Battle Below the Belt

Designer underwear may not be a logical concept, but as Calvin Klein can attest, it is highly profitable. Which is why boxers, briefs and other Klein-branded skivvies could soon be at the center of a high profile court case that will have New York's gossip-ridden 7th Avenue fashion district twittering at high volume. Last week, the designer stunned the industry by filing suit against Warnaco, the company which makes the jeans and underwear that bear his name. And to show he means business, Klein hired the firm of Boies, Schiller & Flexner, which was special trial counsel for the U.S. Justice Department in its case against Mircrosoft.

The suit alleges that Warnaco, and specifically CEO Linda Wachner, have damaged the brand image by selling to discount stores and putting Klein's name on designs he didn't approve. Described in the suit as a "cancer" on the brand, Wachner is also lambasted for her "abusive and unprofessional" management style

"The vitriol in the comments is astounding," says one former senior Calvin Klein executive. "It's going to be a very nasty battle."

Wachner was taken by surprise by the action, but quickly countered that the real reason for Klein's suit was his inability to find a buyer for his company. Klein put his business on the block last October, only to take it off in April. Industry experts said at the time that the $1 billion price tag was too high, and that his extensive agreements with Warnaco were a major hindrance. Warnaco controls about $1 billion of Klein's $2.5 billion annual wholesale sales. It also owns Klein's underwear business outright and has a license to produce jeans until 2034. Buy Calvin Klein and you're also buying Warnaco and Wachner. A spokesman for Klein said that Boies was retained in January while the company was still on the market and that the lawsuit has nothing to do with the failed attempt to sell the company.

Licensing is fashion's dirty little secret. Designers try to keep it quiet that clothes, makeup, underwear, shoes and other items sold with a designer label may not be made by the designers, but by a more mass market producer, like Warnaco or Nine West. Licensing has advantages for the designers. They get an expert in a specific product to do all the work produce, market and distribute the goods while they collaborate on design and collect a hefty fee. Lately, however, the strategy has fallen out of favor with high-end designers. Gucci, Giorgio Armani and Burberry have all bought back licenses to keep tight control over their brands. But none of them has had to go to these lengths.

The suit comes at a time when Warnaco is vulnerable. Saddled with debt from acquisitions, poor earnings and a sinking stock price, nearly 44% of Warnaco's sales some $2.1 billion come from Calvin Klein products. News of the lawsuit sent its stock spiraling and started rumors that its board would rather lose Wachner than Klein. But a trial is also bad for the Calvin Klein brand image. It will leave everyone wondering who's wearing the pants.