THE WAR’S OVER: CALVIN AND LINDA SETTLE
Byline: Vicki M. Young / Lisa Lockwood
NEW YORK — Calvin and Linda have kissed and made up — literally.
The two adversaries reached a stunning 11th-hour settlement in Manhattan federal court Monday morning, moments before jury selection was to begin in the trademark infringement suit filed last May by Calvin Klein Inc. against The Warnaco Group.
Terms of the settlement were not disclosed. However, the two companies will continue to work together, and Warnaco gets to keep the Calvin Klein jeanswear license until 2044. Sources said no monetary remuneration was exchanged.
The bottom line: Warnaco can still sell the discounters and warehouse clubs — but only closeouts and overruns, no current fashion items — and at substantially reduced levels over time, according to sources. And all design changes, from fit to fabric, wash to trim, must be OK’d by Klein.
“I’m feeling really good. It worked out, and I’m really excited. The license continues and we’ve resolved the issues,” Calvin Klein, vice chairman of Calvin Klein Inc., told WWD. “I’m happy. We’re both happy.”
“I’m feeling great,” said Wachner, chairman and chief executive officer of Warnaco. “It’s a great day. It’s good for the brand and good for the company. I still have the license for the next 44 years.”
Shortly after the dramatic announcement at 9:30 a.m. by Jonathan Schiller, Klein’s attorney, to Federal District Court Judge Jed Rakoff, that a settlement was imminent, Klein turned from the front row at the plaintiff’s table to Wachner, who was sitting in the following row at the defendant’s table, to give her a kiss on the cheek and a handshake. That kiss, at 9:50 a.m., was the signal to the crowded courtroom that a settlement between the two protagonists had indeed been reached. Schiller, of Boies, Schiller & Flexner, gave Judge Rakoff the official word at 10:15 a.m, and Nicole Seligman of Williams & Connolly, Warnaco’s law firm, signed off on the agreement, thus ending one of the most acrimonious chapters in fashion history.
Many people in the courtroom were shocked it was over. The trial would have had all the ingredients of a prime-time drama — a world famous designer; a tough-as-nails ceo; provocative advertising; depositions from former employees; witnesses for the plaintiff such as Arnold Simon, former ceo of Designer Holdings [the former holder of the Calvin Klein Jeans license]; distribution issues; character assaults; defamation charges over disparaging remarks made on “Larry King Live,” a languishing Wall Street stock and top gun lawyers.
Rakoff, not missing a beat, quipped, “Well, my law clerks are devastated. But I’ve been around long enough to know that the interests of justice have been served.” He then entered an order into the record dismissing the suit and countersuit “with prejudice,” a term that means neither side can refile the same identical lawsuit — assuming the same set of facts and circumstances — against the other.
The legal costs and possible loss of Calvin Klein Jeanswear revenues constituted threats to both Warnaco’s bottom-line and top-line prospects in the months, quarters and years to come. The settlement Monday removed those burdens and sent Warnaco’s stock soaring 60 percent, up $1.50 to close at its high for the day, $4, in New York Stock Exchange trading. Shares moved up 30 percent by midday and 42.5 percent by 1:30 p.m.
The upward motion propelled Warnaco shares to more than three times their 52-week low of $1.25, although still less than one-third their peak of $12.56. At more than 2.28 million shares, volume was more than five times the 405,409 average.
In the CKI lawsuit, Klein charged that Warnaco infringed upon and diluted the Calvin Klein jeanswear trademarks in the U.S., both by selling goods that were never approved by CKI and directing large-volume sales of full-price merchandise to off-price warehouses such as Costco, Sam’s Club, BJ’s and other unauthorized channels. Warnaco had countersued, claiming trade libel and defamation against CKI and Calvin Klein personally.
Warnaco — whose 1999 volume was $2.1 billion — does slightly less than $700 million with the Calvin Klein Jeans license and about $300 million with the Underwear business, which it owns directly. Together, those two businesses provide $60 million annually in licensing income to CKI, whose licensed business generates wholesale volume of $2.5 billion, or $5 billion at retail.
When the lawsuit was filed last May, Barry Schwartz, chairman of CKI, said he received a list in mid-March 2000 of where Wachner did most of her business in 1999, and the top six accounts included Costco, Sam’s Club and B.J.’s. In fact, sources said currently one-third of Calvin Klein jeanswear sales had gone to warehouse clubs and discounters. As part of the settlement, sources indicated that Warnaco will gradually cut back its distribution to warehouse clubs and discounters to roughly 10 percent over the next few years.
In addition, Warnaco has reportedly agreed not to sell current fashion items to warehouse clubs and discounters, and that overruns and closeouts will only account for a limited percentage of percent of net sales, in the neighborhood of 4 to 5 percent. One source indicated that, under the settlement — in effect, a newly revised licensing agreement — Warnaco is prevented from selling CK Jeans to J.C. Penney, where the Calvin Klein underwear is currently distributed. The move to Penney’s was an early sore point between Klein and Wachner and resulted in department stores such as Dillard’s and May cutting back their buy of the line.
On the design front, CKI is believed to have won final say on such issues as style, fabric, fit, wash and trim and any design changes must be approved by Klein in writing.
In an interview last year, Schwartz and Klein alleged that Warnaco often redesigned the product, and the quality of the merchandise was sacrificed. “She’ll change the design and take it out of the garment, no matter where she can cut a cost,” Schwartz charged last year.
Sources said Monday that last week CKI obtained copies of e-mails sent to Warnaco from warehouse clubs detailing its specs for products sold in its stores. Other ammunition CKI’s legal team apparently was ready to use in court were documents showing that Warnaco had used inferior fabric for certain warehouse clubs. In addition, CKI reportedly was prepared to argue that overruns of certain Chaps product — for which Warnaco also has the license — had their labels changed to Calvin Klein.
The joint statement from CKI and Warnaco said, “Calvin Klein Inc. and Warnaco Inc. are pleased to announce that they have resolved all disputes between them regarding the Calvin Klein Jeanswear business. The parties believe their resolution will protect and promote the integrity and success of the Calvin Klein brand for their mutual benefit and the benefit of other Calvin Klein licensees.”
The statement added, “The parties look forward to expanding jeanswear sales consistent with the image and prestige of Calvin Klein products and to expanding and concentrating the distribution of Calvin Klein jeanswear products in the department and specialty stores.”
Another source said an arbitration provision was added to the modified jeanswear license as part of the settlement.
Schiller said after the hearing, “We never expected to settle. We came to try the case. There were no talks of settlement until [Sunday] and then we worked through the night on it.”
According to Schiller, the settlement resolves the trademark infringement action filed by CKI, the counterclaims — including the defamation claim against the designer, personally — that were filed by Warnaco in June and the state court action filed Thursday alleging that Warnaco breached a financial covenant by running up too much debt. However, other sources said they waived the debt to equity issue until the end of the year.
There is also an ongoing dispute between CKI and Warnaco over Calvin Klein underwear, a business that Warnaco owns outright. The disagreement, which was not a part of the trademark infringement lawsuit, is subject to an arbitration provision. Schiller said Monday that CKI has not filed for arbitration yet, only that it was something that was “discussed.”
Boies told a group of reporters in the courtroom that both sides had approached the other about a possible settlement. Schiller hinted later on that Warnaco made the first overture.
A source familiar with the night-long negotiation session that began Sunday told WWD that one reason why the case settled was because Warnaco’s bank lenders were pushing for a settlement. Attorneys for the banks were at the table negotiating with counsel for both Warnaco and CKI. They were also present in the courthouse when the deal was announced to the court, sources said.
Warnaco had a lot at stake with the Calvin Klein Jeanswear license. Warnaco concluded fiscal 1999 with net income of $97.8 million, against a prior-year loss, on sales that bounded ahead 8.4 percent to $2.1 billion. In the third quarter of 2000, ended Sept. 30, the net loss after a $72.5 million restructuring charge was $96.5 million while sales declined 13.5 percent to $500 million. Warnaco blamed its operating losses on increased markdowns, lower sales and the cost of preparing for the trial with Calvin Klein.
Christine Kilton Augustine, equity analyst at ING Barings, said, “If Wachner had lost that license, it would have been a big chunk of Warnaco’s revenue base. We’re definitely seeing a relief rally, knowing now that Warnaco is keeping the jeans license. This is good news for Warnaco. What should happen is that this should help the margins and keep the business more of a full-price business over the longer term, which would be good for profitability. The settlement keeps brand integrity intact and would also help the other piece of the CKI business in intimate apparel.”
Liz Miller, portfolio manager for Trevor Stewart Burton & Jacobsen Inc., an investment management firm, said, “Warnaco has had a difficult year from a business standpoint. There’s been softness across the board in terms of demand for the product. The stock had a double whammy, first from the publicity regarding the dispute and then by actual business trends. Calvin Klein [Jeans] represents about 25 percent of Warnaco’s business, not an easy part of the business that they could quickly replace. This settlement was critical to the business prospects of Warnaco.”
Tom Dewey, an attorney at Dewey Pegno & Kramarsky, a commercial litigation firm, observed, “Both companies have a shared interest in doing what they can in maintaining the viability and success of the brand. They both realized late in the day, as is often the case in these kinds of disputes, that it is better for them to work it out outside of the courtroom.”
According to Dewey, the case would have been “moderately challenging” for the jury, which he said would have been a panel of at least six jurors and most likely around nine jurors for a three-week trial. The governing rule in Manhattan federal court doesn’t provide for alternate jurors.
On Monday morning, the two high-profile company heads and their extensive legal teams — along with Barry Schwartz — were all smiles as they waited for Judge Rakoff to enter the packed courtroom on the 14th floor of the federal courthouse at 500 Pearl Street.
Wachner, wearing a black suit with an animal print silk scarf and red eyeglasses, smiled and joked with Brendan Sullivan of the law firm, Williams & Connolly. Sullivan, wearing a conservative dark suit and white shirt, headed the Warnaco legal team.
Klein, wearing a steel gray suit and blue shirt, was in discussions with Schwartz, wearing a dark suit and shirt, and David Boies of Boies, Schiller & Flexner, wearing a navy suit and blue and white striped shirt. Boies — who led both Microsoft’s and Al Gore’s legal team — headed up the CKI team.
Others who came to court to support Klein were his friend Fran Lebowitz; his daughter, Marci Klein and her new husband, and Sheryl Schwartz, wife of Barry Schwartz.
Wachner had her PR machine in tow, including representatives from its outside PR firm Rubenstein Associates.
The press turnout was sizeable, too, including cameramen from People magazine and reporters from the Wall Street Journal, The Daily News, The New York Post, CNN and the Guardian in London.
“It’s business as usual; it never wasn’t,” said Wachner, immediately after the settlement was announced. She said the debt suit, filed last week, was resolved Monday morning, as well.
Reached later on Monday, Wachner said she was happy the case was settled, rather than having to go through a lengthy trial.
“I didn’t bring the lawsuit. I think it’s the best thing for the business. Calvin is very important to us and we’re very important to Calvin. He’s 24 to 25 percent of our business,” said Wachner, referring to the jeanswear.
Wachner said she had planned to attend the trial every day until it was concluded. “I have an empty calendar,” she said. “We were going to work every night.”
“I thought we’d be involved in a trial for a month, even this morning,” said Klein. “They [the lawyers] have been up all night.” He said his legal team was prepared for a long trial. And when one reporter asked if the settlement would benefit an eventual sale of the company, Klein said emphatically, “The company is not for sale.”
Asked how he was feeling, Schwartz said, “I feel fine.” He said he felt as if he just got a month back of his life, since he figured the trial would have gone that long. He pointed out that CKI’s attorneys had been working on the case since last February.
Fran Lebowitz said she had planned to come to court every day to support the designer. “I wasn’t hoping for a long, juicy trial. Trials are juicy, but not to friends. Calvin is so thrilled and I wanted to support him. As a Democrat, I also went to meet David Boies.
“It’s horrible to go to court,” Lebowitz added. “It’s only fun if you’re a spectator.” She said although she cleared her calendar this week for the trial, she was happy it was settled. “I have to get a tooth pulled so I’m glad it didn’t interfere with my dentistry.”