The primary risk for lawsuits in my company revolve around trademark infringement, and unauthorized distribution of licensed product. The company is in litigation constantly. Typical scenarios that have resulted in lawsuits are as follows: The company buys $500, 000 worth of Tommy Hilfiger inventory from a manufacturer, no longer licensed to make the product. It is surplus inventory. Because the manufacturer no longer has a license from Hilfiger (probably because he sells to people like us) the product is considered unofficial and illegal.
My company sells the product to XYZ large chain discounter. The legal trademark-infringement staff from Hilfiger constantly shops at these type stores. In order to protect the value of their trademark, they want to make sure that they control what, if anything shows up in them. The Hilfiger representative sees their products in the store, obtains information as to who sold it to them (my company) and then we are sued for trademark infringement. XYZ Discount chain is also sued for purchasing and selling counterfeit merchandise. We purchase a lot of assorted clothing from a department store (surplus merchandise.
) It is sold to us as “first quality” goods. There are industry standards for first, second and third and fourth quality which are generally accepted throughout the industry. First quality generally means the clothing has no holes, tears or stains. It can be slightly irregular in size, but other than that should be essentially perfect.
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Second quality means that there could be small holes (no larger that 1 to 2 millimeters), small, unnoticeable tears – such as in the hem of a garment, or inside the collar, or small stains. Third quality means there could be larger holes and stains, broken zippers, some tears. Fourth quality is really the bottom of the barrel. The garments have holes, stains, broken zippers, cuts, etc.
At this level the goods also generally have the brand labels cut out of them. We do not inspect this particular lot, due the quick turn-around required by our customer. They receive the goods, and find that most of it is really second quality, some even third. Upon receiving the customer complaint, the Chief Executive Officer, who is the only person authorized to allow returns or discounts, refuses to take the shipment back, or discount the price. His premise is that the goods did not come with a guarantee, and that it was the customers’ fault that we didn’t have time to inspect them properly in the first place. The customer sues us, asserting that we knew that the goods were second quality all along, and intentionally cheated them.
Far and away the first scenario is the most common. Although it is not really a quality issue, it is the area in which the company is the most vulnerable. Several procedures have been put in place to mitigate the potential liability issues. The people selling us high-end licensed apparel are required to provide us with documentation that the manufacturer has the legal rights to manufacturer and distribute the merchandise. This may come in the form of a copy of a portion of their license agreement or a letter from the licensor or a “sanitized” invoice. To sanitize an invoice, the proprietary details are whited out, such as price, date, contact person, terms, etc.
What is important is that the trademark logo shows on the invoice, and the size and color breakdowns of the merchandise. Sanitized invoice is applicable when buying from broker. The other way that the risk is controlled is by using specific channels of distribution. There are some brands that are extremely aggressive in protecting their trademarks. The example I used above, Tommy Hilfiger is one of them. The Hilfiger licensees are strictly forbidden from distributing trademarked apparel through discount stores anywhere in the United States.
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Further, because there are licensees all over the world, they are restricted from selling in those countries where there is a valid licensee. If they are caught doing so, they could lose their license. This makes things very difficult and expensive for the licensees. As a result, they will at times, try to sell us product anyway. In this event, the most important protection is through the use of proper channels of distribution, specifically, very small stores. The likelihood of a trademark representative targeting this channel is very small.
If, for no other reason, there are too many stores and it would be cost-prohibitive. Also, because the merchandise is popular and high-end, it usually moves very quickly, further reducing the risk of litigation. The second example, involving quality levels is less likely. Because we repackage the merchandise into assorted pre-packs before shipping it to our customers, someone must handle each and every piece. The quality system is not formal, however there are some general rules. If one of the employees in the warehouse notices a garment that is very poor quality, they are instructed to put it aside.
These “packers” are trained to quickly look over the garments as they hang them or fold them. This is considered 50% quality inspection. If the Warehouse Supervisor notices an unusually high number of rejections in a particular lot, she will request authorization from the Warehouse manager to institute 100% QC inspection. He will do an analysis of current shipping deadlines, additional labor costs involved, potential profits, etc. He will then take this information to senior management.
He will inform them of the problem, the cost implications of not correcting it, the cost implications of performing 10% QC on the goods, and the impact on other scheduled tasks. If approved, 100% QC will be implemented in which each garment is thoroughly inspected. The garments are then separated into batches based quality – 1 st, 2 nd, 3 rd, and 4 th. If there is a large amount of lesser quality goods, the CEO may decide to return them, or he may decide to sell them in their appropriate category.
