Friday, July 6, 2012

5 Things a Fashion Lawyer Needs to Know About Arbitration

After receiving a few recommendations, I finally buckled down and watched a recently concluded Korean drama called "Fashion King" on hulu. It is the story about aspiring designers who start working penniless in Dongdaemun (Korea's Santee Alley but on a much larger scale where they specialize in knock-offs and cheap clothes) and collaborate to make it big in New York, then the rest of the world. Like in many Korean dramas, there is the girl who is the sweet, innocent victim and is achingly bland. Like in many Korean dramas, she is involved in a love triangle with the ambitious guy from her neighborhood and the mega rich jerk of a guy who never takes no for an answer. Like in many Korean dramas, there is the "evil" girl who wants the rich guy and tries to sabotage the innocent, bland girl. Like I have done at the end of many Korean dramas -- aside from historical dramas -- I reacted with a "what the heck was that" and glared darkly at the TV screen for a good ten minutes.

I did, however, notice that a few times I had tears rolling down my cheeks, but then I realized that it was from the yawning. I digress.

So why am I furiously ranting bringing this up in this blog? The story touches upon the world of fashion. (I use the word "touches" because I am a little skeptical about the accuracy of the depiction, given that it was in said Korean drama.) Although the clothes were very conservative ready-to-wear styles and not haute couture as they keep claiming, it reminded me that it is crucial that an up-and-coming designer arms themselves with both a capable lawyer and business/finance person from the start. The financial analyst will help create a business plan for the designer so the designer will maintain a healthy budget and not go bankrupt within the year. The lawyer protects the designer from being swallowed up by corporations and perhaps losing their own name. The lawyer also makes sure that the designer's rights and designs are protected.

Which leads me to arbitration clauses in contracts. Should an arbitration clause be included in a contract?

Alright so what is an arbitration clause? An arbitration clause states that disputes arising from the contract will be resolved through arbitration instead of litigation. An arbitration clause can be a few paragraphs long but basically should state the parties' intention to arbitrate, which arbitration rules the parties will adhere to, whether they will be relying upon an arbitration institution to manage the arbitration, and the jurisdiction. I briefly wrote in my previous post the benefits of arbitration so here I am to list the top 5 reasons why arbitration is preferable over a court case. (These are not in any particular order.)

1. Party Autonomy

An arbitration can only occur if both parties agree to it. It is in a contract so unless they both sign the contract, the arbitration clause does not work. The parties have power to decide how many arbitrators they want (usually 1 or 3), who the arbitrators will be or how they will be selected, which arbitration rules they want to follow, confidentiality, what is arbitrable, and/or who will be orchestrating the arbitration. Before the actual arbitration, the parties will also have to agree on the location, duration, witnesses, expert witnesses, the amount of discovery, the type of award (judgment) they prefer, expenses and so on. The parties have the power to create an arbitration procedure together instead of having the Court schedule everything. They have control over the procedure. However, both parties must understand that once the arbitration begins they concede that power to the arbitrator.

2. Arbitrator Selection

The ability to choose the arbitrator is significant. Judges are smart and knowledgeable but they are not experts on all fields. They usually have to be given a crash course teaching of the industry to understand the dispute better. Parties in a fashion dispute would want and adjudicator who understands the nuances of the fashion industry -- who appreciates the merits of the dispute to a greater degree. Selected arbitrators tend to be experts in their respective fields. Given that the fashion world is very expansive in what is involved in it, an arbitrator who has been in the field for a long time can appreciate the facts and the parties will not have to waste time explaining the manufacturing process of shearling jackets.

The arbitrators, as a default, must be neutral and are required to disclose to both parties their professional backgrounds and any relationships they have or had with any member of the parties. If they do not, the arbitration award can be set aside/appealed. A party has a right to ask for another arbitrator should they feel that the arbitrator might be biased. Parties have a right to a neutral and fair forum.

3. Worldwide Recognition of Awards

Due to the 1958 New York Convention (NYC) -- so named because it was promulgated in the New York office of the United Nations -- an arbitration award is enforceable in all countries that are signatories of this international arbitration treaty. There are currently 146 signatories. Even if the arbitration was held in a country that is not in a signatory, if the arbitration law selected is from a signatory then the award is still enforceable in any signatory country.

Fashion is a global industry and disputes can arise from worldwide locations. For example, if a fashion house in Italy wins an award against a Japanese manufacturer for counterfeiting, the fashion house can seize assets in Japan through that award -- even if the arbitration took place in London under the arbitration rules set forth by the Paris International Chamber of Commerce. How sweet is that?

4. Time and Costs

As mentioned above, the duration of the entire arbitration process can be set by the parties. This means that a large commercial case will not drag on for 6 years as it might in litigation. Discovery, being a uniquely American phenomenon, takes up most of the years. In the meantime, the parties are being billed by the attorneys. Attorneys costs probably measure up to about 80% of the lawsuit expenses. Arbitration can cut back on both time and costs, especially through limited discovery.

This is also very relevant to the fashion industry since a season's line will be a long, lost memory by the time the case goes to court many years later.

5. Preservation of Business Relationships

After a judgment is made, rarely do the parties stay in a great relationship. Litigation is very adversarial, especially if the attorneys practice a scorched earth policy. Arbitration is not as adversarial as litigation, although some people may think otherwise. There is an award (judgment) issued by the arbiter (judge), but the parties need to collaborate with eachother, which may encourage negotiation. Court cases can be widely publicized, where confidentiality can be agreed upon by the parties in arbitration. Arbitration is a privatized process, and there are less chances for publicity damage, slander, defamation, information leaks, and whatnot.

In an industry with endless networks and connections, parties to a fashion dispute would not want to make lasting enemies. Or at least I would not think so. I will not divulge what happens in "Fashion King" in case you want the pleasure of experiencing it, but bitter enemies can sure ruin careers.

So what say you? Would you opt for arbitration?

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