Seventh Avenue Smackdown Fashion moguls Calvin Klein and Linda Wachner are going toe-to-toe in a bitter suit. The feud is as much about personality as it is about business.
(FORTUNE Magazine) – Somebody is tarnishing the Calvin Klein name. On that much, the antagonists agree. But in a case that has become one of the bloodiest intersections of fashion faux pas, corporate survival, and high-wattage legal talent in memory, everything else is in dispute. And unlike two models hissing at each other over a chance to be on the cover of Vogue, this fashion face-off looks to have some staying power.
America's best-known fashion designer, Calvin Klein, is suing his company's most important partner, Warnaco, which manufactures the blue jeans that bear his name, and its bellicose CEO, Linda Wachner. She's the real target of the fashion icon's rage. Klein, 57, charges that Wachner, 54, is sullying his brand by peddling his high-prestige jeans in low-rent discount emporiums. Moreover, he says, Warnaco is not only altering his designs, but skimping on quality. These transgressions, he claims, violate the contract that gives Warnaco the license to make Calvin Klein jeans through 2044. Klein wants the license back. Wachner, he charges, is a "cancer" on his brand.
It's not just any brand, of course--it's also Klein's name. Indeed, the normally urbane Klein seems utterly devastated by the dispute. "This is my most unfortunate experience ever," he says, his voice strained and raspy. So overwrought was Klein that he not only launched the legal attack in late May, but then followed it with an emotional diatribe against Warnaco on CNN's Larry King Live.
Warnaco's two-fisted CEO isn't the sort to take that lying down, and fired back with a suit of her own. Warnaco's legal papers claim that it is contractually entitled to sell Klein's jeans in such stores as Costco (the very idea sends chills down the designer's spine). Warnaco blasts his company's "ignorance of current market trends"--and that, Warnaco implies, has forced it to alter his designs. Warnaco is charging Klein with neglecting his business, which, in turn, hurts Warnaco's. And, in what must be the ultimate irony, Wachner has accused him of libel for maligning not only Warnaco but also Calvin Klein's own products.
Are these people crazy? On one level, they're like Siamese twins stabbing each other in their mutual heart. Warnaco is a huge money-producer for Calvin Klein. The company pays a fee for every pair of Calvin Klein jeans, khakis, and underwear it sells. This added up to more than $60 million of Calvin Klein Inc.'s estimated $240 million in revenues last year. (The privately held company gets most of its other revenues from royalties on products such as fragrances. Overall, Calvin Klein-branded items generated more than $5 billion in retail sales last year.) Klein, in turn, is Warnaco's most important licensor. His apparel accounted for about $1 billion of its $2.1 billion in sales last year.
Both, then, have a lot to lose. But Wachner is in greater immediate peril. Warnaco's profits are lousy, the stock is down 89% from its high in mid-1998, and some investors want her out. While Klein is fighting for his identity, Wachner is fighting for her survival.
So this is serious stuff, with serious lawyers lined up. Klein has hired David Boies, the feds' star litigator against Microsoft. Wachner is countering with a team from Williams & Connolly, including Brendan Sullivan, Nicole Seligman, and Greg Craig, who have variously represented Oliver North, President Clinton, and the father of Elian Gonzalez. Among litigators who handle complex, high-profile cases, few can match the throw-weight in this fight.
Neither Klein nor Wachner was eager to talk to FORTUNE; both did so only after a barrage of letters and calls. Their reluctance is understandable. The two don't relish revealing the messy details of their corporate estrangement. While Klein calls the battle "a really painful, difficult experience," Wachner is taking it in stride. "I'm so proud of this company," she says. "We're running business as usual."
The split has become so acrimonious that it's easy to forget that these partners were a terrible match from the start. Klein sells class--high-priced vanity goods no one really needs. Wachner sells mass--bras for full-figured women were her career foundation. He creates and rides trends. She acquires out-of-favor businesses that have missed them. He's all image: a Bronx-bred boy insecure about almost everything except his talent for design--"my gift," as he calls it. She is his antithesis in almost every regard. Crowned one of FORTUNE's "Toughest Bosses" several years ago, the Manhattan-born Wachner has, if anything, bolstered her reputation since. In the end, it's no shock that the two have fallen out. The surprise is that they lasted so long.
Part of this case rests on a contradiction: You can't be a ubiquitous, world-dominating brand bent on generating billions in revenue and simultaneously insist that your products be available only in exclusive, high-class outfits. Given that Calvin Klein has those conflicting aims, and that Warnaco is supposed to be the instrument of achieving them, their conflict may have been inevitable.
That's especially true given today's confusing retail landscape. Department stores, the mainstays for brands such as Calvin Klein, are losing customers to discounters. Unless Klein wants to see his sales stagnate, he needs, in Warnaco's view, to accept that his products will be available in nontraditional outlets.
The problem is, Klein can't afford to alienate the department stores. They abhor the sight of Calvin Klein jeans stacked, at $24.99 each, on wooden pallets in Costco. After all, those upscale retailers are trying to sell the same jeans for $48. "Absolutely, I'm concerned whenever there's an erosion of a brand," says Bloomingdale's CEO, Michael Gould. For Klein, Gould's message has more than sunk in. "Once an upscale brand goes into mass-discount distribution," the designer says, "it's over."
It's not just a matter of snobbishness--at least, for someone in Klein's position. The late designer Halston allowed his line to be sold at J.C. Penney in 1982. Upscale retailers shut their doors to him soon after. His brand faded, and Halston never recovered.
The tension between elitism and democracy has lurked inside Calvin Klein Inc. since its founding. "I never wanted to dress just women who lunch," Klein says in his stark white Manhattan office, with Barry Schwartz, his longtime business partner, by his side. With Klein's creative vision, and $10,000 from Schwartz's family grocery business, the two opened Calvin Klein Inc. in 1968. "I was always interested in doing all sorts of things relating to design, which could mean accessories, fragrances, beauty, and home products," Klein says. "The idea was, we create the design, the image, and the advertising, and find the best partners to do the manufacturing and distribution."
Business was beautiful for a while. The partners found the right manufacturers and moved Calvin Klein beyond women's coats and dresses to sportswear in 1973, then to men's wear, and in 1977 to jeans--"our first business that could reach a lot of people," Klein says. "I love jeans. They're American. They're not expensive, and they're fun to design."
His jeans catapulted Klein's brand into the national eye. But within a decade, a problem emerged that led circuitously to his plight today. In 1987, Carl Rosen, the CEO of Puritan Fashions, Calvin Klein's jeans licensee, was dying of cancer. "We had a real fear that the company would collapse without Carl," says partner Schwartz. He and Klein bought the company for $68 million. When the jeans market slowed, the partners got buried in excess inventory and were strangled by ballooning interest payments on their junk-bond debt.
By the early '90s, Calvin Klein faced a financial crisis. But in 1992, media mogul David Geffen, a close friend of Klein's, bailed him out. Geffen bought the bonds and told Klein and Schwartz to pay him back whenever they could. (They did so a year later.) At the time, Calvin Klein was making its own jeans and underwear. "You stink at manufacturing," Geffen told them. He urged them to get out.
Enter Linda Joy Wachner. Calvin Klein happened to meet the brash and brassy garmento in the fall of 1993 during a weekend gathering at Wyntoon, the home of Randolph and Veronica Hearst in Northern California. "I had no idea who she was or what business she was in," Klein says.
Klein may not have heard of her, but Wachner had been making a name for herself. A woman who spent an entire year at age 11 encased in a full-body cast (for scoliosis), Wachner grew up intent to rely on no one and to run a company someday. Early in her career, she was a star bra buyer at Macy's. (Sales boomed after she hit on the idea of taking the bras out of their boxes and displaying them on hangers.) At Max Factor, she was a turnaround champ, weeding out laggard cosmetic lines and overseeing big layoffs. The death of her husband, in 1983, seemed only to spur her tenacity and determination. In 1986 Wachner bought Warnaco, a struggling $425-million-a-year apparel company, in a hostile leveraged buyout. The job made her the first woman to run a FORTUNE 500 company. Selling off sportswear lines and focusing on what she knew best, bras and other intimate apparel, Wachner revived Warnaco. After she took the company public in 1991, its stock jumped more than 50% in a year.
By the time Wachner met Klein, in 1993, FORTUNE had anointed Wachner "America's most successful businesswoman." Klein was intrigued. "I got the idea she'd be a good partner for us in our underwear business," he says. "Someone who really understands the product as well as the numbers." Over dinner in New York, Wachner offered to buy not only the license to make and sell Calvin Klein underwear but also his entire underwear business. Facing a cash squeeze, Klein agreed, and Wachner got the business for $62 million.
Relations between Linda and Calvin were reasonably harmonious early on. She broadened his underwear line, put his label on bras, and opened Calvin Klein women's intimate apparel shops inside stores such as Bloomingdale's and Macy's. Within a few years she'd increased sales from $50 million (she says) or $66 million (he says) to $300 million.
Klein and Schwartz credited Wachner for the success. But they worried that her management style, which led to high turnover, would damage both her business and theirs. In the suit, they characterize her variously as "abusive," "unprofessional," and "vulgar." The suit also asserts that Klein had trouble finding employees willing to work with Wachner. While Klein declined to cite specifics for this story, Wachner's style is well known. Customers say she berates staffers in front of them. Klein says he discussed the problems with Wachner. "Linda, you make them quit," he'd tell her. "You cannot treat people this way." Turnover never has fazed her, though. Division heads, an executive once heard her quip, "are like tissues from a box." (Wachner declined to comment on her management style.)
For a while, Klein and Schwartz tolerated Wachner, even with humor. Schwartz, who owns 142 thoroughbreds, named one of his horses Life With Linda. The horse was "every day another problem," says Schwartz, who eventually sold her.
Wachner was harder to tame. In fact, she wanted another piece of Calvin--his jeans. "She had always wanted to buy our jeans business," says Klein, who rejected her every overture. "The Warnaco people were not experts in the world of jeans."
In 1997, Wachner's aggression became more than a personality quirk. Over Klein's objections, she acquired, for $354 million, the company that had the license to manufacture and sell Calvin Klein jeans. To Klein's dismay, the licensing agreement he had signed didn't include a clause giving him veto power over the sale. He was stuck.
Wachner had once been Klein's white knight. Now, to Klein, she was a raider.
Wachner has only deepened her invasion since. According to Klein, she and her team frequently change the colors, cuts, and styles of jeans that Calvin Klein Inc. has designed. Warnaco argues that this occurs when the specs don't suit the needs of the market. Klein caters to trendy, streamlined, Kate Moss types, while Wachner is happy to put out jeans in sizes that recognize that most Americans are not that svelte. "At her whim," is the way Klein puts it. He claims Wachner "bastardizes" his designs.
In general, Wachner runs the business her way. In late 1997, when she bought the jeans licensee, she told Klein she would limit distribution and even told Women's Wear Daily, "There will be no more mass merchandisers. We really don't want to go in that direction anymore." Apparently she changed her mind. After initially cutting back, Klein says, she increased sales significantly to off-price outlets. Warnaco's 1999 sales report shows that the six biggest customers of Calvin Klein jeans--accounting for $216 million, a third of total jeans sales--were discounters. "She gave us her word and didn't stick to it," says Klein. (Wachner declined to comment, but Warnaco's court papers deny Klein's allegation.)
By last fall, the animus was intense. And, though few people know it, Klein's relationship with Wachner was one reason he decided to put his company up for sale. "Calvin could no longer take dealing with Linda," says David Geffen, who has no financial interest in Calvin Klein Inc. but talks to Klein daily. "It had taken so much of the fun out of the business. He lost his heart for the fight."
Klein's hunt for buyers turned out to be as frustrating as life with Linda. His bankers at Lazard Freres set the price for Calvin Klein Inc. at $1 billion. The fashion press reported that a parade of premier companies--Gucci, Liz Claiborne, Tommy Hilfiger, and luxury-goods giants LVMH and PPR Group--were interested.
The reality was gloomier. "We had no interest in Calvin Klein," says Serge Weinberg, CEO of Paris-based PPR Group, which owns 42% of Gucci. "In my mind, it's not a luxury brand. It's overdistributed." Others say that Calvin Klein had given away too much--licenses, cachet, and partial ownership of his trademark. What would a buyer be buying? "Scrambled eggs," says the CEO of one major company. And then there was the so-called Linda Factor--the reality that an owner would have to work with Wachner.
One person had no qualms about any of this: Wachner. Last fall, she offered Klein around $600 million--a bottom-fisher's bid. Then came an affront that has nothing to do with the jeans business but, in Klein's mind, proved Wachner a cheat and a liar. Over lunch in his office last December (the last time they saw each other), he asked her if there was any truth to a rumor that she planned to allow J.C. Penney to sell his underwear. No, she said, according to Klein. (In her court papers, Wachner denies his account.) Whatever was actually said, the aftermath is uncontested: Warnaco announced a new underwear customer, Penney's, two weeks later. "Calvin almost had a heart attack," says Geffen.
Klein was at a crossroads. He felt he had two options: sell or sue. He called David Boies in January and told him he might need his help. In the spring, Klein was still considering a sale of his company. Tommy Hilfiger offered $888 million. But the deal collapsed over price and trademark issues. By mid-April, Warnaco was the only prospect left. Wachner offered $900 million. The contract was drawn. Friends say Klein wouldn't have signed it. But Wachner is the one who backed out. In their last phone conversation, she challenged Klein. "You mean I can't make Calvin Klein cell phones?" she asked, posing the theoretical question to gauge how far she might stretch his brand. "No, you can't," he replied, saying he wanted to retain the right to use his brand in new areas. She walked.
Six weeks later, she was at Calvin Klein headquarters, going over a new line of junior jeans with his merchandising team, when her assistant called and patched through a reporter from the Wall Street Journal. "What lawsuit?" Wachner was heard to snap. It wasn't until a day after the press received the lawsuit, Warnaco contends, that the company was served its copy. (Even on this point there's a dispute: Klein asserts the complaint was delivered to the office of Warnaco's general counsel right before it was released to the press.)
In this case, as in any divorce, there are three versions: his, hers, and the truth. He says she has no right to sell his jeans at discounters like Costco and Sam's Club, which are not, as the license requires, "consistent with the quality, reputation, image, and prestige" of his brand. Warnaco's legal papers assert that its license with Calvin Klein gives it broad distribution rights. Besides, the papers argue, club stores showcase lots of prestigious brands, including DKNY, Prada, and Estee Lauder.
The issue of "design injection" is more personal. Warnaco contends that the design process is collaborative. But Calvin Klein "has abdicated its responsibility to design salable products," Warnaco's filings say, and Klein himself has "surrendered his responsibility to a constantly changing cadre of low-level, inexperienced designers." These are breaches that, in Warnaco's view, necessitate changes to his designs. Klein sees it differently: "I don't micromanage. I set the design direction and philosophy, and we have the teams to execute." He admits his design staff has had turnover troubles.
Klein acknowledges that he hasn't gone to a single scheduled design meeting since September. "Calvin can't walk into a room that Linda is in," says Geffen. "For a while, he tried to meet with her once or twice a week, to keep it from being an issue. But now he can't look at her."
Who has the farthest to fall? Probably Klein. As he has lost jeans customers to Tommy Hilfiger and DKNY, and his business in Asia has slumped, his company's worldwide growth has slowed significantly. But he still sits atop the fashion world.
Wachner, meanwhile, has already tumbled. Warnaco's stock has dropped from $44 to $5 in just over two years. Almost all apparel stocks are way down from 1998. But Warnaco has fallen farthest: Its market capitalization, once $2.7 billion, is now $250 million--a shrunken equity base for Warnaco's $1.4 billion in debt. In Wall Street's view, Wachner has spent too heavily on acquisitions, overpromised on earnings, and papered over problems with write-offs. She's taken a hit personally: After selling almost one million Warnaco shares in December, when the stock was around $12, she now has 3.8 million shares worth less than $20 million; and her nine million options are underwater. She's taken a hit publicly too: At Warnaco's annual meeting in May, Leon Cooperman, a value investor who owns 7.3% of the stock, blasted Wachner with a long list of criticisms. "I've never seen such a generous compensation for lack of performance," he told her. "How's your performance?" she asked him.
These days, Wachner is saving her bile for Klein. But she can't let it get the better of her. For now the two sides have to continue doing business together against a backdrop of bitter litigation. Wachner, for example, still routinely visits Warnaco's jeans operation, which is in the same building as Calvin Klein's headquarters.
It would be smart business to settle this case. But that doesn't mean the parties will do that. Getting his jeans license back--and getting back at Wachner--is Klein's new obsession. His friends say he is so outraged and so believes she has violated their contract that he has steeled himself to go the distance. Calvin and Linda have a date: Jan. 16 in Manhattan federal court.
In the meantime, Wachner isn't likely to roll over and give up the jeans license. And it's hard to imagine her giving in to Klein's views about the marketing of his products.
For Calvin Klein, there are a couple of elegant, if equally unlikely, solutions. Wachner could be pushed out by Warnaco's directors. That probably won't happen soon. The nine-member board is weak and clubby. (In April, FORTUNE named it one of America's worst boards.) Another scenario: Warnaco could be acquired and Wachner swept out in the transition. Apparel maker VF is the most logical buyer. But Wachner has expressed no interest in selling. And VF chief executive Mackey McDonald shuns hostile deals.
Still, Klein can hope. Says a friend: "If Warnaco would replace Linda with a professional CEO, Calvin and Barry would withdraw the lawsuit in a day." Klein and Schwartz say no, they'll still pursue this to the end.
At a hearing in early August, federal Judge Jed Rakoff criticized Calvin Klein for unnecessarily personalizing the litigation. Klein and Wachner weren't in court that day. When they do meet again, have no doubt: It will be personal. This is about far more than money; it's about self-worth. For two people whose stature means everything to them, this is the ultimate battleground. Images will be trashed. Secrets will be exposed. And even if, as often happens, the lawyers are the only winners, they'll likely tire of the fight long before Klein and Wachner ever do.