Civil Case (Tel Aviv) 13315-08-20 LIFESTYLE EQUITIES C.V v. Don Gilley Ltd. - part 10

2nd to 6th year: $ 20,000

7th to 10th years: $ 25,000 per year"

101. In other words, the license agreement gave the licensee the option to renew the contract at a royalty rate of 10% FOB, with a minimum commitment of $20,000 for the second to sixth year, and $25,000 for the seventh year through the tenth year.
102. Clause 6.1 of the License Agreement obligates the Licensee to submit a quarterly report signed by the Licensee's CEO, stating, inter alia, the FOB rate for the relevant period:

"Without prejudice to the aforementioned general terms, by the date of Payment due for each quarter mentioned above, the licensee will provide A periodic report signed by licensee's CEO.  This report will detail The overall F.O.B.  of the products, as well as the specific Invoice numbers.

For each type of product purchased during the preceding period, as well as stores sold during said period".

103. Before examining the defendants' real-time reports that were transmitted to the plaintiffs, including with regard to the FOB rate, the defendants' defense argument with respect to their alleged reliance on Mr. Hasson, with regard to the plaintiffs' schedule, with regard to the fulfillment of their obligation under the license agreement to send quarterly reports throughout the life of the agreement, must be removed from the chapter.
104. The defendants claim in their summaries that they submitted the quarterly reports "in accordance with the instructions they received" from Mr. Hasson and at his request, as he was the sole representative and agent of the plaintiffs in Israel (paras. 38, 43, 58, 60 of the defendants' summaries).  The defendants' summaries do not explicitly refer to the identity of the entity that prepared or produced the reports, and emphasis was placed on the fact that these reports were forwarded by them "at Mr. Hasson's request".
105. This is the place to note that Mr. Jinli's affidavit regarding the submission of the quarterly reports was concealed in his cross-examination. Thus, he stated in his affidavit (at paragraphs 60-65) that "the bookkeeper forwarded the ongoing reports to Yoav [Mr. Hasson - M.A.A.] and Yoav transferred them as they were to the plaintiffs"; and that Mr. Hasson "never told me and did not give me any other indication from which it could be understood that there was some problem with the reports that we gave to the plaintiffs."
106. On the other hand, in his cross-examination, Mr. Jinli disavowed the extent of his responsibility for the content of the reports sent to the plaintiffs: "Yoav [Mr. Hasson - M.A.A.] He himself would come into my offices, at that time as early as 2011, 2012 he would be a clerk, issue all kinds of "invoices" of imports, fill out a report himself, write down sums [...] There were cases where I also signed, signed and I was fighting with him all the time, my quarrel was that he was bothering me with it, that he would come and ask to report the reports to him."
107. When asked by the court what the content of the reports meant, Mr. Jinli replied, "I did not give any interest myself to the reports, what was recorded in the reports, what amount was recorded there, and what was reported there. Because during this entire period I stood for 5 years only in front of Yoav [Mr. Hasson - M.A.A.]" (Transcript of the hearing from November 13, 2025, p.  325).
108. Hasson, who was brought to testify by the defendants, confirmed in his testimony that he forwarded all the quarterly reports to the plaintiffs as they are, "AS IS", on the same day he received them from the defendants (transcript of the hearing of November 12, 2025, p. 266, paras.  22-23).  He also testified that "I assume that the reports I receive from franchisees, from a variety of franchisees, are true.  I also have no way, it's not my job and I don't have a way, right? To investigate the reports" (transcript of the hearing of November 12, 2025, p.  296, paras.  1-2).
109. Thus, Mr. Ginley's version, according to which Mr. Hasson was the one who produced the reports and sent them to the plaintiffs, was raised for the first time during his cross-examination. This version, as stated, is inconsistent with his affidavit, and from the evidence presented to me and from the testimonies heard before me, including the testimony of Mr. Hasson, which was brought to testify by the defendants themselves, it appears that this version has no real basis.
110. It should be remembered that the contractual obligation to provide the plaintiffs with a quarterly report in accordance with the provisions of the license agreement, which contains a true report regarding the FOB rate during the relevant period, is a duty imposed on the Genely/Don Gilly Company.   It should be remembered that the quarterly reports were sent to the plaintiffs in real time on Don Gilley's letterhead and signed by it with its seal (Exhibit 22 of the plaintiffs' exhibits).
111. Therefore, even if there is truth in the defendants' claim that Mr. Hasson did not raise any claim as to the correctness of the reports that were forwarded to him by them, and even if there is any claim on the part of the plaintiffs towards Mr. Hasson and the fulfillment of his duties towards them with respect to the quarterly reports under the agency agreement, this does not mean a "permit" to Don Gilley not to report true reports to the plaintiffs under the license agreement. In a way that may reduce the amount of payment that it must pay by virtue of it.
112. Therefore, it is now necessary to examine the FOB rate as reported by the defendants in the years 2011-2018, as opposed to its true rate as examined and found in the expert opinions before the court.
113. Expert opinion of the plaintiffs, CPA Shai Medina (hereinafter: "the plaintiffs' expert"). The plaintiffs' expert concluded that the quarterly report provided by Don Geely regarding the scope of imports of the brand's products was false.  Thus, while the volume of imports reported by Don Gilly was ILS 4,353,624, the findings of the examination showed that the actual volume of imports was ILS 17,732,037.  The plaintiffs' expert calculated Don Geely's average gross profit rate from the brand's products in Israel, which he found to be 59.9%.  On the basis of the estimate of the gross profit rate, the plaintiffs' expert estimated the volume of sales of the brand's products that were imported without reporting, in the amount of ILS 33,382,452.

Therefore, the plaintiffs' expert reached the conclusion that as a result of the concealment of the information regarding the true scope of the import, Don Gilley succeeded in making profits on account of its payments to the plaintiffs, in the amount of ILS 19,994,039 (paragraphs 27, 32, 35, 40, 46, 47 of the plaintiffs' expert opinion).

114. Expert opinion of the defendants, CPA Yosef Cohen (hereinafter: "the defendants' expert"). The defendants' expert did not refer in his opinion to the scope of the actual import of the brand's products.  With respect to the relevant period, the defendants' expert reached the conclusion that the total income from the brand's products amounted to ILS 35,932,043.  Don Gilly's gross profit percentage was set by him at 19%.  According to the defendants' expert, according to internal calculations and calculations made by Don Geely, the percentage of profitability of all Don Geely products is identical.  The defendants' expert conclusion is that the company's cumulative gross profit from the sale of the brand's products is ILS 6,827,088, while there is a cumulative net loss from operations for the company in the amount of ILS 1,805,683.
115. Expert opinion on behalf of the court. The court's expert notes in his opinion that since the defendants did not provide him with documents regarding the cost of purchasing the brand's products, he was required to calculate and check the calculation in accordance with the plaintiffs' documents.  Therefore, it was found that the volume of imports for the years 2011-2018 is ILS 17,732,877.  The expert concluded that since in his opinion the defendants' records regarding the scope of sales are more complete, there is room to accept the defendants' position regarding the scope of sales, and this was determined by him at the sum of ILS 35,932,032.  The gross profit was determined by the court's expert in the sum of ILS 15,225,867 for the years 2011-2018.
116. The plaintiffs accept the expert's calculation (paragraph 32 of the plaintiffs' summaries). As stated, the defendants' expert did not refer in his opinion to the FOB rate.  Therefore, there is no alternative to accepting the position of the plaintiffs' expert (which was adopted by the court's expert), according to which the actual volume of imports (FOB) was ILS 17,732,877 for the years 2011-2018.  This means that Don Geely's real-time report that it has made a purchase volume (FOB) of the brand's products, in the amount of ILS 4,353,624, is an understatement, in a way that it did not report an import volume of ILS 13,379,253.
117. The defendants' main argument on this point is that the royalty mechanism according to the license agreement was modified by agreeing to a fixed annual payment of $20,000, which was paid to the plaintiffs over the years and without any protest on their part. The defendants claim that there is no basis for charging them 10% under the license agreement, since Mr. Hasson, when the plaintiffs' board, undertook a fixed payment of only $20,000.

According to the defendants, an "explicit and clear" agreement with Mr. Hasson changed the terms of the original agreement and established a fixed global payment mechanism ("fix price"), in exchange for the exercise of the option period in the agreement.  Thus, it was argued that this was not a case of unilateral conduct, but rather the result of legitimate business negotiations with the person who was presented as the plaintiffs' representative, Mr. Hasson, who, in his capacity as an agent, approved the outline, received the payments and transferred them to the plaintiffs without any protest (paragraphs 27, 28, 34 of the defendants' summaries).

118. Therefore, the question now arises as to whether it has been proven before me that there was a late agreement between the plaintiffs and the defendants to the license agreement, including through Mr. Hasson as the plaintiffs' agent, to change the payment mechanism set out in the license agreement and to switch to a permanent global payment mechanism.

The decision on this question is of considerable significance, because if there is indeed a basis for the defendants' claim that the payment mechanism in the license agreement was changed by a late agreement to a fixed and global payment, then in any case the plaintiffs were not entitled to royalty payments as a derivative of the FOB rate, but only to a fixed payment (subject to a minimum payment).