Q&A: manufacture and distribution of fashion goods in USA

Manufacture and distribution

Manufacture and supply chain

What legal framework governs the development, manufacture and supply chain for fashion goods? What are the usual contractual arrangements for these relationships?

In the United States, development of designs is largely governed by federal statutes governing copyrights, trademarks and patents. In addi­tion to the federal statutory framework, a retailer will enter into contracts with its designers and creative professionals to clearly provide for the ownership of designs and other intellectual property developed by the individuals in the course of their employment or services. A retailer’s development contracts should protect a brand’s confidential informa­tion and trade secrets, as well as include an assignment to the brand owner by the designer or creative professional of intellectual property created in connection with their work for the brand, and recite that such work constitutes a ‘work made for hire’ under the US Copyright Act. Manufacturing of luxury and fashion goods is governed by statutory and common law considerations as well as contractual provisions. Statutory considerations include compliance with: (1) federal and state laws governing the materials used in manufacturing, such as the Consumer Product Safety Improvement Act of 2008 and state laws governing plastic content; (2) state laws governing the sales of goods (such as the Uniform Commercial Code); and (3) state and federal laws around sales and distribution methods. State laws are not uniform. Even the Uniform Commercial Code, despite its name, is just a general name for similar, but not identical, laws that have been adopted by the various states based on a common model. Some states, such as California, have enacted relatively stringent laws governing issues from product composition to labelling to labour practices of suppliers. For example, if a brand sells products via an e-commerce platform in the United States, it is likely subject to various disclosure requirements under California state law, such as Proposition 65 (Prop 65) (requiring certain disclosures or warnings on packaging) and the California Electronic Commerce Act of 1984 (requiring certain disclosures to e-commerce consumers). The California Transparency in Supply Chain Act (CTSCA), which requires that large retailers and manufacturers provide consumers with certain disclosures with respect to steps they have taken to remove slavery and human trafficking from their supply chains, is triggered by doing business in the state and meeting a certain minimum worldwide income. Other states have enacted similar laws regulating their supply chains. In addressing these requirements, manufacturers and marketers of luxury goods generally comply with the standards of the most stringent jurisdictions.

Distribution and agency agreements

What legal framework governs distribution and agency agreements for fashion goods?

Distribution arrangements are primarily governed by the specific terms of the contractual arrangement with a brand’s distributors, and not surprisingly, brands predominately structure their distribu­tion agreements to drive sales and value. For example, a brand may grant distribution rights for a specific geography, for online versus offline channels, full price versus off-price, etc. Further, state laws can impose limitations on a manufacturer’s ability to terminate a distributor, although in the United States, state laws governing the termination of distributors are less stringent than in many other jurisdictions. Agency is generally governed by common-law concepts in the United States, and agency relationships should identify the scope of the agent’s authority on behalf of the brand. However, agents or sales representa­tives are further protected by statute in many US states. Among other things, these laws may require brands to clearly describe and promptly pay a sales representative’s earnings and to set forth the terms of the arrangement in writing.

What are the most commonly used distribution and agency structures for fashion goods, and what contractual terms and provisions usually apply?

Luxury goods derive value in part from scarcity and brand reputation; therefore, exclusivity in distribution channels and brand protection are key. Luxury fashion goods are primarily distributed to end customers through both online and brick-and-mortar channels. Brands may have their own retail operations through which they reach customers or may sell products through one or more third-party retailers. The dramatic increase on e-commerce sparked by the covid-19 pandemic has accel­erated brands’ development of direct-to-consumer sales platforms that are disrupting traditional distribution models.

When selling through third-party retailers, it is important to include contractual provisions relating to exclusivity and brand protection. Some examples of contractual provisions that usually apply in luxury fashion distribution agreements include:

• grants of exclusivity for a particular retail channel (eg, brick and mortar versus online), market (eg, a particular geography) or segment of the market (eg, women’s apparel versus men’s apparel), or category of goods (eg, footwear, eyewear, cosmetics);
• restrictive covenants, which are closely related to grants of exclu­sivity, and include non-competition, non-solicitation and pricing protections;
• trademark or brand licences and licence restrictions;
• additional brand protection provisions including quality control mechanisms and audit rights, anti-dumping or disposal of goods provisions;
• terms relating to promotion (eg, obligations to devote specific amounts to marketing campaigns and to undertake particular efforts to market products); and
• sales targets or minimum volume requirements.

Two years of covid-19-related shutdowns, shipping challenges and labour shortages have brought increased attention to force majeure provisions. In the US, force majeure is a matter of state, not federal, law, and the analysis begins with the written agreement of the parties, so it is important to carefully consider and agree on the allocation of risks relating to a force majeure event.     

Import and export

Do any special import and export rules and restrictions apply to fashion goods?

When a shipment reaches the United States, the importer of record (ie, the owner, purchaser, or licensed customs broker) must file entry documents with Customs and Border Protection (CBP) at the port of entry. The importer of record must use ‘reasonable care’ due diligence in making entry and in determining the shipment information is correct, including the tariff classification, value, and country of origin of the goods. In addition, the entry must be accompanied by evidence that a bond has been posted with Customs to cover any potential duties, taxes and charges.

Entry of goods may be made by a non-resident individual or partnership, or by a foreign corporation, through a US agent. A foreign corporation in whose name merchandise is entered must have a resident agent in the state where the port of entry is located who is authorised to accept service of process.

All importers must ensure that products imported into the United States are properly labelled to include the products’ country of origin in a conspicuous location, that any label appears in English, and if the labelling is obscured by packaging, that the information is also included on the packaging of the product. Textile and apparel articles imported into the United States are required to be labelled with: (1) fibre content (there are specific rules for fibre names, such as pima cotton, or merino wool); (2) country of origin; and (3) name of the importer, distributor, retailer, or foreign manufacturer. All imports into the United States must be free from any forced labour in the entire supply chain and importers must be able to prove that if questioned by US Customs and Border Protection (for example, imports containing cotton from Xinjiang, China are banned). Also, importers must comply with a number of government agency rules regarding the importation of goods, including rules impacting imports of certain animal materials (animal hides and leather products, feathers, etc).

In addition, certain exports, such as software, technology and services may require an export licence to be exported out of the United States and US economic and trade sanctions programmes prohibit transactions with certain countries, institutions and individuals.

Corporate social responsibility and sustainability

What are the requirements and disclosure obligations in relation to corporate social responsibility and sustainability for fashion and luxury brands in your jurisdiction? What due diligence in this regard is advised or required?

United States laws relating to social responsibility and sustainability fall into two main categories: those that prohibit or sanction certain prac­tices and those that require disclosure.

There are relatively few laws impacting luxury goods that fall into the first category: laws prohibiting or sanctioning certain practices. Various federal and state laws regulate labour and safety practices with the United States and prohibit the importation of goods produced by forced or slave labour outside of the United States. The CPSA and Food and Drug Administration regulations (with respect to cosmetics) prohibit the use of certain materials. But more of these laws are expected, particularly at the state level, in coming years. Companies manufacturing in the United States should monitor laws working their way through state legislature that, if enacted, will require the states to limit carbon emissions, necessarily putting pressure on manufacturers. Companies with a presence in the United States can also face liability under the Alien Tort Claims Act for human rights impacts that occur extraterritorially and throughout the business’s value chain.

More laws govern the disclosure of sustainability practices. For almost a decade, companies with securities listed on a US exchange have had to report on the use of certain minerals on the basis that such minerals originate in conflict zones. In recent years, the United States Securities and Exchange Commission (SEC) has signalled a decreased interest in enforcing these reporting requirements, and the fashion industry has been among the least compliant. State laws like Prop 65 and the California Transparency in Supply Chain Act (CTSCA) also impose disclosure obligations. Companies that make sustainability claims are subject to federal and state unfair advertising laws. Fashion companies making such claims need to be aware of compliance and obligations and consider the systems that will have to be put in place to substantiate their claims. Disclosure of sustainable or responsible practices must be correct and supportable, as they are open to challenge by regulators and customers alike. While companies filing with the SEC are not subject to specific reporting requirements relating to sustainability, that is expected to change in 2022 when the SEC issues rules on climate disclosure. US reporting companies will have to create and implement robust disclosure control systems to produce sustainability data.

What occupational health and safety laws should fashion companies be aware of across their supply chains?

Fashion companies face particular challenges in complying with health and safety laws. Companies manufacturing in the United States are subject to state and federal wage and hour and occupational safety laws. Lack of compliance with these laws has been the subject of numerous investigations and lawsuits, particularly in California, where much of the US-based luxury fashion manufacturing is done.

Because of the widespread outsourcing of manufacturing in the industry, much of it abroad, many fashion companies address supply chain occupational health and safety concerns through certifications, codes of conduct, and brand standards. Although, as noted above, there are state and federal laws addressing the use of child and forced labour and US companies have been subjected to class action litigation in the United States arising out of foreign safety and health practices, the primary drivers of fashion companies’ compliance efforts have been external pressure by non-governmental organisations, consumers, investors and corporate responsibility programmes. Several US companies have signed on to the Apparel and Footwear Supply Chain Transparency Pledge, pursuant to which participating companies disclose the location, ownership, and other relevant information about all of their manufacturing sites. Luxury brands are increasingly recog­nising consumer expectations with respect to socially responsible manufacturing practices. Any claims about responsible practices are subject to the Federal Trade Commission requirements (and similar state law requirements) that advertising and promotional materials be truthful, not misleading and, where appropriate, backed up by data.

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22 February 2022.