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Ralph v. Jones: The Gloves Are Off

Jones Apparel Group and Polo Ralph Lauren Corp. are suing each other over the bitter dispute involving Jones’ licensed Lauren businesses.

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Ralph Lauren

Ralph Lauren

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Peter Boneparth

Photo By WWD Staff

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NEW YORK — The battle between Jones Apparel Group and Polo Ralph Lauren Corp. got even nastier on Tuesday.

To the apparent surprise of Lauren executives, Jones walked away from the contested Lauren by Ralph Lauren license and filed a breach of contract suit against the Lauren company as well as former Jones president Jackwyn Nemerov, seeking $550 million, representing lost profits from sales, and punitive damages to be determined.

Polo immediately returned fire, filing its own lawsuit separate from any counter-claims it may have arising from allegations in the Jones suit. The Polo lawsuit seeks a declaration from the court that, as it has asserted, the Lauren license rightfully ends on Dec. 31, 2003, and reverts to Polo the next day due to the terms of a separate “cross-default agreement” executed by the parties.

The stage is set for one of the fashion industry’s juiciest legal battles, right up there with Warnaco versus Calvin Klein and LVMH Moët Hennessy’s skirmish with Gucci Group.

Surprisingly, Jones and Lauren initially appeared headed toward a peaceful resolution of their four-month dispute over the Lauren by Ralph Lauren license, as well as the Ralph by Ralph Lauren license. According to sources, Polo Ralph Lauren president and chief operating officer Roger Farah, his team and attorneys met with Jones’ chief executive Peter Boneparth and his attorneys Tuesday morning and were actively negotiating a purchase agreement for the licenses. During the meeting, Boneparth left the room, came back in and bluntly told the Polo people he had just filed a lawsuit, catching the Polo executives by surprise. Polo’s lawyers quickly left to file their own suit.

“The good news is we got the line back,” Farah said in a phone interview. “I’m unhappy it got a little messy here. We’ll be producing it for spring 2004.” Farah called Jones’ lawsuit “without merit, and we truly expect to prevail.”

As for Jones’s position, Boneparth told WWD: “This was the last resort. Litigation is nobody’s preferred strategy. We both believed we had reached an impasse.”

Jones also made a merchandising move, saying it would launch a Jones New York lifestyle label as a replacement for the Lauren line in spring 2004.
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Both lawsuits were filed Tuesday in a New York state court in Manhattan, with the Jones legal action the first judicial escalation in a four-month old dispute over the status of the Lauren by Ralph Lauren license and its relationship to the Ralph by Ralph Lauren line.

As reported, Jones first acknowledged rifts in the licensor-licensee relationship in February. Polo believed that Jones’ failure to meet established sales minimums with the Ralph by Ralph Lauren license, scheduled to expire at the end of the current year, would result in a co-termination of the Lauren license, which Jones has maintained that it owned through 2006.

The lawsuit also seeks enforcement of the noncompete agreement between Jones and Nemerov in force since Nemerov left the firm in March 2002. On an afternoon conference call with analysts, Boneparth noted that Jones had paid Nemerov “about $20 million to avoid the situation we’re in today.” A check of company and government records puts the amounts for confidentiality and noncompetition at more than $18.8 million.

In a “Dear Ralph” letter dated June 3 from Boneparth to Polo ceo Ralph Lauren, included as an exhibit in the lawsuit, Boneparth said that, “In your letter of Feb. 11, 2003, you stated Polo’s intention not to perform its obligations under the license and design agreements for the Lauren line for the full duration of their effective term, which does not end until Dec. 31, 2006. This repudiation constitutes a material breach of the Lauren agreements.”

Jones will retain the Polo Jeans license, acquired when it bought Sun Apparel in 1998, which wasn’t part of the dispute. Whether Polo is pleased with that, remains to be seen.

The Jones-Polo ballistics sent both issues down in New York Stock Exchange trading on Tuesday, although Polo bore the brunt of investor concern. Polo shares dropped $1.08, or 4 percent, to $26 in trading that was more than 7 times average levels. Jones shares were off 55 cents, or 1.8 percent, closing at $30.25 as the number of shares changing hands fell just short of 3 times their daily average.

Discussing why he decided to give up the Lauren by Ralph Lauren business if he believes it still has three years left on the contract, Boneparth said in a telephone interview, “Operating this business in this environment is very difficult. We’ll let a third party decide what is right.”
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So how does he expect to operate the Polo Jeans business under such litigious conditions?“We don’t have a choice. They haven’t tried to get it back. We’ll run that business to the best of our ability,” said Boneparth.

As for the Lauren line, the two companies had been negotiating for a transition line which they thought would have put less pressure on retailers, but Boneparth chose not to go that route. Sources believe Jones caught Polo off-guard, and Polo didn’t expect to have to ramp up so quickly.

“Polo was not prepared for that transition. Polo wanted it [the Lauren license] back, and they proposed it to Jones, but Jones is going to make it extraordinarily difficult for them to get it done,” said one source.

Boneparth’s June 3 letter alleged that Polo has been “conspiring with Jackwyn Nemerov, the former president of Jones Apparel, in clear violation of the confidentiality and noncompete provisions of her agreement with Jones and that Polo tortiously induced Ms. Nemerov’s violations.”

Sources said that Lauren will have to pay heavily to get Nemerov off the hook and questioned whether Lauren will come to her defense.

Farah told WWD that he has not been working with Nemerov and found her inclusion in the lawsuit “very strange. She has a very clear noncompete. She’s talked to people in the industry. Everybody understands what a noncompete is.”

Nemerov didn’t return a phone call to her home seeking comment. “She’s kind of tied up right now,” said her husband.

Polo now has two months to create a Lauren better-price line, while in litigation and all without sourcing, backroom facilities, patterns, samples, and management in place. Sources don’t believe Boneparth will give Polo any of the samples and patterns and other items it needs, and it will be difficult for Lauren to start from scratch, and build the business that quickly. Especially when they’re dealing with a business that last year did $548 million in revenues.

“If you lose that floor space for a major season [fall], the retailer has to give that floor space to other people,” said one source.
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Sources believe that Boneparth and Ralph Lauren simply didn’t see eye to eye, and Boneparth never went out of his way to ingratiate himself with Lauren. Furthermore, Lauren was deeply irritated by Boneparth’s continual refrain to Wall Street and the press that the Lauren by Ralph Lauren line was a “mature business.” Polo, of course, felt strongly that there was still plenty of room to grow.

A former attorney and investment banker, Boneparth and his team appeared to be more focused on the financial and operational ends of the business, rather than the merchandising side, said sources. When the Polo-Jones relationship first began in 1995, it was based on a mutual respect between Sidney Kimmel, chairman of Jones, and Lauren. Sources believe that relationship changed when Boneparth replaced Kimmel as ceo. They said Boneparth didn’t spend much time nurturing the relationship between Jones and Lauren the way Kimmel had, contributing to the downfall of the business relationship.

“I have tremendous admiration for what Ralph has achieved,” said Boneparth, when asked about a difficult relationship between himself and Lauren.

In a statement, Farah said, “We regret taking this action, but we felt we had no choice but to seek immediate court relief from what we believe is obstructionist behavior from a business partner that may irreparably damage our brands. We believe we are well within our legal right to reclaim our licenses. We are confident that the court will enforce our clear contractual rights enabling us to serve our customers without interruption.”

Gilbert Harrison, chairman of Financo, a New York investment banking firm, said about the Lauren-Jones lawsuits: “I think it’s a shame that it has to come to this. In my opinion, the Jones-Ralph Lauren relationship was a great relationship, and worked very well for both parties. To end up in litigation results in a lose-lose situation for both parties.”

Meantime, the Polo Jeans license with Jones expires on Dec. 31, 2005. According to an Securities and Exchange Commission filing in April 2001, the license may be renewed by Jones in five-year increments for up to 25 additional years if certain targets are met. Renewal of the Polo Jeans license after 2010, however, requires a one-time payment by Jones of $25 million or, at Jones’ option, a transfer of a 20 percent interest in its Polo Jeans business to Polo Ralph Lauren, with no fees required for subsequent renewals. Polo also has the option, exercisable on or before June 1, 2010, to purchase the Polo Jeans Co. business at the end of 2010, subject to certain conditions.
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In addition to the upcoming Jones New York label, Jones already has Jones New York Sport, Jones New York Dress and Jones New York Suits. Boneparth said total company sales under the Jones New York umbrella label will approximate $730 million in 2003, and he expects the Jones New York family of labels could exceed $1 billion in sales in 2004.

The rift first surfaced in the press during the first week of February when Jones revealed that, due to performance issues pertaining to its Ralph by Ralph Lauren license, the Lauren by Ralph Lauren license, the source of $548 million in revenue for Jones last year, might be terminated at the end of 2003, three years earlier than originally planned.

Polo asserted that Jones’ failure to meet minimum volume requirements in the Ralph license, responsible for just $37 million in sales last year, would allow for the early termination of the Lauren line. Polo said the “cross-default agreement,” executed by the companies in May, 1998, provides that the “termination or expiration” of any of the Lauren agreements or Ralph agreements “shall result in the simultaneous termination or expiration” of all such agreements.

Even if the new Jones New York program is successful, the loss of the Lauren business potentially leaves a gaping hole in the center of Jones’ top line. On Tuesday, several industry sources questioned how long Boneparth will be heading up Jones, considering he just lost about 15 percent of the company’s business.

Meantime, Jones is now saying it’s open to other deals, and told stockholders last week at its annual meeting that it is looking for licensing agreements.

Boneparth declined comment Tuesday on whether he’s interested in the CK Calvin Klein women’s license.

Bruce Klatsky, chairman and chief executive officer of Calvin Klein Inc., said he should have a CK Calvin Klein women’s deal within two weeks. He declined to divulge with whom he’s negotiating, but sources believe Kellwood still has the inside track.

While Boneparth declined to say whether Jones would renew the license at its option in 2005, Boneparth offered that the company “wants to be in the Polo Jeans business…We have a mutually shared economic dependence on making this business successful. They obviously have a royalty stream and obviously we have a revenue stream to protect.”
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As for the noncompete provision in the Polo Jeans license, Boneparth said that the removal of the Lauren license from its operation helps it move to other opportunities. “The Lauren agreement is characterized by names of things we can’t do. The Polo Jeans contract is characterized for a noncompete from a classification category. So it would be fair to say that if we’re in the Polo Jeans business there would be other status jeans businesses that would be difficult for us. There are a very large number of things that the Lauren restriction having been lifted will allow us to pursue that are not going to be troubled by the fact that we have a Polo Jeans noncompete as well.”

Boneparth said, “We have obviously painstakingly tried to figure out a resolution that made sense for everybody, but what is most important to us is to protect the interests of our shareholders. Given the uncertainty of the outcome and given what we knew today, we were not prepared to invest shareholder money in building inventory on a go-forward basis with having the risk that there was any question about whether or not that license was in fact ours.”

He noted that the lawsuit was seeking what Jones believes is rightfully its own — the operating profits for the remaining term of the license from 2004 through 2006.

The Jones lawsuit alleged that Nemerov, in her position as president, obtained Lauren “buy plans” that reveal the terms of the proposals Jones makes to retailers concerning their purchases of clothing line. In addition, she allegedly also obtained a list of names and addresses regarding fabric suppliers and factories that produce the Lauren line. Finally, Nemerov is alleged to have obtained updated swatch books detailing historical sales performance associated with each style by fabric, a “critical source of information for the design of lines for future seasons.”

According to Jones’ definitive proxy, filed with the Securities and Exchange Commission on April 18, Nemerov exercised stock options valued at $11.9 million and has received semimonthly payments of over $205,000 for the past 14 months. Additionally, after her departure from the firm in March 2002, Jones paid her $625,000 in a contract bonus, $172,000 in a target bonus, $342,000 in interest reimbursement, $85,000 for unused vacation time and $10,000 for outplacement services.
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The company said previously that it took a $31.2 million charge in the first quarter of 2002 to cover obligations to Nemerov and former vice chairman Irwin Samelman.

According to Boneparth, employees who were working on Lauren will migrate to the new line. “This will preserve the highest number of jobs in the Jones Apparel Group. We are very excited about that because these are very talented people that we do not want to lose.”

According to Boneparth, the new line will be targeting the better department store distribution channel, and will be a bridge between Jones’ sport business and its career business: “This is tremendous for us as an organization because this is clearly a brand that we own. It is not to suggest, however, that our strategy has fundamentally altered from looking at licensed opportunities along the way where they may in fact be relevant to increasing our overall product mix and profitability.”

Boneparth said that Jones New York label is “an incredibly valuable asset that can be much larger than it currently is,” as well a lifestyle brand. In addition, the focus of the new line will be centered in the dress-up casual arena, with price points lower than the Lauren line.

Jennifer Black, an analyst at Wells Fargo, said, “The Jones New York extension makes sense, but it is not anywhere near the cachet of the Lauren brand. The consumer knows Jones as a better brand, but it doesn’t have the same aspirational quality as the Lauren name.”

Robert Drbul, analyst at Lehman Brothers, wrote in a research note, “We believe ceasing production of the Lauren line is a smart strategic move for Jones. This decision removes a level of uncertainty and allows Jones to move the business forward and pursue other growth opportunities in the better apparel zone.”

He added that the disruption of the Lauren business “creates an opportunity for Jones to capture valuable floor space and sales.”

Farah told analysts during Polo’s conference call that the company was happy about getting back Lauren in January. “This is a very exciting and important day in our history,” he said.

Farah explained that the company was very carefully thinking about the infrastructure for the business. “The ball is in our court to show a line in September for delivery in spring, and that is what we are prepared to do.”
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Farah added that he didn’t expect the real estate in department stores to change following the changeover production for the Lauren line. “The department stores want product that is going to sell. The Lauren or Ralph Lauren name is the best in the industry that they are going to have. Why would they artificially shrink the business if we develop in the right way and they get the right sell throughs?”