Imagine discovering jackets from your latest collection on a discount website. The problem? Your fashion brand rejected those jackets weeks earlier because they failed inspection. You instructed the factory not to distribute them, but the merchandise is now being sold to customers under your brand’s name.
Can a fashion brand sue a factory for selling rejected or defective merchandise? Yes, potentially. Unauthorized factory sales may support legal claims involving breach of contract, trademark infringement, or other protected business rights. The outcome depends on the manufacturing agreement, ownership of the goods, the reason for rejection, and the circumstances of the sale.
A factory selling rejected merchandise can create serious commercial concerns. Customers may receive clothing that never passed the brand’s quality standards. Retailers may unknowingly purchase unauthorized inventory. The brand may also face questions about products it never approved for distribution.
For Los Angeles designers and apparel companies, these situations can involve both commercial and intellectual-property rights. Through our Fashion Law practice, we work with businesses confronting manufacturing disputes, unauthorized distribution, and related legal concerns.
Can a Factory Legally Sell Rejected Merchandise?
Not every sale of rejected merchandise is unlawful.
The first question is why the brand rejected the goods and what the factory agreed to do with them.
Consider two situations.
In the first, a fashion company rejects 1,000 shirts because they arrive too late for a seasonal launch. The shirts otherwise meet the company’s specifications.
In the second, a manufacturer produces 1,000 shirts with incorrect fabric, defective stitching, and sizing errors. The brand rejects the shipment under its inspection procedures, but the manufacturer sells the garments with the original labels attached.
Both situations involve rejected clothing, but the legal issues can differ substantially.
The first may involve contractual restrictions and the resale of otherwise genuine merchandise. The second may raise additional questions about trademark rights and quality control.
Before pursuing a claim, a fashion business should establish:
- The reason the merchandise was rejected.
- Who owned the goods at the relevant time.
- The factory’s contractual restrictions on resale.
- The brand’s approval and inspection requirements.
- The use of trademarks, labels, or protected designs.
- Evidence of unauthorized production or distribution.
These details influence the available legal claims and remedies.
Who Owns Rejected Merchandise Under California Law?
Fashion brands sometimes assume they own all garments manufactured under their names.
California law does not always support that assumption.
Under California Commercial Code Section 2401, ownership of goods generally depends on the parties’ express agreement and applicable statutory provisions.
Section 2401(4) provides that a buyer’s rejection or refusal to receive or retain goods revests title in the seller, even when the rejection is not justified. A justified revocation of acceptance also revests title in the seller.
However, rejection, acceptance, and revocation of acceptance are legally distinct.
For example, a brand might reject defective garments during an initial inspection. In another situation, it might accept a shipment and discover defects several weeks later. The available rights and requirements may differ.
California Commercial Code Section 2601 addresses a buyer’s right to reject nonconforming goods, subject to applicable statutory rules. Separate provisions govern acceptance and revocation of acceptance.
The contract, timing of inspection, delivery arrangements, and nature of the manufacturing relationship must be considered before determining ownership or available remedies.
Some manufacturing arrangements may also involve legal issues beyond a conventional sale of finished goods.
What If the Brand Already Paid for the Merchandise?
Payment does not always settle the ownership question.
Suppose a Los Angeles clothing company pays a factory in advance for a production order. The company later rejects the finished garments because they do not meet agreed specifications.
The fact that the brand paid for the merchandise is relevant, but the legal analysis may also involve the parties’ agreement, identification of the goods, delivery provisions, acceptance or rejection, and available remedies.
A different result may arise when the brand owns the fabric or other components, or when the parties have made a manufacturing arrangement that is not simply a conventional sale of finished goods.
The agreement and surrounding facts must be evaluated together.
Importantly, even if the factory owns the physical garments, that does not automatically give it unrestricted permission to sell those garments using the fashion brand’s trademarks or other protected intellectual property.
Ownership of physical merchandise and authorization to distribute branded products are separate legal issues.
When Unauthorized Factory Sales Breach a Manufacturing Agreement
A manufacturing agreement often provides the clearest starting point for a legal claim against a factory.
For example, a contract may prohibit the factory from:
- Selling rejected or defective garments.
- Distributing products bearing the brand’s labels without approval.
- Manufacturing quantities beyond authorized purchase orders.
- Selling overruns, samples, or canceled inventory to third parties.
- Transferring branded goods to unauthorized distributors.
- Using proprietary artwork or designs outside the agreed production relationship.
The agreement may also require the return, relabeling, or destruction of certain merchandise.
If a manufacturer violates an enforceable contractual obligation, the fashion brand may have a breach-of-contract claim.
To recover damages, the brand must establish the legal requirements for the claim, including recoverable harm where required. Contractual limitations, available remedies, and governing law can affect the outcome.
Example: A Factory Sells Unauthorized Inventory
A clothing company orders 3,000 dresses. The contract prohibits the manufacturer from producing additional units without written approval.
After completing the order, the factory manufactures another 800 dresses bearing the same brand labels and sells them to a discount distributor.
The brand discovers the additional merchandise when customers begin asking about heavily discounted products.
If the factory’s conduct violates the contract, the brand may pursue applicable contractual remedies. Separate trademark claims may also require examination, but the unauthorized production alone does not automatically establish trademark infringement.
Our Business and Corporate Litigation practice represents businesses in disputes involving contracts and commercial relationships.
Can Selling Rejected Branded Merchandise Be Trademark Infringement?
Trademark infringement is another possible claim, but the law draws important distinctions between genuine merchandise and goods distributed outside a brand’s authorized quality-control process.
Under the federal Lanham Act, 15 U.S.C. Section 1114, certain unauthorized uses of a registered trademark can give rise to infringement liability when the relevant legal requirements, including likelihood of confusion, are satisfied.
However, the mere fact that a fashion brand did not approve a resale does not automatically make that resale infringing.
Genuine Merchandise and the First-Sale Doctrine
The first-sale doctrine generally limits a trademark owner’s ability to prevent the resale of genuine trademarked products.
For example, a customer who purchases an authentic designer jacket ordinarily does not need the brand’s permission to resell it.
Similar principles can apply when genuine goods reach secondary retailers through channels the trademark owner did not authorize.
That distinction was central to a significant Ninth Circuit fashion-industry case.
The Monte Carlo Shirt Case: Unauthorized Sales Are Not Always Trademark Infringement
In Monte Carlo Shirt, Inc. v. Daewoo International (America) Corp., 707 F.2d 1054 (9th Cir. 1983), a clothing company ordered men’s dress shirts bearing its labels from a manufacturer.
The company rejected the shipment after delays in shipping documents interfered with its planned holiday sales.
The manufacturer’s American affiliate subsequently purchased the shirts and sold them to discount retailers without the clothing company’s permission.
The shirts retained their original labels and packaging.
The Ninth Circuit concluded that the unauthorized sale of these genuine shirts did not establish the asserted trademark infringement claim.
The dispute also involved contractual issues, illustrating that commercial obligations and trademark rights must be analyzed separately.
A manufacturer may breach a commercial obligation without automatically committing trademark infringement.
The reason the merchandise was rejected matters. In Monte Carlo, the rejection concerned shipping delays rather than a finding that the shirts failed the brand’s quality specifications.
What If the Rejected Merchandise Never Passed Quality Inspection?
A different issue arises when garments enter the market without completing a fashion brand’s legitimate quality-control process.
Clothing companies may reject finished merchandise because of defective seams, inaccurate sizing, inferior fabric, unsafe components, or other production problems.
These issues may not be obvious to customers at the time of purchase.
In appropriate circumstances, the unauthorized sale of merchandise that has not satisfied established quality-control requirements can support a trademark claim.
However, an internal decision not to approve merchandise does not automatically establish trademark infringement. Courts examine the applicable legal standards, the genuineness of the goods, relevant quality-control procedures, and the possibility of consumer confusion.
The El Greco Case: Why Inspection Approval Matters
In El Greco Leather Products Co. v. Shoe World, Inc., 806 F.2d 392 (2d Cir. 1986), a manufacturer produced shoes bearing the CANDIE’S trademark.
The manufacturing arrangement required inspection approval before the shoes could be released.
Certain shoes never received the required inspection certificates, but they subsequently entered the marketplace.
The Second Circuit concluded that the shoes were not genuine for purposes of the trademark claim because the trademark owner’s required quality-control procedure had not been satisfied.
Importantly, the court’s conclusion did not depend on proof that the shoes were physically defective. The absence of the required inspection approval was central to its reasoning.
The decision illustrates why a brand’s contractual inspection rights and actual quality-control practices may affect the legal analysis.
Although El Greco is a Second Circuit decision and does not bind federal courts in California, its reasoning is relevant when examining disputes involving unapproved branded merchandise.
What the Ninth Circuit Decided in Enesco v. Price/Costco
The Ninth Circuit examined the limits of trademark quality-control arguments in Enesco Corp. v. Price/Costco Inc., 146 F.3d 1083 (9th Cir. 1998).
The case involved genuine collectible figurines that a retailer removed from their original packaging and repackaged for sale.
The trademark owners argued that the new packaging could damage the figurines and interfere with their quality-control rights.
The Ninth Circuit concluded that the quality-control exception to the first-sale doctrine did not apply on the facts presented. Adequate disclosure of the repackaging could address the relevant consumer-confusion concern.
However, the court allowed the case to proceed on a separate theory involving the retailer’s failure to disclose that it had repackaged the products.
The distinction matters for fashion brands.
A claim based solely on the loss of control over distribution is not necessarily sufficient. The particular defects, quality-control practices, consumer understanding, and allegedly misleading conduct can influence the outcome.
Taken together, these cases show why rejected merchandise should be assessed according to its actual condition and distribution history, rather than assuming that every unauthorized factory sale violates trademark law.
Are Factory Overruns Considered Counterfeit Merchandise?
Factory overruns are products manufactured beyond the quantity ordered or authorized.
For example, a brand may order 5,000 sweatshirts, but a manufacturer produces 5,500 units.
The factory may intend to use the additional merchandise as replacements for defective items. Problems arise when those extra garments are sold without the brand’s approval.
However, factory overruns are not automatically counterfeit goods.
Counterfeiting has specific legal requirements under federal trademark law.
For certain seizure remedies, 15 U.S.C. Section 1116(d)(1)(B) defines a counterfeit mark and excludes marks used on goods when the manufacturer or producer was authorized to use the mark for that type of merchandise at the time of manufacture or production.
The timing and scope of authorization therefore matter.
This statutory provision does not excuse breach of contract or resolve every possible trademark claim. It concerns the defined counterfeit-mark standard for the remedies addressed by that subsection.
For example, a manufacturer authorized to produce branded sweatshirts may present different legal questions from an unrelated factory producing unauthorized copies of the same garments.
In both situations, the facts surrounding production, permission to use the trademark, and subsequent distribution must be examined.
Fashion brands should avoid treating unauthorized factory production, unauthorized resale, trademark infringement, and counterfeiting as interchangeable legal concepts.
What If the Factory Removes the Brand Labels Before Selling?
Some manufacturers attempt to sell rejected inventory after removing neck labels, hangtags, or branded packaging.
Removing the trademark may affect the legal analysis, but it does not necessarily eliminate other obligations.
For example, a manufacturing agreement may expressly prohibit selling rejected goods, regardless of their labeling.
If that provision is enforceable, removing the label would not, by itself, eliminate the contractual restriction.
Other legal issues may also arise if the factory distributes protected artwork, confidential patterns, proprietary information, or other material covered by applicable intellectual-property rights.
Copyright protection may apply to qualifying original artwork or separable creative elements. It does not automatically extend to every aspect of a garment’s shape or construction.
Trade-secret protection generally requires information to have independent economic value from not being generally known or readily ascertainable through proper means, and to be subject to reasonable efforts to maintain secrecy. A trade-secret claim also requires legally recognized misappropriation.
A dispute involving unbranded garments may therefore present different claims from one involving merchandise sold with the original fashion label attached.
What If the Factory Sells Rejected Merchandise on Amazon or eBay?
Online marketplaces can make unauthorized factory sales more visible and, in some cases, more difficult to investigate.
A fashion brand may discover rejected clothing listed by a seller it has never worked with.
The seller may be a distributor, liquidator, reseller, or another party that acquired the goods through the manufacturer.
Before filing a marketplace complaint, the brand should document the merchandise and evaluate the legal basis for its concerns.
Useful steps may include:
- Saving the product listing, seller name, price, photographs, and product description.
- Recording the listing URL and date of discovery.
- Purchasing a sample through lawful means when appropriate.
- Comparing the merchandise with rejected inventory and quality-control records.
- Identifying batch numbers, labels, packaging details, or production markings.
- Reviewing the manufacturing agreement and correspondence concerning the rejected goods.
- Considering applicable marketplace reporting procedures or legal action.
A brand should not automatically submit a counterfeit complaint merely because a seller lacks distribution authorization.
The first-sale doctrine and other legal considerations may affect the available claims.
Where sufficient grounds exist, trademark complaints, direct negotiations, or court proceedings may offer possible ways to address unauthorized sales.
Can a Fashion Brand Demand the Return or Destruction of Rejected Goods?
A brand may have grounds to demand the return, removal from sale, or destruction of merchandise, but those remedies are not automatic.
The manufacturing agreement is often important.
For example, the contract may require the manufacturer to return rejected products or destroy specified units after receiving written instructions.
The agreement may also establish procedures for confirming disposal.
If the manufacturer refuses to comply, the brand may consider contractual remedies.
Other legal rights may support relief in appropriate circumstances.
However, a brand cannot simply assume that it can order a factory to destroy merchandise because the brand rejected it.
Ownership rights, contractual provisions, applicable law, and the circumstances of the dispute all matter.
Can a Fashion Brand Recover Damages or Stop Further Sales?
When unauthorized factory sales violate a legally recognized right, a fashion brand may seek applicable remedies.
Depending on the claim, these may include monetary damages, contractual relief, or an injunction.
Recovering Financial Losses
A breach-of-contract claim may allow recovery of losses established under the applicable legal rules.
The brand may need evidence showing how the manufacturer’s conduct caused the claimed financial harm.
The agreement’s provisions concerning damages, limitations of liability, and dispute resolution may also affect recovery.
Trademark remedies are governed by separate federal legal requirements and are not identical to contract damages.
Seeking an Injunction
An injunction is a court order requiring a party to stop specified conduct or comply with particular obligations.
In appropriate circumstances, a brand may seek preliminary relief to restrict ongoing unlawful distribution while litigation proceeds.
Federal trademark law provides an important rule concerning irreparable harm.
Under 15 U.S.C. Section 1116(a), a plaintiff seeking an injunction for a qualifying trademark violation is entitled to a rebuttable presumption of irreparable harm upon certain statutory findings.
For a preliminary injunction or temporary restraining order, the presumption applies upon a finding of likelihood of success on the merits for a covered violation.
For a permanent injunction, it applies upon a finding of a covered violation.
This presumption does not automatically entitle the plaintiff to an injunction. The court must still evaluate the other applicable requirements for the requested relief.
The existence of a disputed factory sale, by itself, does not establish that an injunction will be granted.
What If the Factory Is Located Overseas?
Many Los Angeles fashion brands manufacture merchandise outside California or the United States.
International manufacturing disputes can raise additional questions involving jurisdiction, governing law, arbitration agreements, service of legal documents, and enforcement of judgments or awards.
The correct approach depends on the agreement, parties, location of assets, and applicable law.
A dispute involving a foreign factory should be reviewed before assuming that a California court can exercise jurisdiction or that any resulting judgment can readily be enforced abroad.
What Evidence Should a Fashion Brand Preserve?
A brand that discovers rejected merchandise being sold without approval should preserve evidence as early as possible.
Relevant materials may include:
The manufacturing agreement: The signed contract, amendments, purchase orders, and provisions governing approved production, ownership, and disposal.
Inspection records: Quality-control reports, rejected-unit photographs, defect descriptions, and communications documenting the reason for rejection.
Production information: Authorized quantities, invoices, batch numbers, shipment records, and available information about excess production.
Sales evidence: Online listings, product photographs, purchase receipts, distributor communications, and other records identifying where the goods were offered for sale.
Correspondence: Emails and messages documenting the manufacturer’s knowledge of restrictions or instructions concerning rejected goods.
Physical products: Lawfully obtained samples that may help establish the source, condition, labeling, and identity of the merchandise.
This evidence may help attorneys evaluate contractual obligations, trademark issues, possible financial harm, and available relief.
How Can Fashion Brands Prevent Similar Factory Disputes?
Although this article focuses on disputes that have already occurred, clear manufacturing agreements can reduce uncertainty about what happens to rejected inventory.
Contracts may address ownership, inspection requirements, authorized production quantities, resale restrictions, and disposal procedures.
Brands can learn more about these provisions in our existing guide to fashion manufacturing contracts.
Once unauthorized sales have begun, however, reviewing the agreement is only one part of the response. The brand also needs to investigate the merchandise, preserve evidence, and assess the legal basis for any proposed action.
Frequently Asked Questions About Unauthorized Factory Sales
Can a factory sell rejected clothing if it owns the goods?
Possibly. Ownership of physical clothing does not necessarily eliminate contractual restrictions or applicable intellectual-property rights. The manufacturing agreement and circumstances of the sale must be reviewed.
Can a clothing brand sue a manufacturer for making extra products?
A brand may have a claim if unauthorized production breaches an enforceable agreement or infringes protected rights. Producing additional units does not automatically establish every potential legal claim.
Are factory overruns considered counterfeit?
Not automatically. The legal classification depends on the scope and timing of manufacturing authorization, use of the trademark, and other relevant facts. Unauthorized production and counterfeiting are not interchangeable concepts.
Can a fashion brand stop rejected merchandise from being sold online?
Potentially. Depending on the evidence and legal basis, a brand may pursue appropriate marketplace procedures, negotiation, or court relief. The availability of each remedy depends on the circumstances.
Legal Help for Fashion Brands Facing Unauthorized Factory Sales
Discovering rejected inventory in the marketplace can be particularly concerning when customers associate the defective merchandise with your brand.
A manufacturer may have violated contractual restrictions, distributed products without quality approval, or used intellectual property beyond the scope of its authorization.
At the same time, not every unauthorized sale creates the same legal rights.
Our Intellectual Property Litigation practice addresses disputes involving trademark rights and other protected business interests.
At SRP Lawyer, we work with businesses and creative professionals in Los Angeles and surrounding business districts on commercial disputes affecting their operations and intellectual property.
We review the available evidence, contractual obligations, and potential legal claims to identify practical options for addressing the dispute.
If your factory has sold rejected, defective, or unauthorized merchandise under your brand’s name, early legal review may help clarify the available steps before additional products enter the market.
Schedule a Confidential Consultation to discuss your manufacturing dispute with our firm.
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Not Legal Advice. The information here is for educational purposes and is not formal legal advice.
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