CALVIN DECLARES WAR ON LINDA
Byline: Lisa Lockwood
NEW YORK — In a stunning move that could rewrite the rules of fashion licensing and distribution, Calvin Klein has sued his biggest licensee, Linda Wachner.
On Tuesday, Calvin Klein Inc. and the Calvin Klein Trademark Trust filed a lawsuit against Warnaco Group, Inc. and Wachner, its chairman and chief executive officer, for federal trademark violations and breach of fiduciary duty and contracts.
And he wants his license back.
The suit, displaying a high level of acrimony, was filed in the U.S. District Court for the Southern District of New York, and claims that Warnaco has threatened to erode the Calvin Klein jeanswear and underwear lines through a flood of discounting and other unauthorized sales and practices “that are the equivalent of counterfeiting.” The Calvin Klein jeans and underwear business under Warnaco’s umbrella represent about $1 billion in sales and account for $60 million in licensing income to Calvin Klein Inc.
“This is about Barry and me taking a big step to protect our company and to protect our trademark,” said Calvin Klein, in an exclusive interview.
“After 30 years, we’ve built this business and built this trademark. This is a very disappointing day. We’ve tried very hard over the last few years to avoid this, but Warnaco and Linda Wachner have left us no alternative. We can’t stand by any longer and jeopardize the integrity and the value of the trademark.”
Klein added: “It’s about being lied to and having intentions misrepresented.”
Wachner told WWD late Tuesday: “I have no idea what’s behind this and why, and we intend to vigorously defend it. Calvin Klein is fully aware of everyone we sell. We even have permission letters to sell them. I’m surprised. I just had a very friendly conversation with Barry Schwartz last week and I was in a meeting with their junior jeans head up at Calvin’s offices when I heard about the lawsuit.”
“The claims are completely without merit and we will vigorously defend them,” said Stanley Silverstein, general counsel at Warnaco Group.
The suit seeks termination of the agreements between Calvin Klein Inc. and Warnaco; an injunction preventing Warnaco from engaging in practices that violate the agreements; Warnaco’s profits from the improper sales, and compensatory damages, which haven’t been assigned a dollar value yet.
The suit says Warnaco and Wachner herself “have become a cancer on the value and integrity of the [trade] marks.”
Among the charges against Warnaco and its subsidiaries are that Warnaco infringed upon and diluted the Calvin Klein underwear and jeanswear trademarks in the U.S., both by selling goods that were never approved by Calvin Klein Inc. and directing large volume sales of full-price merchandise to off-price warehouses such as Costco (and Costco’s Web site), Sam’s Club, BJ’s and other unauthorized channels.
According to the suit, Warnaco treated these unauthorized distribution channels as if they were regular, full-priced accounts, instead of using them in select, pre-approved situations only for the sale or irregular and closeout items.
“There have been a series of violations and breaches of the contract that allows Warnaco to produce unauthorized merchandise and sell significant amounts to discount warehouses and mislead us,” said Klein. He said Wachner misled Klein and his business partner, Barry Schwartz, by giving numerous reasons about why the merchandise kept ending up in discount stores.
“I’ve never had this problem with anyone,” said Klein. “We’ve never had to take this type of action. This is all to beef up her [Wachner’s] sagging revenues. The stock is down and her business is suffering. If the board of directors and the shareholders were aware of it, they’d be furious. It’s not being managed. They’re in complete violation,” charged Klein.
In recent months, Warnaco has been under tremendous pressure to boost its lagging stock price. Shares of the Warnaco Group Inc. are trading at a quarter of the peak they reached 1 1/2 years ago, and the stock is underperforming on other financial measures. And, in fact, Warnaco was among a handful of suitors — including Tommy Hilfiger Corp. and HdP — for the entire Klein business this spring. But a deal never materialized and Schwartz and Klein took the company off the block.
Schwartz told WWD that Calvin Klein Inc. is asking for the termination of the jeanswear license, which Warnaco assumed in December 1997 after acquiring Designer Holdings Ltd. Last year the jeanswear license generated revenues just under $700 million.
Klein said he had to resort to a lawsuit, because reasoning with Wachner didn’t work. “This is the absolute last straw. We tried to get her to stop. In one year, we sent her 94 letters,” Klein stated.
“She had a program of systematically producing and selling to them [warehouse clubs],” added Schwartz.
Schwartz noted that the first year Wachner had the jeans business, she asked Klein for a “one-time only” chance to sell Costco to clean up the distribution. She promised to get all the merchandise out of mass merchandise channels. In fact, in an interview published in WWD on Dec. 11, 1997, Wachner said, “There will be no more mass merchandisers. We really don’t want to go in that direction anymore…Calvin Klein is concerned about diversion and jobbers having stuff. We gave [the jobbers] word that it was over… We don’t want to be in the business of jobbers. Merchandise shows up in places we can’t control. We don’t want to do anything contraindicated to our licenses with Calvin.”
According to the suit, “Despite Wachner’s public and private representations, however, Warnaco continued to make substantial sales to Costco after that ‘one-time’ sale. Warnaco and her senior executives have actively solicited orders from Costco and other, similarly inappropriate discounters and mass-merchandisers, and have tried to misrepresent and conceal the nature and volume of those unauthorized sales from CKI.”
The suit claims that among its violations, Warnaco accepted a large multimillion-dollar order for jeanswear from Costco earlier this month for special cut, first quality products. In addition, a wide selection of Calvin Klein goods, including jeanswear, is currently available on the Costco Web site, which discloses that Costco is “not an authorized” dealer of [CKI] merchandise.
Schwartz said he received a list in mid-March of where Wachner did most of her business in 1999, and the top six accounts included Costco, Sam’s Club and B.J.’s.
“Everyplace she wasn’t allowed to,” added Schwartz.
The suit claims that “Since 1997, CKI has never approved Costco, BJ’s or Sam’s Club as appropriate channels of regular distribution for closeouts, seconds, or irregulars of Calvin Klein goods — much less sales of first-quality goods.”
“We have been told that these were irregulars, or end of the season. But it isn’t so,” said Klein. “It’s merchandise Linda Wachner has been cutting for these discounters. She’s been inflating her numbers at the expense of the trademark and causing damage to the jeanswear and the underwear,” charged Klein.
Schwartz also alleged that Warnaco often redesigns the product, and the quality of the merchandise is sacrificed. “She’ll change the design and take it out of the garment, no matter where she can cut a cost,” said Schwartz. “The public is buying a Calvin Klein garment and they’re really buying something designed by Linda Wachner.”
In addition, Klein said that Dillard’s dropped the Calvin Klein Underwear because Wachner was selling to the line to J.C. Penney.
However, the issue of selling underwear to Penney’s was not named in this lawsuit, and is covered by an arbitration clause, said Jonathan D. Schiller, an attorney with Boies, Schiller & Flexner, which represents Klein. The law firm recently represented the U.S. Justice Department in its landmark case against Microsoft.
Still, Klein noted, “Owning the underwear business does not give Warnaco the right to create and design products with the Calvin Klein name. The fact that she owns the company, she and Warnaco do not have the right to create their own product. They do not have the right to sell mass merchandisers. We do not approve of J.C. Penney. She’s still governed by the licensing agreement with the underwear, even though she owns it.”
According to Schiller, Klein told Wachner that Penney’s was not an authorized distribution outlet. “She promised not to sell there. She increased her sales there, and demonstrated she’s not reliable and we can’t count on her to abide by the rulings,” said Schiller.
“She’s been very dishonest throughout this whole process,” added Schwartz. “It’s not about how much she controls. She’s trying to destroy it. There’s nobody who will destroy the company or the trademark. She’s used her last one. We will now very aggressively pursue getting this business back. The court will decide how these issues will be resolved.”
Schwartz added that “action will be taken” on the underwear license as well.
Klein said he’s never encountered this kind of problem with a licensee before. “Every licensing partner we have agrees to the same agreement. Nobody can sell the product to mass merchandisers or discounters. Both Barry and I have had conversations with her. She told us she would fix these problems. She promised us they’d be rectified and it’s only gotten worse. This could affect our other businesses if we allowed it to go on,” said Klein.
“We are a design company,” Klein continued. “Our responsibility is to protect the integrity of the design, the fabric and the quality…. The truth is, my name is on the product. We want to get the license back. There will be no more mass merchandisers.”
“We’re filing the suit before it does damage to our other businesses,” added Schwartz.
The suit claims that Warnaco breached its fiduciary duty by misrepresentation, self-dealing and malfeasance, and by placing its short-term financial interests ahead of the long-term interests and integrity of the jeanswear and underwear trademarks.
The suit also claims Warnaco also told Calvin Klein Inc. that it would not sell Calvin Klein jeanswear and underwear to J.C. Penney, then shortly thereafter Warnaco started such sales. It also notes that Warnaco engaged in self dealing by selling unauthorized products, including goods produced by another Warnaco division, Chaps by Ralph Lauren — in Calvin Klein Outlet Stores, which are supposed to offer Calvin Klein merchandise exclusively.
Further, the suit claims that Warnaco’s contract breaches include repeated interference with, and failure to abide by, distribution and quality control standards, design timetables and marketing guidelines for the Calvin Klein jeanswear and underwear lines. It says that Warnaco made unapproved changes in the design of products and delivered merchandise plans late and incomplete.
For example, it noted that although the merchandising plan for the children’s summer 2001 line was due on Feb. 29, 2000, Warnaco had yet to provide a complete merchandising plan as of March 23, 2000, with similar delays incurred for the spring 2001 merchandising plan. In addition, during the winter of 1999-2000, Warnaco “injected” additional garment designs that Calvin Klein Inc. never approved.