Washington v. Kellwood Company
1:05-cv-10034
| S.D.N.Y. | Jul 15, 2016Background
- Daryl Washington’s startup Sunday Players licensed its exclusive brand to Kellwood (Nov. 2003) for apparel manufacturing, marketing, and sales; Kellwood had the unilateral right to renew and agreed to pay 5% royalties and supply up to $25,000/year of samples. The agreement included a Section 9.1 marketing clause requiring Kellwood to spend 3% of net sales on marketing.
- Kellwood performed no direct-to-consumer marketing, made no sales of Sunday Players apparel through retailers, did not sign athlete endorsements, and failed to finalize a proposed MTV promotional deal; Kellwood terminated the license in March 2005 and soon closed the relevant divisions and factory.
- On summary judgment the court held Kellwood breached by terminating early and by failing to provide promised promotional samples; the remaining trial issue was whether Kellwood also breached an implied contractual duty to use reasonable marketing efforts and the amount of damages caused.
- A jury found Kellwood liable for failing to use reasonable marketing efforts and awarded $4,350,000 in lost profits (alternative: $500,000 lost market value). Plaintiffs elected lost profits; court entered judgment and parties filed renewed Rule 50/59 motions.
- The magistrate judge (Netburn) held Kellwood did breach the obligation to use reasonable marketing efforts, but vacated the lost-profits award as legally speculative because Sunday Players was a new venture lacking a reliable track record and the expert’s yardstick (Under Armour at 50%) was unsupported.
- The court also held plaintiffs proved loss of business value but rejected the jury’s lost-value figure because it relied on the same speculative profit projections; the court ordered a new trial limited to damages (excluding the expert’s testimony under FRE 403) and left nominal damages as a fallback.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Kellwood breached an implied duty to use reasonable marketing efforts | Washington: exclusive license implied a duty to make reasonable efforts to give the brand a chance at market success; Kellwood failed to market (no consumer ads, no endorsements, didn't sign MTV deal) | Kellwood: Section 9.1 (3% of net sales) was an express, exclusive obligation; with zero net sales it owed nothing; any ambiguity was for the jury | Held: Court ruled as a matter of law that an exclusive license imposes an obligation to use reasonable efforts; Section 9.1 did not displace that duty and did not require waiting for sales before spending; jury liability upheld |
| Whether lost profits were proven with reasonable certainty and causation | Plaintiffs: expert Barnes used Under Armour as a comparable and estimated Sunday Players would have achieved 50% of Under Armour’s sales, producing multi‑million lost profits causally tied to Kellwood’s failures | Kellwood: lost-profits theory is speculative, lacks causation and reliable foundation; Under Armour is not a close comparator; no marketing effectiveness proof | Held: Lost-profits award vacated as speculative; causation and reasonable-certainty requirements not met for a new business using the Under Armour yardstick |
| Whether lost market value (business value at breach) was proven | Plaintiffs: Barnes also estimated lost brand value at the time of breach and jury awarded $500,000 | Kellwood: Barnes’s market‑value relied on the same flawed profit projections and used improper post‑disclosure valuation methods | Held: Plaintiffs proved value was lost, but the only market‑value evidence traced to the speculative expert; jury’s lost-value award set aside; new damages trial ordered for market-value only, excluding Barnes’s testimony |
| Proper remedial procedure (JMOL vs. new trial; evidentiary limits) | Plaintiffs opposed JMOL and sought to uphold verdict; requested damages for renewal period | Kellwood sought JMOL and, alternatively, a new trial; objected to various evidentiary/admissibility rulings and jury instructions | Held: Court granted JMOL in part (vacating damages) and ordered a new trial limited to damages under Rule 50(b)/59; excluded Barnes’s speculative testimony for the retrial (FRE 403); denied plaintiff’s new‑trial requests on other grounds |
Key Cases Cited
- Wood v. Lucy, Lady Duff-Gordon, 222 N.Y. 88 (establishing implied reasonable-efforts duty in exclusive licensing)
- Contemporary Mission, Inc. v. Famous Music Corp., 557 F.2d 918 (2d Cir.) (express minimum spending floors do not displace an obligation to use reasonable efforts)
- Zilg v. Prentice-Hall, Inc., 717 F.2d 671 (2d Cir.) (licensor contract must guarantee a realistic chance of success; promotion obligation cannot be illusory)
- Kenford Co., Inc. v. County of Erie, 67 N.Y.2d 257 (lost profits require causation, reasonable certainty, and contemplation by parties)
- Schonfeld v. Hilliard, 218 F.3d 164 (2d Cir.) (heightened scrutiny for lost profits claims by new businesses; yardstick comparators require close similarity)
- Ashland Mgmt., Inc. v. Janien, 82 N.Y.2d 395 (clarifies reasonable-certainty standard and expectations-of-parties analysis for lost profits)
- Bucalo v. Shelter Island Union Free Sch. Dist., 691 F.3d 119 (2d Cir.) (standard for JMOL: verdict must lack legally sufficient evidentiary basis)
- Daubert v. Merrell Dow Pharm., 509 U.S. 579 (admissibility vs. sufficiency of expert testimony)