[00:00:00] Speaker 02:
next case on the calendar, the final case on the calendar, which is 24-2269, Smart Apparel versus Nordstrom.

[00:00:39] Speaker 03:
May it please the court, Chris Cariello, for appellant and plaintiff smart apparel.

[00:00:43] Speaker 03:
I'd like to reserve three minutes for rebuttal, please.

[00:00:47] Speaker 03:
We're at the pleading stage, so our allegations must be taken as true and for all they are worth.

[00:00:53] Speaker 03:
And what those allegations plausibly allege is that Nordstrom, with too many shirts in its inventory, used a CBP press release as a false pretext to get out of $6.7 million in purchase orders.

[00:01:06] Speaker 03:
And so the only question at this stage is and should have been, does canceling a purchase order based on a pretext that is knowingly false give rise to a claim for breach of contract or breach of the implied covenant of good faith and fair dealing?

[00:01:21] Speaker 03:
The district court erred in dismissing both claims before discovery.

[00:01:25] Speaker 02:
It erred- You have an allegation that Nordstrom actually knew, but it has to be a plausible allegation, right?

[00:01:31] Speaker 02:
It can't just be an assertion, right?

[00:01:34] Speaker 03:
Absolutely, Your Honor, and we went chapter and verse and gave specificities to that allegation, so.

[00:01:39] Speaker 02:
Well, I understood this troubled the district court, but I think the complaint, your complaint alleges that the parties had a multi-year relationship.

[00:01:45] Speaker 02:
I want to make sure you didn't miss anything in terms of fleshing this out.

[00:01:48] Speaker 02:
A multi-year relationship that Smart Apparel had provided quarterly audits and then in response to Nordstrom's actions, Smart Apparel conducted additional audits of its entire supply chain.

[00:01:57] Speaker 02:
Are there other assertions in your allegations in your complaint that factor into this?

[00:02:04] Speaker 03:
So we also alleged the depth of the relationship.

[00:02:07] Speaker 03:
So we alleged that Nordstrom and Smart Apparel actually collaborated.

[00:02:11] Speaker 03:
We alleged that Nordstrom understood the location of the four facilities at issue.

[00:02:16] Speaker 03:
So factories that make the shirts in Sri Lanka, mills in China, and Vietnam.

[00:02:21] Speaker 02:
I'm not sure why that location helps you a lot, but you did allege that, OK?

[00:02:25] Speaker 03:
I'm happy to explain why.

[00:02:26] Speaker 03:
It's because it goes to the depth of Nordstrom's understanding of Smart Apparel's supply chain.

[00:02:31] Speaker 02:
And so when you have a part of your complaint that gets a little bit muddy, though, because it also talks about the locations of supply for sunshine.

[00:02:41] Speaker 02:
And it's not entirely clear to me that they're they are separate.

[00:02:45] Speaker 03:
So so all the complaint stands for when it comes to sunrise and the overlap between the supply chains.

[00:02:52] Speaker 03:
is it's largely in paragraph 10 of the complaint.

[00:02:56] Speaker 03:
And it says, Sunrise has dozens of facilities in its supply chain, and Smart Apparel has four.

[00:03:03] Speaker 03:
These are the four.

[00:03:04] Speaker 02:
But you can't tell if the four are part of the dozens.

[00:03:07] Speaker 02:
That's the point.

[00:03:07] Speaker 03:
You can't tell if they're separate.

[00:03:10] Speaker 03:
You're right that the complaint does not specify.

[00:03:12] Speaker 03:
It's ambiguous.

[00:03:13] Speaker 03:
And even if it weren't, there's a difference between, OK, these are sort of nominally part of Sunrise's supply chain, or they're operationally making sure it's side by side.

[00:03:24] Speaker 03:
I will concede that it is not on the face of the complaint.

[00:03:27] Speaker 02:
Well, I'm not trying to get you completely into the minutiae, but that's what you're relying on heavily, is that the complaint alleges that Nordstrom actually knew that there was not forced labor being used.

[00:03:39] Speaker 02:
And so I think the district court was concerned that that was a mere allegation.

[00:03:42] Speaker 02:
And I'm trying to just make sure I have all of what you intend for me to consider about how that allegation is fleshed out so that it's not just conclusory.

[00:03:51] Speaker 03:
Understood, Your Honor.

[00:03:52] Speaker 03:
So I do want to start by noting this is an allegation of state of mind at the pleading stage.

[00:03:57] Speaker 03:
Very rare for a complaint to be dismissed on the basis of what we weren't able to allege about the defendant's state of mind.

[00:04:05] Speaker 03:
That's what discovery is typically for.

[00:04:07] Speaker 03:
But if we're talking about giving rise to plausible inferences, again, we alleged Nordstrom's understanding of the way these supply chains work.

[00:04:16] Speaker 03:
We, in fact, also alleged, and I can grab this site, we also alleged that Nordstrom knew or could easily discover that Sunrise uses dozens of factories with nothing to do with smart apparel.

[00:04:28] Speaker 03:
That's ER 40, paragraph 62.

[00:04:31] Speaker 02:
But the terms and conditions don't require that Nordstrom do that, I don't think.

[00:04:35] Speaker 02:
That's pretty tough.

[00:04:36] Speaker 02:
Maybe if you talk about the covenant claim.

[00:04:38] Speaker 02:
But, right, the terms and conditions just require that if Nordstrom has reason to know in good faith, reason to know, a reason to believe in good faith that one of these warranties has not been abided by.

[00:04:52] Speaker 02:
Then that's enough.

[00:04:53] Speaker 02:
That's what they're going to argue, right?

[00:04:56] Speaker 02:
No, that is what they will argue.

[00:04:57] Speaker 02:
They didn't have an obligation to do an investigation.

[00:04:59] Speaker 03:
Right.

[00:05:00] Speaker 03:
And we are not arguing that there's an obligation to do an investigation.

[00:05:03] Speaker 03:
We'll get to the good faith.

[00:05:04] Speaker 02:
I thought you were.

[00:05:05] Speaker 02:
What point were you just making?

[00:05:07] Speaker 03:
Oh, the point I was just making was based on knowledge.

[00:05:09] Speaker 03:
So what I said was Nordstrom, we alleged that Nordstrom has

[00:05:13] Speaker 03:
a deep understanding of the facilities that Smart Apparel uses.

[00:05:17] Speaker 03:
So these four, it's seen third-party audits, it's collaborated on these audits, they've been clean for years.

[00:05:23] Speaker 02:
Part we know, but what were you just saying about Nordstrom being able to check?

[00:05:27] Speaker 03:
Yes, Your Honor, and then you were asking about the overlap between Sunrise and Smart Apparel.

[00:05:32] Speaker 03:
And then what I was saying was Nordstrom's understanding of this supply chain, we went further and alleged that Nordstrom knew or could easily discover

[00:05:40] Speaker 03:
that there were many Sunrise facilities that had nothing to do with Smart Apparel.

[00:05:44] Speaker 02:
Or could easily discover part that is tripping me up, but I don't mean to, I don't think they had to do that.

[00:05:50] Speaker 03:
So understood, Your Honor.

[00:05:51] Speaker 02:
All right, that's fine.

[00:05:53] Speaker 03:
So the point that I am trying to make is that you need a leap to get from a CBB press release as to Sunrise and Sunrise's supply chain to get to Smart Apparel and Smart Apparel's supply chain, and that leap

[00:06:08] Speaker 00:
Well, there are no allegations in the complaint that tell us what the relationship is between Sunrise and Smart Apparel.

[00:06:16] Speaker 00:
Is Sunrise a parent company?

[00:06:18] Speaker 03:
Sunrise is the parent, yes.

[00:06:20] Speaker 00:
Were any of its goods impounded by Customs and Border Protection?

[00:06:26] Speaker 03:
Never.

[00:06:26] Speaker 03:
At no time was anything ever detained.

[00:06:29] Speaker 03:
That's a DR-34.

[00:06:30] Speaker 02:
Does the complaint allege that the presumption was bottle?

[00:06:36] Speaker 02:
And that it was rebutted, or does it just allege no goods were ever impounded?

[00:06:41] Speaker 03:
Just that no goods were ever detained at all.

[00:06:42] Speaker 03:
It was never required to demonstrate the absence.

[00:06:45] Speaker 02:
That's key, I think, to your argument that this was not ever a sanctioned person.

[00:06:48] Speaker 03:
Absolutely.

[00:06:49] Speaker 03:
So this was never, first of all, the CBB press release.

[00:06:52] Speaker 03:
And the way that 22 USC 9241A functions is it creates a presumption as to goods, as to shipments.

[00:07:01] Speaker 03:
It doesn't designate a status of a party.

[00:07:04] Speaker 03:
That's A.

[00:07:05] Speaker 03:
And B is, when I say A and B, I'm talking about my argument, not the statute.

[00:07:10] Speaker 03:
And B is, it's not a final determination at all.

[00:07:15] Speaker 03:
It is a rebuttable presumption.

[00:07:17] Speaker 00:
So, normally, and I'm no expert on import-export law, but normally, the goods are seized at the port of entry and placed in a bonded warehouse and then notice is sent out to the shipper

[00:07:34] Speaker 00:
identifying the fact that the goods have been impounded and then the shipper has to take some action in order to release.

[00:07:41] Speaker 00:
It may be post-a-bond, started an administrative proceeding to challenge the seizure.

[00:07:46] Speaker 00:
You're saying there are no allegations that this ever occurred with anybody's goods.

[00:07:50] Speaker 03:
That's correct.

[00:07:51] Speaker 03:
That's correct.

[00:07:51] Speaker 02:
All we have, I think, is Nordstrom.

[00:07:53] Speaker 02:
And I think Nordstrom's pretty straight up about this.

[00:07:55] Speaker 02:
They relied on the press release, right?

[00:07:58] Speaker 03:
I think that's absolutely right.

[00:07:59] Speaker 02:
It pertains to a different party, and I think pertains to a rebuttable presumption.

[00:08:04] Speaker 03:
Exactly right.

[00:08:05] Speaker 03:
Exactly right.

[00:08:05] Speaker 03:
And if you look elsewhere in the law at the way these sorts of rebuttable presumptions work, I mean, think, for example, in the employment discrimination context, the McDonnell Douglas standard, right?

[00:08:15] Speaker 03:
If a plaintiff files a motion for summary judgment and makes out a prima facie case against the defendant, you would never say, oh, well, I have this motion for summary judgment, therefore I've concluded that

[00:08:27] Speaker 03:
that the defendant is a discriminator, and that is final, and it's the breach of warranty.

[00:08:31] Speaker 03:
You would say, OK, the presumption has shifted the burden to that party to demonstrate they've done nothing wrong.

[00:08:38] Speaker 03:
So Sunrise itself, which again is not smart apparel, Sunrise always retained the ability to import into the country upon satisfying this condition.

[00:08:48] Speaker 03:
It could show we never used North Korean labor.

[00:08:51] Speaker 03:
It could show we employed North Korean nationals who fled an oppressive regime, and they were never subjected to forced labor.

[00:08:57] Speaker 03:
It could show this had nothing to do with any facility that CBP was ever talking about.

[00:09:02] Speaker 03:
What ended up happening is nothing was ever detained.

[00:09:05] Speaker 03:
And then three or four.

[00:09:06] Speaker 02:
I know that by the time Nordstrom took this action, Nordstrom reacted, I think, pretty quickly.

[00:09:11] Speaker 02:
So the 30 days hadn't lapsed, had it?

[00:09:14] Speaker 03:
Nordstrom reacted the following month.

[00:09:17] Speaker 03:
So press release December.

[00:09:19] Speaker 02:
So there would have been time?

[00:09:21] Speaker 02:
There would have been a 30 day lapse?

[00:09:22] Speaker 03:
For Nordstrom to know that there were no detentions?

[00:09:26] Speaker 03:
I don't think Nordstrom would have known at that point, if I'm being totally fair, that the complaint doesn't disclose it.

[00:09:32] Speaker 03:
The reason we emphasize that there were never any detentions and that a later third party audit confirmed that CBP was wrong.

[00:09:40] Speaker 03:
There was no North Korean labor.

[00:09:41] Speaker 02:
After Nordstrom took this action and canceled the order, purchase order, you allege that some contingent of your client came to meet with Nordstrom, I think at Seattle.

[00:09:51] Speaker 03:
Yes.

[00:09:52] Speaker 02:
That was after they had already canceled the order, right?

[00:09:55] Speaker 03:
Right, within days after they canceled the order.

[00:09:57] Speaker 03:
So Nordstrom says, we have reason to believe, right?

[00:10:01] Speaker 03:
It's terminating on reason to believe.

[00:10:02] Speaker 03:
Not, we have found you breached a warranty.

[00:10:04] Speaker 02:
But the audits have been delivered to Nordstrom prior to them raising the flag to say they have reason to believe.

[00:10:10] Speaker 03:
The audits of Smart Apparel's facilities, yes, have been delivered quarterly.

[00:10:13] Speaker 03:
The most recent one is November 2022, a month before the press release.

[00:10:18] Speaker 02:
All right.

[00:10:18] Speaker 02:
Judge Clifford, do you have any questions?

[00:10:21] Speaker 02:
Looks like we don't have any additional questions.

[00:10:23] Speaker 03:
Thank you your honors.

[00:10:24] Speaker 04:
I'll reserve the remaining area of my time for a little That's fine Thank you may please court My name is David press over at Perkins cooey, and I'm proud to represent Nordstrom in this matter There was something you asked about which I wanted to address which was timing It was two and a half weeks after the press release so it was within those 30 days Nordstrom cancels It's within two and a half weeks the press release also on the subject of timing

[00:10:52] Speaker 04:
came after the audits.

[00:10:54] Speaker 04:
So these audits were actually facility-specific, not supply chain-wide.

[00:11:00] Speaker 04:
So these one-off facilities were audited.

[00:11:04] Speaker 04:
Two of those audits occurred in 2021.

[00:11:06] Speaker 04:
So the press release actually uncovered evidence after the audits.

[00:11:13] Speaker 02:
The chronology that you're just describing is entirely consistent with my earlier question and with my notes and with the briefing.

[00:11:18] Speaker 02:
I think you've all got that.

[00:11:19] Speaker 02:
But you've got a problem, right, that we're at the 12b6 stage and they allege that Nordstrom actually knew that forced labor hadn't been used.

[00:11:28] Speaker 02:
And I think your position in the trial court was that that was too conclusory.

[00:11:33] Speaker 02:
And I'd like to hear why you think that is.

[00:11:35] Speaker 04:
Correct.

[00:11:36] Speaker 04:
And it goes actually back to timing, if I might tease that out, because they're saying you knew because of our audits.

[00:11:43] Speaker 04:
So you must necessarily, as a matter of law, believe our one-off facility audits.

[00:11:47] Speaker 04:
And the district court looked at this

[00:11:49] Speaker 04:
and said, well, first off, the terms.

[00:11:51] Speaker 04:
Is it a matter of law?

[00:11:51] Speaker 02:
I think they're alleging that as a matter of fact, you actually knew.

[00:11:54] Speaker 02:
Does that matter for your argument?

[00:11:56] Speaker 04:
We can have a reason to believe post those audits that the press release, which says we've uncovered based on evidence that these entities are using North Korean labor.

[00:12:06] Speaker 02:
East, plural, or Sunshine?

[00:12:08] Speaker 04:
Say that again?

[00:12:08] Speaker 02:
Sunshine, right?

[00:12:09] Speaker 04:
Sunshine, the parent company of Smart.

[00:12:11] Speaker 02:
Well, you just said entities, and I want to know if I'm.

[00:12:13] Speaker 04:
Oh, sorry.

[00:12:14] Speaker 04:
There were two entities late.

[00:12:15] Speaker 02:
But it's not Smart Apparel.

[00:12:17] Speaker 04:
It's not smart apparel.

[00:12:18] Speaker 04:
Smart apparel is the ultimate, is the subsidiary wholly owned by Sunshine.

[00:12:23] Speaker 04:
It's Sunshine and then Smart.

[00:12:26] Speaker 04:
Yeah, so the terms and conditions say that smart apparel cannot have dealings directly or indirectly or any dealings directly or indirectly with entities that might be subject to sanctioned territories or sanctioned parties themselves.

[00:12:41] Speaker 02:
What's your best argument that after the press release that Nordstrom had reason to believe that

[00:12:46] Speaker 02:
sunshine was actually that smart apparel was dealing with a sanctioned person.

[00:12:51] Speaker 04:
The press release itself notes that sunshine's products will be detained at the port.

[00:12:58] Speaker 04:
The press release itself is effectively make sunshine a sanctioned person under the contract.

[00:13:03] Speaker 04:
What's a sanctioned person?

[00:13:04] Speaker 02:
There's a rebuttable presumption that arises by virtue of the legal authorities that your purchase order cited.

[00:13:11] Speaker 04:
That's right.

[00:13:11] Speaker 04:
There is a rebuttable presumption that they must rebut by clear and convincing evidence.

[00:13:15] Speaker 04:
So if you go back, kind of turn back the clock on the investigation, to trigger investigation, a port director must submit a report that he or she has a reason to believe that forced labor or child labor is being used.

[00:13:29] Speaker 04:
That triggers the investigation.

[00:13:31] Speaker 04:
So just to trigger investigation under the CFRs, there must be a reason to believe.

[00:13:36] Speaker 04:
The investigation- Somebody had a reasonable belief.

[00:13:38] Speaker 04:
Bingo, right.

[00:13:39] Speaker 04:
And then the investigation itself went further and uncovered evidence.

[00:13:42] Speaker 02:
So now we're beyond... The first step in the process is not the step that Nordstrom invoked in its agreement.

[00:13:48] Speaker 04:
We didn't know about the investigation when it was triggered.

[00:13:51] Speaker 02:
What I'm saying is... I'm talking about the Legal Provision Council.

[00:13:53] Speaker 04:
Right.

[00:13:53] Speaker 04:
The legal provision, we triggered our rights upon receiving the press release because CBB sends this to buyers like Nordstrom.

[00:14:00] Speaker 04:
And Nordstrom, seeing this, an objective reader, an objective buyer in Nordstrom's position, whether we're Nike or the Gap, would say, okay, within this supply chain,

[00:14:09] Speaker 04:
We now have a reason to believe that North Korean or forced labor or child labor is being used.

[00:14:13] Speaker 04:
Now, it doesn't matter to Nordstrom whether those products are being sent to Gap, but trust us, your products, the ones we're sending to you, don't have North Korean labor.

[00:14:22] Speaker 04:
So long as the supply chain itself has been implicated in North Korean labor, that's enough.

[00:14:30] Speaker 04:
The parent company supply chain within which smart apparel resides there was some ambiguity in the complaint that they're saying on appeal That it's not clear, but even at the complaint the complaints paragraph in paragraph 10 the complaint said that Sunrise uses dozens of mills and factories in a supply chain smart apparel used only for what and this is their words which makes it exceedingly unlikely that

[00:14:57] Speaker 04:
that one of Smart Apparel's mills or factors had been implicated.

[00:15:00] Speaker 04:
Not that it's zero.

[00:15:02] Speaker 02:
We understand.

[00:15:02] Speaker 04:
And then, well, that's the reason to believe.

[00:15:04] Speaker 04:
We could have a reason to believe, even if it's unlikely.

[00:15:07] Speaker 02:
And so we keep coming back.

[00:15:08] Speaker 02:
And I know you're not pushing back on that, Council, but it all comes back to my scorecard.

[00:15:12] Speaker 02:
We have very detailed notes here.

[00:15:14] Speaker 02:
Sure.

[00:15:15] Speaker 02:
What is your best, at the 12b6 stage, the alleging that Nordstrom actually knew because of these, and we went through it a minute ago, right?

[00:15:22] Speaker 02:
We'll tell you your relationship, quarterly audits, and so on and so forth.

[00:15:26] Speaker 02:
What's your best shot at this?

[00:15:27] Speaker 04:
The press release itself, in our view, could trump the audits.

[00:15:30] Speaker 04:
We can have seven reasons to believe that they are clean, and we only need one reason to believe that they are not.

[00:15:36] Speaker 01:
This is how... Is that really true?

[00:15:39] Speaker 01:
If you had seven reasons to believe to the contrary, and you get some discordant, in this case, press release, does that really give a reason to believe to assume the first seven reasons don't count?

[00:15:53] Speaker 01:
Reason to believe suggests more than

[00:15:55] Speaker 01:
A possibility out there sure and that's where we tease out whether it's a contract claim in the good faith and fair dealing claim under the contract Yes, that would be enough now the contract well if you if you determine that's reason to believe correct, but Reason believe considers all the knowledge that in this case Nordstrom had I'm not sure you can just say well you got this one little thing out there We're entitled to disregard everything else that we know or have been told because it's one

[00:16:24] Speaker 04:
That's not necessarily reasonable leave under the contract either And that's fair what we're saying the press release itself would have been enough because it came after the audits audits that came two of which came two years before the press release a Single facility audits and the press release itself implicates the entire supply chain so the Supply chain, but what's bothering me is the complaint is ambiguous as to what the relationship is between sunrise and smart apparel

[00:16:53] Speaker 00:
Were there any documents that Nordstrom had that lists Sunrise as being involved at all in the distribution of these products?

[00:17:04] Speaker 04:
So the supply chain, I think as a grammatical matter, if you read the paragraphs, actually alleged in the complaint, paragraphs 10, I believe it's paragraph 10 and 62.

[00:17:14] Speaker 02:
But Nordstrom didn't respond to those.

[00:17:15] Speaker 02:
Nordstrom acted, pulled the trigger after the press release.

[00:17:19] Speaker 04:
Correct.

[00:17:19] Speaker 04:
I'm saying now they're making this argument, or at least suggesting the argument, because I'm not sure it's saying.

[00:17:24] Speaker 04:
I don't think they've actually expressly said that the supply chains are separate.

[00:17:27] Speaker 04:
They're simply saying.

[00:17:29] Speaker 02:
But you're suggesting that since the press release pertained to the parent, that that's enough because, and I think you're asking us to assume that the supply chains are coextensive.

[00:17:40] Speaker 04:
The press release actually did not make a distinction between the press release actually implicated the entire supply chain.

[00:17:46] Speaker 04:
It did not say, in fact,

[00:17:48] Speaker 00:
In in fact in paragraph 6 doesn't mention smart No, it doesn't Sunrise so that's why I keep asking you whose supply chain are we talking about here because I don't know how the goods got from Sunrise's other manufacturing locations to the gap or any other US entity and You're assuming for purposes and the problem is we're doing this on a motion to dismiss.

[00:18:12] Speaker 00:
It's not even summary judgment yet

[00:18:15] Speaker 00:
We're assuming that the smart apparel goods somehow got commingled in the supply chain from the four factories where they were manufactured and that that's just somehow tainted Smart apparel goods and that's the problem I'm having Right and that's why where we if we fall back on the contract language the contract language itself is very intentionally written broadly that if Nordstrom has any reason to believe that

[00:18:42] Speaker 02:
Smart apparel has imply you you you can see that it has to believe in good faith.

[00:18:47] Speaker 04:
Oh absolutely absolutely I wouldn't have known that from your Briefing we would argue that the good faith is on a face of the press release itself But the contract language written broadly that Nordstrom has a reason to believe That they're having direct or indirect dealings or any sanctioned person has an interest in

[00:19:05] Speaker 04:
in smart apparel and of course smart apparel wholly owned by Sunshine Group that that itself is enough for Nordstrom to have a reason to believe under four parts of the contract to terminate the provisions.

[00:19:17] Speaker 04:
And there's a strong policy reason for that too.

[00:19:20] Speaker 04:
You don't want retailers to then be able or be forced to play a shell game where your parent company is implicated in North Korean labor and the policy of CAATS is supposed to be broadly written

[00:19:30] Speaker 04:
We want to eliminate these goods from the U.S.

[00:19:33] Speaker 04:
economy.

[00:19:33] Speaker 02:
What's your best argument in response to if there's an allegation that there was an interest between the two, that that gave Nordstrom the right to cancel the order?

[00:19:43] Speaker 04:
The contract language itself says that if any sanctioned entity has an interest in smart... I'm asking you to respond to the argument that is in his briefing.

[00:19:53] Speaker 04:
Which argument?

[00:19:55] Speaker 02:
that even if this is the case, even if a sanctioned person had an interest in Smart Apparel that didn't give Smart Apparel the right, didn't give Nordstrom the right to cancel the purchase order.

[00:20:04] Speaker 04:
Oh, and that's, their arguments say that we have to tie it to specific purchase orders, and that goes back to the policy or, well, two arguments.

[00:20:12] Speaker 04:
One is the policy argument, one is the contract argument.

[00:20:14] Speaker 04:
We don't want to have forced retailers like Nordstrom or Nike or The Gap to say, well, this particular order may have been clean, but you're still selling

[00:20:22] Speaker 04:
child labor products to the Gap or American Eagle.

[00:20:24] Speaker 04:
We're not going to countenance that.

[00:20:26] Speaker 04:
We're not going to say, and tell the public because of our brand, our products are clean.

[00:20:30] Speaker 04:
Trust us.

[00:20:31] Speaker 04:
They're only sending North Korean products.

[00:20:33] Speaker 02:
Your language.

[00:20:34] Speaker 02:
It's your language.

[00:20:34] Speaker 02:
And your language talks about the sanctioned person.

[00:20:37] Speaker 02:
And this is the second warranty.

[00:20:38] Speaker 02:
But it requires it in connection with this order.

[00:20:43] Speaker 02:
Nordstrom authored this agreement.

[00:20:47] Speaker 02:
Because now you're trying to walk away from this provision.

[00:20:49] Speaker 04:
If they have, by virtue of- We're not going to countenance that.

[00:20:53] Speaker 02:
This is the provision that you wrote.

[00:20:56] Speaker 04:
Right.

[00:20:56] Speaker 04:
And what we're saying is it's, of course, in connection with this order.

[00:20:59] Speaker 04:
If the parent company has an interest in the child and the parent company is being sanctioned, and in this case, we think just by its plain terms, it's a sanctioned party, then that parent company has an interest in connection with all the orders.

[00:21:13] Speaker 02:
It's a sanctioned party because the irreparable presumption had arisen?

[00:21:17] Speaker 04:
At the moment of the press release,

[00:21:19] Speaker 04:
The CPB was announcing that under CAATSA, their goods were being held at all ports of entry.

[00:21:25] Speaker 02:
But the goods weren't held.

[00:21:29] Speaker 02:
Under CAATSA, what it says is that we've announced that we're going to hold them, unless you rebut this presumption within 30 days.

[00:21:37] Speaker 02:
Yes, and we don't... Again, that's a provision Nordstrom drafted.

[00:21:40] Speaker 04:
That's true.

[00:21:40] Speaker 04:
And in that moment, we could have a reason to believe that they're a sanctioned person

[00:21:44] Speaker 02:
And a sanctioned person has an interest in- At that moment, you have a reason to believe that they're not going to be able to rebut the presumption within 30 days.

[00:21:50] Speaker 04:
Well, they're going to need clear and convincing evidence.

[00:21:53] Speaker 04:
And clear and convincing evidence is higher than a reason to believe.

[00:21:55] Speaker 02:
And good faith, you have got to act in good faith.

[00:21:57] Speaker 02:
Correct.

[00:21:58] Speaker 02:
This is a provision that you drafted.

[00:21:59] Speaker 02:
It pertains to the parent.

[00:22:01] Speaker 02:
And what you're saying is two and a half weeks in, Nordstrom had a good faith belief that the parent wasn't going to be able to rebut the presumption within 30 days.

[00:22:07] Speaker 02:
If I'm following you correctly, you are.

[00:22:09] Speaker 04:
Yes.

[00:22:11] Speaker 04:
The contract doesn't give a notice in cure period and say we must do further investigations.

[00:22:16] Speaker 04:
I think I heard counsel concede we don't have to investigate ourselves or look at subsequent audits.

[00:22:22] Speaker 02:
But then circle back to Judge Clifton's point, which is what you're saying is that this was enough.

[00:22:26] Speaker 02:
Never mind the course of dealings, never mind the history, never mind this is enough and we can do this in good faith.

[00:22:30] Speaker 04:
We can.

[00:22:32] Speaker 02:
What's your best argument authority for that?

[00:22:35] Speaker 04:
OK, so one case might address both the contract and discretion.

[00:22:40] Speaker 04:
was the Amazon case.

[00:22:41] Speaker 04:
This is Haywood v. Amazon.

[00:22:43] Speaker 04:
This is 2023, also arising out of the Western District of Washington.

[00:22:46] Speaker 04:
And in that case, Amazon removed a plaintiff's book reviews and then banned him from posting for violating his terms of use.

[00:22:53] Speaker 04:
His terms of use gave Amazon that discretion.

[00:22:55] Speaker 04:
And in dismissing it under 12b6, not a summary judgment, the court held that the conduct was expressly authorized.

[00:23:02] Speaker 04:
And it got all quoted.

[00:23:03] Speaker 02:
Was there rebuttable presumption involved in that case?

[00:23:06] Speaker 04:
No.

[00:23:06] Speaker 04:
Amazon just had the discretion under the terms of the

[00:23:09] Speaker 02:
Right, so Nordstrom has discretion under the terms of this purchase order, to be sure, but has to act in good faith.

[00:23:14] Speaker 02:
Yes.

[00:23:15] Speaker 02:
And this rebuttable presumption is a big problem for you.

[00:23:19] Speaker 02:
Yes.

[00:23:20] Speaker 02:
Pursuant to a question that all three of us have asked, so why does this Amazon case help you if there's a rebuttable presumption?

[00:23:25] Speaker 04:
So the reason being that nothing in the contract forces us to wait until they do or do not rebut that presumption.

[00:23:33] Speaker 04:
Once we have the moment we have a reason to believe, we can act on that belief.

[00:23:37] Speaker 04:
Now, they might disagree.

[00:23:38] Speaker 02:
They haven't been sanctioned yet.

[00:23:39] Speaker 02:
Even the parent hadn't been sanctioned is the point we're all trying to make.

[00:23:42] Speaker 04:
Right.

[00:23:42] Speaker 04:
The parents, they had been, the CBP had announced that it was going to withhold or hold its products.

[00:23:48] Speaker 04:
What are those products?

[00:23:49] Speaker 02:
If something else happened, there was a condition that had to happen.

[00:23:52] Speaker 00:
Seizure, impoundment, that's what has to happen.

[00:23:55] Speaker 00:
That's the problem I'm having.

[00:23:57] Speaker 04:
Well, just because the goods may not have actually arrived to be withheld within those 30 days doesn't mean they would not have been withheld.

[00:24:04] Speaker 01:
What about the goods that already came in?

[00:24:06] Speaker 01:
Did Nordstrom's continue to sell those?

[00:24:08] Speaker 04:
The ones that were already on the shelves, Nordstrom did not return the smart apparel.

[00:24:13] Speaker 04:
The contract didn't allow us to return them or force us to seek a refund.

[00:24:17] Speaker 04:
And there's all sorts of good policy reasons why we wouldn't want to force retailers.

[00:24:21] Speaker 01:
And there's sort of an elephant in the room, too, because they've alleged

[00:24:25] Speaker 01:
as part of the bad faith claim that Nordstrom's had an ulterior motive.

[00:24:29] Speaker 01:
It had an oversupply of dress shirts and were conscious of people dressing differently thanks to the pandemic.

[00:24:39] Speaker 01:
Why doesn't that factor into whether Nordstrom behaved in good faith?

[00:24:44] Speaker 01:
I mean, I have to say, and granted we're motion to dismiss, we take the allegations of the complaint.

[00:24:51] Speaker 01:
But I've read lots of briefs

[00:24:54] Speaker 01:
And when there's an allegation like that, even if it's not in the complaint, the defendant always makes a point of saying in their briefs, it's not true.

[00:25:01] Speaker 01:
And I didn't see any mention of the subject whatsoever in your brief.

[00:25:05] Speaker 01:
Was it true?

[00:25:07] Speaker 04:
We don't know what happened to those shirts that were on the record.

[00:25:10] Speaker 04:
The complaint alleges we continue to sell them, which is somewhat contradicts that the shirts weren't selling.

[00:25:15] Speaker 04:
But taking that as true, the contract never required us to terminate and also pull everything off.

[00:25:22] Speaker 04:
You're missing the point.

[00:25:24] Speaker 01:
You're missing the point.

[00:25:25] Speaker 01:
The point is that they allege that Nordstrom had an ulterior motive to exercise this right, so they grabbed on a pretext.

[00:25:33] Speaker 01:
And I never heard anything from you today.

[00:25:35] Speaker 01:
I never saw anything in the brief that suggested that's not true.

[00:25:39] Speaker 04:
So we do argue in the brief that a party

[00:25:42] Speaker 04:
exercising its rights under a contract can have multiple motives.

[00:25:45] Speaker 01:
That's not a really good argument if in fact the elephant is still in the room.

[00:25:50] Speaker 01:
Because it suggests that Nordstrom's didn't pay attention to its economic concerns and acted on those economic concerns to cancel the contract because it could, not because there was real justification for it.

[00:26:08] Speaker 01:
Am I left with that impression?

[00:26:11] Speaker 04:
No, and if I may respond

[00:26:12] Speaker 04:
I think it's easy to criticize retailers or buyers in this position for, you know, if you were to terminate an agreement in this sense and cancel an order to then punish them or see differently because they don't then pull all the shelves off, all the shirts off.

[00:26:28] Speaker 02:
I really think you're missing this question.

[00:26:29] Speaker 04:
But that the shirts weren't selling is the point.

[00:26:32] Speaker 04:
And the shirts could have been selling hot.

[00:26:34] Speaker 04:
They could have been selling cold.

[00:26:36] Speaker 00:
But the question is, you had a warehouse full of shirts.

[00:26:39] Speaker 00:
Right.

[00:26:40] Speaker 00:
They weren't on the shelf.

[00:26:41] Speaker 00:
Then you got $6 million more coming in that you don't want because they're not going to move.

[00:26:46] Speaker 00:
That's what the complaint alleges.

[00:26:49] Speaker 04:
I think that goes to the good faith and fair dealing claim, absolutely.

[00:26:51] Speaker 04:
Not necessarily just a pure contract claim.

[00:26:54] Speaker 04:
But absolutely, if Nordstrom could have ulterior motives or multiple motives,

[00:27:00] Speaker 04:
In any complex organization, there might be several people saying it's going to be easier or harder for us to pull the trigger on here.

[00:27:06] Speaker 04:
We don't have enough shirts.

[00:27:08] Speaker 04:
We need their shirts, let's say, the inverse hypothetical.

[00:27:11] Speaker 04:
We need these shirts.

[00:27:13] Speaker 04:
We don't have enough shirts.

[00:27:15] Speaker 04:
But Nordstrom can still stand on its rights.

[00:27:16] Speaker 04:
And it's not any more or less persuasive if the shirts were flying off.

[00:27:20] Speaker 01:
It's much less persuasive.

[00:27:21] Speaker 01:
In fact, Nordstrom was acting affirmatively for its economic interests to look for a pretext to cancel a contract

[00:27:28] Speaker 01:
for shirts it didn't want to buy.

[00:27:30] Speaker 01:
And you're trying to tell me, well, the opposite could happen.

[00:27:33] Speaker 01:
Nordstrom's could decide to cancel a contract even if it was unfavorable to Nordstrom's.

[00:27:38] Speaker 01:
That doesn't help your case here.

[00:27:40] Speaker 01:
Because the allegation, which we have to take at face value, is that Nordstrom's acted not because of its concern about the potential involvement of North Korean labor.

[00:27:50] Speaker 01:
It acted because it had too many shirts and was desperate for a reason to cancel this order.

[00:27:55] Speaker 01:
And with that allegation, it's hard for me to see how

[00:28:00] Speaker 01:
The action by Nordstrom couldn't be characterized as being at least a breach of good faith and fair dealing.

[00:28:06] Speaker 01:
And frankly, I think probably a breach of contract too, if that allegation stands and there's been no denial, not just that we're on a complaint, motion to dismiss, got that, but there's been no denial of the fact is actually true.

[00:28:20] Speaker 04:
Well, we can't deny a fact.

[00:28:22] Speaker 01:
Sure you can.

[00:28:23] Speaker 01:
We get briefs all the time that tell us, by the way, this isn't true.

[00:28:27] Speaker 01:
And I didn't see anything like that here.

[00:28:29] Speaker 01:
And I didn't see an argument that dealt with that.

[00:28:31] Speaker 04:
We did, in passing, say that wasn't true in the brief.

[00:28:34] Speaker 04:
And to be clear, just to take a step back, as a practical matter, it is actually exceedingly difficult for a retailer to replace a vendor like Smart.

[00:28:45] Speaker 04:
It is a difficult decision to pull the trigger on a cancellation of an order of this size.

[00:28:49] Speaker 04:
As a practical matter, there are supply chains you rely on

[00:28:53] Speaker 04:
And to replace a supplier like Smart is not an easy decision.

[00:28:56] Speaker 01:
If you've got warehouses full of dress shirts that aren't selling very well, maybe it's not such a hard decision after all.

[00:29:03] Speaker 01:
But that's the allegation we have.

[00:29:05] Speaker 04:
No, and that's fair.

[00:29:06] Speaker 04:
And so ultimately, to circle back to what's our best case, the Amazon case also stands for the good faith and fair dealing.

[00:29:14] Speaker 04:
And I do believe that if you agree that Nordstrom was standing on its rights, if the press release was enough,

[00:29:20] Speaker 02:
And we are over time.

[00:29:21] Speaker 02:
So I think your position, and I think you articulated this a couple of times in your briefing, is that if we conclude that Nordstrom had the right to do this, it could not have violated the covenant of good faith and fair dealing.

[00:29:33] Speaker 04:
Correct.

[00:29:34] Speaker 02:
We got it.

[00:29:35] Speaker 02:
Thank you very much for your argument.

[00:29:43] Speaker 03:
Thank you, Your Honors.

[00:29:44] Speaker 03:
Just a few very quick points.

[00:29:47] Speaker 03:
Judge Christen, you noted that much of Mr. Perez's argument hinges on this premise that the supply chains are coextensive.

[00:29:56] Speaker 03:
Simply put, Nordstrom is not entitled to that inference at this stage.

[00:30:01] Speaker 03:
The inferences need to be drawn in smart apparel's favor.

[00:30:06] Speaker 03:
Judge Clifton, you noted the reason to believe standard.

[00:30:09] Speaker 03:
Nordstrom's reading of reason to believe

[00:30:12] Speaker 03:
reads it to say something very subtly but very importantly different.

[00:30:16] Speaker 03:
They read it to mean a reason to believe, ignoring all other facts that they know.

[00:30:23] Speaker 03:
That is incorrect for reasons we explained.

[00:30:26] Speaker 03:
Nordstrom itself invoked official standards of knowledge or likelihoods that are much like this that require a sort of cautious, prudent person to take into account all relevant facts.

[00:30:40] Speaker 03:
Judge Christin, you asked about our argument that the sanctioned person provisions wouldn't permit termination because they aren't shipment or merchandise related.

[00:30:50] Speaker 03:
We pointed to Washington law explaining that warranties, the default rule, is typically their promises or covenants.

[00:30:58] Speaker 03:
They're not conditions that would permit non-performance.

[00:31:01] Speaker 03:
Now, you can modify that, and the parties did, in paragraph four.

[00:31:06] Speaker 03:
But if you walk through paragraph four and the grounds for which Nordstrom cannot pay for orders it has made, every one of them starts with merchandise, merchandise, shipment, shipment, merchandise, which limits this modification of the default rule meaningfully.

[00:31:22] Speaker 03:
I didn't get a chance to say much about the good faith and fair dealing claim, and I won't say much about it here.

[00:31:27] Speaker 03:
The relevant allegations are at ER 44 paragraph 78.

[00:31:33] Speaker 03:
We allege not only starting in complaint paragraph one that Nordstrom did act in bad faith and on a pretext.

[00:31:40] Speaker 03:
For good measure, we added the economic motivation for that.

[00:31:43] Speaker 03:
We provided the facts and circumstances.

[00:31:46] Speaker 03:
We noted that that smart apparel flew to Seattle.

[00:31:49] Speaker 03:
In the days after to demonstrate that the supply chain was clean, we noted an audit three or four months after demonstrating that CBP was simply incorrect.

[00:31:58] Speaker 03:
That is more than enough to give rise to an inference of bad faith pretext.

[00:32:04] Speaker 00:
Were your clients able, I realize this is not in the complaint, but in that presentation to show that the goods came by a separate supply chain and were not commingled with other sunrise goods?

[00:32:19] Speaker 03:
So it's not in the complaint.

[00:32:21] Speaker 03:
I mean, the complaint does flatly allege that we demonstrated to Nordstrom that the supply chain was clean.

[00:32:29] Speaker 03:
Look, this is a point of pride and an existential aspect of smart apparel's business to be able to demonstrate over and over and over and over again throughout the years that there's no forced labor in the supply chain and trace it, right?

[00:32:42] Speaker 03:
Document it rigorously.

[00:32:44] Speaker 03:
So no, it isn't in the complaint exactly what happened.

[00:32:47] Speaker 03:
That can come out on discovery, and we can demonstrate it, but it isn't in the complaint.

[00:32:49] Speaker 02:
That's also a point of pride for Nordstrom, too.

[00:32:51] Speaker 02:
And that's part of what he's telling us.

[00:32:53] Speaker 02:
They didn't want to countenance any such practice.

[00:32:59] Speaker 02:
And I think that's to be commended, for sure.

[00:33:03] Speaker 02:
So what is it that Nordstrom should have done?

[00:33:06] Speaker 02:
So Nordstrom- The press police would certainly have gotten their attention.

[00:33:08] Speaker 03:
So the good faith and fair dealing standard, and we cited numerous cases that go just to this, but Microsoft versus Motorola is an example, Scribner is an example, describe this obligation as cooperating in good faith to ensure that both... Tell me what they should have done.

[00:33:26] Speaker 02:
What does that mean?

[00:33:26] Speaker 02:
They get this red flag, they really want to abide by this law, they don't want forced labor.

[00:33:30] Speaker 02:
So what were they supposed to do?

[00:33:32] Speaker 03:
So I want to make clear that we are

[00:33:33] Speaker 03:
We are now operating in a world where we're inferring that they actually are in good faith, and they aren't just trying to- Yes, I am.

[00:33:39] Speaker 02:
I'm asking you to do that, and you have one minute and 20 seconds.

[00:33:42] Speaker 03:
Yes, understood.

[00:33:42] Speaker 03:
So in that world, where they actually genuinely do believe it, I still think good faith requires taking a phone call, listening to evidence- Phone calls.

[00:33:52] Speaker 02:
Your complaint says as much.

[00:33:55] Speaker 02:
They took your phone calls.

[00:33:55] Speaker 03:
Oh, that when we demonstrate, as we did and must be taken as true, that the supply chain is clean, that no warranties were breached, that they pay for the orders that they made.

[00:34:06] Speaker 03:
When Nordstrom makes an order, they ask Smart Apparel to spin up their factories and make 350,000 shirts, and then they say, OK, we saw this press release.

[00:34:16] Speaker 03:
We have reason to believe.

[00:34:17] Speaker 03:
We don't have sort of an understanding that you've breached this warranty, and we're not saying that.

[00:34:23] Speaker 03:
We just have reason to believe.

[00:34:24] Speaker 03:
Give us your explanation.

[00:34:25] Speaker 03:
And we demonstrate that all of these shirts, 350,000 of them worth $6.7 million, were made as they have been for years on end.

[00:34:35] Speaker 02:
Do the protocols that were incorporated into the purchase order call for that kind of cooperative communication?

[00:34:42] Speaker 03:
The duty of good faith and fair dealing calls for that kind of cooperation.

[00:34:44] Speaker 02:
I know about the duty of good faith and fair dealing, counsel.

[00:34:46] Speaker 02:
I'm asking a different question.

[00:34:47] Speaker 02:
No.

[00:34:47] Speaker 03:
So there aren't any specific terms that say here is what Nordstrom has to do.

[00:34:51] Speaker 03:
It has to call up.

[00:34:52] Speaker 02:
The incorporated protocols require that?

[00:34:55] Speaker 02:
In any in the vendor purchasing guide or anything yeah, so I'm not sure I'm not sure I'm not either it wasn't a trick question I just wondered if you know I want to thank you for your advocacy Both of you and we'll take that case under advisement and we'll stand in recess for the week.

[00:35:09] Speaker 03:
Thank you