Apparel v. Sportswear
| Decision Date | 07 July 2010 |
| Docket Number | No. BC319612,B203995,BC319612 |
| Parties | UNZIPPED APPAREL, LLC et al.,Plaintiffs, Cross-defendants and Appellants, v. SWEET SPORTSWEAR, LLC et al.,Defendants, Cross-complainants and Appellants. |
| Court | California Court of Appeals Court of Appeals |
Latham & Watkins, Kristine L. Wilkes and G. Andrew Lundberg; Blank Rome, James T. Smith, Brian S. Paszamant and Judd A. Serotta; Greenberg Traurig, George M. Belfield and Jordan D. Grotzinger for Unzipped Apparel, LLC, Iconix Brand Group, Inc., Michael Caruso & Co., Inc. and IP Holdings, LLC.
Law Offices of Gary Freedman and Gary A. Freedman; Browne Woods George, Edward A. Woods, Peter W. Ross, Michael A. Bowse and Marta B. Almli for Apparel Distribution Services, LLC, Sweet Sportswear, LLC, Azteca Production International, Inc. and Hubert Guez.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
APPEALS from a judgment and orders of the Superior Court of Los Angeles County, James R. Dunn, Judge. Affirmed in part, reversed in part, vacated in part, and remanded.
After an 11-week jury trial on numerous claims and cross-claims between the parties, the jury returned verdicts in favor of plaintiffs and appellants on all of their claims, and against defendants and appellants on all of their claims. The parties filed numerous posttrial motions. The trial court granted some of the posttrial motions and denied others. The trial court had also dismissed some of the parties' claims before trial. Both sides appeal. We affirm in part and reverse in part.
Hubert Guez, in his words, is "a specialist ofjeans, making jeans for everybody" and "for the whole world." Through his various companies, Guez manufactures and distributes designer jeans for brands such as Calvin Klein, Tommy Hilfiger, American Eagle, and Levi's. One of his companies is Azteca Production International, Inc. (Azteca), which Guez owns with his brother. Azteca through a Mexican subsidiary has a one million square foot facility in Mexico dedicated to manufacturing jeans. Azteca manufactures 100, 000 pairs ofjeans a day and 25 million pairs of girls junior jeans annually, and generates annual gross income of $250 to $350 million. Another one of Guez's companies is Apparel Distribution Services, LLC (ADS), which, as its name implies, provides warehousing, shipping, inventory, and distribution services for the jeans manufactured by Azteca. Sweet Sportswear, LLC (Sweet), another entity owned by Guez and his brother, provides management services for Guez-affiliated companies.
Iconix Brand Group, Inc., a publicly traded company formerly known as Candie's, Inc. (Candie's), is in the business of managing brands and licensing trademarks, including the Bongo and Candie's trademarks. Candie's has a wholly owned subsidiary, Michael Caruso & Co., Inc. (MC), which licenses these trademarks in exchange for royalty payments. Another wholly owned subsidiary of Candie's, IP Holdings, LLC (IPH), does what its name suggests: It is a holding company for intellectual property rights, and owns the Bongo trademark. Neil Cole is chairman of the board and chief executive officer of Candie's.
The parties' business relationship began in 1998 when they formed Unzipped Apparel, LLC (Unzipped), a joint venture among Candie's, MC, and Sweet, with MC and Sweet each owning 50 percent of the joint venture.1 The 1998 joint venture agreement provided that MC would contribute to Unzipped $500,000 and royalty-free licenses for the Bongo and Candie's trademarks, and Sweet would contribute to Unzipped $500,000 and management services to supervise and operate Unzipped's business and affairs. The 1998 joint venture agreement also provided that Unzipped would be governed by a management committee, that Sweet would be the manager of Unzipped, and that Sweet would be responsible for maintaining and managing the "financial recordkeeping and accounting affairs" of the joint venture. The joint venture agreement was accompanied by two additional contracts: The 1998 Supply Agreement, pursuant to which Azteca agreed to manufacture and supply Bongo jeans for Unzipped at cost plus 7 percent, and the 1998 Distribution Agreement, pursuant to which ADS agreed to warehouse and distribute the jeans for Unzipped for $.50 per pair of jeans ($.35 for warehouse storage, shipping, tracking, labor and management services, and "maintenance of perpetual inventory," and $.15 for order entry, billing, "MIS" (presumably management information services), and office supplies).
One of the terms of the 1998 Unzipped joint venture agreement was that Candie's would purchase Sweet's 50 percent interest in Unzipped on January 31, 2003. This term was intended to provide a mechanism for ending the joint venture and separating the parties. The agreement established a formula for calculating the sale price: 50 percent of 7.5 times EBITDA (earnings before interest, taxes, depreciation, and amortization) for fiscal year 2003 (February 1, 2002 to January 31, 2003). The parties, however, did not wait until January 31, 2003 to consummate the buyout by Candie's of Sweet's 50 percentinterest in Unzipped. Instead, during April through October 2002 the parties negotiated an early buyout, documented by, among other agreements, a binding April 23, 2002 Term Sheet, and a more formal October 18, 2002 Equity Acquisition Agreement. Both aspects of this transaction, the formula for calculating the purchase price and the early purchase by Candie's of Sweet's 50 percent interest in Unzipped, created much of the dispute that eventually led to this litigation.
And here's why: The economic fundamentals of the transaction created uncertainties and incentives for each side to take advantage of the other side. For example, the purchase price was dependent on the financial performance of Unzipped for fiscal year 2003. Sweet had the incentive to report Unzipped's financial condition and performance as healthy and robust as possible; Candie's had the incentive to question and understate Unzipped's financial condition. Valuation issues, such as the subjective or discretionary component in determining the value of Unzipped's inventory at any point in time, contributed to the difficulty of valuing Unzipped's overall financial condition. The timing of the purchase also affected the parties' incentives, with each side gambling that the early purchase price in 2002 would be lower (Candie's) or higher (Sweet) than it would be in January 2003. The two sides' different levels of access to Unzipped's financial information created another significant potential for dispute. Candie's claimed that Sweet inflated Unzipped's financial figures so that Candie's paid more than it should have for Sweet's half of the joint venture and that Guez concealed financial information that would have affected the purchase price. Guez and Sweet claimed that Candie's "finagled" Unzipped's financial figures when it suited Candie's' purposes.
As part of the April 23, 2002 Term Sheet, Guez became a member of the board of directors of Candie's. As part of the October 18, 2002 Equity Acquisition Agreement, the parties entered into a new contract for the provision by Sweet of management services for Unzipped, the Management Services Agreement (MSA). Pursuant to this agreement, Sweet, although no longer a 50 percent owner of Unzipped, agreed to continue to serve as the manager of the Unzipped. Sweet also agreed to provide management services to Unzipped, including maintenance of Unzipped's financial records and preparation of itsannual financial reports. The parties also entered into a new supply contract with Azteca, the Amended and Restated Supply Agreement (ARSA), which required Unzipped to pay Azteca cost plus 6 percent, and a new distribution agreement with ADS, the Amended and Restated Distribution Agreement (ARDA), which required Unzipped to pay ADS $.50 per pair of jeans.
The October 2002 agreements contained several terms that became important to the parties' subsequent dispute. Pursuant to the Equity Acquisition Agreement, Candie's paid for Sweet's 50 percent interest in Unzipped with stock (which Guez subsequently sold for $18 million) and an $11 million note at 8 percent interest, which required Candie's to make quarterly interest payments of $220,000 until April 23, 2012, the maturity date of the note. In the Equity Acquisition Agreement, Sweet warranted that Unzipped's financial statements were true, correct, and accurate and that Sweet had prepared them in accordance with generally accepted accounting principles (GAAP). Sweet also warranted that there were no undisclosed adverse material circumstances, liabilities, changes, or losses. The MSA provided that Sweet would manage Unzipped "in a faithful manner and in the best interest of" Unzipped and that Sweet would continue to maintain Unzipped's books and records. Significantly, Sweet guaranteed in Paragraph 2.7 of the MSA that Unzipped would make an annual profit of at least $1.7 million, and agreed that if Sweet failed to realize this profit, as determined by Unzipped's accountants "at the time of the issuance of the audited results," then Sweet would not earn a management fee for that year. Sweet also agreed that if Unzipped's annual net income was less than the $1.7 million guarantee, Sweet would pay Unzipped the difference. Candie's could receive the "shortfall" (i.e., the amount less than $1.7 million in net income) in cash, or Candie's could offset the shortfall amount against interest and principal due under the $11 million note.
The parties' relationship, which was never smooth, deteriorated in early 2004. Candie's owed quarterly interest payments on the $11 million note; Sweet would owe a shortfall payment if Unzipped's net income failed to reach $1.7 million; and neither side trusted the other side or its accountants and auditors. The issue of inventory reserves, which had a...
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