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Breach of Fiduciary Duty and Trade Secret Misappropriation Alleged In “Preppy Clothing Dispute” Involving Fashion Designer Tory Burch

Posted in Breach of Fiduciary Duty, Trade Secrets, Unfair Competition

A high profile trade secret dispute among the board members of one of the fashion world’s most well-known companies has the American fashion elite taking sides. Last month, Christopher Burch filed a breach-of-contract and tortious interference complaint against his ex-wife, fashion mogul Tory Burch, in Delaware Chancery Court. In response, Tory filed counterclaims in early November, in which she accused Christopher of stealing trade secrets to establish stores which looked suspiciously like her own boutiques.

Tory Burch and her ex-husband, J. Christopher Burch, co-founded the fashion empire Tory Burch LLC in 2003. The company is an apparel and accessories brand providing consumers with luxury apparel and other goods. As Oprah Winfrey stated in 2005, the company is “the next big thing in fashion.” Today, the company’s annual sales total more than $700 million annually.

The Burches divorced in 2006, and both Tory and Christopher remained on the board of Tory Burch LLC. Christopher continued to pursue other projects, and in 2008, began to lay the groundwork to launch his own apparel brand, C.Wonder. The company opened its first store in October 2011. Its products included clothing, accessories, and home décor, all of which allegedly resembled Tory Burch’s products, but were sold at a significantly lower price. Allegedly, the store copied the Tory Burch brand, using similarly styled lacquered front doors and store fixtures, as well as furniture and rugs which closely resembled those found in the Tory Burch stores.

In June 2011, Christopher provided the Board of Directors (“the Board”) of Tory Burch LLC with notice that planned to sell his shares of the company. The Company then engaged Barclay’s Capital to assist in the process of locating a buyer. This project was referred to as “Project Amethyst.”

The events which followed the opening of C. Wonder vary depending on who is telling the story. Tory alleges the company sought to “arrive at a consensual resolution of its dispute” with Christopher, despite his violations of his fiduciary duties. In her counterclaim, she states the company continued to move forward with Project Amethyst to find a new investor to purchase Christopher’s stake in the company. In addition, five of the seven board of directors agreed that Christopher would need to enter into a settlement agreement to protect Tory Burch LLC’s brand and confidential information prior to completing any sale. According to Tory’s version of the story, the three bidders positioned to purchase Christopher’s required such an agreement to be in place before they would agree to invest, and Christopher’s refusal to agree prevented the sale from taking place. Christopher tells the story very differently, alleging Tory had cut off his power and “hijacked the bidding process” through which he had been attempting to sell his stake in the company. Furthermore, he alleges Tory manipulated third party bidders into requiring him and his company, C Wonder to reach a one-sided and onerous settlement agreement with the Company regarding trade secret misappropriation and trade dress infringement allegations.

On October 2, 2012, Christopher filed suit against Tory, the other directors, and Tory Burch LLC, requesting a declaratory judgment stating the defendants could not restrain him from pursuing other business ventures. Additionally, Christopher alleged the Board had breached the Operating Agreement by preventing him from engaging in other business ventures, tortiously interfered with his business relationships, and improperly interfered and acted in bad faith to impede his ability to sell his shares of the company.

On November 5, 2012, Tory filed counterclaims against Christopher, alleging Christopher had stolen trade secrets from Tory Burch LLC to establish stores which closely resembled Tory Burch boutiques. Tory alleged Christopher had stocked the stores with mass-market knock-offs of her luxury brand , and that under the terms of the operating agreement, he did not have the right to create knock-off goods, and his right to compete was qualified and limited by his other obligations as a director. Tory’s counterclaim alleges Christopher breached his fiduciary duty by using confidential information belonging to Tory Burch LLC and engaging in unfair competition for his personal benefit. Additionally, Christopher allegedly misappropriated trade secrets from Tory Burch LLC, which he then used in creating C Wonder. Tory’s counterclaim also alleges unfair competition, breach of contract, and deceptive trade practices. She further requests injunctive relief to stop Christopher’s use of Tory Burch LLC’s confidential information and company inventions.

Heavyweight fashion industry players like Anna Wintour and Diane Von Furstenburg have already spoken out in support of Tory Burch. According to Anna Wintour, the editor of Vogue, “As far as we’re concerned [this is] 100% Tory’s business, and we’ve never had anything to do with Chris.” Diane Von Furstenburg, the President of the Council of Fashion Designers of America, echoes Wintour’s support, characterizing Christopher’s behavior as “bizarre and nasty.”

The case is still in the early stages, but has already drawn attention for some colorful hearings. At the first scheduling hearing, which occurred on November 1, 2012, Chancellor Leo Strine promised not to burden anyone’s holidays with this “preppy clothing dispute. . . I’m sorry, but this is — this is not a case about intercontinental ballistic missiles.” In proposing an April trial date, Strine reflected on the popularity of “really ugly” duck shoes, “slightly irregular alligator shirts,” and how “real WASPS actually don’t go and pay full Polo price. . . at Macy’s. No way. They actually will find a bargain. That’s how they got to be, you know, WASPs.” Strine went so far as to suggest, jokingly, that the best way to evaluate the similarities between the C. Wonder and Tory Burch brands would be a fashion show featuring the parties’ attorneys. Finally, Strine discussed his recent reading of John Cheever’s works, and explained its impact on the dispute. “Totally unrelated to this case, I’ve been deep in it, in an autumnal Cheever phase. ” he said. “So I’ll have to just keep that up through the case. Have you read your Cheever lately? You know who he is? … And Mad Men will be coming back at some point in time. So I think if you read Cheever, go see the new Virginia Woolf revival and watch Mad Men, we’ll be all geared up and in the mood for this sort of drunken WASP fest. Are they WASPs? Are the Burches WASPs? Do we know?”

Whether Chancellor Strine’s preliminary views of this “preppy clothing dispute” lead to a quick resolution between the parties remains to be seen. We will continue to keep you apprised of future developments as the case progresses.