Key takeaways from the retail buzz coffee chat with the Hogan Lovells NY team - February

Hogan Lovells Partners discussed prominent topics for the year’s retail trends including:

Restructuring Joint Ventures

Joint ventures offer businesses a path to expand into new sectors and product lines, explore new markets, innovate with new technologies, and share costs with others. Just as joint ventures can accelerate company growth in strong economies, they can also introduce significant challenges in economic downturns including rising capital costs and over-extending human capital. Unwinding or terminating joint ventures can be expensive and time consuming, exposing companies to risk while sending negative messages to the market. Instead, an economic downturn can provide opportunities to restructure joint ventures. In fact, active rethinking and restructuring can help companies meet financial and strategic objectives over peers that fail to do so. Our lawyers acknowledged the bespoke nature of joint ventures while recommending considerations ranging from changing board composition to finding new capital sources to reallocating responsibility and equity.

Reducing Risk in the Event of Layoffs

Current economic conditions and declines in retail volume have already impacted employees in a number of high profile layoffs, and more may follow. Reductions in force are difficult enough and can be made even more so from an employment law perspective if not handled carefully. Our lawyers recommend several ways to avoid legal pitfalls in the context of a layoff. First, communicate decisions to all relevant stakeholders far enough in advance to comply with the Worker Adjustment and Retraining Notification (WARN) Act and its state and local counterparts, some of which are more exacting than federal law.  Second, employers should consider whether severance offers are consistent with their policies, practices and individual contracts. Otherwise, employers may risk claims under contract or quasi-contract theories. Third, if impacted employees are unionized, employers should consider whether they have an obligation to bargain over either the decision or the effects of a proposed layoff. Fourth, employers should carefully review their form separation and release agreements to ensure that they are as protective of the company as commercially feasible and that they are compliant with applicable federal, state and law. This includes ensuring there are appropriate carve-outs from post-termination covenants and nondisclosure obligations, and that the forms include necessary language and schedules for compliance with applicable age discrimination statutes. Finally, employers should conduct adverse impact analyses before finalizing layoff decisions to ensure that individuals with certain protected characteristics are not overrepresented in layoffs and to identify more individualized red flags, such as including individuals who may have engaged in protected “whistleblowing” activity or who may be on or have recently returned from a leave of absence.

Keeping Aware of Restrictive Covenants

Oftentimes, the fact of workforce reductions can make even more acute the need to retain talent and prevent loss to another competitor. To that end, employers in the U.S. commonly use restrictive covenants—contractual agreements not to compete, solicit customers, solicit employees or misuse confidential information—as a “stick” to retain and protect their investment in key employees. While restrictive covenants are common, their enforceability currently depends on applicable state law. Some states are relatively permissive, others are more hostile, and others—like California, North Dakota and Oklahoma—prohibit certain restrictive covenants outright. Generally speaking, the U.S. is trending towards stricture rules on enforcement—a trend evidenced by a rule the Federal Trade Commission (FTC) proposed on January 5 which would ban non-compete clauses on a nationwide basis, subject to limited exceptions. While this rule is nowhere near final or effective (to the extent it ever becomes so), our lawyers recommend that employers who use restrictive covenants remain vigilant in this space.  As always, we will continue to monitor developments in federal, state and local law.

The Disconnect in Public Company Equity Values

Companies face uncertainty due, at least in part, to changing consumer habits, and debt loads climbing to record levels. That said, an economic downturn can also bring with it opportunity. Companies with strategic vision can pick up new assets, business lines, and competitors at prices previously unavailable. At the same time, undervalued businesses face the risk of being acquired. More than ever, businesses need to closely monitor their inventory levels, and tax positions, so they can be ready should a strategic opportunity present itself. Economic distress can breed interesting opportunities, and companies can consider consolidation and vertical integration. As always, risk should be viewed on a spectrum, with the risk of doing nothing on one end and the risk of jumping into a transaction at the wrong time on another. Companies will have to grapple with keeping eyes on opportunities and deciding, with adequate due diligence, when to act, all while remaining nimble in these uncertain conditions.

Personalization in Retail

Retailers continue to be focused on personalizing consumer retail experiences, whether in person or online. Customers expect personalization and are willing to provide data for seamless experiences, and otherwise will depart companies if they do not receive such an experience. While important, there remains a gap between the expectation of personalization and the reality of these experiences. In a retail landscape where knowing too little or too much about a consumer can cost a retailer, striking the appropriate balance with respect to the use of customer data is vital. Our lawyers emphasized that personalization has to work holistically across the entire retail experience. We expect increased usage of unique identity features such as emails and IP addresses to track customer patterns and personalize experiences. E-commerce will integrate further with in-store shopping for an omnichannel experience, driven primarily by with shoppable posts on social media and the use of augmented reality tools and personalized chatbots. We have, and continue to assist retail clients with commercial agreements with third parties offering  the types of personalized features that we discussed, including AI-driven tools, customized loyalty programs, and augmented reality technology and  AR applications. Personalization in retail continues to evolve as technology does and so we expect retailers to focus on innovation, and we’re here to help retailers either protect the innovation they develop internally or obtain rights from the vendors at the forefront of innovation in the industry.

Authored by Meryl Bernstein, David Baron, Michael J. Kuh, Martha N. Steinman, Michael Szlamkowicz, and Nathan Truong.