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Adele v. Burlington Coat Factory Warehouse Corp.

August 10, 2009

FENDI ADELE S.R.L., FENDI S.R.L., AND FENDI NORTH AMERICA, PLAINTIFFS,
v.
BURLINGTON COAT FACTORY WAREHOUSE CORP. ET AL., DEFENDANTS.



The opinion of the court was delivered by: Sand, J.

MEMORANDUM AND ORDER

The instant dispute arises out of a consent injunction entered in 1987 ("1987 Injunction"), under which Defendants agreed not to purchase or sell any merchandise bearing the Fendi trademark unless they received written permission from Plaintiffs. In the Court's October 2007 opinion, we granted partial summary judgment to Plaintiffs, finding Defendants in contempt of the 1987 Injunction for selling Fendi-branded merchandise. Fendi Adele S.R.L. v. Burlington Coat Factory Warehouse Corp., No. 06 Civ. 85, 2007 U.S. Dist. LEXIS 75812, at *3--*4, *13 (S.D.N.Y. Oct. 10, 2007). In April 2009, Magistrate Judge Dolinger issued a Report and Recommendation ("R&R") addressing the extent of relief to be awarded to Plaintiffs in the wake of our finding of civil contempt against Defendants. Plaintiffs and Defendants have both filed objections to the R&R. This Order addresses the parties' objections, most of which concern whether Defendants may deduct from their gross profits a share of various indirect expenses, which would yield a lower net profit amount.

We adopt Judge Dolinger's recommendations with respect to denying a deduction for store expenses and permitting a deduction for shipping expenses. We also adopt the R&R's denial of Defendants' request to exclude from the contempt order its profits from October 2003 to January 2006, the time period when Plaintiffs contacted Defendants about removing Fendi items from Defendants' stores but before Plaintiffs invoked the 1987 Injunction. In accord with the R&R, we limit the award of attorneys' fees and costs to Plaintiffs to those expenses triggered by Plaintiffs' contempt claim and the summary judgment motion for a contempt citation. Thus, we award Plaintiffs a fees and costs award of $541,913.65. We also order a forward-looking sanction of a $1,000 fine for each future proven violation of the 1987 Injunction.

We remand to the Magistrate Judge one issue: whether pre-judgment interest should be calculated based on federal or state statutory benchmarks.

I. Background

In May 1987, Plaintiffs agreed to discontinue a lawsuit against Defendants for counterfeiting in exchange for Defendants' agreement not to purchase or sell any Fendi-branded merchandise unless they received permission in writing from Plaintiffs.*fn1

Plaintiffs have not provided such written permission to Defendants at any time since May 1987. Defendants did not deal in Fendi goods again until 2002, when they began purchasing and selling Fendi-branded merchandise once again. Defendants claim that in the intervening fifteen years, they had forgotten about the 1987 Injunction. Plaintiffs contacted Defendants in 2004 alleging that Defendants were selling counterfeit Fendi bags. The parties exchanged correspondence regarding the genuineness of the Fendi-branded merchandise, apparently both unaware of the 1987 Injunction. It was not until a December 2005 letter to Defendants that Plaintiffs made reference to the 1987 Injunction. Defendants did not take action in response to the letter until Plaintiffs filed a lawsuit in January 2006. Shortly thereafter, Defendants instructed their stores to remove Fendi merchandise from its shelves. In 2007, however, Defendants were still actively marketing a Fendi-branded perfume. Accordingly, in our 2007 opinion we concluded that Defendants had been in violation of 1987 Injunction since 2002, which constituted negligence until 2006, and a willful violation thereafter. 2007 U.S. Dist. LEXIS 75812, at *13.

II. The Parties' Objections

The Court's 2007 opinion found that Defendants violated the 1987 Injunction when they started selling Fendi-branded merchandise again in 2002. However, Plaintiffs contend and Defendants do not dispute that Burlington's records reflect that it had begun selling the items as early as 1993, and that Defendants' profits predating 2002 should also be subject to disgorgement. (R&R at 6.) Thus, for the transactions between 1993 and February 2008, Plaintiffs have stated that they will stipulate to a gross profits figure of $2,772,945.00. (R&R at 7.) The principal dispute is whether Defendants may deduct from its gross profits a share of various indirect expenses.

In assessing the parties' claims over the appropriateness of certain deductions, we note that Defendants must show a "sufficient nexus between each expense claimed and the sales of the unlawful goods" before it may deduct any indirect expenses from its profits. Manhattan Indus., Inc. v. Sweater Bee by Banff, Ltd., 885 F.2d 1, 8 (2d Cir. 1989). Furthermore, "[w]hen infringement is found to be willful, the district court should give extra scrutiny to the categories of overhead expenses claimed by the infringer to insure that each category is directly and validly connected to the sale and production of the infringing product." Hamil Am., Inc. v. GFI, Inc., 193 F.3d 92, 107 (2d Cir. 1999) (citation omitted). This enhanced scrutiny, however, only applies to a limited portion of revenues - that is, those revenues from sales post-dating 2005, which were made in willful violation of the 1987 Injunction.

Defendants have raised five objections: first, that Defendants should be permitted to deduct store expenses; second, that Fendi perfume sales should not be disgorged; third, that Defendants should not be ordered to disgorge profits from the period of 1993 to December 2005 when Fendi "sat on its rights" to enforce the 1987 Injunction; fourth, that tax deductions should be increased in the event of the disallowance of store expenses; and fifth, that Defendants should be permitted to amend their answer to assert a statute of limitations defense. Based on the analysis in Magistrate Judge Dolinger's carefully reasoned R&R, we find Defendants' objections to be without merit.

Plaintiffs, in turn, have raised four objections to the R&R. Plaintiffs first argue that shipping expenses should not be deducted; second, that income taxes should not be deducted; third, that Defendants should pay pre-judgment interest at the New York State interest rate; and fourth, that final judgment on the contempt claim should be entered pursuant to Rule 54(b) of the Federal Rules of Civil Procedure. We now address these objections.

a. Shipping Expenses

With respect to shipping expenses, we reject Plaintiffs' objections and find that the Magistrate Judge applied the correct legal standard to the evidence. Defendants' calculations of shipping costs in fiscal years 2005, 2006, and 2007 "reflect conservative assumptions" in applying a two percent figure to the sale of all Fendi-branded goods except for perfumes (under an arrangement with a third party, Burlington did not pay for the shipment of perfume ...


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