Exclusivity clauses and the Fashion Industry

The fashion industry is dynamic and unpredictable and provides creatively satisfying work for many designers. However there are countless challenges in such a competitive industry and understanding exclusivity clauses is an important step towards building a successful career as a fashion professional.

Exclusivity clauses

Exclusivity clauses are included within a contract to stop suppliers and/or designers entering into negotiations with other purchasers. Such clauses should be reviewed and seriously considered, as they may place large and long-lasting implications on the supplier’s business.

For a long while Australian fashion labels have had to venture into exclusivity agreements. The duopolies of department store retailers Myer & David Jones have made certain that exclusivity clauses are placed within their contracts. The point is to remove the ability for the supplier to also supply a competitor, and in turn to avoid competition. In the Australian market, the decision to go exclusive has often squeezed brands to the point of voluntary administration, and at times liquidation in doing so.

Kym Ellery, owner and designer of the fashion label “Ellery Land” is a recent example of an individual and label placed in the deep end over an exclusivity clause. The retail battle was that of Myer v Ellery Land and involved Ellery Land breaching an exclusivity contract signed with Myer until 2014 by signing a second agreement with David Jones.

Myer argued Kym Ellery breached the exclusivity of her contract by signing up to David Jones in November last year, and sought an injunction preventing her and the Ellery label from supplying any more clothing to David Jones. In her defense, Ellery claimed her contract with Myer was a restraint of trade. The lack of clothing orders from Myer meant the prospect of facing potential ruin – all stemming from the exclusivity clause in the agreement with Myer – was very real.

The case has continued to raise finely plucked eyebrows throughout the legal, business and fashion worlds. Myer’s public case against Ellery was overshadowed by the notion of being a battle against David Jones rather than the designer herself. A warning perhaps from Myer to other department stores to back off from snatching designers exclusively contracted to them.

After a public apology from Ellery, the battle for now is over. Ellery settled the lawsuit brought against her, through partial payment of legal fees, and agreeing to Myer’s re-negotiated terms to extend its contract with Ellery for another two seasons in exchange for letting her carry out her contract with David Jones.

Myer claims that the Ellery case would not set a precedent for designers who wanted to deal with both of the large department stores.  Various press releases at the time claimed that the Myer corporate affairs manager had stated that “There has been significant time and cost and Supreme Court proceedings that have taken place to ensure that we have been able to continue to gain the supply of Ellery …For us it has ensured that exclusive agreements, which are a big part of the retail industry, will continue going forward… Exclusive agreements are commonplace around the globe in retail and we’re sure that will continue.”

Where to from here for suppliers?

There is an overarching lesson for suppliers and designers dealing with exclusivity clauses.For almost all designers it will be imperative when pursuing a contract containing any form of exclusivity clauses (no matter the size of that hard to read fine print), to consider the following:

1.         Quantity v Returns – Keep your shirt on your back!

Ensure that the contractual agreement provides that the minimum quantity to be ordered by the purchaser is large enough to justify locking in to the exclusive arrangement. Is the return enough to cover your expenses, including hidden or unforeseeable costs, and still enough to live and grow on?

            2.         Termination clause – Give yourself room to move

Make sure you are able to terminate the contract early! This is a crucial component of the agreement. There may be circumstances where you need to terminate early. These may include issues that are the fault of either party, or are unforeseeable situations that could leave you in the red i.e.  Where your suppliers are not able to supply the quality, in time or at all, or when the purchaser does not meet the minimum order quantity.

            3.         Continuance v Compensation – Stay only when it is worth staying

Ensure that the terms of the agreement provide scope for both continuance and compensation.

Ensure that the contract is for a reasonable period of time. Don’t let the lure of having your goods stocked on the shelves of a store surpass your ability to move when you want to. If your business is overly restricted you might not see those lights as so bright anymore, and continuance may not seem like such a good option for sustaining your brand and its image in the way you want to.

If the contract is terminated due to a fault other than your own, don’t take it personally, and ensure you are fairly compensated for all loss. Large department stores will often carry seasonal lines, to test run a brand/label/image that may be later carried or dropped. Contracts may be terminated due to any number of reasons.

Ensure that your agreement contains a compensation clause that will be enough to sustain your label through the loss. This should almost always include sales figures of future projections, contracted future sales or a pre-agreed figure. Never let the retailer/purchaser leave you high and dry.

All considered there is hope. Sass & Bide, Ksubi and many other Australian designers have reached breaking point, just to bounce back stronger than ever. The easiest way to avoid disaster is to ensure that you are aware of what you are signing, be sure that you understand what it really means, and be sure that any exclusivity clause comes counter-part with both a termination and a compensation clause. If there is any doubt seek legal advice.

Note: This article provides a summary only of subject matter covered, without the assumption of a duty of care by the Author or the Arts Law Centre of Australia. The summary us not intended nor should it be relied upon as a substitute for legal advice.