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Iconix Brand Group, Inc. v. Bongo Apparel

July 8, 2008

ICONIX BRAND GROUP, INC. AND IP HOLDINGS, LLC, PLAINTIFFS,
v.
BONGO APPAREL, INC. AND TKO APPAREL, INC., AND DOES 1-50, DEFENDANTS.



The opinion of the court was delivered by: Denise Cote, District Judge

OPINION and ORDER

Plaintiffs Iconix Brand Group, Inc. ("Iconix"), a Delaware clothing design company, and IP Holdings, LLC ("IPH"), its wholly-owned subsidiary, bring this diversity action against TKO Apparel, Inc. ("TKO"), its subsidiary Bongo Apparel, Inc. ("BAI"), and various unnamed defendants (the "Doe Defendants," and with TKO and BAI, the "Defendants"). The amended complaint brings claims for breach of contract, negligence, trademark infringement and dilution, constructive fraud, and conspiracy to commit fraud against BAI and TKO. The amended complaint also asserts a claim of aiding and abetting against the Doe Defendants.

On March 28, 2008 the Defendants moved to dismiss the amended complaint. Plaintiffs filed their opposition on April 11; there was no reply. For the following reasons, the motion is granted with respect to count 9 of the amended complaint, and denied in all other respects. In addition, as discussed below, Counts 11 and 14 have been withdrawn to the extent that they are alleged on behalf of Iconix.

BACKGROUND

The following facts are drawn from the amended complaint and assumed to be true for the purposes of deciding the motion to dismiss.*fn1 In 2004, plaintiffs Iconix and IPH entered into negotiations with defendant TKO, an apparel manufacturing company. These discussions related to the "Bongo" brand of jeans wear (also referred to herein as the "Licensed Mark"), the license for which was then held by Unzipped Apparel, Inc. ("Unzipped"), a wholly-owned subsidiary of Iconix. Unzipped was managed by Hubert Guez ("Guez") and Sweet Sportswear LLC ("Sweet"), both non-parties to the present case. The amended complaint states that Iconix and IPH were seeking out a new licensee because they were dissatisfied with Guez's and Sweet's management of the Bongo brand.

On June 9, 2004, IPH and TKO's wholly-owned subsidiary, TKO Apparel Licensing, Inc. ("TKO Apparel"), executed a license agreement granting TKO Apparel the exclusive right, with some exceptions, "to use the Licensed Mark ["Bongo"] in connection with the design, manufacture, sale, marketing, distribution, advertising and promotion" of women's jeans wear, bottoms, and active wear throughout the United States (the "License Agreement"). The License Agreement, which became effective on August 2, 2004 for a period ending December 31, 2007, gave TKO Apparel an option to renew the agreement for two three-year terms, and required it, inter alia, to meet minimum net sales targets, to pay royalties based on a percentage of its sales (or, in the alternative, certain minimum royalties), and to remain adequately capitalized.

On September 21, 2004, IPH entered into a management agreement with TKO's newly formed subsidiary, BAI (the "Management Agreement"). Pursuant to the Management Agreement, IPH paid BAI approximately $750,000 for it to manage the transition of the Bongo license from Unzipped to BAI, and to bring products to market that were already in the distribution pipeline. Plaintiffs allege that the payment made to BAI under this agreement was made necessary when BAI/TKO Apparel*fn2 failed to do "what it should have already been doing" under the License Agreement, namely, "preparing to take over operations for BONGO jeans wear" from Unzipped.

In November 2004, TKO Apparel assigned the License Agreement to BAI. As a condition to the assignment, TKO executed a guarantee dated November 11, 2004 (the "Guarantee"), which guaranteed BAI's obligations to IPH under the License Agreement. Iconix and BAI also entered into a stock purchase agreement that permitted TKO to purchase one million shares of Iconix stock at a discounted price of $2.20 per share.

In late 2004, Iconix and IPH approached TKO to discuss the expansion of the Bongo product line into the men's wear market. On December 15, 2004, IPH and BAI executed a license agreement ("Men's License Agreement"), which contained substantially similar terms as the prior License Agreement.

Plaintiffs allege that soon after the execution of the License Agreement, BAI began to threaten IPH with a claim under the License Agreement based on difficulties related to the transition between Unzipped and BAI, and to press IPH for a reduction in BAI's minimum sales and royalty obligations.*fn3 Plaintiffs also allege that BAI was "wholly unprepared to perform its obligations under the License Agreement," and that, as a result, Unzipped had lost approximately $8 million by January 2005.

In an effort to resolve these and other issues, Iconix, IPH, and BAI executed a settlement agreement on August 26, 2005 (the "Settlement Agreement"). Under the terms of the Settlement Agreement, Plaintiffs paid BAI a lump sum of $735,000, issued BAI and its principals 200,000 warrants to purchase Iconix stock, reduced the minimum net sales and royalty payment requirements under the License Agreement, and extended the due date for the first-year of royalty payments due under the Men's License Agreement.

Plaintiffs allege that, despite these concessions, BAI notified IPH of its intent to terminate the License Agreement in May 2006, and that this termination became effective on July 13, 2006. Plaintiffs also allege that BAI continued to sell products bearing the Bongo mark after it terminated the agreements without paying any royalties.*fn4

BAI filed a complaint against Iconix and IPH in New York State Supreme Court on June 12, 2006. IPH and Iconix moved to dismiss. While that motion was pending, this action was filed by IPH and Iconix on October 6, 2006. BAI and TKO, in turn, filed a motion to dismiss this action, arguing that this Court should abstain from jurisdiction in light of the pending state action. Following a conference with the parties, the motion to dismiss was denied by Order dated January 4, 2007, and this action was stayed.

On January 2, 2008, IPH and Iconix's motion to dismiss the state court action was granted in its entirety with respect to nine claims and was granted to the extent that the allegations were made against Iconix with respect to four of the remaining claims.*fn5 Following the receipt of status letters from the plaintiffs dated January 4 and January 14, 2008, regarding the state court proceedings, a conference was held with the parties on February 29, and the stay of this ...


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