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Sears lost lawsuit of $40M to Bangladeshi apparel suppliers

Amid the COVID-19 pandemic a Bangladeshi readymade garment (RMG) manufacturers — battered by the pandemic and the unethical business practices of Western clothing giants—have safeguarded an exceptional victory against one of the biggest monopoly players in the apparel supply chain: Sears, reports Forbes.

The decaying apparel retailer left its manufacturers with tons of its clothing and due bills last spring and has stiffed them numerous times before as it scrambled through horrible bankruptcy proceedings.

Sears-lawsuit-$40M-Bangladeshi-apparel-suppliers
Figure 1: Bangladeshi RMG makers win $40M lawsuit against Sears.

The COVID-19 pandemic exposed in fresh detail the frightening inner workings of the apparel industry and the power that giant apparel companies exercise over their RMG manufacturing partners, many of whom are frightened to speak out against brands in case they be barred from future orders.

According to attorney Joseph E. Sarachek, whose firm represented the 21 Bangladeshi factories in a $40 million lawsuit filed against Sears last June, his clients have gotten ‘the bulk’ of their money back in a defrayal with Transformco, the privately-held company set up by American billionaire Edward Lampert’s ESL Investments hedge fund to acquire Sears and Kmart out of bankruptcy last year.

Joseph E. Sarachek says, “The suppliers were thrilled that we got them a significant return.”

Sears is far from alone in shortchanging RMG suppliers during the COVID-19 pandemic. Last spring, when the COVID-19 struck, scores of key brands and retailers, including Forever 21, Ross Dress for Less, The Children’s Place, Kohl’s KSS -3.6%, Global Brands Group and Arcadia (owners of Topshop), declined payment to RMG factories on US$40 billion worth of completed goods, leaving factories facing down bankruptcy and pushing RMG workers out onto the street without pay in some cases.

According to lawyers representing factory owners, the terminations have “contributed to an evolving humanitarian disaster in Bangladesh and elsewhere in Asia.”

Nonetheless, Sears pushed apparel suppliers to a breaking point after the brand went through bankruptcy and factories were left without payment on completed inventory multiple times.

Sarachek says, “They lost money before the bankruptcy. They lost money in the bankruptcy, and then they were charged by the bankruptcy estate.”

The Bangladeshi apparel suppliers who filed suit over the void orders, some owed as much as $6 million each for garments they’d already made and shipped for Sears last spring, received primary payments from the settlement last September and are continuing to receive payouts, aiding them to evade certain financial tragedy.

Sarachek highlighted that all suppliers have managed to stay in business despite the dreadful conditions.

Rakibul Alam Chowdhury, Managing Director of Combined Apparels, one of the suppliers to Sears said, “As per the court order, we have received $5million as an advance on condition of approving to release goods from US ports without payment.”

Sears owes 19 Bangladeshi suppliers about $50 million in arrears, Rakibul also added.

Bangladeshi-apparel-workers-lost-job-buyers-dues
Figure 2: Sears pushed apparel suppliers to a breaking point and thousands of workers lost their jobs.

Sears will pay the rest of the amount by selling apparel goods, while advance payment will be adjusted from the first lot sales. Then the rest of the sales sum will be divided equally to brand and suppliers, explained Rakibul.

Rakibul added further that the US brand informed its Bangladeshi RMG suppliers the first lot sales amounted to US$8.6million, hoping to receive the rest of the amount this week.

However, exporters have to pay 13% of realized payments as the US lawyer’s commission, payment of which might create complexity as per Bangladesh’s law, said Rakibul.

Combined Apparels’ unsettled bills with Sears stands at $1.7 million.

Sources at the Bangladesh Garment Manufacturers and Exporters Association (BGMEA) said among the Bangladeshi RMG suppliers, Sears has the highest unsettled bill of $13.48 million to NASA Group.

Sears and its concerns also owe companies owned by incumbent BGMEA President Rubana Huq and former President Abdus Salam Murshedy about $0.5 million and $1.5 million respectively.

Windy Apparels Ltd.’s unpaid bills are over $0.7 million.

On October 15, 2018, Sears filed for Chapter 11 bankruptcy and was running its business with consent from the court.

On February 11 last year Transform Holdco LLC formed and registered as a private company to acquire some of the properties of Sears.

Sarachek states he is still working through complaints from over 100 factory owners who are owed tens of millions of dollars by other large fashion retailers, including Forever 21 and Global Brands Group, a subsidiary of Hong-Kong based Li & Fung and makers of brands like Sean Jean, Katy Perry, and Jones New York.

Li & Fung, the world’s largest apparel sourcing agent, similarly appears to have acted as a middleman to produce some of the inventory for Sears.

While other large brands, including H&M, PVH, VF Corporation, Zara, and C&A, restored and paid for orders after international pressure last year, a staggering $20 billion worth of apparel manufactured before the COVID-19 pandemic have not yet been paid.

The crisis also revealed the contract terms between brands and factories that underpin this unfair system. Contracts are written by Arcadia (Topshop) and Kohl’s, for example, grant the retailers the right to cancel orders for almost any reason, even though these terms violate international norms such as the UN Guiding Principles on Business and Human Rights (UNGPs).

That’s according to “Farce Majeure,” a policy paper released last year by the European Center for Constitutional and Human Rights, the International Lawyers Assisting Workers Network, and the Worker Rights Consortium. Sarachek says that since the pandemic, at least one large apparel retailer has rewritten its purchase order contracts to include these unethical blanket provisions to cancel whenever they please. What’s more, contracts often stipulate that bankruptcy and other legal proceedings must take place in the brands’ home country and at the suppliers’ expense, in the event they lose. This puts manufacturers at a further disadvantage.

Jeffrey Vogt, the Legal Director of the Solidarity Center and co-author on the ‘Farce Majeure’ report says that the contracts are one-sided by design.

Jeffrey Vogt said, “None of this is accidental. The system was built exactly to push most of the risk on manufacturers and workers, and most of the rewards to the brands.”

Garment suppliers and labor rights groups are organizing to fix the root causes of unfair business practices and lopsided contracts that benefit brands and put manufacturers and their workers at risk. The hope is to put suppliers and garment makers on a more even footing with these corporate giants. It won’t be easy.

STAR Network group has organized factory owners in six countries, including China, Bangladesh, Vietnam, Myanmar, Pakistan, and Cambodia, to fight for better purchasing practices in the textile and garment industry.

A recent Sourcing Journal article said changes will include building apparel supplier power to negotiate an end to unfair order cancellations and long delays in payments by brands.

Similarly, the ‘Farce Majeure’ report lays out a multi-step offer for reform that its authors are working towards, including establishing mandatory human rights due to diligence legislation in countries where brands are headquartered and expanding the European Union’s Unfair Trading Practices Directive, which currently covers food products, to also cover textiles and garments.

“Until the system is fundamentally reformed, most brands will have no incentive to change,” says Vogt.

In the meantime, Sarachek says there’s a more immediate solution: Suppliers need to band together and speak up when brands take advantage of them.

Sarachek says, “They have to be proactive.” And he hopes to hear from more factory owners who have been slighted.

When contract terms are flouted and ignored, Sarachek says it creates a Broken Windows effect where ethical business norms crumble and brands are emboldened to commit more violations against their factories.

“Once you let these guys step on your neck, they will always step on your neck,” Sarachek adds.

If anyone has any feedback or input regarding the published news, please contact: info@textiletoday.com.bd

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