Issue 7 – Autumn 2012

LAW À LA MODE

Fashion, Retail and Design Group

Counterfeit goods online: ISP liability – still a grey area?

Red card from adidas to third-party online trading platforms

Time to wear your #ad on your sleeve

Customizing your customs strategy

Opportunities for international retailers in the United Arab Emirates – part I

Using a haute couture approach to protecting business secrets

Discrimination issues in the fashion industry

The real estate challenges of factory outlet centers in Germany

Transfer pricing and global controversy trends

ContentsContents

COUNTERFEIT GOODS ONLINE: ISP LIABILITY – STILL A GREY AREA? 04

The EU Model and its impact on Turkish national legislation

RED CARD FROM ADIDAS TO THIRD-PARTY ONLINE TRADING PLATFORMS 06

Sporting goods manufacturers start tackling third-party online sales of their brand products

TIME TO WEAR YOUR #AD ON YOUR SLEEVE 07

Hurdles when advertising through social media and tips for advertisers

CUSTOMIZING YOUR CUSTOMS STRATEGY 08

Tips and tricks for brand owners on dealing with counterfeits coming into the EU

OPPORTUNITIES FOR INTERNATIONAL RETAILERS IN THE UNITED ARAB EMIRATES – PART I 10

Thoughts on how foreign retailers can set up business in the UAE

USING A HAUTE COUTURE APPROACH TO PROTECTING BUSINESS SECRETS 13

Why secrecy is especially important in and around the fashion industry

DISCRIMINATION ISSUES IN THE FASHION INDUSTRY 14

Knowing how to deal with and be prepared for discrimination in the workplace

THE REAL ESTATE CHALLENGES OF FACTORY OUTLET CENTERS IN GERMANY 15

Good opportunities for FOCs in Germany, despite some real estate challenges

TRANSFER PRICING AND GLOBAL CONTROVERSY TRENDS 17

Tax planning opportunities for multi-national enterprises: transfer pricing

BUSINESS ROUND UP 19

The news and the views

CALENDAR 20

Our round up of what’s on where you are

02 | Law à la Mode

Summer 2012 may be fading away, but for those in the fashion industry, this does not mean it is time to rest. September is an important month, if not THE most important month, in the fashion calendar. Designers, fashion houses, manufacturers, buyers, journalists and – last but not least – the fashion-loving crowd get ready for the fashion shows in Milan, Paris, London, New York and Madrid. DLA Piper’s Fashion, Retail and Design “FRD” group is right on time to deliver the latest news and views in the legal fashion arena.

This Autumn 2012 edition of Law à la Mode is brought to you by our German editorial team. It is fair to say that Berlin is currently the fashion capital of Germany. International fashion events such as Mercedes-Benz Fashion Week, PREMIUM and Bread & Butter, as well as the popularity of designers like Lala Berlin, Kaviar Gauche, c.neeon, Claudia Skoda and Kostas Murkudis, have helped to revive the fashion hype of 1920s Berlin. Autumn, however, sees the focus turn to the southern part of Germany, where the world-famous Oktoberfest takes place every year. Although technically a folk festival and not a fashion event, fashion plays no minor role alongside Bavarian beer and pretzels. In fact, the traditional costumes worn by men (lederhosen) and women (dirndls) can be quite exquisite and costly and a whole industry has evolved around them. This season, for example, Austrian designer Lena Hoschek will be opening a pop-up dirndl store in Munich.

To kick off this edition, we look at how online counterfeit sales are raising legal issues worldwide. It is not only Germany that is struggling to understand the precise rules on the liability of Internet service providers, as we learn from our Turkish colleagues on page 4. Further, we hear from our German antitrust colleagues, on page 6, how brand owners such as Nike and adidas are adapting their selective distribution systems as a means of blocking unauthorised third-party sales of their products.

Advertising through social media is becoming ever more attractive for companies, but it is also risky due to existing legal uncertainty. Our IP colleagues from the UK provide recommendations for advertising over Twitter and similar social media sites (page 7).

Our IP colleagues from the Netherlands explain how to efficiently deal with counterfeits coming into the EU and how to discover and obstruct the trade lines used by counterfeiters (page 8).

In the first of a two-part publication, on page 10 our colleagues in Dubai report on how foreign retailers can identify good business opportunities in the United Arab Emirates, and they provide tips as to what needs to be considered from the corporate, IP and real estate perspectives.

From an employment law perspective, our colleagues from the UK explain how to protect business secrets effectively (page 13), while their German colleagues provide insight as to how to deal with discrimination issues in the workplace (page 14).

When it comes to factory outlet centers, consumers expect a diversity of goods and great bargains. To meet their expectations, various legal aspects need to be considered in the planning phase, as explained by our real estate colleagues from Germany (page 15).

Multi-national enterprises should adopt best practices in regard to transfer pricing in order to avoid exposure to tax authority enforcement, as outlined by our tax colleagues from the US (page 17).

We do hope that you enjoy this Autumn issue. If you have any comments, please get in touch with the Fashion, Retail and Design group via our email: fashion@dlapiper.com.

By Saskia Laïs and Silke Hesse

Editorial

Saskia Laïs (Cologne)

Silke Hesse (Munich)

Editorial Board

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By Gokhan Gocke and Fulya Ozgeber (Istanbul)

Counterfeit Goods Online ISP Liability – Still a Grey Area?

The development of the Internet has led to a proliferation of trademark infringement abuses: analysis shows a rapidly increasing volume of higher quality counterfeit goods being disposed of through online auction sites, such as eBay, as well as easier access to means of disseminating copied works via web-based communities. In an online context, the concept of territorial IP infringement also tends to lose its significance: the operation of the World Wide Web commonly involves a number of parties within a complex infrastructure across several jurisdictions. The parties involved in an IP infringement action can therefore be numerous.

04 | Law à la Mode

With an increasing dissemination of counterfeit goods online and the weakening of geographical boundaries creating practical barriers to pursuing individual infringers, it is unsurprising that trademark owners are concerned that the strength of their IP rights is being eroded. One reaction to this dilemma by rights-owners has been to initiate legislative actions against Internet service providers (ISPs). There are clear issues with imposing such liability: particularly when an ISP is not involved in content creation, holding it liable for all third-party information on its hosted websites can seem commercially unreasonable. However, in the circumstances, this can be the only practical solution open to brand owners.

Global laws and international courts continue to arrive at different conclusions as to whether imposing liability on ISPs is valid, creating a patchwork of decisions and rules surrounding the limitations of liability, which vary depending on which jurisdiction you are in. However, in Europe at least we are starting to reach some level of harmonization.

According to article 14 of the E-Commerce Directive (Directive 2000/31/EC), ISPs are not liable if they have no actual knowledge of the illegal activity in question or are not aware of the facts or circumstances from which the illegal activity or information is apparent. However, upon obtaining such knowledge or awareness, they must act expeditiously to remove or to disable access to the infringing content in order to avoid their liability.

In our own (Turkish) jurisdiction, the liability of ISPs was previously a gap in Turkish national law, dealt with only by the statement in the Turkish Civil Code: “Every person is bound to exercise his rights and fulfill his obligations according to principles of good faith”. However, in 2007, the Law no. 5651 on Regulating Broadcasting in the Internet and Fighting against Crimes Committed through Internet Broadcasting came into force. While Law no. 5651 does not mention counterfeiting and trademark infringement directly, it reflects the provisions of the E-Commerce Directive by stating that (although ISPs are under no obligation to control the “content” made available by

third parties), ISPs are required to remove illegal content from websites when they are put on notice and receive notification of such illegal content.

It remains to be seen how the law in this area develops, but one thing is clear: brand owners operating online will continue to look for simple and cost-effective solutions to online infringements, and while they do, ISPs will need to stay on their toes.

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Just a few weeks ago, the world’s no. 2 brand (by turnover) in the sportswear industry, adidas, announced new rules for the online distribution of its products: online sales via third-party platforms will no longer be tolerated. According to an article in the German daily newspaper Süddeutsche Zeitung, ASICS have introduced similar rules and Nike is likely to follow suit, though officials have not yet confirmed this. These latest developments show a clear trend in the high-end sportswear industry towards developing new distribution rules aimed at restricting the sale of goods via third-party platforms like eBay or Amazon.

Such trends reflect the view of leading sportswear manufacturers that their brand image is being endangered, especially by third-party online trading platforms which do not always comply with the brand owners’ own perception of luxury, quality and style. The set-up, maintenance and support of a high-end online store can be costly. Selling products via eBay, on the other hand, is relatively cheap. Online marketplace sellers therefore benefit from the advertising efforts of high-end online stores – as well as from those of traditional bricks-and-mortar stores – without having to bear any of the associated costs – so-called free riding.

From the perspective of applicable antitrust laws, the restriction of free riding is permissible. The European Commission clarified in its Guidelines on Vertical Restraints (OJ 2010/C 130/01) that “… where the distributor’s website is hosted by a third party platform, the supplier may require that customers do not visit the distributor’s website through a site carrying the name or logo of the third party platform.” Additionally, two rulings by German regional courts, both dating from 2009, confirmed that even without a qualitative selective distribution system, manufacturers may rightly restrict sales via eBay in agreements with their distributors.

However, despite these guidelines and rulings, in 2009, the German Federal Cartel Office (FCO) found that an obligation in an agreement between a manufacturer of contact lenses (CIBA Vision) and eBay, requiring eBay to delete offerings of CIBA products on its platform, was anti-competitive and not justified by reason of prevention of free riding. In Germany,

at least, this critical approach by the FCO to agreements restricting online sales seems likely to continue to prevail: as Süddeutsche.de reported, officials have already confirmed that the FCO has opened investigations regarding ASICS’ new distribution conditions in connection with alleged resale-price maintenance. It remains to be seen whether the future of adidas’ new proposals face a similar fate.

Red card from adidas to third-party online trading platformsBy Jan Dreyer and Ulrich Bartl (Cologne)

06 | Law à la Mode

TIME TO WEAR yOUR #AD On yOUR SLEEvE

As Morgan Spurlock pointed out in his 2011 docu-film, The Greatest Movie Ever Sold, advertising has snuck into every crevice of modern life. Yet it remains a fundamental tenet of most national advertising codes that consumers must be able to identify marketing communications as such. This principle was thrown into the spotlight this summer, when the UK Advertising Standards Authority (ASA) ruled that celebrity tweets sponsored by Nike breached the CAP Code.

The Offending Tweets

The tweets, posted by footballers Wayne Rooney (Manchester United) and Jack Wilshere (Arsenal), formed part of Nike’s “Make it count” campaign. The tweets contained the hashtags #makeitcount and the URL gonike.me/Makeitcount, but despite that, the ASA held that the tweets were not identifiable as marketing communication. In particular, since the timing of the tweets coincided with the launch of the campaign, not all consumers would recognize them as part of the campaign. Moreover, the ASA considered that not all Twitter users would know that the footballers and their clubs were sponsored by Nike, and that the tweets were not obviously marked as brand-led communications.

Wider Crackdown

Nike is not the first brand to be admonished for such activities. In 2010, the UK Office of Fair Trading found that Handpicked Media (a blog operator) had breached the Consumer Protection from Unfair Trading Regulations 2008 by failing to disclose when promotional comments had been

paid for. Further afield, the Australian Advertising Standards Bureau ruled in July 2012 that a corporate Facebook site is a marketing tool “controlled” by the advertiser, and thus is subject to national advertising rules, even if the content is user generated.

Tips for Advertisers

While the law in this area is still evolving, there are certain measures that you can take to protect your advertisements from recrimination:

The ASA is not prescriptive as to ■ how advertisers identify their marketing communications, but has recommended following the IAB and ISBA guidelines by using #ad or #spon to identify marketing tweets. In March 2012, Mars thus successfully defended complaints over celebrity tweets such as: “You’re not you when you’re hungry @snickersUk #hungry #spon…”.

Sponsorship should be made clear in paid-for content, and ■

within the blog posts/videos themselves (in case they go viral).

Check terms and conditions of social media platforms/ ■

websites: in April 2011 Facebook banned Ad.ly for breaching its terms and conditions by paying celebrities to endorse products in their updates.

Ultimately, brands need to take a common-sense approach. ■

If in doubt as to whether a communication’s promotional nature is evident or not, amend it appropriately. If you remain concerned – seek legal advice, try to get comfort from your national regulator – or just #avoid!

By Rebecca Kay (London)

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Research shows that most consumers enjoy purchasing luxury products and believe that such goods are worth the price they pay for them. However, a small minority of people still believe that the wide availability of counterfeits does not decrease the value, satisfaction and status of original luxury brand names and that imitation is the sincerest form of flattery.

CUSTOMIZInG yOUR CUSTOMS STRATEGyBy Carja Mastenbroek (Amsterdam)

08 | Law à la Mode

“Imitation is the sincerest form of flattery” – True?

The luxury goods industry, rather unsurprisingly, does not share this view. Luxury articles are not necessarily difficult or expensive to copy. Luxury goods brand owners are therefore frequently victims of intellectual property fraud, such as trade mark, design right and copyright infringement. Other than being a general nuisance for luxury goods brand owners, the existence of counterfeit products has serious economic and social consequences at a global scale. Furthermore, it disrupts the proper functioning of the market and jeopardizes consumer protection.

A few figures

In 2011 and based on Customs regulation 1383/2003, European Union Customs agencies retained almost 115 million suspected counterfeit goods at the borders of the EU on grounds of suspected intellectual property infringement. The value of the goods seized amounted to nearly €1.3 billion. In the same year, Dutch customs alone stopped about 150,000 pieces of shoes and garments from entering the EU.

Anti-counterfeiting strategies

Trademark owners can protect themselves against such criminal actions in a number of ways. First of all, it is possible to submit a request to European customs asking that they stop all suspected counterfeit branded products from coming into the European Union, by filing a Customs Notice. Furthermore, cooperation with organizations that deal with anti-counterfeiting, such as the nonprofit Dutch anti-counterfeit organization REACT, is also recommended. Trademark holders can become members of such organizations and receive legal support for limited standard fees, e.g. in regard to customs seizures, market sales, and advertisements on third-party trading websites such as eBay. Such measures are generally effective in addressing the majority of small scale and one-off national counterfeit cases in an inexpensive way.

Dutch courage

Customs in the Netherlands often deal with European-wide infringements because the Rotterdam harbor is a well-known hub for counterfeit goods entering Europe. As a result, Dutch customs are well versed in dealing with such issues.

Furthermore, where anti-counterfeiting actions are brought in the Netherlands, the Dutch courts tend to adopt a pro-claimant attitude and the court has no strict requirements as to the required level of proof that the claimant must provide. Once a Dutch infringer is involved, or a route through the Netherlands is used to transport the infringing goods, it is possible to bring a claim against the infringer before the Dutch courts with a view to obtaining an injunction against the infringer preventing them from carrying out further infringing acts or producing further infringing goods. Other remedies include recall, correction and acquiring information about the identity of suppliers and/or buyers (not consumers) concerned, quantities and routes subject to a penalty per breach.

The Dutch courts can also grant permission to search the administration of the infringers. This lawfully acquired information, if used correctly, can then be used to detect trading activity across Europe, which in turn enables a brand owner to deal with infringers both at the bottom of trade lines where goods are purchased and at the intended destination of the counterfeited goods.

By employing such strategies, a brand owner can simultaneously stop the criminal activity and commence proceedings against an infringer. Additionally, by securing evidence, the brand owner has assurance that the infringer is able to comply with any court order requiring it to pay compensation or surrender profits. It is also open to the court to order that all infringing products be destroyed.

Conclusion

The fight against counterfeits is one of the most important, and complex, battles waged by brand owners. By developing a multi-pronged approach, brand owners should reach the best result in the most cost-efficient way. By cooperating with official organizations, such as customs, as well as private organizations that deal with anti-counterfeiting, brand owners can see the majority of the illegal products removed from the market. When this approach is combined with customized action, such as seizures and legal proceedings, the more professional, complex and internationally operating trade lines can also be obstructed.

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OPPORTUnITIES FOR InTERnATIOnAL RETAILERS In THE UnITED ARAb EMIRATES – PART I

Expanding Market

With ever-expanding purchasing power, increasing brand awareness and a growing population, the United Arab Emirates (UAE) is increasingly attracting inward foreign investment as it entices more and more international retailers to its shores. Rather than deter new investors, the Arab Spring (the political unrest that has swept across the region) has reinforced the UAE’s appeal as a safe haven to visit and do business.

When entering any new market, there are always legal issues that need to be considered, and the regulatory regimes that apply within Middle Eastern markets are notably different from those in other jurisdictions. This article is the first of a two-part publication which highlights the common legal issues that brand owners need to be aware of when entering the UAE market for the first time. This first part focuses on the corporate structuring options for retailers; part two (coming in the Winter edition) will look at real estate and intellectual property issues. While some of these issues will

be common to all of the Middle Eastern jurisdictions, each jurisdiction ought to be considered separately and advice sought where appropriate.

Corporate Structures

For foreign retailers entering the region, careful consideration is required when choosing which corporate structure to adopt, and retailers should consider all the options (which are often new and unfamiliar) available to them. For example, these options include, but are not limited to: (i) appointing a local agent, (ii) operating a traditional franchise model with a local entity acting as a sponsor or (iii) a joint venture with a local partner.

The structure chosen will always depend upon the individual circumstances of the retailer, its local partner/agent and its target market. The choice of local partner/agent is key and the contract between the retailer and that local partner/agent must clearly define the relationship between the parties.

By Kevi Watkins and Katie Withers (Dubai)

10 | Law à la Mode

Agency Arrangements

Agency arrangements are common, although they do not suit all retailers, particularly where brand protection is important. Some retailers are uncomfortable with the concept of using an agent as a result of:

■ the retailer’s inability to control all of the day to day commercial decisions

■ the retailer’s lack of involvement in negotiations with third parties

■ the level of agent’s fees

■ the agent’s lack of full understanding of the brand (and brand requirements) and

■ the simple fact that retail is not always the agent’s core business

These issues are easier to address in a joint venture or franchise arrangement, which can provide the retailer with more control over the brand and management of the business.

In certain circumstances, federal law in the UAE permits commercial agents to register their agreement with the ministry, which then provides them with a raft of statutory protections (which cannot be contracted out of), including:

a) entitlement to territorial exclusivity

b) a presumption that the agent will be entitled to statutory compensation in the event of termination (even where the contract does not provide for this) and

c) an entitlement for the agent to receive commissions on sales of products in their designated territory, irrespective of whether such sales are made by or through them

These enhanced rights mean that, in most cases, registration is detrimental to the brand owner (the “principal” in the relationship) and is a key issue to be covered when appointing an agent in the UAE.

Franchise Arrangements

The UAE agency laws described above are construed broadly and may capture and apply to franchise arrangements as well as commercial agencies. In view of the enhanced rights described above, this is an obvious risk for franchisors. It is therefore essential to ensure that the possibility of registration is envisaged in, and prohibited by, the franchise agreement. There are also a number of practical steps that a franchisor can take to avoid any suggestion that it has consented to registration including setting out in the franchise agreement a prohibition on registration, and express acknowledgement by the franchisee that the agreement is not and should not be construed as creating a commercial agency, and to impose practical difficulties on a franchisee trying to register an agreement.

Joint ventures

The local partner of the joint venture company must own at least 51 percent of the shares in the joint venture. Carefully drafted joint venture documentation should afford protection to the international retailer notwithstanding that the local partner holds the majority shareholding ensuring that it receives enhanced profits. Profits can be skewed in the favour of the international retailer so that a split of up to 80/20 in favour of the international retailer can be achieved, but there are anti-concealment Iaws in place which prevent parties attempting to structure around these thresholds. Criminal sanctions apply if breached.

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Choice of Agent/Local Partner/Master Franchisee

The services required of a local partner/agent/franchisee (and the fees payable for them) will vary from retailer to retailer. Where a retailer is new to the region, it is likely to require a more active local partner/agent/master franchisee to facilitate introductions and create business opportunities.

The large retail partners/agents/franchisees in the region have a good knowledge of the market and usually have strong commercial relationships with landlords and other third parties, which generally enable them to negotiate better terms.

A partner/agent/franchisee that represents a number of strong brands can be appealing to landlords, as they can negotiate a number of deals with a variety of retailers through one entity. This collective bargaining may lead to improved commercial terms including better rents, rent free periods, exclusivity of a certain product and prime locations in a mall, to name a few.

Alignment of Interest

An important practical consideration for retailers is to ensure that their interests are aligned so far as possible with the interests of the local partner/agent/master franchisee. Staff operating the stores should undertake the same quality of training as their colleagues in London or New York, for example, to ensure that brand recognition and value is upheld and that the trading format and product offering reflects the same standard which is available in the retailer’s flagship stores. This has been a frequent problem in the UAE, where the same level of training has not generally been provided and, therefore, clients do not receive the same shopping experience as they would in the same branded store in Paris,

for example. Retailers have become aware of this issue, which is being addressed and is improving across the region. Again, the best way for a franchisor or principal to avoid this problem is to impose strict terms on the use of its brand in any master franchise or agency agreement and in many cases to exercise similar control over the terms on which its master franchisee may permit third parties to use a brand. Trademark registrations (which can then be licensed to the local partner) are also essential in this respect.

Trading Licences

Each emirate has its own licensing requirements. However, retailers operating in Dubai and Abu Dhabi require a commercial licence and a permit for each individual outlet. The commercial licence is renewed annually and is prescribed on an individual basis according to the retailer’s business activities.

The UAE is fast becoming a key market for fashion brands, and as retail markets continue to struggle in many parts of the world, continued growth in the Middle East makes the region ever more attractive. However, the relatively complex regulatory regime applicable to foreign investors makes local advice essential. Similarly, brand expansion typically involves trading in more than one part of the region. Brand owners should ensure that their agreements are effective (and their IP is registered) in each relevant country, because there are also significant differences between jurisdictions.

12 | Law à la Mode

Every business in the fashion industry has information that it considers both integral and invaluable to its success. The information may include designs for existing and future collections, secret pricing information or confidential marketing strategies including branding, advertising and new store concepts. However, all this information is open to exploitation by employees if it is not protected in the right way. Many employees across the business will have valuable knowledge about company secrets, making them attractive to any competitor seeking to move into, or develop their share of, the fashion industry. In the current challenging economic climate, it is essential that businesses protect their key information and seek to retain customers, suppliers and key employees; protecting these assets can be fundamental to maintaining the success of the business.

The key to protecting confidential information from misuse by employees is to ensure that the issue addressed at the outset of the employment relationship. The contract of employment should clearly set out the information that the business considers confidential and stipulate the restrictions on its use or disclosure by employees both during and, importantly, after employment. The confidentiality provisions should then be supplemented by bespoke restrictive covenants. These restrict the way in which an employee can act following the termination of their employment. Careful thought must be given to the drafting of the covenants. They must be

tailored to each individual employee depending on role and/or seniority. The time span and geographical scope of the covenants is critical; if the covenants go further than is reasonably necessary to protect the legitimate interests of the business, they are unlikely to be enforceable. In the fashion industry, covenants include restrictions on employees competing with the business, a prohibition on soliciting staff, and restrictions on dealing with, or soliciting, customers and suppliers.

It will also often be appropriate for contracts of employment to include what is known as a garden leave clause. This allows an employer to prohibit the employee from attending the workplace or from contacting staff, customers, suppliers or other business contacts of the employer during the employee’s notice period. The employee remains employed and is paid their normal salary and benefits. The purpose of garden leave is to remove the employee from the business to reduce exposure to recent information they could exploit and to dilute their relationships with customers and suppliers.

There is no doubt that protecting confidential information is a complex matter. However, employers need to rise to the challenge and give careful thought to how adequate protection can be achieved in their business and should bear in mind that the approach should very much be haute couture; off-the-peg solutions are of no value here.

USING A HAUTE COUTURE APPROACH TO PROTECTInG bUSInESS SECRETSBy Vinita Arora and Jennifer Holyoake (London)

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DISCRIMINATION ISSUES In THE FASHIOn InDUSTRy

By Marcus Kamp (Cologne)

In an industry where aesthetics reign supreme, the line between superficial partiality and unjustified discrimination can easily become blurred. As a result, the fashion industry is particularly vulnerable to employment actions for discrimination with respect to age, sex and ethnic origin.

The Issue – The spectre of a discrimination complaint cannot be underestimated; court action can easily damage a company’s reputation and result in additional business costs, both due to a decrease of employee productivity and staff morale as well as compensation for the affected employees. Therefore, it is in every company’s interest to be proactive and prevent discrimination, rather than having to redress it after damages have been suffered.

Education, Education, Education – The key to complying with anti-discrimination laws is education. Employees, in particular senior employees, should receive preventative equality and diversity training. It is also advisable that companies provide anti-discrimination and diversity policies to their employees. A well-crafted policy should, among other things, clearly identify prohibited conduct and also warn employees of disciplinary measures that accompany policy violations. Policies should also set out the company’s discrimination complaints procedure.

Selection – Recruitment is often a sensitive spot area from which discrimination complaints arise. Employers need to avoid selection by stereotype (e.g. targeting only younger people

or white females) as this can readily give rise to allegations of discrimination on the basis of age or ethnic origin.

Pay and Promotion – Disparities in women’s and men’s earnings for equal work and significant overrepresentation of men in leadership positions are some of the most common grounds for complaints of sexual discrimination. Companies should audit their current salary scheme to resolve any pay inequity between the sexes. Existing promotion policies should be amended accordingly to avoid any suspicion of reinforcing the glass ceiling.

Sexual Harassment – Although not strictly a form of discrimination, sexual harassment is a further issue which fashion businesses need to keep in mind. Sexual harassers can be women or men and do not have to be of the opposite sex to the victim. In an employment context, the harasser can be the victim’s supervisor, subordinate, colleague or even a client. Employers can help to avoid the problem in the first place through a clear no tolerance policy.

Whilst no policy or preventative training can eliminate the problem of discrimination in the workplace altogether, enhanced awareness of the potential issues and of official company policies for dealing with it will go a long way to reducing its occurrence.

14 | Law à la Mode

THE REAL ESTATECHALLENGES OF

FACTORy OUTLET CEnTERS In GERMAny

It started as a trend in the United States in the early 80s and only made it to Europe in the mid-90s: designer outlet centers (DOCs) or factory outlet centers (FOCs) are large retail centers generally located slightly off the beaten track in a safe distance from larger towns in which brand owners or license holders sell their merchandise at highly discounted prices. The appeal of FOCs greatly depends on the mix of tenants and the goods on offer. Generally the fashion and clothing industry is represented in a large proportion with clothing retailers renting up to 70 percent of the total lease area. The remaining stores usually sell goods such as shoes, leather articles, accessories and household utensils.

Experts claim that the average customer spends approximately €300 per visit in an FOC, containing at least 100 rental units covering a sales area of more than 20.000 sqm. Due to strict planning legislation, there are very few FOCs in Germany compared with the number of FOCs found in other European countries. To date, less than 10 FOCs have been opened in total, however this number is likely to double over the next 10 years as demand for the FOCs outstrips supply.

On average it takes between 5 and 10 years from establishing a FOC to its grand opening. The greatest challenge is the establishment of appropriate planning law. In general, FOCs

are not developed within town centers; their development therefore has to be considered within the context of an existing building plan, or a suitable project-related building plan “vorhabenbezogener Bebauungsplan,” pursuant to Section 12 of the German Building Code – BauGB) has to be enacted. In the latter case, a municipality and project developer will work in close cooperation to establish the project-related building plan. In general, the project developer is then also obliged to bear project-related planning and development costs. Due to their size, FOCs have a supra-regional impact. Consequently, both the interests of the municipality in which the FOC is located and the interests of those in the neighboring villages have to be considered in the planning process.

After the hurdle of planning law has been overcome, both landlord and tenant face certain particularities when concluding the lease agreements. Due to restrictions in the building plans only a certain product range may be sold in FOCs. Care should be taken to ensure that all limitations are reflected in the lease agreement in detail. In general two prerequisites have to be complied with. The goods to be sold should consist of (i) brand name articles and (ii) specific category of goods, which are often characterized to have one or several of the following features: factory seconds,

By Fabian Muehlen (Frankfurt)

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discontinued models or models of the previous season, unsold goods, goods for market testing and supply overhang products, i.e. initially unsold products which have not met the envisaged customer demand.

In order to ensure that the retail space within each unit is utilized efficiently, certain basic rules for the operation of a retail business need to be taken into account. The factory outlet store has to offer a sufficient number of goods to satisfy the demand of the target customer. This means having suitable stock levels that are of equal amount to those offered in full-price retail stores, including a comparable range of sizes. Clothes should be in line with the season and time of the year and match the customers’ expectations in regard to quality and the general factory outlet center concept, and therefore match the standards of an FOC’s facilities.

To avoid possible public fines for the breach of selling constraints in the building plan, the exact scope of use should be defined in the lease agreement. Rights of the landlord to verify that these restrictions are complied with and corresponding contractual penalties for possible cases of breach of contract have also become a standard in FOC leases. In case of severe breaches of contract a special termination right is often agreed on as last resort.

Customers expect to find prices in FOCs which are significantly lower than the manufacturer’s recommended retail price. As a result the parties often agree on minimum and average price discounts, varying between 30 percent and 50 percent.

A key factor in the success of a FOC is to ensure that the FOC is designed and operates in a way that puts the needs of its consumers first. It is therefore crucial that the common

opening hours are respected, which are usually not only limited to the statutory opening hours but also include special promotional events, open-for-trade Sundays (normally shops only open six days a week in Germany), or seasonal marketing activities such as summer, winter and Christmas sales. In this context, the landlord should also consider an appropriate tenant mix which is in line with the general conception of the FOC. This is not only in the interest of the landlord. Increasingly tenants also have a very specific idea of the fellow tenants they would like to see in the immediate neighborhood of their rented unit and in the FOC in general. It is not unusual that specific lists of key tenants are discussed among the parties before conclusion of the lease agreements.

Lastly, FOCs are not only seen as a pure shopping experience. Bearing in mind that customers often have to travel a significant distance to get to the FOC and that the round trip can easily turn into a full-day excursion, besides having attractive retail stores, it is important to have engaging non-retail areas within the FOC. In this respect, an eating and drinking area rich in variety and a kid’s club are considered essential.

In summary, FOCs in Germany offer a great opportunity for both landlords and tenants in the years to come, as long as the lease agreements are well drafted and the legal prerequisites set out above are considered. Talking about opportunities: even if you are neither landlord nor tenant, but just the customer, don’t we all share the excitement of a good bargain if we get the chance?

16 | Law à la Mode

TRANSFER PRICING AND GLObAL COnTROvERSy TREnDS

Over the past decade, transfer pricing (that is, what affiliated companies charge each other for finished goods, services, financing or use of IP) has been a source of tax planning opportunity and the largest single source of tax controversy for multinational enterprises (MNEs), large and small, in a wide variety of industries, including retail and consumer products companies.

Service charges, and especially headquarters types of charges, have historically been the most frequent type of transfer pricing transaction challenged by tax authorities, followed by intercompany interest charges. However, many tax authorities are challenging charges for the use of IP (such as royalties) or asserting claims for increased tax based on assertions that IP is being created locally by non IP owning affiliates. Many MNEs report that tax authority enforcement of transfer pricing rules is becoming increasingly aggressive, especially in emerging market countries.

By Michael F Patton (Los Angeles)

www.dlapiper.com | 17

According to a survey of MNEs conducted by Transfer Pricing Week in mid-2010, the 10 most active jurisdictions for transfer pricing enforcement were:

Worldwide Enforcement Trends

In the United States, the IRS is targeting transfer pricing issues by significantly increasing the number of international examination agents and economists. These agents and economists are scrutinizing tax reduction strategies that have as a core element the transfer of intangible assets, such as trademarks or brands, outside of the U.S. into low tax jurisdictions. Scholars and policy makers have estimated that these tax reduction strategies result in a loss to the US Treasury of $10 billion to $25 billion annually. Legislation has been proposed that would limit the amount of a US taxpayer’s foreign profits attributable to IP exploited outside the US that could be deferred in any tax year.

Focused transfer pricing examination approaches are being taken in other countries, including China, where tax officials have begun asserting that the profits deemed attributable to local cost advantages should be taxable in China and that the profits attributable to product development efforts conducted in China should be taxed locally.

In Europe, examination of the effects on profits of business restructurings continues to be a significant issue in Germany, where statutory exit taxes on future profit reductions may apply, as well as in France and other countries where administrative positions to deem a transfer of future profits as part of a business restructuring may effectively result in an exit tax.

Recently, the OECD initiated a multi-year project to revise the Transfer Pricing Guidelines used by member countries. This project reflects an interest by member countries in developing rules to combat transactions seeking to shift profits attributed to intangibles away from high tax jurisdictions and into tax favored jurisdictions. In early June 2012, the OECD released draft revisions to the Transfer Pricing Guidelines dealing with intangibles. Under this draft, a locally created taxable marketing intangible could be deemed to exist when a local non-brand owning distribution and marketing affiliate incurs advertising or marketing expenditures beyond certain undefined levels.

Some non-governmental organizations, especially in the UK, have vigorously challenged whether the arm’s length standard, which is the accepted international norm used by companies and tax authorities to administer transfer pricing rules, should continue to be used by tax authorities. However, a UN Committee of Experts recently rejected calls for developing countries to abandon the arm’s length standard, noting that failure of developing countries to follow internationally accepted norms of transfer pricing taxation could hinder investment into, and economic development of, those countries.

Transfer Pricing best Practices

What are best practices that companies should adopt to deal with transfer pricing compliance burdens, controversy exposures and to take advantage of legitimate tax planning opportunities?

■ Formal transfer pricing policies should be adopted and implemented through legally effective agreements that are able to withstand challenge.

■ Global transfer pricing documentation should be prepared and updated periodically. As many jurisdictions have different documentation requirements, a risk adjusted approach should be taken so that documentation meets local requirements in those jurisdictions where the transaction volume at issue justifies taking a country-specific approach.

■ At the onset of a transfer pricing examination, an experienced advisor should be consulted to assess the tax exposure and to assist with preparing a comprehensive defense.

■ Risk mitigation through Advance Pricing Agreements or advance rulings should be considered for those countries where the transaction volumes and risks justify the time and expense involved.

■ Changes in existing tax structures and transfer pricing practices should reflect the economic substance of the transactions and be supported by a business purpose.

1 Japan2 India3 China4 Canada5 United States

6 France7 Germany8 Australia9 Korea10 United Kingdom

18 | Law à la Mode

Christian Louboutin secures his title as the red-sole man. Christian Louboutin, renowned world-wide for his signature red-soled high heels, brought legal proceedings in the United States against Yves Saint Laurent in 2011 for trademark infringement, after the French fashion house released a high-heel with a very similar red sole. Having lost his application for a preliminary injunction against Yves Saint Laurent back in August 2011 (see the Winter 2011 edition of Law à la Mode), Louboutin appealed the decision to the United States Court of Appeals for the Second Circuit.

The US court issued its long-awaited and landmark decision on 5 September 2012. Overturning the prior ruling that use of a single hue in fashion items should not qualify for trademark protection, the Court held that Louboutin

does have a valid and enforceable trademark for the use of red soles on shoes, because red is widely seen by consumers as representing the Louboutin brand.

There is a caveat to Louboutin’s success, however: the trademark protection conferred by the US courts only applies to those designs in which the red sole contrasts with the colour of the rest of the shoe. Yves Saint Laurent, and other fashion houses, will therefore be able to continue to sell monochromatic red shoes.

Ethical fashion: will clothes soon be grown in laboratories?As the effects of global warming, and the importance of sustainability, continue to make headlines, worldwide governments and the fashion textile industry alike are looking for ways to reduce the carbon footprint of the fashion industry. Indeed, Scottish designers are currently being encouraged to participate in a trade mission in Chicago at the end of September, where they will display their designs in a room dedicated to ethical fashion.

One designer, based in London, has gone a step further and is growing her fashion designs in her workshop using a concoction that includes green tea, sugar and bacteria. The resulting fabric is a form of “vegetable leather” that can be used for clothes, handbags, shoes and other goods. At this point in time, however, the material is biodegradable, beginning to decompose after a number of years. We shall wait to see if this problem can be overcome, and whether this method of producing fashion garments will ever take off.

BUSINESS ROUnD-UPBy Saskia Laïs (Cologne)

button up!On 1 August 2012, the so-called “Button Solution” came into effect in Germany. The new law aims to protect consumers from hidden cost traps during online transactions and requires e-retailers to render the buying process on their websites transparent and the terms unambiguous. Immediately before placing an order, consumers must be informed in a “clear, comprehensible and prominent” manner about all relevant contract details, e.g. the main characteristics of the goods or services, the minimum term of the contract and the total price, including all associated components such as delivery costs and an indication of any possible further costs or taxes. The relevant information needs to be distinguishable from the rest of the text on the website and may not be “hidden” or only made available via link. In order to complete the transaction, e-retailers must provide purchasers with a click-button, inscribed with the wording “purchase now” (or a similar clear wording), which needs to mark the last step in the purchase process while leaving the consumer with no doubt about the arising payment obligations. This German legislation constitutes a transposition of Article 8 (2) of the European Consumer Rights Directive (2011/83/EU), which has to be officially transposed into national law by all member states by 13 December 2013.

www.dlapiper.com | 19

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Calendar (September 2012 – November 2012)

SEPTEMbER

Compiled by: Silke Hesse (Munich) and Saskia Laïs (Cologne)

Madrid Fashion Week 30 August – 4 September

Madrid International Fashion Fair, Madrid 1 – 3 September

vogue Fashion’s night Out Various cities including Berlin, London, Milan, Amsterdam, New York and Tokyo 6 September

new york Fashion Week 6 – 13 September

Giftrends Madrid 12 – 16 September

London Fashion Week 14 – 18 September

Milan Fashion Week 19 – 25 September

Modacalzado + Iberpiel, IFEMA, Madrid 22 – 24 September

International Design Exhibition, Dubai 24 – 27 September

Paris Fashion Week 26 September – 2 October

Style birmingham Live A/W, Birmingham 29 September

OCTObER

Gold Silver Time Jewellery & Watch Fair Warsaw 5 – 7 October

Chanel Little black Jacket Exhibition Saatchi Gallery, London 12 – 28 October 2012

Hollywood Costume Exhibition Victoria and Albert Museum, London 20 October 2012 – 27 January 2013

Tokyo Fashion Week 13 – 19 October

Designers’ Open 2012, Leipzig 25 – 28 October

FuturModa, Alicante 30 – 31 October

nOvEMbER

Fashion A – Z – Part 2, New York until 10 November

Chloé. Attitudes, Palais de Tokyo, Paris until 18 November

valentino: Master of Couture Somerset House, London 29 November 2012 – 3 March 2013