Originally posted by Apparelnews.net
Seven Lawsuit
Adds Up to Confusion
By Deborah Belgum
A long and drawn-out lawsuit dispute among the founders of Seven for All Mankind ended with a jury recommending that the creative forces behind the company be paid $5.5 million in profits and be considered part owners of the venture.
Because of the uncertainty over what the judge will do with the jury’s recommendations, both sides of the case declared victory. “We are extremely happy with the verdict,” said Koral, who believes the judge will side with his argument that his partners have already been justly compensated. “My version of it is we were totally exonerated from any wrongdoing and they will get awarded zero dollars.”
But Glasser had a different version. “Jerome and I are ecstatic,” he said. “The judge did say there was evidence that was convincing that we own the business.”
The jury, which returned a special verdict on June 29 after deliberating for 61/2 days, decided that Peter Koral, the owner of Los Angeles–based L’Koral Inc. and the financial backer of the blue jeans label, still owed designer Jerome Dahan and businessman Michael Glasser $5.5 million in profits for 2001 and 2002. This sum is on top of the $5.5 million in profits Dahan and Glasser have already received.
The jury also agreed that Dahan and Glasser were joint owners of the company when it was formed. After a disagreement with Koral, Dahan and Glasser left in late 2002 to start another high-end denim label, Citizens of Humanity.
Addressing a cross complaint filed by Koral for breach of faith and fair dealing, the jury recommended that Dahan and Glasser pay the longtime apparel maker $600,000.
Los Angeles Superior Court Judge James R. Dunn will hear more arguments on July 21 to decide whether to uphold the jury’s verdicts.
Dahan and Glasser could receive millions of dollars more if, as co-owners, they are entitled to 2003 and 2004 profits or if the company is sold or dissolved.
Lingering lawsuit
During five weeks of testimony in Los Angeles Superior Court, jurors heard accusations of shady accounting practices, blatant theft and behind-the-scenes maneuvering to sell the denim label to Liz Claiborne or Ralph Lauren. At times, the drab courtroom was packed with employees from L’Koral and Citizens of Humanity.
The story began more than four years ago, when Dahan and Glasser came up with the idea for a high-end, well-made denim line that would sell for $100 to $160.
The two had plenty of creativity but little money. While attending the MAGIC International show in Las Vegas in early 2000, they ran into veteran apparel maker Peter Koral, whose 29-year-old L’Koral Inc. makes knitwear for women and children out of a 160,000-square-foot facility in Vernon, Calif. Koral, who started his career as a bundler on the sewing room floor of his father’s business, had parlayed his years of apparel expertise into a $120 million-a-year venture.
After much discussion, the three apparel makers struck an oral agreement to launch Seven for All Mankind, a label that quickly found its way through the doors of such tony stores as Barneys New York, Fred Segal Santa Monica and Neiman Marcus.
According to court documents, the three agreed that Koral would finance the operation and receive a 50 percent stake in the profits. Dahan and Glasser would provide the expertise in exchange for the other 50 percent, working as a division of L’Koral.
Glasser, who had launched other blue jeans labels, would be the head of marketing, receiving $250,000 a year. Dahan, who put in a 9-year stint as head designer at Lucky Brand Dungarees, would be the head of design and also receive a $250,000 salary as well as an additional 3 percent of the label’s net profits.
The three partners agreed that once Seven generated $12 million in revenue, Koral would put up another $4 million to spin the operation off into a separate company, court documents said.
The line was launched in September 2000. By 2001, the label was hauling in $13 million in revenues with net profits of $2 million, court documents said.
By 2002, celebrities including Cameron Diaz, Tyra Banks and Kate Hudson were fans of the jeans. The trend caught on. That same year, net sales totaled $60 million and net profits hit $20 million, court documents said.
But with all this success, there were no profits distributed to Glasser and Dahan. The two maintained that when they asked for their share, Koral told them Seven had lost $1.5 million in 2000 and the 2001 profits were plowed back into the business, court documents said.
In December 2002, Glasser and Dahan filed a lawsuit in Los Angeles Superior Court against Koral, accusing him of using Seven’s profits to cover personal expenditures and business expenses at L’Koral.
In court documents, Dahan and Glasser claimed that Koral was using Seven’s profits to prop up a loan from apparel factor CIT Group Inc., hampering the opportunity for Seven to become a separate company. Koral said the loans were for the blue jeans label.
Evidence introduced in court showed that in October 2002, Koral met with the Buxbaum Group of Calabasas, Calif., and asked the company to put together a portfolio booklet to shop the Seven label around to big-name East Coast apparel makers such as Liz Claiborne and Ralph Lauren.
Depending on the final ruling, Seven could still be sold to the highest bidder.
