In the latest installment of the litigation between L-7 Designs and Old Navy, the Unites States District Court for the Southern District of New York (on remand from the 2ndCircuit Court of Appeals), held that no reasonable jury could conclude that Old Navy failed to negotiate in good faith with L-7, thus partially granting defendant Old Navy's motion for summary judgment.

Old Navy and L-7 agreed in 2007 to negotiate a licensing deal by October 1, 2008. After L-7 made its first offer in April 2008, the parties began a series of negotiations lasting for five months; however, Old Navy failed to make a counteroffer during that time. By September 2008, Old Navy was experiencing weak sales and informed L-7 that it would no longer enter into a licensing agreement. Despite litigation threats, the parties restarted talks at the end of 2008, and in January 2009, Old Navy made a deal proposal. L-7 initially responded with a counterproposal, which in turn prompted Old Navy to pull out of the talks entirely. L-7 tried to salvage the negotiations by informing Old Navy thatitwould accept the material terms of Old Navy's January offer, but Old Navy refused to move forward with the deal. Old Navy stated that this was because of the material open issues in the negotiations, but the real reasons appeared to be Old Navy's weak sales, new management, and a decision to focus on a new customer segment to which L-7's designs were not suited. L-7 argued that Old Navy continued to engage in negotiations even after it knew that it was not going to enter into a licensing agreement, and that it made a purposely unreasonable offer to L-7 with the hope thatL-7 would not accept.

The Court held that the evidence unequivocally showed that Old Navy did not act in bad faith. The Court noted that acting in financial self-interest is not bad faith, and that "bad faith requires some 'deliberate misconduct --arbitrary or capricious action taken out of spite or ill will or to back out of an otherwise binding contractual commitment." Applying that standard to the underlying facts, the Courtheld, inter alia, that even assuming Old Navy changed its mind about entering into a license agreement with L-7, it was clear that the decision was motivated by Old Navy's "legitimate business concerns." It further stated that "L-7 has presented no evidence to show thatOld Navy acted with malice or ill will or for any reason other than its own financial self-interest. Hence, a reasonable jury could only find that independently, and certainly viewed in the aggregate, these legitimate business reasons were what prompted Old Navy to proceed with caution and prudence when negotiating with L-7."

L-7 Designs, Inc. v. Old Navy, LLC, No. 09-1432 (DC), ---F.Supp.2d ----, 2013 WL 4569979 (S.D.N.Y. Aug. 29, 2013)