An Israeli company ("defendant") imported notebooks and looseleaf binders ("merchandise"), bearing Disney characters, from an Italian distributor who purchased such merchandise from the exclusive European licensee of Disney Enterprises, Inc. In August, 1998, Disney Enterprises, Inc. petitioned the district court for an interlocutory injunction and a temporary receivership order. In its petition, Disney alleged that the defendant's merchandise was counterfeit and that, by importing merchandise bearing Disney characters, the defendant had also infringed rights owned by Disney in such characters. The District Court granted Disney's petition and issued an interlocutory injunction and temporary receivership order against the defendant.

The defendant subsequently petitioned the court for cancellation of the court orders on the ground that it had lawfully purchased the merchandise bearing Disney characters from a distributor of Disney's exclusive licensee in Europe. In support of its petition, the defendant submitted evidence consisting of actual merchandise bearing specific identification codes showing that the merchandise had in fact been manufactured by Disney's exclusive European licensee. Sales receipts evidencing the purchase of the merchandise by the defendant from the Italian distributor were also produced. In addition, in an affidavit submitted to the court, the manager of the Italian distributor acknowledged that the products sold by his company to the defendant were originally purchased from Disney's exclusive licensee.

During the cancellation hearing, it was established that the license, which had been granted to Disney's European licensee, limited the marketing rights of the licensee to Europe. Accordingly, Disney argued that, since the merchandise had been marketed outside Europe in possible violation of the license, the products marketed by the defendant were counterfeit.

The court granted the defendant's petition for cancellation and rescinded the orders it had originally issued in favor of Disney. According to the court, the relevant issue under consideration was whether the possible violation by Disney's exclusive European licensee of a provision in the license to exclusively market Disney goods in Europe transformed the merchandise purchased by the defendant outside of Europe into counterfeit goods.

The court determined that the possible breach by Disney's exclusive European licensee of its license with Disney was insufficient to transform the merchandise purchased by the defendant into counterfeit goods. The court reasoned that, since the merchandise was manufactured by an authorized manufacturer of Disney, the merchandise was authentic and not counterfeit as originally alleged by Disney.

In addition, the court determined that the defendant was essentially importing authentic Disney merchandise and, as such, Disney did not have the right to prevent parallel imports, particularly in view of the fact that the defendant had purchased authentic merchandise through a distributor of Disney's exclusive licensee in Europe.