Out-Law / Your Daily Need-To-Know

Fashion businesses should assess IP rights in light of Covid-19 challenges

Out-Law Analysis | 21 Apr 2021 | 10:30 am | 5 min. read

The Covid-19 pandemic has accelerated change on the high street, pushing a number of fashion businesses over the edge into insolvency.

However, even where businesses have failed, their brands have survived. For example Topshop and Topman were bought by ASOS for £330 million, with the deal meaning the survival of their brand names while the physical stores closed down.

Those in the fashion industry need to evaluate and assess their intellectual property (IP) assets and licensing agreements to ensure they are adequately protected from the risks posed by insolvencies.

This means assessing who owns the IP and what is required to continue to operate a business: what happens to branded stock if a company fails? Who bears the risk of an insolvency? Can a business place its IP outside the trading business to de‑risk it, in the event that the trading arm runs into difficulties?

When a business becomes insolvent or goes into administration, it may be possible to realise value from tangible assets such as the company's stock but it is likely that one of the most valuable assets will be the trading name and other IP assets such as product and brand names.

Thus, even if a business ceases to exist, its brand, reputation and goodwill may continue to survive. In the fashion industry, in particular, where the cost of establishing a brand proposition can be high, buying an existing name can present real opportunities.

IP rights in the fashion industry

When talking about IP rights in the fashion industry, in addition to trade marks which protect the trading name, domain names and other brand elements, businesses also own customer lists protected by database rights and confidentiality; design rights which protect the designs; and copyright which protects the design drawings, the fabric prints and marketing collateral.

IP rights are intangible assets, but similarly to tangible assets, they can be sold, purchased, assigned, licensed and used as security.

IP rights can be valuable to a business and should be considered whether or not the business is at risk of becoming insolvent. The first step to understanding the IP rights a business owns is to identify what these are and to confirm who owns them.

While trade marks are protected by registration, the majority of IP rights held by a fashion house are unlikely to have been formally registered. Therefore, while evidence of registration of any IPRs is always helpful, other records such as contracts and agreements dealing with any assignments or licences, payments and royalties are likely to be key and so accurate records should be kept.

Contracts for employees producing work for an employer or for commissioned works should include carefully drafted clauses to ensure that the IP rights which may arise from such works are correctly held or assigned to the appropriate owner. By having a clear idea of these rights and ownership, the value of these rights can be more easily assessed as the basis for an injection of cash or, should the worst happen, realising asset value.

Conversely, it is important for suppliers in the fashion sector to consider whether they own the designs in the items they are supplying to ensure they can sell, license or assign them through another channel, should this be necessary in the future.

However, in a fast-moving industry like fashion, legal ownership to some key IP rights and assets may not be that easy to track down which risks value being lost.

Opportunities for fashion businesses on insolvency

Despite the usual difficulties surrounding insolvency, the value of the goodwill, reputation and brands in the fashion industry, built up by different IP rights, can give rise to opportunities.

The strength of their reputation can allow a fashion house to leverage different market channels more easily and if the worst does happen, the business can be sold as a going concern or certain IP rights can be sold off, often as part of a larger portfolio of rights and assets, to competitors or new market entrants to rescue the brands.

The urgent nature of these acquisitions coupled with the limited warranties, guarantees and other assurances often result in these businesses and IP rights being sold at lower prices, but the ultimate outcome is that the brand, if not the business, is able to re-emerge under new ownership and continue trading.

IP licences

An important feature of IP assets is their ability to be monetised to help generate revenue for a business. One method to maximise a return on an IP asset is through licensing use rights to third parties. However, amid the recent downturn of economic activity and the continued threat of retail closures it is important to understand the implications on an insolvency event on any licensing agreements.

To begin with, parties should understand if the licence terminates automatically on insolvency of either party or just the licensee. In the event the licence does not automatically terminate following insolvency of the licensor, it is possible for the licensee to apply to the court for an order to rescind the licence. The benefit of such an order is that it can contain terms as to payment of damages for non-performance of the licence.

However, for most licensees the licensed rights are often business-critical and termination of the licence is not desirable. Therefore, there are a number of protective provisions which can be incorporated in the licence in the event the licensor becomes insolvent.

For example, it may be possible to ensure that stock can continue to be sold and for the licence to become perpetual if the licensor becomes insolvent. Provisions can also be included to provide the licensee with the option to buy the IP rights, while also requiring that any transfer of the IP rights by the licensor to another party are made subject to the terms of the licence following insolvency.

Typically IP licences contain a provision allowing the licensor to terminate the licence if the licensee suffers any insolvency-related event. However, in light of the UK's Corporate Insolvency and Governance Act, which came into force on 26 June 2020, in some circumstances such licence terms may now be considered unenforceable and ineffective.

Even where a licensor has the right to terminate an IP licence, it may be prudent to consider if it should permit the licensee's insolvency practitioner to continue to use the licence, and therefore continue to receive royalties, or permit a new purchaser of the licensee's business to take over the licence.

There are a number of protective measures a licensor can consider to protect their position such as termination rights. This incorporates into the agreement early trigger events, such as failure to make timely payments, or appropriate assignments provisions to ensure the licence cannot be assigned to an undesirable licensee without consent.

Action points

Brands, logos and designs are all key IP rights closely protected in the fashion industry. Therefore it is strongly advised businesses take the time to fully understand the IP rights their business owns to not only identify what these are and who can enforce these rights, but to also enable the business to fully exploit and monetise their IP assets to generate additional revenue streams, together with ultimately assisting with the value assessment of those rights upon administration.

Businesses should also consider taking into account the risks of insolvency of their counterparty when negotiating terms of IP licences. It is advisable to review existing IP licenses to understand the level of insolvency safeguards already in place and to further consider whether further protective measures should be taken. A sound understanding of how important licensing arrangements operate will help businesses prepare for impending insolvencies.

By Katie Lo and Fiona Timms, intellectual property experts at Pinsent Masons, the firm behind Out-Law