Former husband and wife team and cofounders of Tory Burch LLC (the Company), Tory and J. Christopher Burch, are currently involved in a trade secret and misappropriation case before the Court of Chancery of the State of Delaware. On October 2, 2012, J. Christopher Burch brought an action for declaratory judgment against the Company, its directors and his ex-wife seeing an order that the launch of his apparel brand C. Wonder did not violate his previous obligations as a member of the Company’s board. Tory Burch and the Company filed counterclaims on November 5, 2012, alleging that J. Christopher had stolen the company’s trade secrets, breached his fiduciary duty, and engaged in unfair competition, breach of contract and deceptive trade practices. The case is scheduled for trial in April 2013.

In 2003, Tory and J. Christopher Burch founded Tory Burch LLC. The Company grew rapidly, with projected sales of $900 million for 2012. Although the Burches divorced in 2006, they both remained on the Company’s board. Meanwhile, J. Christopher Burch developed an apparel brand, C. Wonder, and notified the board that he planned to sell his shares in the Company. In October 2011, C. Wonder opened its first store. According to Tory Burch, leading up to the launch of C. Wonder, and under the guise of an $11 million consulting agreement, J. Christopher was given access to confidential information regarding the Company’s business strategy, customer base and performance. While the purpose of the consulting agreement was to identify manufacturing locations for the Company, Tory Burch alleges that J. Christopher used the Company’s trade secrets to launch a brand that clearly mimics the Tory Burch image; C. Wonder sells products that strongly resemble those offered by the Company, but at a lower price, and operates a store with a similar appearance to Tory Burch stores.

The parties dispute the facts following C. Wonder’s October 2011 launch. According to Tory Burch, the Company believed that J. Christopher’s actions constituted a breach of his fiduciary duties. In light of this belief, the Company, as well as potential bidders to J. Christopher’s shares, required that J. Christopher sign a settlement agreement including provisions to protect the Tory Burch brand and the Company’s confidential information. J. Christopher argues that he was essentially bullied into signing a one-sided settlement agreement.

Thereafter, J. Christopher brought a declaratory action against Tory Burch, the board and the Company. The complaint requests that the court find that the Company and the board had tortuously interfered with J. Christopher’s business relationships, had improperly prevented him from pursuing other business ventures, and had acted in bad faith to limit his ability to sell his shares in the Company. Tory Burch and the Company counterclaimed, alleging that J. Christopher had misappropriated trade secrets in launching C. Wonder and in selling products resembling the Tory Burch brand. The counterclaims further assert that the non-complete terms of the settlement agreement limited J. Christopher’s ability to launch the C. Wonder brand. Tory Burch and the Company also allege unfair competition, breach of contract and deceptive trade practices.

Recent hearings before the court have resulted in interesting commentary. In the first hearing, Chancellor Leo Strine noted that this “preppy clothing dispute…is not a case about intercontinental ballistic missiles.” Chancellor Strine went on to jokingly propose that the parties’ attorneys participate in a fashion show to allow a proper comparison of the similarities between the brands.

This case highlights the challenges that brand owners, particularly in the fashion industry, face in protecting their designs and overall image. While recent developments have shown increased interest in concrete intellectual property protection for fashion designs, owners have attempted to protect aspects of their brands under trade secret, trademark, trade dress, copyright and patent laws. However, in an industry where trends consistently change and look-alike designs sprout quickly, these laws do not necessarily provide adequate protection. Arent Fox is continuing to monitor this case and other cases involving the intellectual property protection of fashion designs. Please contact Anthony V. Lupo or Luna M. Samman with questions.