The luxury sector is undergoing significant change, with multiple disruptive factors impacting brands, from inflationary pressure to geopolitical tensions that are upending supply chains.
Higher-income consumers, however, are continuing to trade up to luxury products, although they are becoming ever more demanding.
On 8 June, general counsel from an array of luxury brands gathered at a roundtable hosted by A&O Shearman in partnership with Luxury Law Summit London for a series of discussions anchored to the theme Navigating the Future of Luxury.
A&O Shearman lawyers Megan McMellon (co-lead associate for the consumer and retail sector), Jim Ford (global co-head of digital, data, IP and technology), Kate Pumfrey (employment partner) and Alex Shandro (global head of AI advisory) discussed some of the key trends currently impacting luxury brands, including collaborations, employment reforms and agentic commerce.
McMellon noted significant changes relating to what luxury consumers are buying. For example, there is a shift towards luxury experiences across retail, hospitality and travel as consumers seek immersion, storytelling and interaction rather than just products, McMellon says. In addition, there has been a rise in “conscious luxury” with the emergence of fashion rental sites and second-hand luxury platforms, she adds.
“Research is consistently showing that the rate of change of what consumers want is faster than ever before,” McMellon said, which means businesses need to be more agile to keep pace.
Collaboration boom
Collaborations are now a defining feature of the luxury market. They are being driven by experiential luxury and often tie in technology, like the EssilorLuxottica/Meta partnership. Collaborations can also be a pathway to acquisition, with businesses getting a feel for a collaboration partner that might also be a potential M&A target.
Set against these opportunities are an array of legal risks, including, importantly, those related to the protection of intellectual property, says Ford.
“Brand reputation is not just an asset for many [luxury brands], it is the asset,” he said. “You simply cannot afford to get it wrong. But the number of times that we do see mistakes being made in these collaborations is quite high.”
Those mistakes include a lack of due diligence on a collaboration partner’s track record before even getting to the contracting stage. When it comes to contracting, brands need to put in place strong quality controls that won’t slow speed to market. This means having one eye on IP protections but also ensuring the collaborations – which are typically fast-moving – have a workable governance structure that doesn’t paralyse the collaboration.
Ford says he is seeing an increase in morality clauses being inserted into contracts, where there is frequent reference to ‘material disrepute’, though it is not always clear what that means.
“There are clearly examples where it is material disrepute, and there are examples where it isn’t, but there’s a whole grey area in between,” said Ford. “As a brand owner, I would always try to make it a subjective test wherever you possibly can, so as the brand owner, if I feel that there has been material disrepute, then remedies follow.”
Another area where mistakes are made is with ownership of IP where the collaboration involves design of a new product. Where the parties have worked collaboratively on the design, it is not always clear who would own the IP and often in a collaboration scenario the parties can too readily default to a position of joint ownership for new creations without truly interrogating what this means. In the case of a proposal of joint ownership of IP, the parties can often assume that this means that each of them, as an owner, will be free to use and exploit those rights in the future, whereas the reality can be very different, with joint ownership often creating deadlock and the inability to act without the other joint owner’s consent, Ford says.
Employment matters
Changing employment laws in Europe are likely to be relevant for luxury brands in the hospitality and retail space. For example, in the UK, the Employment Rights Act is bringing in the most sweeping set of employment law changes in a generation, increasing costs, litigation risk and compliance burden for all employers operating in the UK, says Pumfrey.
One key area in that new legislation relates to dismissal rights. First, the qualifying period for unfair dismissal is being reduced from two years to six months from next January. Second, while unfair dismissal awards are currently capped at around £125,000, from next year, that award will be uncapped. This will create more negotiation leverage at senior levels when it comes to executive exits, while also increasing risk for companies that have low-paid workers with historically higher churn, given that previously many would have departed before acquiring those rights.
This means businesses need to think more carefully about how they engage and dismiss staff and ensure there is a fair reason and process, as well as thinking about how they hire from a contract perspective, says Pumfrey.
“Some of our clients are thinking about moving some portions of their workforce onto fixed-term contracts; others are really zooming in on what probationary periods they have in their contracts,” said Pumfrey. “A six-month probationary period is going to be completely useless, because by the time you complete the probation, that person has already acquired unfair dismissal rights, so it needs to be three months with an ability to extend.”
This means businesses need to strictly monitor those probation periods so that if they do make a bad hire, that can be managed sooner rather than having a much larger liability down the line, Pumfrey adds.
The Employment Rights Act is also doubling the penalty for failure to inform and consult on redundancies, while the government is also consulting on a new business-wide trigger for when businesses need to consult (currently the threshold is 20 redundancies per establishment, but that is being widened to apply to an entire business, though the new threshold is yet to be decided).
Aside from the Act, brands need to be aware of changes around pay transparency and pay equity. In the UK, there are currently a number of equal pay claims going through the courts, which, if successful, could have significant ramifications across the retail sector.
The EU Pay Transparency Directive is also changing pay transparency requirements in Europe, including pay transparency at hiring and rights to access pay information for employees alongside gender pay gap reporting for businesses with 100 or more employees.
Finally, brands need to be alive to issues that may arise around culture and conduct, particularly in an age of social media where employers are held to greater scrutiny and allegations about senior executive behaviour may require crisis management measures to limit the fallout.
Legal reforms being introduced in September will require organisations to take all reasonable steps to prevent harassment of employees, including by third parties. The Employment Rights Act also further limits the use of NDAs, the details of which remain subject to consultation. Following the outcome of the consultation, organisations are likely to need to rethink what they are putting in contracts with staff around confidentiality and how they use NDAs more broadly.
Agentic commerce
Luxury brands are increasingly exploring the potential of agentic commerce – broadly speaking, AI agents that act (with varying degrees of autonomy) to find, compare and buy products. For retailers, this brings many opportunities. This spans agents deployed on a retailer’s own distribution channels, organic referrals from AI platforms, and agents deployed on the AI platforms themselves. It is a wide spectrum.
Chief among the opportunities for retailers, agentic commerce gives them access to much richer data, including intent data (why consumers are buying things) and purchase signals (when consumers are ready to buy things). Until now, these are things that retailers have had to infer from purchase history. In addition, agentic commerce potentially gives retailers increased distribution reach.
Set against this, however, agentic commerce raises an existential threat for retailers of disintermediation from their customers and brand dilution. How this plays out is uncertain. It will depend on consumer sentiment, how the technology evolves, how the many regulatory uncertainties are resolved, and it will likely be different for different product categories. It will be a very jagged line, says Shandro.
For this reason, the key risk isn’t a legal matter.
“The biggest business risk is being too slow to start, and we are seeing the competitive advantage of being first to market with this. Innovation is an asset,” Shandro said. “That said, the biggest competitive advantage comes not just in doing it quickly, but also doing it right.”
This means adopting the appropriate AI technology for the right purpose. Different systems will work for different product categories and use cases. A programme of diverse partnerships (across AI companies, AI model types, and geographies) is the best strategy. It gives access to the best-in-class models and ensures resilience to external shocks, such as the recent export controls that the US government imposed on Anthropic’s latest model release.
Those partnership agreements are highly strategic. They need to address data usage rights, provide flexibility for the retailer to adapt its strategy, protect IP and embed appropriate compliance standards.
Brands also need to think about accountability when they are rolling out consumer-facing AI tools. This is the question of who is responsible when things go wrong. This means identifying the possible harms and then using those to inform negotiations with their AI providers and the right governance controls. There is no one size fits all.
On the contracting side, market practice is changing rapidly. “There is a misconception that doing partnerships with AI companies necessarily entails giving up your data. This is absolutely not the case,” said Shandro. “There is a value exchange around data in any of these partnerships, but it is very nuanced and will be different for different categories of data. Customer data, for instance, will be a red line for retailers. Product data, though, needs to be structured to be retrieved by the AI system. The retailer will also want to ensure that it can access the prompt data, which is where the intent data sits.”
“More broadly,” says Shandro, “We are in a window where retailers which act quickly will be best placed to build the best customer experiences and to do so with the most leverage. It is a great time to forge partnerships. AI companies are in the scale part of their growth cycle, and are eager for use cases and design partners.”
When something does go wrong, there are two dimensions at play. Who is liable at law, and whether that can be allocated contractually or otherwise managed through governance.
“If you think about what could go wrong, it would be things like inaccurate product data, late or non-delivery of items, fraud, data leakage, privacy violations, IP infringement, bias, misalignments: there’s lots of different ways,” said Shandro.
While contracts are important to mitigate this risk, businesses should also have in mind that contractual protections are not a panacea. Organisations need to ensure they supplement their contractual controls with governance and technical controls. “Agentic AI calls for a new and specific approach to governance, in light of the particular risks and challenges they pose, not least around cyber security, which is certainly the top concern of our clients,” Shandro said.
Luxury Law Summit London, which was hosted by The Global Legal Post, took place on 9 June. Click here for more details.
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