Gucci America won a $2,059,583.62 money judgment against several defendants who were found by a federal district court to have engaged in trademark infringement.
The parties subsequently entered into a settlement wherein Gucci graciously agreed to reduce the judgment to $75,000 -- subject to the defendants' remittance of $25,000 upon the agreement's signing and monthly payments of $5,000 for ten months thereafter. In the event of a default, the original judgment amount (minus any payments made) would be due and payable.
The defendants paid some $35,000, but neglected to remit the balance. When Gucci sought to enforce the higher judgment amount, the defendants alleged that Gucci had failed to comply with the settlement's default provisions.
Paragraph 2 of that agreement required Gucci to "give written notice of ... default by delivering such notice notice to the address provided in the paragraph 3." Paragraph 3 provided that notice "shall be given by sending a facsimile, followed by confirmation sent by U.S. Mail."
Although defendants admitted receiving a copy of the default notice, they objected to Gucci's failure to serve an additional copy by fax. Siding with the defendants, the New York County Supreme Court concluded that the omission precluded Gucci's ability to enforce the judgment.
On appeal, the Appellate Division, First Department, reversed. After examining the wording of the parties' settlement document, the AD1 was of the opinion that the sending a copy of the default notice by fax was not contractually required. The appellate court also viewed the omission of a fax version of the notice of little consequence since the defendants conceded receiving a copy of the document (in some fashion or form).
Clearly, the AD1 was not amused by the fact that the defendants were insisting upon Gucci's literal compliance with the terms of an agreement which defendants had knowingly disregarded and, in an interesting twist, concluded that the defendants could not "compel enforcement of a settlement agreement the material terms of which they willfully breached ...."
Wow! (Do you get a sense that the appellate court didn't like these particular defendants?)
Putting aside for the moment whether these defendants were good or bad guys, we're not very comfortable with the court's analysis or the outcome reached in this instance.
Most litigants objecting to a contract's enforcement -- whether it be a lease or any other agreement -- will cite to an opponent's failure to properly issue or serve a default notice. So, it is not unusual to find a individual with "unclean hands" insisting that an agreement's default provisions were somehow dishonored. (Often times such an argument is well received by a court, in the interests of avoiding a forfeiture or other harsh result. An attack of the notice also allows the defaulter a bonafide opportunity to cure or correct the breach.)
However, if one reads this decision carefully, it would appear that the appellate court is promulgating a standard that upon an agreement's breach, hypertechnical compliance with notice of default provisions will not be of critical importance, particularly when it is uncontested that the document advising of the violation has been received by the defaulter.
Since there was some ambiguity whether the cited provisions also required a default notice to be transmitted by fax, why was the appellate court reluctant to throw these defendants a bone? After all, a $2 million hit is still substantial, even in today's dollars.
A bit cutting, don't you think?
For a copy of the Appellate Division's decision, please use this link: Gucci America, Inc. v. Sample Sale Wholesales, Ltd.