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HOLFORD USA LTD., INC. v. CHEROKEE

October 7, 1994

HOLFORD USA LTD., INC., Plaintiff,
v.
CHEROKEE, INC., Defendant.



The opinion of the court was delivered by: LEWIS A. KAPLAN

 KAPLAN, District Judge.

 This is a motion by plaintiff Holford USA Ltd., Inc. ("Holford"), an importer and supplier of wearing apparel, for a preliminary injunction pending arbitration of a contractual dispute with its customer, Cherokee, Inc. ("Cherokee"), a firm engaged in the business of designing, marketing and selling wearing apparel and evidently the owner of the well-known CHEROKEE trademark used on jeans. Holford contracted with Cherokee for the manufacture and sale of a large quantity of five pocket denim jeans of a specific weight ("Jeans") and obtained a right of first refusal with respect to Cherokee's future requirements of Jeans. It claims in essence that Cherokee has (a) failed to pay in full for the Jeans it has accepted, (b) wrongfully refused to take delivery of and pay for other Jeans it allegedly was obligated to buy, and (c) contracted with others for the supply of Jeans in derogation of Holford's right of first refusal. Holford seeks a preliminary injunction restraining Cherokee from (a) contracting for, purchasing or taking delivery of Jeans from, and (b) interfering with Holford's efforts to sell Jeans to, others. Before proceeding to a detailed consideration of the evidence and the parties' contentions, it is useful to place this dispute in its practical business context.

 In December 1993, Holford and Cherokee entered into a contract, known in the trade as a replenishing inventory arrangement, pursuant to which Holford agreed to manufacture Jeans for Cherokee. The specific product in question was a new line for Cherokee and, Cherokee claims, it would not have introduced the product but for the Holford arrangement. The attraction of the deal to Cherokee was that Holford would finance the manufacture of the Jeans, as Cherokee was not obligated to put up any money until after it took delivery, which it evidently hoped and expected would be only upon its own receipt of orders from its own customers. Holford, on the other hand, received a right of first refusal on the sale of Jeans to Cherokee and, it thought, an assured market for its product at favorable prices.

 Cherokee began to have second thoughts about the wisdom of being solely dependent upon Holford for the Jeans. While the precise reason is disputed, it sought out other suppliers no later than March 1994, even before Holford was to have made substantial deliveries. Cherokee did not afford Holford the opportunity to match the price, terms and quantity of the Jeans it ordered from other suppliers.

 By the summer of 1994, the Holford-Cherokee relationship was in shambles. Cherokee, by then in financial difficulty, had failed to pay Holford for substantial quantities of goods on which it had taken delivery. Holford had a good deal of capital tied up in additional Jeans, both completed and in production, for which Cherokee either declined to issue or purported to cancel purchase orders. And Cherokee was buying Jeans from other suppliers, claiming that Holford had breached its alleged obligation to make timely deliveries, which is hotly disputed by Holford. Indeed, Cherokee acknowledges that it has sourced its entire requirements for the holiday 1994 and spring 1995 seasons from suppliers other than Holford.

 The reality of this motion therefore is evident. Holford wants its money and wants to sell the Jeans it has on hand, either to Cherokee or to someone else. Cherokee is unwilling to pay Holford what it owes, preferring to use its scarce cash resources to buy new merchandise C.O.D. And it objects to Holford turning its inventory into cash by selling Jeans, which of course bear a Cherokee label and trademark, to others because that allegedly would result in the discounting of Cherokee brand jeans and take sales away from Cherokee. So Holford, itself in a bind, wants the Court either to (a) cut Cherokee off from any source of supply of Jeans other than Holford or, alternatively, (b) prevent Cherokee from interfering with Holford's sale of Cherokee brand Jeans to other distribution channels. Holford's objective in seeking this broad preliminary injunction therefore seems to be to put Cherokee in a position in which it is forced to agree to a resolution favorable to Holford, a resolution presumably including payment of Holford.

 Cherokee, for its part, is no more charitable. Anxious to conserve its cash and, perhaps, to extract a pound of flesh for what it regards as Holford's previous hardball tactics, Cherokee asserts that Holford should wait in line for payment for past deliveries like Cherokee's other trade creditors. And it would have Holford hold its inventory of Cherokee brand Jeans indefinitely while Cherokee decides whether to purchase any of it, which it apparently is willing to do to the extent it in turn obtains purchase commitments from retailers. Thus, in seeking denial of Holford's application, Cherokee evidently would put Holford to the choice of (a) sitting in its currently overextended position, or (b) negotiating a deal favorable to Cherokee.

 Each side claims the moral high ground, arguing that the allegedly inappropriate behavior of the other should be weighed against it in any balancing of the equities.

 In my view, Holford has shown a threat of irreparable injury, albeit not as extensive a threat as it claims. After considering the likelihood of success on the merits and the balance of the equities, I grant the motion in part and deny it in part.

 The issues on this motion are whether Cherokee should be enjoined from (a) continuing its purchases of Jeans from other suppliers and, for that matter, from taking delivery of Jeans already ordered from them, or (b) from interfering with any effort that Holford might make to sell Jeans, the delivery of which Cherokee has not taken, to other distribution channels. Thus, the central factual concerns bearing on the merits are whether Cherokee is likely to breach the right of first refusal in the future, which implicates the question whether it has done so in the past, and whether the circumstances permit Holford to dispose of its Cherokee inventory to others. In addition, Cherokee's financial condition bears on the question of irreparable injury and the balance of the equities. I confine my consideration of the facts to these concerns, simply noting that it is undisputed that Cherokee owes Holford and its factor hundreds of thousand of dollars and thus stands in breach of the contract in at least this respect. (Transcript ("Tr."), Aug. 30, 1994, 36:15-17) *fn2"

 The Right of First Refusal

 The aspects of the December 8, 1993 contract (Zane Aff. Ex. A) pertinent to the first refusal claim are three:

 1. Cherokee granted Holford "the right of first refusal, based on price, quantity and terms, to supply" Jeans to Cherokee. It recited that this right was granted by Cherokee to assure Holford of "a steady market for the Apparel." (Id. P 11)

 2. The contract contained no delivery times or schedule.

 3. The contract was for a term of five years, but terminable by either party on 180 days notice. (Id. P 16)

 It is undisputed that the contract has not been terminated by either party and that Cherokee has purchased Jeans from other suppliers without giving Holford a right of first refusal with respect to those purchases (Zane Aff. P 28).

 Cherokee makes two arguments in defense of its purchase of Jeans without affording Holford its right of first refusal. First, it claims that its performance was excused by Holford's alleged delivery delays which, Cherokee argues, constituted material breaches of the contract by Holford. Second, it contends that it notified Holford of its intention to use other suppliers in February 1994 and that Holford acquiesced.

 The Alleged Delivery Delays

 Inasmuch as the December 1993 contract was silent as to the time for delivery, I must examine the course of dealings.

 Cherokee begins by asserting that Holford initially provided delivery schedules indicating that it would deliver Jeans for Cherokee's back-to-school product line "as early as March" 1994, but that it did not meet that schedule. (Elles Supp. Aff. P 2)

 On February 24, 1994, Cherokee wrote to Holford. *fn3" The letter, which is significant for other purposes as well, noted among other things that the initial agreement provided for the purchase by Cherokee of 534,000 units, which were to be delivered in the period February 15 through May 31, 1994 and were intended to permit Cherokee to respond quickly to customer orders. It went on to state that the schedule had been changed as a result of "holidays, patterns, jet blue dye color, etc." to provide for delivery of 50% of the order in each of May and June 1994. (Elles Aff. Ex. D at 1-2) While the letter expressed concern about Holford's ability to deliver additional orders on time, ...


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