LAW ÀLA MODE Issue 7 – Autumn 2012

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

Fashion, Retail and Design Group Contents

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

Editorial Summer 2012 may be fading away, but for those in the fashion Our IP colleagues from the Netherlands explain how to efficiently industry, this does not mean it is time to rest. September is an deal with counterfeits coming into the EU and how to discover important month, if not THE most important month, in the and obstruct the trade lines used by counterfeiters (page 8). fashion calendar. Designers, fashion houses, manufacturers, In the first of a two-part publication, on page 10 our colleagues buyers, journalists and – last but not least – the fashion-loving in Dubai report on how foreign retailers can identify good crowd get ready for the fashion shows in Milan, Paris, London, business opportunities in the United Arab Emirates, and they New York and Madrid. DLA Piper’s Fashion, Retail and Design provide tips as to what needs to be considered from the “FRD” group is right on time to deliver the latest news and corporate, IP and real estate perspectives. views in the legal fashion arena. From an employment law perspective, our colleagues from the This Autumn 2012 edition of Law à la Mode is brought to you by UK explain how to protect business secrets effectively (page 13), our German editorial team. It is fair to say that Berlin is currently while their German colleagues provide insight as to how to deal the fashion capital of Germany. International fashion events with discrimination issues in the workplace (page 14). such as Mercedes-Benz Fashion Week, PREMIUM and Bread & Butter, as well as the popularity of designers like Lala Berlin, When it comes to factory outlet centers, consumers expect a Kaviar Gauche, c.neeon, Claudia Skoda and Kostas Murkudis, diversity of goods and great bargains. To meet their expectations, have helped to revive the fashion hype of 1920s Berlin. Autumn, various legal aspects need to be considered in the planning phase, however, sees the focus turn to the southern part of Germany, as explained by our real estate colleagues from Germany (page 15). where the world-famous Oktoberfest takes place every year. Multi-national enterprises should adopt best practices in Although technically a folk festival and not a fashion event, regard to transfer pricing in order to avoid exposure to tax fashion plays no minor role alongside Bavarian beer and pretzels. authority enforcement, as outlined by our tax colleagues from In fact, the traditional costumes worn by men (lederhosen) and the US (page 17). women (dirndls) can be quite exquisite and costly and a whole industry has evolved around them. This season, for example, We do hope that you enjoy this Autumn issue. If you have any Austrian designer Lena Hoschek will be opening a pop-up dirndl comments, please get in touch with the Fashion, Retail and store in Munich. Design group via our email: [email protected]. To kick off this edition, we look at how online counterfeit sales By Saskia Laïs and Silke Hesse 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. Editorial Board Advertising through social media is becoming ever more attractive for companies, but it is also risky due to existing legal uncertainty. Saskia Laïs (Cologne) Our IP colleagues from the UK provide recommendations for Silke Hesse (Munich) advertising over Twitter and similar social media sites (page 7).

www.dlapiper.com | 03 Counterfeit Goods Online ISP Liability – Still a Grey Area?

By Gokhan Gocke and Fulya Ozgeber (Istanbul)

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 third parties), ISPs are required to remove illegal content from and the weakening of geographical boundaries creating practical websites when they are put on notice and receive notification of barriers to pursuing individual infringers, it is unsurprising that such illegal content. trademark owners are concerned that the strength of their IP It remains to be seen how the law in this area develops, but one rights is being eroded. One reaction to this dilemma by rights- thing is clear: brand owners operating online will continue to look owners has been to initiate legislative actions against Internet for simple and cost-effective solutions to online infringements, service providers (ISPs). There are clear issues with imposing and while they do, ISPs will need to stay on their toes. 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

www.dlapiper.com | 05 Red card from adidas to third-party online trading platforms

By Jan Dreyer and Ulrich Bartl (Cologne)

Just a few weeks ago, the world’s no. 2 brand (by turnover) at least, this critical approach by the FCO to agreements in the sportswear industry, adidas, announced new rules restricting online sales seems likely to continue to prevail: for the online distribution of its products: online sales via as Süddeutsche.de reported, officials have already confirmed third-party platforms will no longer be tolerated. According to that the FCO has opened investigations regarding ASICS’ new an article in the German daily newspaper Süddeutsche Zeitung, distribution conditions in connection with alleged resale-price ASICS have introduced similar rules and Nike is likely to follow maintenance. It remains to be seen whether the future of suit, though officials have not yet confirmed this. These latest adidas’ new proposals face a similar fate. 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,

06 | Law à la Mode Time to wear your #ad on your sleeve By Rebecca Kay (London)

As Morgan Spurlock pointed out in his 2011 docu-film, paid for. Further afield, the Australian Advertising Standards The Greatest Movie Ever Sold, advertising has snuck into every Bureau ruled in July 2012 that a corporate Facebook site is crevice of modern life. Yet it remains a fundamental tenet of a marketing tool “controlled” by the advertiser, and thus most national advertising codes that consumers must be able is subject to national advertising rules, even if the content to identify marketing communications as such. This principle is user generated. was thrown into the spotlight this summer, when the UK Advertising Standards Authority (ASA) ruled that celebrity Tips for Advertisers tweets sponsored by Nike breached the CAP Code. While the law in this area is still evolving, there are certain measures that you can take to protect your advertisements The Offending Tweets from recrimination: The tweets, posted by footballers Wayne Rooney ■■ The ASA is not prescriptive as to how advertisers identify (Manchester United) and Jack Wilshere (Arsenal), formed part their marketing communications, but has recommended of Nike’s “Make it count” campaign. The tweets contained the following the IAB and ISBA guidelines by using #ad or hashtags #makeitcount and the URL gonike.me/Makeitcount, #spon to identify marketing tweets. In March 2012, but despite that, the ASA held that the tweets were not Mars thus successfully defended complaints over celebrity identifiable as marketing communication. In particular, since tweets such as: “You’re not you when you’re hungry @ the timing of the tweets coincided with the launch of the snickersUk #hungry #spon…”. campaign, not all consumers would recognize them as part of the campaign. Moreover, the ASA considered that not ■■ Sponsorship should be made clear in paid-for content, and all Twitter users would know that the footballers and their within the blog posts/videos themselves (in case they go viral). clubs were sponsored by Nike, and that the tweets were not ■■ Check terms and conditions of social media platforms/ obviously marked as brand-led communications. websites: in April 2011 Facebook banned Ad.ly for breaching its terms and conditions by paying celebrities to Wider Crackdown endorse products in their updates.

Nike is not the first brand to be admonished for such ■■ Ultimately, brands need to take a common-sense approach. activities. In 2010, the UK Office of Fair Trading found that If in doubt as to whether a communication’s promotional Handpicked Media (a blog operator) had breached the nature is evident or not, amend it appropriately. If you Consumer Protection from Unfair Trading Regulations 2008 remain concerned – seek legal advice, try to get comfort by failing to disclose when promotional comments had been from your national regulator – or just #avoid!

www.dlapiper.com | 07 CUSTOMIZING YOUR CUSTOMS STRATEGY

By Carja Mastenbroek (Amsterdam)

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.

08 | Law à la Mode “Imitation is the sincerest form of Furthermore, where anti-counterfeiting actions are brought flattery” – True? in the Netherlands, the Dutch courts tend to adopt a pro- claimant attitude and the court has no strict requirements as The luxury goods industry, rather unsurprisingly, does not to the required level of proof that the claimant must provide. share this view. Luxury articles are not necessarily difficult Once a Dutch infringer is involved, or a route through the or expensive to copy. Luxury goods brand owners are Netherlands is used to transport the infringing goods, it is therefore frequently victims of intellectual property fraud, such possible to bring a claim against the infringer before the Dutch as trade mark, design right and copyright infringement. Other courts with a view to obtaining an injunction against the than being a general nuisance for luxury goods brand owners, infringer preventing them from carrying out further infringing the existence of counterfeit products has serious economic acts or producing further infringing goods. Other remedies and social consequences at a global scale. Furthermore, it include recall, correction and acquiring information about the disrupts the proper functioning of the market and jeopardizes identity of suppliers and/or buyers (not consumers) concerned, consumer protection. quantities and routes subject to a penalty per breach. The Dutch courts can also grant permission to search A few figures the administration of the infringers. This lawfully acquired In 2011 and based on Customs regulation 1383/2003, information, if used correctly, can then be used to detect European Union Customs agencies retained almost 115 million trading activity across Europe, which in turn enables a brand suspected counterfeit goods at the borders of the EU on owner to deal with infringers both at the bottom of trade lines grounds of suspected intellectual property infringement. where goods are purchased and at the intended destination of The value of the goods seized amounted to nearly €1.3 billion. the counterfeited goods. In the same year, Dutch customs alone stopped about By employing such strategies, a brand owner can 150,000 pieces of shoes and garments from entering the EU. simultaneously stop the criminal activity and commence proceedings against an infringer. Additionally, by securing Anti-counterfeiting strategies evidence, the brand owner has assurance that the infringer is able to comply with any court order requiring it to pay Trademark owners can protect themselves against such compensation or surrender profits. It is also open to the court criminal actions in a number of ways. First of all, it is possible to order that all infringing products be destroyed. 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. Conclusion Furthermore, cooperation with organizations that deal with The fight against counterfeits is one of the most important, anti-counterfeiting, such as the nonprofit Dutch anti-counterfeit and complex, battles waged by brand owners. By developing a organization REACT, is also recommended. Trademark holders multi-pronged approach, brand owners should reach the best can become members of such organizations and receive legal result in the most cost-efficient way. By cooperating with official support for limited standard fees, e.g. in regard to customs organizations, such as customs, as well as private organizations seizures, market sales, and advertisements on third-party that deal with anti-counterfeiting, brand owners can see the trading websites such as eBay. Such measures are generally majority of the illegal products removed from the market. When effective in addressing the majority of small scale and one-off this approach is combined with customized action, such as national counterfeit cases in an inexpensive way. seizures and legal proceedings, the more professional, complex and internationally operating trade lines can also be obstructed. 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.

www.dlapiper.com | 09 Opportunities for International Retailers in the United Arab Emirates – Part I

By Kevi Watkins and Katie Withers (Dubai)

Expanding Market be common to all of the Middle Eastern jurisdictions, each jurisdiction ought to be considered separately and advice With ever-expanding purchasing power, increasing sought where appropriate. brand awareness and a growing population, the United Arab Emirates (UAE) is increasingly attracting inward Corporate Structures foreign investment as it entices more and more international retailers to its shores. Rather than deter new investors, the For foreign retailers entering the region, careful consideration Arab Spring (the political unrest that has swept across is required when choosing which corporate structure to adopt, the region) has reinforced the UAE’s appeal as a safe haven to and retailers should consider all the options (which are often visit and do business. new and unfamiliar) available to them. For example, these options include, but are not limited to: (i) appointing a When entering any new market, there are always legal issues local agent, (ii) operating a traditional franchise model that need to be considered, and the regulatory regimes that with a local entity acting as a sponsor or (iii) a joint venture apply within Middle Eastern markets are notably different with a local partner. from those in other jurisdictions. This article is the first of a two-part publication which highlights the common legal The structure chosen will always depend upon the individual issues that brand owners need to be aware of when entering circumstances of the retailer, its local partner/agent and its the UAE market for the first time. This first part focuses target market. The choice of local partner/agent is key and on the corporate structuring options for retailers; part two the contract between the retailer and that local partner/agent (coming in the Winter edition) will look at real estate and must clearly define the relationship between the parties. intellectual property issues. While some of these issues will

10 | Law à la Mode Agency Arrangements These enhanced rights mean that, in most cases, registration is detrimental to the brand owner (the “principal” in the Agency arrangements are common, although they do not suit relationship) and is a key issue to be covered when appointing all retailers, particularly where brand protection is important. an agent in the UAE. Some retailers are uncomfortable with the concept of using an agent as a result of: Franchise Arrangements ■ the retailer’s inability to control all of the day to day The UAE agency laws described above are construed broadly commercial decisions and may capture and apply to franchise arrangements as ■ the retailer’s lack of involvement in negotiations with well as commercial agencies. In view of the enhanced rights third parties described above, this is an obvious risk for franchisors. It is therefore essential to ensure that the possibility of registration ■ the level of agent’s fees is envisaged in, and prohibited by, the franchise agreement. ■ the agent’s lack of full understanding of the brand (and There are also a number of practical steps that a franchisor brand requirements) and can take to avoid any suggestion that it has consented to

■ the simple fact that retail is not always the agent’s registration including setting out in the franchise agreement core business a prohibition on registration, and express acknowledgement by the franchisee that the agreement is not and should not These issues are easier to address in a joint venture or be construed as creating a commercial agency, and to impose franchise arrangement, which can provide the retailer with practical difficulties on a franchisee trying to register an more control over the brand and management of the business. agreement. In certain circumstances, federal law in the UAE permits commercial agents to register their agreement with the Joint Ventures ministry, which then provides them with a raft of statutory The local partner of the joint venture company must own at protections (which cannot be contracted out of), including: least 51 percent of the shares in the joint venture. Carefully a) entitlement to territorial exclusivity drafted joint venture documentation should afford protection to the international retailer notwithstanding that the local b) a presumption that the agent will be entitled to partner holds the majority shareholding ensuring that it statutory compensation in the event of termination receives enhanced profits. Profits can be skewed in the favour (even where the contract does not provide for this) and of the international retailer so that a split of up to 80/20 in c) an entitlement for the agent to receive commissions favour of the international retailer can be achieved, but there on sales of products in their designated territory, are anti-concealment Iaws in place which prevent parties irrespective of whether such sales are made by or attempting to structure around these thresholds. Criminal through them sanctions apply if breached.

www.dlapiper.com | 11 Choice of Agent/Local Partner/Master for example. Retailers have become aware of this issue, Franchisee which is being addressed and is improving across the region. Again, the best way for a franchisor or principal to avoid this The services required of a local partner/agent/franchisee problem is to impose strict terms on the use of its brand in (and the fees payable for them) will vary from retailer to any master franchise or agency agreement and in many cases retailer. Where a retailer is new to the region, it is likely to exercise similar control over the terms on which its master to require a more active local partner/agent/master franchisee franchisee may permit third parties to use a brand. Trademark to facilitate introductions and create business opportunities. registrations (which can then be licensed to the local partner) The large retail partners/agents/franchisees in the region have are also essential in this respect. a good knowledge of the market and usually have strong commercial relationships with landlords and other third parties, Trading Licences which generally enable them to negotiate better terms. Each emirate has its own licensing requirements. However, A partner/agent/franchisee that represents a number of strong retailers operating in Dubai and Abu Dhabi require a brands can be appealing to landlords, as they can negotiate a commercial licence and a permit for each individual outlet. number of deals with a variety of retailers through one entity. The commercial licence is renewed annually and is prescribed This collective bargaining may lead to improved commercial on an individual basis according to the retailer’s business terms including better rents, rent free periods, exclusivity of a activities. certain product and prime locations in a mall, to name a few. The UAE is fast becoming a key market for fashion brands, and as retail markets continue to struggle in many parts of Alignment of Interest the world, continued growth in the Middle East makes the An important practical consideration for retailers is to ensure region ever more attractive. However, the relatively complex that their interests are aligned so far as possible with the regulatory regime applicable to foreign investors makes local interests of the local partner/agent/master franchisee. Staff advice essential. Similarly, brand expansion typically involves operating the stores should undertake the same quality trading in more than one part of the region. Brand owners of training as their colleagues in London or New York, for should ensure that their agreements are effective (and their IP example, to ensure that brand recognition and value is upheld is registered) in each relevant country, because there are also and that the trading format and product offering reflects significant differences between jurisdictions. 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,

12 | Law à la Mode Using a Haute Couture Approach To Protecting Business Secrets

By Vinita Arora and Jennifer Holyoake (London)

Every business in the fashion industry has information that tailored to each individual employee depending on role it considers both integral and invaluable to its success. and/or seniority. The time span and geographical scope of The information may include designs for existing and the covenants is critical; if the covenants go further than future collections, secret pricing information or confidential is reasonably necessary to protect the legitimate interests marketing strategies including branding, advertising and of the business, they are unlikely to be enforceable. In the new store concepts. However, all this information is open to fashion industry, covenants include restrictions on employees exploitation by employees if it is not protected in the right competing with the business, a prohibition on soliciting staff, way. Many employees across the business will have valuable and restrictions on dealing with, or soliciting, customers and knowledge about company secrets, making them attractive suppliers. to any competitor seeking to move into, or develop their It will also often be appropriate for contracts of employment share of, the fashion industry. In the current challenging to include what is known as a garden leave clause. This allows economic climate, it is essential that businesses protect their an employer to prohibit the employee from attending the key information and seek to retain customers, suppliers and workplace or from contacting staff, customers, suppliers or key employees; protecting these assets can be fundamental to other business contacts of the employer during the employee’s maintaining the success of the business. notice period. The employee remains employed and is paid The key to protecting confidential information from misuse by their normal salary and benefits. The purpose of garden employees is to ensure that the issue addressed at the outset leave is to remove the employee from the business to reduce of the employment relationship. The contract of employment exposure to recent information they could exploit and to should clearly set out the information that the business dilute their relationships with customers and suppliers. considers confidential and stipulate the restrictions on its There is no doubt that protecting confidential information is use or disclosure by employees both during and, importantly, a complex matter. However, employers need to rise to the after employment. The confidentiality provisions should challenge and give careful thought to how adequate protection then be supplemented by bespoke restrictive covenants. can be achieved in their business and should bear in mind that These restrict the way in which an employee can act following the approach should very much be haute couture; off-the-peg the termination of their employment. Careful thought must solutions are of no value here. be given to the drafting of the covenants. They must be

www.dlapiper.com | 13 Discrimination Issues in the Fashion Industry By Marcus Kamp (Cologne)

In an industry where aesthetics reign supreme, the line or white females) as this can readily give rise to allegations of between superficial partiality and unjustified discrimination discrimination on the basis of age or ethnic origin. can easily become blurred. As a result, the fashion industry Pay and Promotion – Disparities in women’s and men’s is particularly vulnerable to employment actions for earnings for equal work and significant overrepresentation of discrimination with respect to age, sex and ethnic origin. men in leadership positions are some of the most common The Issue – The spectre of a discrimination complaint grounds for complaints of sexual discrimination. Companies cannot be underestimated; court action can easily damage a should audit their current salary scheme to resolve any pay company’s reputation and result in additional business costs, inequity between the sexes. Existing promotion policies should both due to a decrease of employee productivity and staff be amended accordingly to avoid any suspicion of reinforcing morale as well as compensation for the affected employees. the glass ceiling. Therefore, it is in every company’s interest to be proactive Sexual Harassment – Although not strictly a form of and prevent discrimination, rather than having to redress it discrimination, sexual harassment is a further issue which after damages have been suffered. fashion businesses need to keep in mind. Sexual harassers can Education, Education, Education – The key to complying be women or men and do not have to be of the opposite sex with anti-discrimination laws is education. Employees, in to the victim. In an employment context, the harasser can be particular senior employees, should receive preventative the victim’s supervisor, subordinate, colleague or even a client. equality and diversity training. It is also advisable that Employers can help to avoid the problem in the first place companies provide anti-discrimination and diversity policies through a clear no tolerance policy. to their employees. A well-crafted policy should, among Whilst no policy or preventative training can eliminate the other things, clearly identify prohibited conduct and also problem of discrimination in the workplace altogether, warn employees of disciplinary measures that accompany enhanced awareness of the potential issues and of official policy violations. Policies should also set out the company’s company policies for dealing with it will go a long way to discrimination complaints procedure. reducing its occurrence. 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

14 | Law à la Mode The Real Estate Challenges of Factory Outlet Centers in Germany By Fabian Muehlen (Frankfurt)

It started as a trend in the United States in the early 80s and are not developed within town centers; their development only made it to Europe in the mid-90s: designer outlet centers therefore has to be considered within the context of an (DOCs) or factory outlet centers (FOCs) are large retail existing building plan, or a suitable project-related building plan centers generally located slightly off the beaten track in a safe “vorhabenbezogener Bebauungsplan,” pursuant to Section 12 of distance from larger towns in which brand owners or license the German Building Code – BauGB) has to be enacted. In the holders sell their merchandise at highly discounted prices. latter case, a municipality and project developer will work in The appeal of FOCs greatly depends on the mix of tenants close cooperation to establish the project-related building and the goods on offer. Generally the fashion and clothing plan. In general, the project developer is then also obliged to industry is represented in a large proportion with clothing bear project-related planning and development costs. Due to retailers renting up to 70 percent of the total lease area. their size, FOCs have a supra-regional impact. Consequently, The remaining stores usually sell goods such as shoes, leather both the interests of the municipality in which the FOC is articles, accessories and household utensils. located and the interests of those in the neighboring villages have to be considered in the planning process. Experts claim that the average customer spends approximately €300 per visit in an FOC, containing at least 100 rental units After the hurdle of planning law has been overcome, covering a sales area of more than 20.000 sqm. Due to strict both landlord and tenant face certain particularities when planning legislation, there are very few FOCs in Germany concluding the lease agreements. Due to restrictions in the compared with the number of FOCs found in other European building plans only a certain product range may be sold in countries. To date, less than 10 FOCs have been opened in FOCs. Care should be taken to ensure that all limitations total, however this number is likely to double over the next are reflected in the lease agreement in detail. In general 10 years as demand for the FOCs outstrips supply. two prerequisites have to be complied with. The goods to be sold should consist of (i) brand name articles and (ii) specific On average it takes between 5 and 10 years from establishing category of goods, which are often characterized to have a FOC to its grand opening. The greatest challenge is the one or several of the following features: factory seconds, establishment of appropriate planning law. In general, FOCs

www.dlapiper.com | 15 discontinued models or models of the previous season, opening hours are respected, which are usually not only unsold goods, goods for market testing and supply overhang limited to the statutory opening hours but also include special products, i.e. initially unsold products which have not met the promotional events, open-for-trade Sundays (normally shops envisaged customer demand. only open six days a week in Germany), or seasonal marketing activities such as summer, winter and Christmas sales. In this In order to ensure that the retail space within each unit is context, the landlord should also consider an appropriate utilized efficiently, certain basic rules for the operation of a tenant mix which is in line with the general conception of retail business need to be taken into account. The factory the FOC. This is not only in the interest of the landlord. outlet store has to offer a sufficient number of goods to Increasingly tenants also have a very specific idea of the fellow satisfy the demand of the target customer. This means having tenants they would like to see in the immediate neighborhood suitable stock levels that are of equal amount to those offered of their rented unit and in the FOC in general. It is not unusual in full-price retail stores, including a comparable range of sizes. that specific lists of key tenants are discussed among the Clothes should be in line with the season and time of the year parties before conclusion of the lease agreements. and match the customers’ expectations in regard to quality and the general factory outlet center concept, and therefore Lastly, FOCs are not only seen as a pure shopping experience. match the standards of an FOC’s facilities. Bearing in mind that customers often have to travel a significant distance to get to the FOC and that the round To avoid possible public fines for the breach of selling trip can easily turn into a full-day excursion, besides having constraints in the building plan, the exact scope of use attractive retail stores, it is important to have engaging should be defined in the lease agreement. Rights of the non-retail areas within the FOC. In this respect, an eating landlord to verify that these restrictions are complied with and drinking area rich in variety and a kid’s club are considered and corresponding contractual penalties for possible cases essential. of breach of contract have also become a standard in FOC leases. In case of severe breaches of contract a special In summary, FOCs in Germany offer a great opportunity for termination right is often agreed on as last resort. both landlords and tenants in the years to come, as long as the lease agreements are well drafted and the legal prerequisites Customers expect to find prices in FOCs which are set out above are considered. Talking about opportunities: significantly lower than the manufacturer’s recommended even if you are neither landlord nor tenant, but just the retail price. As a result the parties often agree on minimum customer, don’t we all share the excitement of a good bargain and average price discounts, varying between 30 percent and if we get the chance? 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

16 | Law à la Mode Transfer Pricing and Global Controversy Trends

By Michael F Patton (Los Angeles)

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.

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:

1 Japan 6 France 2 India 7 Germany 3 China 8 Australia 4 Canada 9 Korea 5 United States 10 United Kingdom

Worldwide Enforcement Trends Some non-governmental organizations, especially in the UK, have vigorously challenged whether the arm’s length In the United States, the IRS is targeting transfer pricing standard, which is the accepted international norm used issues by significantly increasing the number of international by companies and tax authorities to administer transfer examination agents and economists. These agents and pricing rules, should continue to be used by tax authorities. economists are scrutinizing tax reduction strategies that However, a UN Committee of Experts recently rejected have as a core element the transfer of intangible assets, calls for developing countries to abandon the arm’s length such as trademarks or brands, outside of the U.S. into low standard, noting that failure of developing countries to follow tax jurisdictions. Scholars and policy makers have estimated internationally accepted norms of transfer pricing taxation that these tax reduction strategies result in a loss to the US could hinder investment into, and economic development of, Treasury of $10 billion to $25 billion annually. Legislation has those countries. been proposed that would limit the amount of a US taxpayer’s foreign profits attributable to IP exploited outside the US that Transfer Pricing Best Practices could be deferred in any tax year. What are best practices that companies should adopt to Focused transfer pricing examination approaches are being deal with transfer pricing compliance burdens, controversy taken in other countries, including China, where tax officials exposures and to take advantage of legitimate tax planning have begun asserting that the profits deemed attributable to opportunities? local cost advantages should be taxable in China and that the profits attributable to product development efforts conducted ■ Formal transfer pricing policies should be adopted and in China should be taxed locally. implemented through legally effective agreements that are able to withstand challenge. In Europe, examination of the effects on profits of business restructurings continues to be a significant issue in Germany, ■ Global transfer pricing documentation should be prepared where statutory exit taxes on future profit reductions may and updated periodically. As many jurisdictions have apply, as well as in France and other countries where different documentation requirements, a risk adjusted administrative positions to deem a transfer of future profits approach should be taken so that documentation meets as part of a business restructuring may effectively result in an local requirements in those jurisdictions where the exit tax. transaction volume at issue justifies taking a country-specific approach. Recently, the OECD initiated a multi-year project to revise the Transfer Pricing Guidelines used by member countries. ■ At the onset of a transfer pricing examination, an experienced This project reflects an interest by member countries in advisor should be consulted to assess the tax exposure and to developing rules to combat transactions seeking to shift profits assist with preparing a comprehensive defense. attributed to intangibles away from high tax jurisdictions and ■ Risk mitigation through Advance Pricing Agreements or into tax favored jurisdictions. In early June 2012, the OECD advance rulings should be considered for those countries released draft revisions to the Transfer Pricing Guidelines where the transaction volumes and risks justify the time dealing with intangibles. Under this draft, a locally created and expense involved. taxable marketing intangible could be deemed to exist when a local non-brand owning distribution and marketing affiliate ■ Changes in existing tax structures and transfer pricing incurs advertising or marketing expenditures beyond certain practices should reflect the economic substance of the undefined levels. transactions and be supported by a business purpose.

18 | Law à la Mode 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? Christian Louboutin secures his title as the As the effects of global warming, and the importance red-sole man. of sustainability, continue to make headlines, worldwide governments and the fashion textile industry alike are looking Christian Louboutin, renowned world-wide for his signature for ways to reduce the carbon footprint of the fashion red-soled high heels, brought legal proceedings in the United States industry. Indeed, Scottish designers are currently being against Yves Saint Laurent in 2011 for trademark infringement, after encouraged to participate in a trade mission in Chicago at the the French fashion house released a high-heel with a very similar end of September, where they will display their designs in a red sole. Having lost his application for a preliminary injunction room dedicated to ethical fashion. against Yves Saint Laurent back in August 2011 (see the Winter 2011 edition of Law à la Mode), Louboutin appealed the decision to One designer, based in London, has gone a step further and is the United States Court of Appeals for the Second Circuit. growing her fashion designs in her workshop using a concoction that includes green tea, sugar and bacteria. The resulting fabric The US court issued its long-awaited and landmark decision is a form of “vegetable leather” that can be used for clothes, on 5 September 2012. Overturning the prior ruling that use of handbags, shoes and other goods. At this point in time, however, a single hue in fashion items should not qualify for trademark the material is biodegradable, beginning to decompose after protection, the Court held that Louboutin 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-Up By 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 Calendar (September 2012 – November 2012) Compiled by: Silke Hesse (Munich) and Saskia Laïs (Cologne)

September October

Madrid Fashion Week Gold Silver Time Jewellery & Watch Fair 30 August – 4 September Warsaw 5 – 7 October Madrid International Fashion Fair, Madrid 1 – 3 September Chanel Little Black Jacket Exhibition Saatchi Gallery, London Vogue Fashion’s Night Out 12 – 28 October 2012 Various cities including Berlin, London, Milan, Amsterdam, New York and Tokyo Hollywood Costume Exhibition 6 September Victoria and Albert Museum, London 20 October 2012 – 27 January 2013 New York Fashion Week 6 – 13 September Tokyo Fashion Week 13 – 19 October Giftrends Madrid 12 – 16 September Designers’ Open 2012, Leipzig 25 – 28 October London Fashion Week 14 – 18 September FuturModa, Alicante 30 – 31 October Milan Fashion Week 19 – 25 September

Modacalzado + Iberpiel, IFEMA, Madrid 22 – 24 September November International Design Exhibition, Dubai 24 – 27 September Fashion A – Z – Part 2, New York until 10 November Paris Fashion Week 26 September – 2 October Chloé. Attitudes, Palais de Tokyo, Paris until 18 November Style Birmingham Live A/W, Birmingham 29 September Valentino: Master of Couture Somerset House, London 29 November 2012 – 3 March 2013

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