The Concession Model Not in Concession: Sephora and J.C.Penny Sue Each Other

*** The writing does not, and is not intended to, constitute legal advice by any means***

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Sephora and J.C.Penny are at loggerheads with one another over their contract, eventually landing in a federal courtroom in Texas. (I assume that there was an enforceable choice of venue provision in the contract because Texas is J.C.Penny's hometown. Why would Sephora want to litigate there?) It first started with J.C.Penny's decision to furlough Sephora employees working on its premises in light of the pandemic. Although the lawsuit initially arose out of the furlough decision, it is much bigger than that. In order to resume operations halted by COVID-19, J.C.Penny was preparing for a re-opening. Sephora, the LVMH-owned cosmetics titan, demanded that J.C.Penny use a specific disinfectant spray to keep its employees and customers safe when they enter a Sephora store. J.C.Penny declined the request, saying it is not a part of the agreement.

The tension is rising as Sephora is now requesting that it be able to shorten the lease it entered with J.C.Penny in light of the extraordinary circumstances by alleging that J.C.Penny materially breached the contractual term. J.C.Penny is pointing the finger at Sephora, claiming that it is suffering from an "irreparable injury" it need not be thrown into in the first place. J.C.Penny asked the court to issue a declaratory judgment (a binding judgment from a court that "declares" the legal rights of the parties; here, J.C.Penny wants a declaratory judgment that says Sephora has no legal right to terminate the lease early according to the terms of the contract.) and a temporary restraining order ("TRO") (a temporary order from a court that "restrains" the parties from taking certain actions for limited duration; here, J.C.Penny wants a TRO that says Sephora is prevented from walking away until the final judgment is issued.) This saga of the retail giants casts doubt on the concession models that's been growing popular in fashion retail.

The concession model is a contractual arrangement between a retailer (mostly department stores) and a brand according to which a brand directly operates its store located within a department store in return for paying a rent and/or a agreed-upon portion of their sales. Under the concession model, the store is staffed directly by the brand. (This is why Sephora can have a say over the furlough decision. In the traditional boutique model, employees working on the premises are hired by the department store.) The appeal of the concession is that the brand owns the inventory, thereby taking back the control from the department store over the pricing of its goods. The store, however, is still subject to certain covenants (a legal term for a promise to do or not to do something) and the general policy of the department store such as a seasonal sale.

Aside from its legal aspect, there's also a business dimension to the current litigation. With the bankruptcy filings of mega retailers such as Barney's and Neiman Marcus making news headlines, the prestige that comes with being a brand in a department store is likely to diminish. The brands are increasingly reverting back to opening its own stores rather than being "in-shops". Also, with more people shopping online, even for cosmetics, the revenue generated from the concession might not be as profitable as it used to be. Now, every statement about fashion is being questioned and revisited. Will this battle lead to a new makeover of the industry? Times like this call for a bigger thinking. A makeover would not be enough to cover the scars.