prevail on the merits of this aspect of its claim.
Sales of Inventory
This brings me to Holford's claim that Cherokee should be enjoined from interfering with Holford's efforts to sell to third parties the 392,560 units on hand. At this point, Cherokee purportedly has cancelled all or substantially all of the goods that Holford has on hand, alleging that it was justified in doing so by reason of Holford's untimely deliveries. I see nothing in the parties' contract that prohibits Holford from disposing of those goods to third parties given that Cherokee has rejected them.
This view is confirmed by Section 2-602 of the Uniform Commercial Code, which provides in substance, with exceptions not relevant here, that any exercise of ownership by the buyer with respect to any rejected goods is wrongful as against the seller. N.Y. Unif. Comm. C. § 2-602(2)(a)(McKinney 1993); see also id. § 2-401(4) Hence, as a matter of contract and of the law of sales, I see no valid objection to Holford's disposal of the goods.
That leaves the issue whether the sale by Holford of these rejected goods, which bear the Cherokee trademark as a result of Cherokee's authorization (Zane Aff. fix. A, P 13), would infringe Cherokee's rights.
Whether sales by Holford in these circumstances would infringe Cherokee's trademark is a close question on which courts are not in agreement. See 3 J. Thomas McCarthy, McCarthy on Trademarks and Unfair Competition § 25.11 (3d ed. 1994). In Monte Carlo Shirt, Inc. v. Daewoo International (America) Corp., 707 F.2d 1054 (9th Cir. 1983), for example, the Ninth Circuit held that the manufacturer's sale of branded goods that had been rejected by the trademark holder was not trademark infringement. On the other hand, in El Greco Leather Products Co. v. Shoe World, Inc., 806 F.2d 392 (2d Cir. 1986), a divided panel held that goods manufactured by the trademark holder's supplier and sold by it to a third party after the trademark holder cancelled an order were not genuine and therefore infringed the mark.
The key to the El Greco decision was its reliance upon the right of the trademark holder "to control the quality of the goods manufactured and sold under the" mark. Id. at 395. The contract between the trademark holder and the supplier in that case provided that the holder's agent was to inspect the shoes prior to shipment to ensure that they met the holder's quality standards. The supplier's right to draw on the holder's letter of credit for payment was conditioned upon presentation of a certificate of inspection signed by the holder's agent "declaring that the merchandise had been 'approved for shipment in accordance with the buyer's delivery and quality specifications.'" Id. at 393. "The inspection step was . . . an integral part of the [trademark holder's] procedure for determining whether to accept its shoes and allow them to be sold under its trademark." Id. at 395. Since the trademark holder had been deprived of its bargained-for right to control the quality of the goods sold under its mark, the majority held that the actual quality of the goods was irrelevant and that the mark had been infringed. Id. at 395-96.
In contrast to the circumstances in El Greco, Holford has asserted, without contradiction, that Cherokee inspected and approved all of the goods in question at Holford's factory in Hong Kong before the goods were shipped. (Zane Aff. P 35) Equally important, the contract contemplated the sale by Holford to third parties of any goods remaining in the warehouse after ninety days and did not exclude from that right any goods rejected on the basis of quality concerns. (Id. PP 10, 13) In these circumstances, I conclude that Holford has a substantial likelihood of prevailing with respect to any trademark claim by Cherokee as to these goods because, unlike the situation in El Greco, Cherokee already has approved their quality.
To the extent that I find that there is an issue worthy of further litigation on the question of Holford's right of first refusal, I must balance the equities to determine if "the harm which [it] would suffer from the denial of [its] motion is 'decidedly' greater than the harm [Cherokee] would suffer if the motion is granted." Buffalo Forge Co. v. AMPCO-Pittsburgh Corp., 638 F.2d 568, 569 (2d Cir. 1981); see also Roland Machinery Co. v. Dresser Industries Inc., 749 F.2d 380, 386 (7th Cir. 1984) (balance the potential harm to the plaintiff if the injunction is erroneously denied against the potential harm to the defendant if it is erroneously granted) Although I conclude that Holford has a substantial likelihood of success on the merits of its claim that interference by Cherokee with attempts to sell the Jeans would be wrongful,
I will consider also the balance of the equities with respect to this aspect of the requested relief in case the Second Circuit either disagrees with my assessment of the merits, or decides that such an analysis is helpful even when there is a substantial likelihood of success on the merits. See Leubsdorf, The Standard for Preliminary Injunctions, 91 Harv. L. Rev. 525, 545 (1978).
The Right of First Refusal
Holford would suffer more harm from the absence of an injunction preventing Cherokee's future breach of the right of first refusal than Cherokee would from its issuance. The harm Holford would suffer with respect to the right of first refusal as to future orders is the possibility it would lose business that it otherwise might have. (Zane Aff. P 41) There are two dimensions to this harm. First, Cherokee's insolvency may prevent Holford from collecting in full on any damage award it may recover for Cherokee's future breaches. Second, it may well prove difficult to establish whether Holford would have matched any other offers. In either case, it may be impossible to be place Holford in the same economic position that it would have enjoyed had the right of first refusal been enforced.
Cherokee, on the other hand, would bear only a small risk if it respects Holford's right of first refusal. Because the right requires Holford to match or better the terms of Cherokee's other offers, including financing and delivery times, Cherokee's only risk is the possibility that Holford would assert its preemptive right and then fail to deliver on the promises it makes to match other suppliers' deals. See Wildenstein & Co. v. Wallis, 79 N.Y.2d 641, 584 N.Y.S.2d 753, 759, 595 N.E.2d 828 (1992) (holding that a right of first refusal, in order to be enforceable, requires the holder to at least match alternative offers) This risk, even if higher than normal for contracts like this in view of past events, is mitigated because Cherokee would have both a breach of contract claim against Holford and the opportunity to cover with other suppliers if Holford cannot keep its promises.
I conclude from the foregoing that the balance of the equities on this point tips decidedly in favor of Holford.
Sales from Inventory
The showings made by both sides concerning the equities pertinent to sales by Holford of the 392,560 units in inventory are thin. Holford is sitting on a large inventory, and there is some evidence -- contradicted by Cherokee -- that the Jeans are declining in value. (Zane Aff. P 5) Holford argues also that it is in a financial bind because it has capital tied up in the goods, a contention that is not disputed but is not elaborated upon. (Zane Aff. P 3) Cherokee's insolvency, however, does put Holford in a position in which any decline in value from this point forward may not be fully collectible.
Cherokee claims that it would be injured by the sale of these goods through other channels because this would divert sales from it. (Tr. Aug. 30, 1994, 35:5-7) This loss, however, would be purely economic, equivalent to the loss of any marginal profit Cherokee would have made but for the Holford sales. There has been no effort to quantify what that injury might be. Although one can imagine circumstances in which diversion of sales from a company teetering on the brink of insolvency might cause irreparable injury by impairing its ability to survive as a going concern, Cherokee does not argue this point. Therefore, any injury Cherokee might suffer if erroneously enjoined would be fully compensable in damages provided an adequate injunction bond were required.
In these circumstances, the balance of the equities tips decidedly in favor of Holford because it is threatened with irreparable injury while Cherokee can be fully protected against its potential financial loss as long as I require an adequate bond.
The motion is granted in part and denied in part as reflected in the order entered herewith. Inasmuch as neither party has addressed the amount of the bond, the Court will consider any application either party may promptly make to adjust the amount contained in the order.
The foregoing constitutes the Court's findings of fact and conclusions of law. Fed. R. Civ. P. 52.
Dated: October 7, 1994
Lewis A. Kaplan
United States District Judge