Non-Competes Shaping Industry Scenarios

DAILY EDITION  – 28 dicembre 2017 –


Non-Competes Shaping Industry Scenarios
Fashion companies have increasingly been enforcing the contractual tool to keep designers and executives off the market.

Fashion’s revolving door of creative and executive talent continues to spin, but there is one chunky wedge that is increasingly clogging things up: the non-compete agreement.
While non-competes have been around for decades, they have recently become more and more binding. “There is more pressure and competition, and executives and design-ers are increasingly more key to success,” said Armando Branchini, deputy chairman of Milan-based consultancy InterCorporate. “I’ve always believed that designers are like soccer champions and chief executive officers are like their coaches and this is even more so now. In a sector where intellectual property and specific knowhow are so relevant, it’s important to be protective. The non-compete is a form of defense, a shield.”
Giovanna Brambilla, a partner at Milan-based executive search Milano firm Value Search, said early on, the non-compete agreement was “a tool mainly used for the top-level figures, to prevent them from leaving because of their strategic knowledge, and in this sense it’s under-standable. The real issue is that many companies are using this tool originally created to defend the company’s know-how as a mechanism of retention today, to discourage the exit of employees at all levels and this has been widely spread throughout the organizations.”
This can become “boorish behavior, it’s just about the fear of having employees being poached,” Brambilla said.
Non-compete agreements complicate matters in the notoriously quick-change fashion industry. Companies often need a talent in a reasonable time, Brambilla said, and they may not be willing to wait around for six to 12 months until a given contract expires.
“There is usually a three- to six-month notice, and if you add a non-compete to that, which can run from another six to 12 months, who has the luxury to wait?” Brambilla said. “This also creates a limited pool of resources.”
It is also a costly tool because it means that, if a company decides to apply a non-compete, an employee will be paid upward of 80 percent of their base salary during the period they’re not allowed to work. A non-compete is generally only applied when an executive or designer makes the decision to depart, rather than if they’re let go.
Non-competes also pose the risk of demotivating employees — with compa-nies binding collaborators and “forgetting that it’s not enough to tie them down — they should be motivated, and having this Sword of Damocles hanging over them is not constructive,” Brambilla said. “This leads to employees being disgruntled for being forced to stay on and to a negative mood in the organization. It’s a vicious circle.”
Italian law allows an employee to pay to be free of the notice period, but to get out of a non-compete, direct negotiation with an employer tends to be the only way, in Italy and elsewhere.
A legal source contended non-compete agreements can become “very com-plicated” when they become “battles between brands,” but personal relations can help ease things. The source claimed Anthony Vaccarello had an exclusive contract with Versace as creative director of the Versus brand and, in order to take the helm at Yves Saint Laurent, “he had a private conversation with Donatella [Versace], who helped discover and launch him. They must have come to some sort of agreement behind closed doors.”
Recently, sources speculated that Versace was looking to bring on
designer Kim Jones, currently men’s artis-tic director at Louis Vuitton, but said his employment contract would stand in the way of any such move. (Versace has since denied Jones is heading there.) Riccardo Tisci was also said to be sitting out his non-compete with Givenchy in order to potentially join Versace, but it is under-stood the talks eventually fell through for unrelated reasons.
Now the non-compete question hangs over Burberry as president and chief creative officer Christopher Bailey is leaving next March. Speculation has swirled that Céline’s creative director and board member Phoebe Philo could be tapped to head the British heritage brand — fueled by news that Philo is leaving the French brand next month. But sources said she has no interest in immediately joining another fashion house and wants to take time off. Others have said that even if Philo did want to join the Brit-ish brand – now headed by her former Céline colleague Marco Gobbetti as ceo — it’s likely the designer has a long-term non-compete agreement she would have to wait out.
Non-competes, for years seen mainly in fields focused on engineering and pro-prietary technology, have become more prominent in beauty and fashion in the last decade or so, according to Anthony Lupo, a partner with Arent Fox LLP, whose legal practice focuses on fashion and entertainment.
“If I’m representing a business, I always recommend them — why wouldn’t you get protection for yourself?” Lupo said. “They have to be thought through and narrow, but they can be effective tools for a company.”
He explained that a non-compete can’t simply bar an employee of a fashion company from working “in fashion” for a year. An effective agreement needs to be tailored and single out specific competi-tors in a given field. Although he admit-ted these contracts are becoming more common, he said it’s still generally “only at the highest executive level.”
One source remarked that, in some cases, non-competes do specify which fashion houses are off-limits for an employee, as they may be closer to a com-pany’s aesthetics.
“When a person has knowledge of a trade secret is when it becomes import-ant,” Lupo added. “If a person merely has business strategy, most companies either won’t enforce it or they won’t have success in enforcing it, especially in New York.”
Courts are increasingly skeptical of non-competes as an anti-competitive tool that, by preventing talented workers from moving about in the employment market, has an effect on wages and even innovation. New York Attorney General Eric Schneiderman this year introduced state legislation to drastically curb the use of non-competes in any industry and they are already unlawful in Cali-fornia. But even though the agreements seem to be increasing in popularity, Lupo said a real fight over enforcement is rare, noting in his experience, “they always settle.”
That was the case earlier this year when a regional vice president of Macy’s sued the department store over an “unreason-able” non-compete agreement that was being used to keep her from taking an executive position with Burlington Stores. Although Macy’s initially pushed back with its own breach of contract lawsuit, the issue appears to have been settled out of court and the executive has moved on to Burlington.
Former L’Oréal executive Antonios Spiliotopoulos didn’t get off so easy when the beauty conglomerate in October took to the courts to stop him from joining Shiseido. After arguing the Japanese beauty company is a direct competitor and Spiliotopoulos has sensitive product and supply chain information, L’Oréal succeeded in halting his move, at least until his non-compete period is up at the end of this year.
Top-level executives, like ceo’s and creative directors, seem less prone to fighting or attempting to work around non-competes. Stefan Larsson is still under a non-compete period after his brief tenure as ceo of Ralph Lauren officially ended earlier this year, and the same goes for Jenna Lyons, who led the creative and design sides of J. Crew for nearly a decade.
The mere existence of a non-compete can make a big difference in job mobility, especially for lower-level executives who find themselves subject to non-competes.
“Some companies don’t want to get involved with any candidate that has a non-compete,” said Jaimee Marshall, executive vice president of executive search firm Kirk Palmer Associates. “I’d say 70 percent to 80 percent of compa-nies will just move on when they hear a candidate is working under one.”
As for the remaining 20 percent to 30 percent that are willing to consider some-one with a non-compete, Marshall said these companies often have more experi-ence with the agreements and understand that they often either go unenforced, or as seems to be the case with a number of big name creatives in the fashion world, they’re simply willing to wait out the enforcement period.
PVH Corp. took this route for Calvin Klein with the August 2016 appointment of Raf Simons as creative director of the entire brand. Simons in October 2015 stepped down from his previous role as Christian Dior’s women’s artistic director, heading up ready-to-wear, couture and accessories, but was bound to a stringent non-compete contract that sources said did not expire until the end of July 2016.
Natalie Massenet, founder and former executive vice chairman of the Net-a-porter Group, is another executive who was forced to wait out a non-compete before making her next move. When she resigned in September 2015 from Net-a-porter after it merged with Yoox Group, she did so with a yearlong non-compete contract. It wasn’t until February that Massenet joined online fashion retailer Farfetch as non-executive co-chairman.
On the other hand, there are plenty of moves that end up in court. Carolina Herrera Ltd. late last year won a tempo-rary restraining order to keep Laura Kim, who had signed a non-compete, from joining Oscar de la Renta as co-creative director before her contracted period was up. The lawsuit eventually was settled out of court and Kim was allowed to join de la Renta. The year before, Nike sued Ralph Lauren Corp. alleging that Matthew Millward, a former design executive, broke his non-compete agreement when he took a job at Lauren’s Club Monaco brand. Nike contended that Millward, who had resigned two months earlier and took a job as vice president of men’s design for Club Monaco, brought sensitive information about the company’s plans to a competitor in the ath-leisure space. Nike wasn’t successful in delaying Millward taking his new job.
Although rare, a non-compete agree-ment can also work in the favor of the employed. Hedi Slimane, for instance, in June 2016 won a 13 million euro judg-ment against Kering, stemming from the non-compete contract he signed to lead Yves Saint Laurent, which he exited abruptly in April of that year. Slimane is also said to be seeking further compensa-tion with the help of his contract, based on clauses covering compensation and his role as a minority shareholder.
Davide Dallomo, founder of Lagente, a Milan-based creative business and fashion consultancy, said a designer can sometimes accept a non-compete as more of a paid perk. “I know of one designer who was thinking of going on sabbatical, had no inclination whatsoever of going to work for another company, so the non-compete was more than welcome.”
Dallomo noted Prada as one of the first companies to enforce non-compete agree-ments, but Louis Vuitton and the LVMH Moët Hennessy Louis Vuitton group at large are among the strongest protec-tors of their brands. In his experience, speaking in general about fashion firms, he’s seen cases where even “juniors with a three-year experience had to sign a non-compete agreement, and this was viewed as an investment in people since creativity is intangible.”
A headhunter in Milan also cited Prada and LVMH as among the strictest compa-nies applying non-compete agreements, which she’s seen in some instances at the top level run up to 24 months. She said executives and designers at the top are more aware of the limitations of non-com-pete agreements, while juniors are more naïve.
Even with so many fights over non-competes cropping up in recent years between brands, often with creatives caught in-between, Marshall of Kirk Palmer said she rarely sees the clauses imposed on employees below the executive level of vice president or its equivalent. But she did note that the extent of the agreements can vary widely by industry.
“In the beauty industry, non-competes are really standard, whereas on the retail side, some are more extensive and used in a variety of ways — to isolate competition or just prevent movement in a category [an employee] is involved in, which are often seen as not enforceable,” Marshall explained. She added that the agreements certainly have their place among these industries, where poaching talent is fre-quent, but there should always be limits to how they’re used.
“[A non-compete] should not be used to prevent employees from going any-where,” Marshall said. “That’s like inden-tured servitude.”
At the same time, Marshall admit-ted that non-competes are often non-negotiable.
“There are companies that literally won’t hire without having one signed. I’d encourage anyone, when signing a non-compete, to try to get a company to be as specific as possible about who the consider competition,” she said.
The Milan headhunter said, “It’s important for the negotiation to struc-ture the pact in a way that you can have a professional parachute. The trend now is to see these agreements, which have become more stringent in the past three to four years, drawn even when there is absolutely no need. And they can be very damaging because it means one is off the market for months.”
If a designer is barred from work for a year, that’s plenty of time for the fast-paced fashion industry to change around them. Another Milan-based headhunter recalled years ago working with a Prada designer who wished to move to Paris after two or three years of living in Milan and Prada ceo Patrizio Bertelli, in an effort to keep the designer, decided to “leverage a six-plus-three-month non-compete.”
The designer had interviewed and was expected to work with Julie de Libran, at the time second-in-command at Louis Vuitton under artistic director Marc Jacobs, but by the time the non-compete was up, Nicolas Ghesquière had suc-ceeded Jacobs.
“This designer was very talented and passed the interview with Nicolas, too, and finally ended working at Vuitton, but it was by no means certain that he would, with the change at the top,” the headhunter remarked. “Prada enforced the non-compete agreement on someone of great talent but young, not a head designer. My feeling at the time was also that Prada was hoping perhaps this per-son would come around and stay put.”

Luisa Zargani and Kali Hays