In the ever-competitive and increasingly digitized fashion world, companies will use every tool at their disposal to maintain a competitive advantage. Trademarks, patents, and copyright are usually the weapons of choice to protect fashion companies’ intellectual property, but trade secret protection can and should also be used to fill in the gaps that these traditional methods can leave.
With the COVID-19 pandemic driving drastic changes and disrupting the industry, the opportunity to resort to trade secrets to increase fashion companies’ competitive edge is bigger than ever. By relying on trade secret protection, fashion companies can safeguard intangible assets such as fashion designs and accessories before they are sold to the public, as well as data and technology, formulas and compositions, and business information.
The fashion industry has always been one of the most fast-paced and competitive. Its rapidly changing seasonal trends and constantly evolving consumer behaviors have historically forced fashion companies, whether they operate in the fast, ultra-fast, or luxury segments, to keep designers busy all year round—sometimes to the detriment of their creativity. With the ever-increasing importance of social media marketing and with global e-commerce sales skyrocketing as a consequence of the COVID-19 pandemic, the need for the industry to make products readily available to consumers means that fashion designs are as vulnerable to copying as they have ever been.
In addition to making it easier for fashion companies and independent designers to market and sell to a global audience, the industry’s need to create content that shows apparel and accessories in order to make designs available online has also allowed for an increased number of knockoffs and counterfeit products by opportunists who now have access to new designs within seconds of a model walking down the runway, an influencer posting about a new product, or a design hitting the online marketplace. As a consequence, fashion companies and designers can derive direct economic value from maintaining the secrecy of their creations by using trade secrets to protect assets, such as apparel and accessories designs, drawings, and mold designs, before they are released to the general public.
Although fashion designs are the backbone of the industry, their legal protection in the United States currently falls in a gray area that is able to afford only partial protection, unlike in other parts of the world. This lack of adequate protections can stifle creativity and incentivize the proliferation of fast-fashion and copycat brands that design their entire business models around copying established brands’ creations. In other parts of the world, such as Europe, a design’s original ornamental features can be protected as industrial designs. While ornamental features of a garment or accessory can be protected with design patents, obtaining a registration with the U.S. Patent and Trademark Office can be prohibitively expensive and take so long that this option is available only to fashion companies that can afford to register staple items or very innovative designs. The same issues arise when relying on utility patents to protect new and useful inventions, although the applicability of utility patents in the fashion industry is usually limited to products that incorporate novel and functional fabrics, designs, shapes, or technology. While trademarks can be used only to protect the brands and logos used on a garment, trade dress protection can be used to safeguard the “total image of a product,” which includes a product’s size, shape, color or color combination, texture, or graphics. Fashion designs, however, are considered functional, so in order to obtain trade dress protection, a company must provide sufficient evidence to show that such design has acquired a secondary meaning in the mind of consumers. As a consequence, obtaining trade dress protection is an option only for those designs that have become so well known as to be associated by consumers with its maker and for those designers who have the economic means to afford to show the design’s acquired distinctiveness. Finally, copyright protection is not available to fashion designs because these are considered to be useful articles in nature, unless their artistic elements can be conceptually separated from the garment; this explains why things such as jewelry, colorways, fabric patterns, and prints can be protected by copyright, but not the overall design of a piece of clothing.
By relying on trade secret protection, fashion companies can thus protect fashion designs and accessories before they are released to the general public. Although protection ends the second that a design is made publicly available, by keeping their new and innovative designs under wraps, fashion companies have the opportunity to sell their products and make a profit before copies make it to the market.
An early example of how trade secrets can be used to safeguard otherwise unprotectible fashion designs is Dior v. Milton, 155 N.Y.S.2d 443 (N.Y. Sup. Ct. 1956), aff’d, 156 N.Y.S.2d 996 (App. Div. 1956). Although this case blurred the line between unfair competition based on misappropriation and tortious interference claims, the court ultimately denied the defendants’ motion to dismiss for failure to state a claim and recognized the irreparable harm caused to the plaintiffs by the defendants’ unlawful conduct. The defendants in Dior attended fashion shows hosted by the French fashion house, where they gained access to carefully guarded designs by concealing their association with a sketch-selling company and by fraudulently promising to hold the new designs in confidentiality. In reaching its conclusion, the court emphasized Dior’s great expense and ongoing precautions to maintain the secrecy of its designs, which included showing them to the public under limited circumstances and requiring viewers to enter into confidentiality agreements before having access to them.
More recently, Nike sued three former employees for allegedly making trade secret information, including unreleased footwear and apparel designs, available to Adidas in violation of their non-compete and nondisclosure agreements. Although the parties later reached a confidential settlement agreement, an Oregon court found that Nike had established a prima facie case of, among other things, the defendant’s improper retention of its trade secrets. Nike, Inc. v. Dekovic, No. 14-cv-18876, 2014 WL 12663761 (Or. Cir. Ct. Dec. 12, 2014).
In an increasingly data- and technology-driven society, trade secrets can help fashion companies maintain their competitive advantage by helping safeguard what might in some cases be some of their most valuable assets: data and technology (including consumer and manufacturing data), algorithms, and custom software. Fashion companies can resort to trade secrets to provide an additional layer of protection for assets that can already be protected by copyright or patents; in other instances, however, trade secrets might be the only form of IP protection available for fashion companies to protect valuable intangibles vital for their survival and growth in the ever-changing fashion market.
The fashion industry has historically been at the forefront of technological and data-driven advancements based on digital and analytics capabilities, and has long embraced developments such as wearable technology, omnichannel retail, artificial intelligence algorithms that accurately predict trends and are capable of designing products, personalized customer engagement based on data, products made-to-order for consumers, and using blockchain to trace a product’s supply chain. The industry’s reliance on technology was no doubt accelerated by the COVID-19 pandemic; companies needed to quickly adapt to virtual fashion shows, designs, showrooms, and fitting rooms, as well as the digitization of operations such as the design process, supply chain, and inventory management. However, with the industry’s position at the forefront of technological advancements and reliance on big data and analytics—in many cases driving innovation on its own—it was uniquely equipped to handle this transformative change.
A prime example of the benefits that the fashion industry can derive from trade secrets is the protection of wearable technology. For example, in 2015, Jawbone sued Fitbit and former employees for, among other things, misappropriation of trade secrets. The now-defunct company claimed that its biggest rival recruited its employees, who in turn brought with them proprietary and confidential information regarding its current and future business plans, products and technology, and market research, all in violation of their confidentiality agreements and the company’s employee handbook. An International Trade Commission judge first favored Fitbit and found that no trade secrets had been stolen from Jawbone; then a San Francisco court ordered employees to return information taken from their former employer. The dispute between the formal rivals then continued over allegations of patent infringement, but eventually all outstanding claims were settled. However, the six Jawbone employees involved in the first set of lawsuits were then charged in an indictment for the unlawful possession of stolen trade secrets, all of which related to research, development, production, and sale of wearable technology. Although the charges were eventually dropped, this five-year battle is a clear example of how trade secrets can be used to safeguard technological developments in an increasingly saturated market where companies will use every tool at their disposal to decimate their competitors’ advantage.
The beauty industry, a rapidly growing subset of the fashion industry, can also resort to trade secret protection to keep product formulas and flavor and fragrance compositions secret, despite the Food and Drug Administration’s labeling requirements—barring, of course, independent development or reverse engineering.
A notorious example of this application of trade secret protection came in 2017, when Olaplex sued L’Oreal for, among other things, misappropriating trade secrets that Olaplex’s founders had disclosed during a meeting between the parties over L’Oreal’s potential acquisition of the company, after entering into a nondisclosure agreement. The alleged trade secrets included using maleic acid during hair bleaching, business information, testing and know-how, dead ends, and trial and error. Although a jury initially issued a verdict for the plaintiff on all claims and awarded almost $100 million in damages, the Federal Circuit ultimately reversed the district court’s award, after finding that there was insufficient evidence to support a finding that Olaplex’s information was not readily ascertainable through proper means and thus eligible for trade secret protection. Olaplex, Inc. v. L’Oréal USA, Inc., 855 F. App’x 701 (Fed. Cir. 2021).
Trade secrets can also be used by fashion companies to safeguard business information such as design, manufacturing, distribution, and logistics processes and methods; sales, marketing, and business strategies; consumer and supplier lists and sources; and financial models and methods. With the COVID-19 pandemic forcing the fashion industry to reinvent its sourcing strategies, there is a huge opportunity for fashion companies to use trade secrets to protect innovative processes and methods of handling supply chain issues to meet consumers’ changing demands. Moreover, as McKinsey reports, the pandemic has also driven an increase in consolidation between fashion houses, partially as a consequence of major retailers entering into restructuring proceedings and partially to meet the need of expanding while acquiring new capabilities to satisfy consumer demand. A recent increase in trade secrets misappropriation by acquisitions claims arising out of negotiations surrounding potential acquisitions underscores both the risks associated with due diligence disclosures and the importance of having adequate agreements in place to protect valuable information during negotiations with other parties.
The importance of trade secrets as a tool to protect business information is highlighted in a series of recent disputes. For example, Le Tote, a clothing rental subscription service company that relies on custom-built warehouse management systems and style recommendation tools, recently sued lifestyle retailer Urban Outfitters. The parties’ investment and merger discussions, which included a nondisclosure agreement, led Le Tote to disclose confidential information to Urban Outfitters, including information about its logistics and infrastructure systems, use of inventory and customer feedback, product road map, and consumer feedback and satisfaction data. After the parties’ discussions fell through, Urban Outfitters launched its own clothing rental subscription service, which prompted Le Tote to sue for misappropriation of trade secrets under the Defend Trade Secrets Act and Pennsylvania Uniform Trade Secrets Act. The Eastern District of Pennsylvania denied Urban’s motion to dismiss, finding that Le Tote had appropriately pled a claim for trade secret misappropriation under both statutes. Le Tote, Inc. v. Urban Outfitters, Inc., No. 20-cv-3009, 2021 WL 2588958 (E.D. Pa. June 24, 2021). The court also found that the facts alleged by the plaintiff could lead to an inference of misappropriation; namely, statements by Urban that, due to logistics, it could not start a business like the plaintiff’s on its own and the subsequent launch of its own competing service (only one month after negotiations had fallen off), Urban’s use of proprietary systems like Le Tote’s, surprisingly quick market success, suspicious requests for information, and the fact that the same executives involved in the parties’ discussions were involved in launching Urban’s nearly identical competing service.
Similarly, Seed Beauty, a beauty brand incubator and cosmetics manufacturer behind several famous direct-to-consumer brands, sued both Kim Kardashian’s and Kyle Jenner’s beauty companies, as well as its largest competitor, Coty, to prevent the disclosure of its trade secrets. The allegations in both cases were essentially the same: that the famous sisters’ companies had acquired valuable information about Seed Beauty’s unique business model and contracts, and that following Coty’s acquisition of stakes in both companies, such valuable information was now at risk of being disclosed. After a court granted a temporary order preventing KKW Beauty from sharing with Coty details of its partnership with Seed Beauty, both cases were settled.
Last month, luxury jewelry and watch maker Cartier sued rival Tiffany & Co. for allegedly misappropriating trade secrets regarding its high-end jewelry collection in an attempt to revive its own high-end jewelry division. According to the complaint, Tiffany hired an “under-qualified employee” with the purpose of taking confidential information and trade secrets from its competitor, in what Cartier characterizes as a “disturbing culture of misappropriating competitive information.” Cartier alleges that Tiffany lured its former employee—also named as a defendant—to share such “highly confidential business information” in violation of her nondisclosure and non-solicitation agreements. The employee admitted to having forwarded confidential information to her personal email and providing it to her new managers at Tiffany, including stock lists, product assortments, pricing information, and product distribution strategies, as well as internal presentations and notes of meetings. Although Tiffany has denied these allegations, this case is a stark reminder of the importance of appropriately protecting confidential information, as well as the relevance of resorting to trade secret misappropriation claims to prevent competitors from using information acquired under suspicious circumstances to their own advantage.
Trade secrets can be used to protect intellectual assets across the fashion industry’s entire ecosystem: from a product’s inception to when a customer receives his or her new purchase. Companies that overlook this invaluable tool in the intellectual property protection arsenal might find themselves at a disadvantage over competitors who take reasonable measures to safeguard their trendiest secrets.
