Opinion ID: 660173
Heading Depth: 2
Heading Rank: 2

Heading: Cost of Goods Sold

Text: 16 K-Mart also sought to prove that the amount it paid Selective to purchase the sweaters should be deducted from gross revenue. See Sygma, 778 F.2d at 93 (allowing infringer to deduct production expenses). It presented invoices from Selective and its own cancelled checks indicating a total purchase price of $475,200 for the 52,800 sweaters. The district court found K-Mart actually paid only $288,111 for the merchandise. It arrived at this reduced figure by subtracting $4,752 for a warehouse discount, $6,897 for an anticipation credit and $175,440 for a hold placed by K-Mart on the amount it owed Selective. The two small reductions are not disputed. But K-Mart challenges the subtraction of $175,440 to reflect the hold. 17 The proof with respect to the hold consisted of a handwritten memorandum from Gemma D'Andrea, manager of K-Mart's tax department, to K-Mart's counsel. It appears that Selective and K-Mart had done business together on a regular basis; hence, they maintained a running account. The memo reflects the hold history on K-Mart's account with Selective, which, according to D'Andrea's testimony, is how much of the accounts payable account of the Selective account was not paid, was held or released, whatever is indicated after each date. In its entirety, the memo states, 18 The hold history on Selective's account is: 11/05/87 $100,000 12/09/87 released hold 01/29/88 $250,000 06/02/88 $250,000 maintained 10/14/88 reduced to $100,000 19 11/10/89 increased to entire acct balance to date--$175,440 20 The district court found the $175,440 hold did in fact relate to the [D]amask sweaters sale and that K-Mart never paid Selective $175,440 of the purchase price. K-Mart declares the holds it placed on Selective's account were unrelated to the cost of the sweaters. Instead, it says the holds merely collateralized the indemnity relationship between K-Mart and Selective, which was formalized in a November 11, 1987 indemnity agreement. 21 The trial court incorrectly reduced K-Mart's cost of goods sold by $175,440. Upon reading the memo, it appears no hold existed on the Selective account on December 9, 1987. K-Mart issued checks to pay the Damask sweater invoices on December 10, 1987. Despite Hukafit's contrary assertion, by permitting K-Mart to deduct from its gross revenues what the sweaters cost--reflected by Selective's invoices and K-Mart's cancelled checks--we do not engage in speculation as to whether K-Mart will ever pay Selective the now existing $175,440 hold. The indemnity relationship between Selective and K-Mart, and the means by which they choose to secure it, is irrelevant to the net profits calculation in this case. 22 Hence, the district court's subtraction of $175,440 from K-Mart's deductible expenses as part of its cost of goods sold was clearly erroneous. The purchase price of $475,200 should only be reduced by the warehouse discount and anticipation credit totalling $11,649, leaving K-Mart's cost of goods sold at $463,551.