World Tricot)] filed suit against Chanel for alleged counterfeit after she spotted in a shop window a Chanel vest with a crochet design that she claimed was hers. The simple cable design with black edging had been previously submitted to Chanel’s studio and rejected, Colle claims.

An earlier ruling in 2009 held Chanel was guilty of breaking the contract (but not of counterfeiting goods) and was ordered to pay €400,000. Colle successfully appealed and was awarded an additional €200,000 last week.

The case has been trumpeted far and wide as a victory for artisans and designers but it falls far short once one realizes that Colle went bankrupt over it.  Perhaps the greatest tragedy of all is that Colle used the enterprise to employ disadvantaged workers from an economically depressed area so they lost too.

So what is the solution for problems like this? I’m not certain there is an easy answer because even if you win, you still lose. The only lessons to take from this case is that if you provide services or products, don’t put all of your eggs in one basket. Chanel was Colle’s main customer; after she complained to Chanel of the design theft, they cut their orders to the knit firm and it eventually folded.

Having a contract is no protection even if you have the means to pursue and prove your case. Structure your enterprise so you can survive the crisis of losing your best customer.

Contracts aren’t an insurance policy
2 of 2: IP and contractors
2 ways to prevent being ripped off if you design for hire

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  1. Since the opening our L.A. office, the decision was made to diversify as much as possible and NEVER LET any ONE ACCOUNT become more than 15% of our business (even if it means turning away LARGE orders)

    We are seeing a slightly different version of this “David vs Goliath” situation with some retailers coming to offer us “LARGE” private label orders for styles that are knock offs of brands they currently sell…

    I got to see first hand how (during the worst of the recession) many of the companies that went under in DAYS had most of their business with one or two accounts that were obviously “too big to fail”

  2. EK says:

    I’m with unlimiteddesign– a big account is a huge liability.

    When we were starting out we took on an account that began modestly but grew to be the majority of our income. Then one day their CEO tells me that I have just delivered their last order. No notice, nothing.

    Was anything wrong? No, everyone loved our product. They decided to set up a team to do the work in house in an effort to reduce cost and increase profit.

    More than a sucker-punch to the gut, it was like scrambling when a riptide takes your legs out from under you. We found more accounts. We diversified. We survived. Then we went retail and never sold wholesale again.

    That big account? They’re still around. But that division shut down, and from what I hear it never made them the money they had hoped it would. And for what it’s worth, I would never work with that company again knowing what I know now.

  3. Esther says:

    Imagine a Big Box retail buyer shows one of your designs to a competing supplier and asks them to make something “similar”. Happens all the time, far more than one would think. Even to me. At the end of the day, not worth suing over. Honesty and integrity, are far more important and will take you further.

  4. Dalila says:

    This reminds me of an article from July’s Harpers about farmers selling mainly to Walmart. With 85% of profits coming from one purchaser who requires specific setups, an un-renewed contract can result in the farm’s downfall (if they have borrowed to put in a cold storage, for example). More here if you’re interested: http://www.harpers.org/archive/2012/07/0083969
    This is a pretty sad case and definitely something to keep in mind – purchase diversity is extremely important!

  5. Sarah_H. says:

    The most intelligent man I ever worked for (at Southwestern Apparel, early 70’s) made sure that he sold no more than 50% to the chains stores and kept 50% of his business with the independents. I have sometimes wondered how he would do it today.

    As an etailer, I am in a similar position now, on the other end. I have one main supplier. If they should go under, or decide not to sell to me, I would have to totally restructure my selling plans. However, I do have a plan B.

  6. Taja says:

    Many moons ago (25 years or so), my CPA recommended that one client not exceed 30% of gross annual sales. I deliberately kept the largest account to approximately 20%, although we could have grown faster if I had not. Thankfully, there were no issues, but it I believe it was a wise precaution.

    I agree with unlimiteddesign that today I probably would limit the largest account to 15% of gross sales.

    Diversifying vendors–and having a Plan B, as Sarah_H. does–also is a good strategy.

    Contracts seem to be letters of intent these days, rather than enforceable contracts–assuming one can afford the legal route to try to enforce an unfulfilled contract.

    Essentially, we need to follow Kathleen’s advice and keep our businesses as nimble and flexible as possible to deal with almost anything that can occur.

  7. This is very sound advice and should be followed by anyone who is serious about the longevity of their business. Companies going under because of one big account is something that I’ve heard way too often to ignore its importance.

    A close family friend saw their business go belly up for a similar reason (they’re not in the apparel industry, they used to own a printing business). Theirs was a healthy small-medium business that had grown steadily over 10 years, gradually adding people to its workforce and generally doing very well. Then came a major sports event and the organizer (who was in the “too big to fail” category – or rather “too big not to pay”) approached them with a huge order for printed prospectuses for said sports event, bigger than they’d ever handled before. Not surprising, the event organizer demanded terms, and being “too big not to pay”, their terms were accepted, no questions asked. The printing business took out a loan to fill the order – there was no other way they could finance an order this large – delivered the order and waited for their payment. After the event was over, the organizer returned 80% of the order, simply stating that “these didn’t sell” and refused to pay for anything that went unsold. The burden of course was too heavy for the printing business, they had spent way more than they could afford on this order (not to mention, gone into debt for it) and were sadly forced to close down. And this is how a previously healthy, steady business went under in a matter of a couple months over one large order that went wrong. Sadly, it happens every day, so we need to be really careful.

  8. LInda Slater says:

    I’m not in business at all….yet. It’s one of my dreams, and probably not apparel, I;m just a home sewer, but this is amazing information that I will slot away in the “need to know” area of my brainbox.Thankyou for sharing.

  9. Sandy Peterson says:

    Great information to keep in mind. I love what Esther is saying about honesty and integrity, but how many people do we have to weed through to find those gems?!? Are there still business owners and workers out there that have character?!?!

    A little off topic, but just today we had a salesman sell tickets for a dinner/cruise to my husband and a co worker. The salesman lied about the days, the food, and neglected to tell the whole story. My husband bought 2 sets of 8 tickets for dinner/cruise for $40 each set – total $80 (that would cover our family of 12 and some to give away, sell, or use again) – otherwise, without this “special” the tickets were $45 per ticket.

    What the salesman “forgot” to my husband and co worker was that it cost an additional $9.60 per person to board the boat + a two drink minimum per person + 18% gratuity. So we figured that it would cost our family $60 + $115.20 + $84.00 + $35.90 = approx. $300.00 for a “great deal”. Seriously? I called the number as soon as I returned home with the tickets and we are suppose to get a refund tonight. We’ll see. The school of hard knocks, knocked again. Will we ever learn?

  10. Sandy Peterson says:

    Ok, so we went to get a refund and the man that helped us was very nice and gave us our money back without any problems. He tried to sell us coupons for other attractions but we didn’t buy anything. He also let us keep the coupons the salesman gave us for free (with the purchase) which was for $25.00 towards dinner at two different restaurants.

    So other than costing us about an hour in the car, everything worked out good. “John” also told us that we could call him anytime if we were looking for something to do with our family and he would see if he had something available.

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