Johnson & Johnson Products, Inc. v. Dal Intern. Trading Co.
| Decision Date | 11 September 1986 |
| Docket Number | No. 85-5629,85-5629 |
| Citation | 798 F.2d 100 |
| Court | U.S. Court of Appeals — Third Circuit |
| Parties | , 1 UCC Rep.Serv.2d 1082 JOHNSON & JOHNSON PRODUCTS, INC., and Johnson & Johnson, Ltd., and Johnson & Johnson Baby Products Company, v. DAL INTERNATIONAL TRADING CO., an agency or instrumentality of the Polish People's Republic, Northeast Brokerage Co., Inc., and John Doe Quality King Manufacturing, Inc. and Quality King Distributors, Inc. Appeal of QUALITY KING MANUFACTURING, INC. and Quality King Distributors, Inc. |
Edward M. Joffee (argued), Sandler & Travis, P.A., Miami, Fla., Budd, Larner, Kent, Gross, Picillo, Rosenbaum, Greenberg & Sade, Short Hills, N.J., for appellants.
Gregory L. Diskant (argued), Eugene M. Gelernter, Patterson, Belknap, Webb & Tyler, New York City, Hannoch Weissman, Roseland, N.J., Eric I. Harris, Johnson & Johnson, New Brunswick, N.J., for appellees.
Robert W. Steele, John R. Fornaciari, Steele, Simmons & Fornaciari, Washington, D.C., for amicus curiae K Mart Corp.
Before SLOVITER and STAPLETON, Circuit Judges and LONGOBARDI, District Judge *.
This is an appeal from a preliminary injunction restraining appellants from selling, distributing, or otherwise disposing of certain products manufactured by appellees and in appellants' possession. Because we conclude that the district court committed an error of law and that the present record will not support a resolution of the legally relevant issue in appellees' favor, we will vacate the preliminary injunction.
Appellants are Quality King Manufacturing, Inc. and Quality King Distributors, Inc., both New York corporations ("Quality King"). Quality King is an independent distributor of national brand health and beauty aids. Its customers include large wholesalers and retail chains. Quality King participates in the so-called "gray market," where imported products are sold in the United States outside the manufacturer's distribution system, often contrary to the wishes of the manufacturer.
Appellees are Johnson & Johnson Products, Inc. ("J & J"), a New Jersey corporation, Johnson & Johnson, Ltd. ("J & J Ltd."), a corporation organized under the laws of Great Britain, and Johnson & Johnson Baby Products Company, a New Jersey corporation. Appellees are all operating subsidiaries of Johnson & Johnson, Inc., a New Jersey corporation.
Appellees claimed in the district court that J & J Ltd., which has its place of business in Great Britain, was fraudulently induced to sell 80,000 dozen toothbrushes and certain baby products to Dal International Trading Company, an instrumentality of the Polish People's Republic (hereinafter "Dal"). The alleged fraud consisted of an oral misrepresentation by Dal in February of 1985 that it intended to distribute the products in Poland only. But for this fraudulent assurance, say appellees, J & J Ltd. would not have entered the transaction.
In March of 1985, Dal ordered the products from J & J Ltd. No written contract was entered. However, J & J Ltd. did execute, in April of 1985, a written contract related to the Dal transaction with Wendexim Trading Company, Ltd., a British firm. The reason for the inclusion of Wendexim in the Dal transaction was the weakness of Polish currency, which necessitated an intermediate barter trade. This intermediate step involved an agreement under which Dal shipped a quantity of wood to Wendexim in return for Wendexim's transmittal of the payment for the wood to J & J Ltd., in satisfaction of Dal's obligation to pay J & J Ltd. for the toothbrushes and baby products.
At the end of June, 1985, J & J Ltd. delivered the toothbrushes to Dal at a J & J Ltd. factory in West Germany. The baby products were shipped from Great Britain at the beginning of June, 1985. Subsequently, J & J Ltd. learned that some or all of these goods had been diverted from their intended destination of Poland and were en route to the United States.
J & J Ltd. investigators followed the goods to the United States, where they came into the possession of Quality King. The goods were packaged in cartons, some of which bore J & J Ltd. shipping labels. The production codes on these labels corresponded to those of the products designated for Dal.
The route by which the J & J Ltd. products came into Quality King's hands was not fully documented below. In early 1985, a British firm called Cubro Trading Company, Ltd. somehow learned of the availability of the J & J Ltd. products and passed this information to Morris Greenfield, the proprietor of Tereza Merchandise Corporation in New York. Greenfield was not interested in the products but advised Glenn Nussdorf, the vice president of Quality King, of the availability of the goods. Nussdorf prepared a purchase order for 75,000 dozen toothbrushes in February of 1985, about the time when Dal and J & J Ltd. were negotiating the sale of 80,000 dozen toothbrushes. Later, Nussdorf added baby products to this purchase order.
Nussdorf had never done business with Cubro before this transaction, so he used Greenfield as an intermediary. The details of the transaction are unclear due to discrepancies in the record as to the disbursements made by Quality King. What is clear is that Quality King purchased and received the goods.
Before the goods arrived at Quality King's warehouse, the J & J Ltd. shipping labels had been stripped from most of the shipping cartons. Greenfield and Nussdorf testified that this was a common gray market practice designed to obscure the identity of supply sources. The protection of these sources is important to gray market middlemen, Nussdorf and Greenfield testified, because if the sources became known, the middlemen would be bypassed in subsequent transactions.
The J & J Ltd. products were priced by it for the Polish market at a level lower than the wholesale price in the United States for Johnson & Johnson products, and even lower than the wholesale price normally offered in Great Britain by J & J Ltd. By purchasing these products in Europe, Quality King was thus in a position to distribute them in the United States at prices below those being charged by J & J.
The district court granted the preliminary injunction after concluding that appellees were likely to prevail on the merits, that appellees would suffer irreparable harm if the injunction were not granted, that an injunction would not harm any other interested person, and that an injunction would not be contrary to the public interest. See Kennecott Corp. v. Smith, 637 F.2d 181, 187 (3d Cir.1980); American Hospital Supply Corp. v. Hospital Products Ltd., 780 F.2d 589, 593-594 (7th Cir.1986).
The court predicted that appellees would prevail on the merits because it found that Quality King was not a good faith purchaser under Section 2-403(1) of the Uniform Commercial Code (UCC). 1 Under this provision of the UCC, a seller with voidable title, such as that acquired by common law fraud, can transfer good title to a subsequent good faith purchaser. For merchants like Quality King, the UCC defines good faith as "honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade." UCC Sec. 2-103(1)(b). If the subsequent purchaser lacks good faith, however, he acquires only the seller's voidable title and may be required to surrender the goods to the defrauded party.
While the district court concluded that Quality King had no actual knowledge of the alleged fraud, it found that the gray market transaction was conducted under "suspicious circumstances" that "cried out for inquiry." District Court Opinion at 23-24. In the district court's view, Quality King, as a result, should have made inquiries that would have uncovered the voidable title. In the absence of such inquiries, the court concluded, Quality King could not be said to have been "honest in fact."
The most suspicious circumstance noted by the court was the fact that "the entire trade in which Quality King is engaged is conducted in a manner designed to insulate a purchaser of goods from knowledge of potential illegality." District Court Opinion at 22. That is, the gray market trade practice of purposely obscuring the chain of title suggested to the court a silent conspiracy to avoid the consequences of bad faith purchase by preventing the transmission of actual knowledge of fraud in prior transactions. This practice was illustrated by the fact that the J & J Ltd. shipping labels had been stripped prior to arrival at Quality King's warehouse.
An additional suspicious circumstance, in the district court's view, was the fact that Nussdorf used Greenfield as an intermediary, thereby indicating Nussdorf's mistrust of Cubro. Finally, the price of the goods was so low that "Quality King must have known that ... [J & J Ltd. would not have knowingly sold] ... its products in Europe for resale in the United States." District Court Opinion at 24.
The district court was undoubtedly justified in concluding that Quality King had reason to suspect that appellees would not approve of a sale of the toothbrushes and baby products to a U.S. distributor. Further, we believe the district court, having reached this conclusion, could appropriately infer that Quality King, in the minds of its officers and agents, subjectively suspected that appellees would not approve of its purchase of these goods. We believe the legally relevant question, however, is whether Quality King knew that the goods had been obtained from J & J Ltd. by fraud, or suspected as much and closed its eyes to the truth. This is a far different question involving an inquiry as to whether Quality King knew or had some reason to know that Dal orally represented to J & J Ltd. that it would distribute only in Poland and that this representation was made at a time when Dal had an affirmative intent...
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