GENCO MEMO: May 20, 2024
SUBJECT: Crocs' IP Licensing Turnaround, Foxtrot's Texas Two-Step Maneuver, and New DOL Exempt Employee Salary Rule
Good morning!
Here is what I’m calling a "GENCO MEMO” on ideas at the intersection of Business, Law, and Strategy. It consists of three parts:
A business story,
A behind-the-scenes legal play, and
An underlying strategy.
The benefit is simple.
Why this matters: The more examples you are exposed to, the better you will become in spotting traps or seeing opportunities.
1. Crocs Turnaround: a Case Study in IP Cross-licensing Strategy
The Story: I ran across this article talking about how Crocs, the ugly but comfy shoe company, had compounding years of declining sales and was facing possible demise. But, with new management, the company pursued a strategy of collaborations with the likes of Kristopher Kane, Balenciaga, Barbie, McDonalds, Bad Bunny, Post Malone, and Justin Bieber. Now, estimated sales are expected to grow 8% to $3.25 Billion.
The Legal Play: This is an example of a constructive (i.e., designed to increase value) cross-licensing legal strategy. Based on a licensing contract, Croc has permission to use the brand owner's name, image, and trademarks in their products and marketing in exchange for royalty payments or vice versa. Here is a good article discussing the good, bad, and ugly of cross-licensing.
The Strategy: Now, the high-level strategy. Crocs executives needed to work fast to turn around a sinking business. One play is to piggyback another and ride on their momentum. Crocs decided to leverage the brand reputation of these other well-known brands to tap into their customer base loyalty.
2. Foxtrot Bankruptcy Appears to be a Texas Two-Step Legal Maneuver
The Story: I saw this story about a trendy coffee/grocery store chain based out of Chicago abruptly closed all its locations. It has locations in Austin and Dallas. It's not unusual to see something like this–too much growth, too fast. However, another article revealed that behind the scenes, an aggressive restructuring play is afoot to jettison debts and restart fresh. Before filing for bankruptcy, the company sold its assets at “auction” (including intellectual property) to another company, one of Foxtrot's shareholders. The article details how all the assets were sold in a process that appeared to be orchestrated for “compliance” but with no real intent to offer the assets for outsiders to bid on.
The Legal Play: It looks like Foxtrot is employing what is known as the Texas Two-Step. It is where lawyers structure and execute on shifting assets to another company, leaving creditors with debts secured by an empty shell company. The empty shell can continue fighting the creditors in litigation or file for bankruptcy. It's good to be aware of this play as a business or a creditor. This article gives a good in-depth legal explanation.
The Strategy: One of the primary drives of life is survival. The same goes for business. The Texas Two-Step can be a survival strategy in reserve if the company and its assets are properly structured early.
3. ALERT! Department of Labor Issues a New Exempt Employee Rule
What you need to know: The Department of Labor released a new final rule in April that will significantly increase the salary thresholds for overtime exemptions for employees classified as executives, administrative, or professional (AEP) positions under the Fair Labor Standards Act. The first increase will take effect July 1, 2023, and a further increase in January 2025.
Options: Employers have a short window to identify affected employees and decide whether: 1) to raise their salaries to maintain the exemptions, or 2) reclassify them as non-exempt.
Next steps checklist: Here are some steps to consider to prepare for and adapt to this new rule:
Identify exempt employees currently earning below the new July 1, 2023 salary thresholds ($844/week for EAP, $132,964/year for HCE).
After consulting with a CPA and legal counsel, decide whether to raise salaries to maintain exemptions or reclassify affected employees as non-exempt.
Determine appropriate hourly rates for employees being reclassified.
Establish timekeeping and recordkeeping processes for tracking hours of reclassified employees.
Adjust work schedules as needed to manage overtime for reclassified employees.
Provide training to reclassified employees on timekeeping and to managers on scheduling, recordkeeping, etc.
Coordinate with payroll to ensure reclassified employees are paid proper overtime wage.
Review and update company policies as needed to reflect changes in exempt/non-exempt status.
Consult with legal counsel to ensure and document full compliance with the new rule.
Have a good start to your week.