As lawsuits and investigations targeting fashion and apparel companies have intensified, such companies must develop robust compliance programs to mitigate risk. Further, COVID-19 has complicated matters significantly by creating disruptions in supply chain management, as well as creating a fertile ground for lawsuits over alleged marketing schemes and workplace violations. Recent high-profile bankruptcy filings by such stalwart companies as J. Crew and J.C. Penney only underscore the increasing financial pressure that fashion and apparel companies face in the current environment.

In this article, we examine some of the most acute risks fashion and apparel companies face and suggest best practices and fundamental steps fashion and apparel companies can take now to strengthen internal controls and implement procedures to mitigate risks in the future.

FCPA Violations

Fashion companies are no stranger to government investigations regarding the Foreign Corrupt Practices Act (FCPA). For example, in 2014, the Ralph Lauren Corporation paid a $1.6 million penalty to the United States Department of Justice and United States Securities and Exchange Commission (SEC) to resolve claims that it allegedly bribed government officials in Argentina to obtain improper customs clearance for merchandise and provided gifts to Argentine officials. Further, since there is significant regulation surrounding the fashion industry, including import and export regulations, FCPA investigations will likely increase over time.

Fundamental compliance practices that fashion companies should follow regarding FCPA compliance involve creating both explicit specific procedures to follow regarding interactions with foreign governments, companies, and individuals, and creating a corporate culture that values ethical business activities. Specific procedures can range from how to record expenses to written guidance on customs in places where a company does business or has manufacturing facilities, including how to properly conduct networking events where business is discussed. Corporate culture, although seemingly more ephemeral, can also be documented in policy guidelines and employee manuals, and companies must specify a zero-tolerance policy for any breach of such requirements.

Senior management must set the tone at the top and foster a culture where bribery and kickbacks are antithetical to corporate values. Relatedly, having clear social responsibility policies and strict requirements in vendor requirements helps amplify the messaging throughout the entire supply chain. Further, fashion and apparel companies should carefully vet their business partners and joint ventures, and draft ironclad joint venture agreements, as FCPA violations of such joint venturers and business partners could be imputed to the fashion company. Lastly, appropriate training and monitoring of employees, officers, and directors are always a good strategy.

Supply Chain Disruptions

COVID-19 has altered what was already a changing landscape for fashion and apparel companies that are engaged in "fast fashion," and therefore, increasingly reliant upon quickly and efficiently sourcing and selling goods online and in retail stores on a seasonal basis.

Supply chain disruptions cause grave impact to a company's business operations and typically come from a variety of sources, including: manufacturing, shipping and transport issues, cybersecurity breaches, environmental issues, health issues, government instability, and quality control problems. With COVID-19, these issues are magnified due to increased challenges in shipping, import and export regulations, and new health and safety guidelines, especially those that limit attendance and capacity. Absent proper internal controls and oversight, gaps in the supply chain are cause for not only financial distress and lost orders, but governmental and regulatory investigations as well.

Building a team focused on logistics that works with the compliance department or in-house or outside counsel is key. Occasionally using an outside consultant can also be useful, but corporate management cannot avoid their fiduciary obligations by outsourcing this role. Ultimately, the team must discern the laws in the places where the company is manufacturing or sourcing goods, as well as assessing the risks attendant in importing and exporting goods. Using technology such as predictive analytics is not only useful for bottom-line revenues but can also show a regulating entity that the company makes its supply chain a priority.

Further, assessing the accuracy and reliability of current transport and shipping companies will help determine whether maximum efficiencies are being realized. COVID-19 has made transportation more complicated and costly. With retail store closures, online shopping will be more widespread, and shipping quickly is critical to maintaining goodwill with consumers. Once goods arrive in the United States, they may be shipped first to fulfillment centers (which have their own host of workplace safety issues due to COVID-19). Companies that are focused on logistics can better assess how to get goods to a consumer's doorstep in the most efficient manner possible.

TCPA

As online shopping becomes more widespread, so does the use of mobile devices to purchase and track the delivery of goods. Likewise, fashion and apparel companies can derive substantial revenue from marketing directly to consumers through these devices.

The Telephone Consumer Protection Act (TCPA) is a federal law that governs how companies may communicate with consumers via text message, calls to mobile devices, and prerecorded messages to landlines.

The Federal Communications Commission (FCC) has the authority to enforce the TCPA, but consumers also have a private right of action, meaning that class-action lawsuits alleging TCPA violations have been rampant. The TCPA permits consumers to bring class actions seeking damages of between $500 and $1,500 per violation, which can result in requests for millions of dollars in damages. Numerous fashion companies have been targeted by such lawsuits. For example, American Eagle Outfitters recently agreed to pay $14.5 million to settle a class-action lawsuit alleging TCPA violations.

Prior to sending messages covered by the TCPA, fashion and apparel companies must secure their consumer's "express written consent" to such communications. Proper compliance requires that the requests for consent be carefully drafted. Further, fashion and apparel companies that outsource their mass-marketing efforts may still be jointly and severally liable if they can be shown to have had knowledge of or controlled the actions of these third parties.

Other Litigation Risks

There are myriad of other litigation risks that a fashion and apparel company may face. Some of the risks may come from internal sources, such as theft of trade secrets and discrimination and workplace safety claims. Robust employee training programs and well-drafted policies and employee manuals can mitigate risk, as well as a specified procedure for addressing and resolving internal investigations. Being able to painstakingly document such investigations can be useful in dealing with governmental regulators and can even assist in lowering penalties and fines.

In particular, cybersecurity risk for fashion and apparel companies is an enormous issue and will be for the foreseeable future. For example, in 2017, Target paid $18.5 million to settle claims by 47 states and the District of Columbia to resolve an investigation into a data breach in late 2013. The data breach was apparently caused by hackers who stole information from up to 40 million credit and debit cards of Target's shoppers. Target reported that the total cost of the data breach had been $202 million.

Further, federal and state agencies, including the SEC, the Federal Trade Commission, the FCC, and state attorney generals, are increasingly likely to investigate a data breach and seek to penalize companies for failing to adequately anticipate attacks and protect consumer's data.

Proper enterprise risk management requires that fashion and apparel companies have protocols in place to identify potential threats, provide proper policies and training to mitigate such threats, remain vigilant, review and update technology, know the state of the law, have appropriate procedures in place to address such breaches, including workaround procedures in the event of a breach, and to document all of the above.

Conclusion

The fashion and apparel landscape has never been more challenging or risky, and COVID-19 has only added to the financial and legal pressures and complexities. Understanding and mitigating such risks is not only good corporate policy for all stakeholders, but, like many of the goods such companies sell, good compliance is always in fashion.

Daniel A. Schnapp is a partner at Nixon Peabody in the firm's complex commercial disputes practice. Staci Jennifer Riordan is a Los Angeles-based partner in the firm's intellectual property practice and vice chair of its litigation department.