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Neiman’s, Penney’s Bankruptcy Talk and Other Legal Entanglements: The Week Ahead

The legal community has been fairly active this past week and that will continue over the next few months as fashion firms hit the court system over a wide range of issues.

Neiman Marcus

The luxury department store chain has been on bankruptcy watch and could file any day now. The sticking point has been lender talks over financing to allow it to operate during the bankruptcy proceeding. The bankruptcy is expected to help Neiman restructure over $4 billion in debt that hit its balance sheet from a 2013 sale. The retailer has survived two back-to-back leveraged buyouts.

It wasn’t immediately clear if there were plans to shutter any of its 43 stores, although Neiman did say previously that it will close the majority of its 24 Last Call concepts and largely abandon the off-price business. The company’s stores have been closed since mid-March due shelter-in-place mandates, and the chain furloughed about 14,000 workers as well. Last week, Neiman missed an interest payment to bondholders, signaling a deterioration of its finances.

CNBC reported on Friday that discussions with lenders center over raising roughly $600 million in emergency financing.

J.C. Penney Co. Inc.

Penney’s was in the midst of a turnaround strategy when COVID-19 hit, which also resulted in the retailer temporarily shutting its stores. Penny’s also has furloughed most of its 95,000 staff members, and had extended the time in which to pay vendors for goods already made and shipped. Earlier this month, factors stopped approving orders the retailer placed with its suppliers, typically the first hint that trouble was brewing on the liquidity front.

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Penney’s, which has about $4 billion in debt, said earlier this month that it wouldn’t be making its $12 million interest payment due on April 15th. A 30-day grace period before the debt goes into default was expected to buy the company time to explore options, including a bankruptcy filing.

The Wall Street Journal reported on Thursday that Penney’s was now in talks for a bankruptcy loan package between $800 million to $1 billion.

Victoria’s Secret

Earlier this year, L Brands Inc. inked a $525 million deal with Sycamore to sell a 55 percent majority stake in Victoria’s Secret. But then COVID-19 hit and L Brands temporarily shut its 1,600 doors and furloughed most employees. Now the private equity firm wants out and is claiming in a lawsuit filed in a Delaware chancery court that the move to close stores less than one month after the parties entered their agreement was without its permission.

It alleges in the court document that other actions taken by L Brands to “drastically” reduce new merchandise receipts, along with its failure to dispose of “existing out-of-season, obsolete and excess merchandise, has saddled the Victoria’s Secret business with a stock of merchandise of greatly diminished value [while the failure] to pay rent during April 2020 for its retail stores in the United Sates [were all actions] in violation of the transaction agreement.”

Sycamore is hoping the court will grant its request for a ruling–a declaratory judgment–that the purchase agreement is null and void.

L Brands fired back on Thursday with a charge that the lawsuit is just a case of “buyer’s remorse,” and that the parties had already agreed that “Sycamore would bear the risk of any adverse impacts” stemming from the coronavirus pandemic.

“L Brands was completely transparent and forthcoming with Sycamore, and Sycamore assured L Brands as recently as a week ago that it intended to proceed with the transaction,” the court papers said. L Brands also classified Sycamore’s lawsuit as “pure gamesmanship,” noting a Sycamore letter indicating the private equity firm still wanted to buy the business, “but wanted to renegotiate the purchase price and other economic terms” to account for the COVID-19 impact.

L Brands is seeking specific performance to force the deal to go through, or in the alternative monetary damages. The deal, if it closes, will help L. Brands pay down some of its $5 billion in debt. The total value of the deal is pegged at $1.1 billion.

Romag Fasteners v. Fossil Group

Romag filed a trademark infringement lawsuit in a federal district court and received a jury award of $6.7 million in profits against Fossil for infringement of Romag’s trademarks in connection with the sale of handbags. On appeal, a federal circuit court declined to allow the award because just 1 percent of profits were attributable to the infringement.

On further appeal, the U.S. Supreme Court on Thursday clarified the standard for an award of profits in a trademark infringement suit. “A plaintiff in a trademark suit is not required to show that a defendant willfully infringed the plaintiff’s trademark as a precondition to a profits award,” wrote Justice Neil Gorsuch. The case was sent back to the circuit court for further review.

“The decision resolves a longstanding disagreement among various circuit courts as to the standard governing awards of profits on claims for trademark infringement and unfair competition. The Supreme Court has clarified that a defendant’s state of mind is a ‘highly important consideration in determining whether an award of profits is appropriate,’ but not a precondition to such an award, as some circuits had held,” Bruce Ewing, an attorney who is co-chair of Dorsey & Whitney’s intellectual property litigation practice group, said.

Fashion Nova to pay $9.3 million in proposed FTC Settlement

The Federal Trade Commission said on Tuesday that online fashion e-tailer Fashion Nova will pay $9.3 million to settle FTC charges that it failed to properly notify consumers and give them a chance to cancel orders when it couldn’t ship the items in a timely manner. The FTC’s complaint also alleged that the company illegally used gift cards to compensate consumers for unshipped merchandise in lieu of providing refunds. The e-tailer is charged with violation of the FTC’s mail, internet or telephone order merchandise rule, or what is commonly referred to as the Mail Order Rule.

Under the terms of the proposed settlement, $7.04 million will be sent to the FTC for use in refunding consumers and $2.26 million must be refunded directly by the company to consumers, the commission said. “Consumers who receive gift cards instead of refunds when the company violated the Mail Order Rule will be eligible for refunds under the settlement,” it added.