Warnaco, Calvin Klein Settle Their Dispute as Trial Begins
By TERI AGINS and REBECCA QUICK
Staff Reporters of THE WALL STREET JOURNAL
In the end, Calvin Klein Inc. and its jeanswear licensee Warnaco Group Inc. decided that their testy coexistence was better than getting a divorce.
Monday morning in Manhattan federal district court, where a high-profile legal battle over whether Warnaco had abused its jeanswear license was starting, the dueling parties surprised onlookers by announcing they were about to settle. Given a half-hour recess by the judge, the two sides put the finishing touches on an agreement hashed out during a weekend of intense, late-night negotiations.
While terms of Monday's settlement remain confidential, the two sides essentially agreed to get back to business as usual, with Warnaco producing apparel and Calvin Klein receiving royalties. Though Calvin Klein may reap some benefits in the future, the immediate winner appears to be Warnaco, whose very existence was threatened by the lawsuit.
No money will change hands in the settlement, according to people close to the deal, and the CK jeanswear licensing agreement remains in place. CK jeans represents 27% of Warnaco's $2.3 billion in annual sales. Warnaco's stock shot up on the news, soaring 60%, or $1.50, to $4 in 4 p.m. composite trading on the New York Stock Exchange Monday.
The settlement effectively ends a string of lawsuits between the two companies. Calvin Klein Inc. originally sued Warnaco in May with the intent to wrestle back its jeanswear license and recoup Warnaco's profits from what it called "improper sales" to discounters. The design firm, which claimed its high-end brand name was being damaged by overproduction and distribution through low-end channels, also sought unspecified compensatory damages. Warnaco struck back with a countersuit seeking hundreds of millions of dollars in damages and accusing the designer of bad-faith dealing and trade libel, saying that Mr. Klein hadn't shown up for a design meeting in over a year.
Why the legal battle was settled at this late hour likely owes to a mix of factors, among them cost and the risk of further negative publicity for both companies. Both had already laid out millions of dollars in legal fees, on top of suffering lost sales and tarnished images. The disagreement was ripe with vicious name-calling, accusations and recriminations on both sides.
Most of that ill-will seemed to have been forgiven, if not forgotten, with Monday's settlement. In a packed courtroom, just minutes before the settlement was announced, Mr. Klein smiled broadly and reached over to shake hands with Warnaco Chairman and Chief Executive Linda Wachner, and also kissed her on the cheek. Later, the 59-year-old clothing designer said, "I'm really happy we've resolved our issues." Mrs. Wachner chimed in: "Everybody's happy; nobody loses." Later, the 54-year-old CEO Mrs. Wachner added: "With this settlement behind us, we're poised for the future. It was a great day for the company."
Last week pressure on both sides mounted after Calvin Klein filed a separate lawsuit in New York State Supreme Court to terminate the jeanswear license, charging that Warnaco had violated financial covenants of the contract. Calvin Klein's original lawsuit, filed in May of last year, included a litany of charges against both Warnaco and Mrs. Wachner. But in September, a federal judge granted Warnaco's request to remove Mrs. Wachner from most counts of the lawsuit and dismissed several charges against Warnaco, including breach of fiduciary duty, deceptive acts and intentional misrepresentation. With his rulings, Judge Jed S. Rakoff of the U.S. District Court in Manhattan narrowed the suit to a simple trademark case by throwing out most claims against Mrs. Wachner.
Under their truce, Warnaco will continue to sell Calvin Klein's CK-branded jeanswear to discount retailers such as Costco, Sam's Club and BJ's, though the volume will be "dramatically reduced," says a person close to the talks. However, the jeans currently in those outlets won't be pulled out, raising questions about whether much will actually change.
It is not unusual for upscale design firms such as Donna Karan, Ralph Lauren and Calvin Klein to license the rights to manufacture and distribute their jeanswear, underwear and other accessories. But the result of such alliances is that the designers lose immediate day-to-day control over the fate of their goods.
Indeed, Calvin Klein's troubles with its laggard jeans brand predate its fight with Warnaco. Before Warnaco obtained the jeans license in 1997, it was owned by now-defunct Designer Holdings Inc. -- which Calvin Klein also complained was overselling to discount channels. When Warnaco took the license, it pledged to cut back on the amount of goods going to such low-end retailers, but the lawsuit by Calvin Klein alleged that Warnaco never followed through on those promises.
As part of Monday's settlement, Warnaco agreed not to sell CK jeanswear through J.C. Penney Co., according to people close to the companies. Although Warnaco has not sold CK jeanswear to Penney's before, Calvin Klein feared that Warnaco might ultimately do so, further diluting the brand's cachet. Nevertheless, Warnaco will be able to sell some styles of Calvin Klein underwear to Penney's.
Calvin Klein also won a number of more-stringent stipulations for approval, design and distribution of licensed jeans, and various auditing provisions, to give him "iron-clad control," according to one person close to the settlement. While Calvin Klein seems to get, at least in writing, more control over how Warnaco handles its brand, the fashion house also resigns itself to living with Warnaco, despite the bitter complaints in the lawsuit. Mr. Klein also has his work cut out for him in terms of branding. After spending the last seven months publicly complaining about the quality of both the jeans and underwear bearing his name, he'll now have to find ways to reassure the public that the product is now worthy.
Write to Teri Agins at teri.agins@wsj.com and Rebecca Quick at rebecca.quick@wsj.com |
