The reality of the fashion industry during the current decade is that the work of creating, marketing and producing a brilliant collection can seem relatively easy compared to the efforts and expense required to transact business each season.

• Today, there are far fewer department stores and boutiques, as well as smaller travel budgets for out-of-town/international retailers.  Having to “go where they are” increases costs for designers and brands trying to establish relationships and/or secure orders.
• Brands are faced with the uncertainty of receiving (timely) payment in full on accounts receivable.
• Recent imposition of new tariffs on goods imported from countries with a substantial amount of apparel manufacturing, including China and Mexico, will increase production costs.  Over 98% of apparel and footwear sold in the U.S. is manufactured overseas, and nearly all of the remaining U.S. manufacturing incorporates imported textiles.
• Additionally, the E.U. is currently finalizing regulations under its Ecodesign for Sustainable Products Regulation (ESPR), which will require brands to attach a digital product passport (DPP) with detailed supply chain and sustainability information to most items, including apparel and footwear, starting in 2027.  This will create added operational expenses for brands that wish to do business in Europe.

But let’s tackle one thing at a time…..

Top of mind for most everyone at the moment is GETTING PAID for goods delivered.

Read on for practical strategy and legal caveats regarding how to proceed when a retailer owes you money.

Past Documentation

A successful effort to get paid begins with reviewing the agreed-upon terms.  Sometimes a contract is nothing more than a signed purchase order, but in the case of a major retailer, you probably have a document with detailed provisions.  The ideal business relationship is one in which the parties sign a contract and never have to look at it again, but in the case of a dispute over payment, it’s important to go back and look at not only the promised payment terms but also your right to “request an accounting,” as well as any provision in the contract that allows the retailer to make unilateral changes to its terms.  These terms could be in the contract itself – or a separate set of policies incorporated by reference into the contract.  Know where you stand, legally speaking, at all times – before finalizing the initial commitment, as well as when making a demand if the terms have not been met.

Next, create a “Timeline” file – collect all correspondence regarding the money that you are owed, including invoices, emails, texts, and any partial payments. If any of your deliveries were sent on consignment, gather the documentation regarding those items as well, including any Uniform Commercial Code (UCC) filings made at the time to protect your interest in the goods.  This file will assist you – or potentially an attorney – as you proceed.

Present Courses of Action

You know how much you believe you are owed, but it is important to confirm that number.  As you may recall from back in 2005, after an internal investigation and inquiries from federal authorities, Saks (then under different ownership) admitted that it owed vendors more than $48 million, including interest, for improperly collected markdown allowances.  Although retailers may currently be exercising greater caution with respect to chargebacks and markdown money since that scandal, a written message confirming the past due amount owed to you can be key to collecting it in full.

When a retailer concedes that its bills are past due and offers or announces a payment plan, it is up to you whether to accept the offer, negotiate for better terms, or bring legal action.  As you consider your options, be aware that some courts have treated acceptance of an initial payment from a debtor as constituting acceptance of the entire payment plan.  In other words, if you deposit the first installment, you could have difficulty challenging the deal as a whole.

Negotiating with a retailer may not result in immediate payment in full, but terms to discuss could include a shorter payment window, a larger up-front payment followed by a series of installments, and/or interest on the past-due amount.  Whether or not a retailer is open to negotiation may depend on its own financial status, the length and strength of your relationship, the importance of your label to its bottom line, or concern about losing you as a vendor – whether because you might refuse to ship future orders, or because delayed payment might force you to shut down your business altogether.

While laws that govern third-party collections agencies do not always apply to attempts to collect payments on your own, it is important to keep your communications professional and direct.  Some states, including New York, prohibit creditors themselves from engaging in actions such as unreasonably frequent contacts, communications that appear to be authorized by a government agency or court when they are not, threats, or disclosure of inaccurate or incomplete information about the debt or the debtor.  Talking to the press or taking your case to the court of social media can be cathartic, but it is unlikely to elicit timely payment or pave the way for a mutually beneficial future relationship with a retailer – and it could leave you open to liability.  Similarly, forging an agreement with fellow designers not to ship to a particular retailer or otherwise calling for a boycott could lead to charges of collusion with competitors.  Not getting paid is difficult and distressing; being held liable for improper attempts to collect a debt, defamation, or violation of antitrust law can make matters worse.

Consulting with an attorney regarding nonpayment by a retailer is another option, but the key question is whether or not legal action is likely to result in a better deal.  Law is a luxury good, with prices to match, and pursuing legal action takes time.  A simple demand letter can be relatively quick and inexpensive, but when a retailer is not bankrupt or on the verge of bankruptcy, acknowledges that it owes you money, does not dispute the amount, and has offered a payment plan, then pursuing a lawsuit may not change the result – except to add legal fees and set up an adversarial relationship.  By the time a court orders mediation, oversees other pretrial activity, conducts a trial, and issues a judgment, the debt might already have been paid in installments.  It is possible to join fellow designers in suing a single retailer – not an antitrust violation, since a lawsuit asks a court to take action rather than having the plaintiffs take matters into their own hands – but multiparty or class action litigation typically takes even longer.

Of course, there are circumstances when you must choose between legal action and writing off an unpaid invoice.  If a retailer abandons a payment plan, for example, or files for bankruptcy, you may need a lawyer to assist you with obtaining a judgment or navigating your rights as a creditor.  It is also possible to sell your accounts receivable to another entity that is willing to engage in debt collection, including legal action, but you would receive only a percentage of the amount you were originally owed.

An attorney can be helpful in negotiation for better payment terms and is critical to filing a successful lawsuit, but be sure to discuss fees up front, and then consider whether the end result is likely to be an improvement that outweighs the expense.  As a law professor, I tell my students that one of the best ways to build trust is to be honest about when and how clients can help themselves.  Ask your lawyer to do the same.

Preparation for the Future

As you pursue past-due payment, you may also be concerned about shipping your next deliveries, especially to a retailer already in arrears.  If the retailer does not comprise a significant part of your current business or projected growth, or if it appears likely to declare bankruptcy, one possibility is simply to terminate the relationship. If your items are on consignment, you can also recall them.  Before unilaterally canceling an order or recalling consigned goods, check the terms of your contract and also consider discussing payment on delivery rather than the usual terms of payment.

When dealing with a retailer too important – i.e too large,  prominent, or closely associated with your label to ignore – consider how many pieces you’re willing to risk and limit shipping particularly high-priced items or incurring extra expense to produce exclusives.  Ask for a 50% deposit in advance – at the very least, you need to cover your cost of goods. Every new order, whether from an existing account or a new one, is an opportunity to review payment and other terms.

In the case of actual or potential nonpayment related to a retail bankruptcy, it may also be possible to recall items shipped close to the time of the bankruptcy filing or, if the retailer is reorganizing rather than liquidating, to maintain high priority as a creditor for goods shipped in the ordinary course of business.  The assistance of counsel can be helpful in navigating this complicated situation.  For consignment deliveries, filing a financing statement under the UCC when you ship can also protect you in the event of a retail bankruptcy.  The UCC, which has been adopted in some form in every state, allows you to file a form describing the consigned items so that it is clear they still belong to you rather than to the retailer and cannot be liquidated to settle the retailer’s other debts.

Diversifying your channels of sale can also create a hedge against nonpayment or a sudden change in a single key retailer’s payment terms. Don’t let any retailer prohibit you from doing business with other retailers. While the sad disappearance of many major luxury retailers and the consolidation of others poses a challenge, the concurrent rise of direct-to-consumer online sales and the ongoing opportunity to create shop-in-shops and to run your own boutiques offer options.  Every form of retail comes with its own costs and complications, but reducing your reliance on a single retail chain is an investment in your future independence.

Nonpayment is an intractable problem.  The good news is that retailers need an assortment of vendors whose diverse talents bring excitement and a unique shopping experience to their customers. With a combination of smart business strategy and legal savvy, it’s possible to work through each new payment crisis and aim for a future in which designers and stores once again grow together.

Susan Scafidi is the first-ever professor to offer a course in Fashion Law, and she is internationally recognized for establishing the field.  She is the Founder and Director of the Fashion Law Institute, the world’s first center dedicated to the law and business of fashion, which runs a free monthly clinic by appointment for fashion professionals in need of legal advice. 

A nonprofit organization headquartered at Fordham Law School, the Fashion Law Institute was established with the generous support and advice of the Council of Fashion Designers of America and its then-Board President, Diane von Furstenberg. 

To contact Professor Scafidi or the Fashion Law Institute, please email info@fashionlawinstitute.com.