California Apparel News

Saks Inc. recently settled a lawsuit with one of its vendors regarding the department store’s charge-back policy, but many in the industry question whether the settlement—for an undisclosed amount—will lead to any substantial changes in charge-back practices.

On Nov. 23, Saks settled a case filed in 2005 by attorney Donald L. Kreindler, a partner at New York firm Phillips Nizer. Kreindler alleged that Saks’ charge-backs for markdown allowances led to the demise of a manufacturer called Apparel Group International (AGI), which produced Oscar de la Renta fashions. Kreindler specifically represented International Design Concepts LLC (IDC), which had purchased the assets of AGI.

The suit alleged that charge-backs issued to AGI for markdown allowances added up to more than $31 million, which Kreindler called excessive and said were an important reason why the manufacturer went out of business.

Saks insisted on a confidentiality clause regarding the settlement, but Kreindler reported being pleased with the amount. However, he said he does not expect the settlement to have any effect on retailers’ charge-back policies. “It is as bad as or worse than ever,” he said.

Saks did not return a request for comment.

Long-standing practice

There are no figures available to tally the annual dollars vendors pay in charge-backs. Kreindler contends that charge-backs are, more often than not, levied against mid-size and smaller vendors. “If you’re Ralph Lauren, you don’t have to take it,” he said.

The practice of charge-backs was started by Wal-Mart founder Sam Walton in the mid-20th century, according to Mark Brutzkus, an attorney with the Encino, Calif.–based firm Ezra Brutzkus GubnerLLP. Walton found that he could guarantee getting the right goods in premium condition if he fined vendors for sending damaged goods or orders that were short a few items. The retailer also could lower inventory costs and speed up the process of getting merchandise to the sales floor if vendors followed specified directions for shipping.

The practice of charge-backs spread quickly throughout the retail industry and, according to many industry observers, soon became a profit center for retailers. The retailers demand discounts on goods if they come with a torn shipping label, for example. They also demand charge-backs if the goods do not reach a certain sales margin. Another charge-back practice demands a certain percentage of the money a vendor takes in total sales.

“The manufacturer has to grin and bear it, otherwise they risk not being able to continue to do business with the retailer,” Brutzkus said.

If vendors do challenge retailers, they might find themselves getting the runaround, said Richard Stern, the operations manager for Los Angeles–based producer of women’s contemporary clothes IDI. “It costs so much time to defend yourself, on one level, they’re hoping that manufacturers will roll over and accept it,” said Stern, whose company recently sent one of its employees to a class to learn how to avoid massive charge-backs.

Stern said that there is a legitimate case to be made for some charge-backs. If a vendor fumbles in delivering to a retailer, a price should be paid. However, he stated that there is no reason to pay for charges that sometimes have nothing to do with the initial agreement between vendors and retailers. “Most buyers are wonderful,” Stern said. “They fight for their business. We fight for ours and we meet in the middle.

Be prepared

Vendors can protect themselves against charge–backs by initially offering a percentage discount against the sales price in lieu of any markdown allowance, so that they will know and not be surprised by the retailers' demands, Kreindler said. Another way to lessen the charge-back burden is by taking advantage of the protections that exist in state laws such as the Uniform Commercial Code, which applies to all sales of goods.

In 2005, Kreindler made waves in the apparel industry when he introduced the Vendors Coalition for Equitable Retailer Practices. He declined to state how many companies were involved in the coalition. The coalition issued a six-point manifesto on how vendors and retailers can avoid legal trouble and aggravation that comes from charge-backs.

The sometimes-contentious relationship between retailers and vendors could be improved if retailers created a mechanism, perhaps an ombudsman, to allow vendors to challenge charge-backs, according to Brutzkus. He said that Wal-Mart has employed ombudsmen to get to the bottom of vendor disputes.

Vendors can also guard against chargebacks by learning as much as they can about retailers’ shipping policies. Many retailers use EDI (electronic data interchange) to control their shipping. Los Angeles–based nonprofit education group Fashion BusinessInc. (FBI) offers seminars on EDI. The FBI’s next EDI-certification course is scheduled for March 4 and 6, 2008. For more information on upcoming classes, visit the FBI’s Web site at www.fashionbizinc.org.