Byline: Vicki M. Young

NEW YORK — Liz Claiborne Inc. has won round one in its high-stakes battle with a former contractor, Mademoiselle Knitwear Inc.
On Tuesday, U.S. District Court Judge Robert W. Sweet in Manhattan ruled in favor of Claiborne in its counterfeiting and trademark infringement suit against Mademoiselle. Claiborne was awarded damages of $582,868, but the ramifications could be much larger.
Mademoiselle has alleged that the suit was based on trumped-up charges and was part of Claiborne’s strategy to get out of an obligation to provide work for Mademoiselle. Mademoiselle has further charged in its own lawsuit that payments made by Claiborne to the apparel union UNITE constituted a bribe to end the work commitment.
Claiborne has responded that the payments were liquidated damages, lawful penalties set under UNITE contracts and paid to the union when a manufacturer violates a contract by using nonunion production. These payments, Claiborne has stated, were not related to its relationship with Mademoiselle.
The controversy has thrown a spotlight on the long established practice of liquidated damages, with both a Congressional committee on labor law and the U.S. Attorney’s office here probing the matter.
It has reached such heights that last week UNITE president Jay Mazur said that union will develop a method to detail how liquidated damages are spent by the union.
The Claiborne suit charged that Mademoiselle was selling on an unauthorized basis sweaters designed by Claiborne with a Mademoiselle or a Claiborne label in Mademoiselle factory outlet stores. The sweaters were overruns or irregulars, according to the suit.
Mademoiselle’s counsel said Tuesday the firm intends to appeal.
“In our opinion, Judge Sweet clearly committed reversible error. The decision will be reversed on appeal,” said John Schryber of Kaye, Scholer, Fierman, Hays & Handler, contending that the judge overlooked certain testimony in the case damaging to Claiborne. For example, Schryber pointed out, a Claiborne executive during testimony admitted that the company used a production report it had learned was inaccurate in an arbitration proceeding to end its work commitment to Mademoiselle. According to Claiborne counsel, the report was used inadvertently.
In a statement reacting to the judgment, Roberta S. Karp, vice president-corporate affairs and general counsel for Claiborne, said: “The court has rejected the false charges Mademoiselle publicized and tried to use to defend its illegal actions. Today’s ruling represents a triumph of overwhelming evidence against Mademoiselle’s baseless allegations.”
In his 50-page opinion, the key point for Sweet appeared to be the “almost complete absence of any Mademoiselle records as to its production, inventory and disposition of garments” concerning Mademoiselle’s conduct and disposition of the sweaters at issue. Also key was a Claiborne executive who testified that he “could not tell the difference between a Mademoiselle brand sweater and a corresponding Claiborne brand sweater when shown side by side at trial.”
Sweet ruled that Mademoiselle used Claiborne trademarks without Claiborne’s consent on sweaters that it sold, also without Claiborne’s permission. The use of Claiborne’s trademarks, Sweet found, “is likely to cause confusion.”
In addition, Mademoiselle was found to have made Claiborne sweaters using the Mademoiselle label, further causing confusion among consumers in its outlet stores.
Mademoiselle’s actions, Sweet found, breached two types of authority conferred by Claiborne: the authority to produce Claiborne merchandise and the authority to sell Claiborne merchandise overruns and irregulars to third parties.
Meanwhile, Mademoiselle’s suit against Claiborne and UNITE, challenging Claiborne’s payments of liquidated damages and alleging a “massive fraud scheme,” continues, with the contractor seeking $90 million from Claiborne and $45 million from the union.
Also moving through the courts is Mademoiselle’s Chapter 11 proceedings, the second time it has been in Chapter 11. A key element in the proceedings are documents from Claiborne and UNITE relating to the liquidated damage payments and put under seal by Bankruptcy Judge Cornelius Blackshear.
Although these documents were turned over to the U.S. Attorney’s office in November, the judge thus far has refused to hand them over to the Congressional committee headed by Rep. Peter Hoekstra (R., Mich.) that is investigating how well workers are protected under current labor law.
The controversy has also been marked by personal drama. On May 31, Shraga (Sy) Newhouse, the owner of Mademoiselle who was outspoken in blasting both Claiborne and UNITE, died of a heart attack at age 50. His attorneys said that the litigation would continue.

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