File this under “Not-So-Great Moments in Supplier Relationship Management.”
Last week, Sports Authority — which filed for chapter 11 bankruptcy protection earlier this month — sued more than 160 suppliers over “vendor claims to consigned goods on the shelves of the distressed retail chain, which has already begun liquidating 140 stores and has little time to save the rest in bankruptcy.” In short, suppliers want their goods back, but Sports Authority wants to sell the inventory ($85 million worth of shoes and sports gear, including $23 million owed to shoemaker Asics America Corp.) and give the proceeds to the banks instead of suppliers. As reported in The Denver Post:
The suits are designed to determine who gets the money when consigned goods are sold, vendors or the banks. Consignment arrangements are supposed to give makers of goods a direct claim on the money that comes in when the goods are sold. Sports Authority and its top banks signaled they’re testing for defects in the consignment deals to upset those claims [emphasis mine].
At Sports Authority’s bankruptcy debut, the judge allowed the sales to continue but required Sports Authority to escrow proceeds from consigned goods.
In legal terms, Sports Authority is invoking the “strong arm powers” of the bankruptcy code to defeat the status of suppliers as creditors. In street terms, as we would say in my old neighborhood in Brooklyn, Sports Authority is trying to give its suppliers the finger.
Last February on Talking Logistics, I interviewed Sarah Rathke, a partner at Squire Patton Boggs LLP who specializes in litigating supply chain disputes. Sarah is also the co-author of Legal Blacksmith: How to Avoid and Defend Supply Chain Disputes. This dispute between Sports Authority and its suppliers reminded me of something Sarah said during our conversation:
Nothing ever goes fully as everybody expects [at the outset of a business relationship]…Then the question becomes: Is your relationship strong enough and robust enough to work through the [supply chain problems that arise], and is your contract strong enough and robust enough to work through the problems, and both are important. I know a lot of times supply chain professionals think that it all comes down to relationships, and a lot of times it does, but the supply chain agreement — knowing for sure what your rights and responsibilities are — frames the relationship in a very real sense.
Later in the conversation, I asked Sarah about the perception many supply chain executives have about corporate lawyers — i.e., that they’re a barrier to creating collaborative business relationships because they often craft agreements that seek to shift as much risk and cost to the other party as possible (see, for example, The 3PL Industry is Suffering from Gresham’s Law). While Sarah acknowledged that some people may view supply chain agreements as being over-lawyered, in her view and experience dealing with disputes, “supply chain agreements are woefully under-lawyered,” as she explains in the video clip below.
And by “under-lawyered” she doesn’t mean agreements have too few terms and conditions; she means agreements are often outlined and negotiated without legal input or participation until the 11th hour. “Companies are better off when they fully understand the risks and all the implications of their supply chain agreements,” Sara explained. “Lawyers who haven’t been involved [throughout the agreement development process] are pretty much forced into the position of being strictly defensive [when they’re brought in at the end], and therefore can be viewed as an obstacle to collaboration and success.”
The fact that Sports Authority is “testing for defects” (looking for signs of under-lawyering) in its consignment agreements validates Sarah’s point. And if Sports Authority prevails in court, I’m sure suppliers across all industries will immediately review their consignment and vendor managed inventory (VMI) agreements to see if similar defects exist and try to amend them. If today’s consignment and VMI agreements are under-lawyered, you can bet tomorrow’s will be over-lawyered.
But regardless of the outcome, the damage has already been done: the trust between suppliers and customers has taken yet another beating, and with each new cut and bruise, more time and effort will be needed to heal the wounds.
For related commentary, see: