Fruit of the Loom affiliate Russell Brands accused Gildan of trademark infringement and unfair competition for selling about US$100,000 worth of its Jerzees brand clothing.
It claims Gildan labels were added to the clothes or Jerzees labels were "ripped out" and replaced with a Gildan label.
The lawsuit filed in Kentucky Western District Court doesn't seek specific damages. Russell Brands declined to comment. Fruit of the Loom is a subsidiary of Warren Buffett's Bershire Hathaway.
The legal skirmish comes a few weeks after Gildan replaced its competitor as the supplier of men's and boys' fleece to Dollar General stores in the United States.
Gildan was required to purchase about US$1 million worth of Jerzees inventory when it won the Dollar General contract and began to supply the retailer with its own Gildan Smart Basics label products.
Typically, it would resell the inventory with their original labels in the seconds market, where flawed or irregular products are sold at a discount.
Chief financial and administrative officer Laurence Sellyn said Gildan (TSX:GIL) is conducting an internal review to determine how the error was made at one of its distribution centres in the United States.
Calling the error "a small glitch," he said no one at Gildan's corporate office was aware of the label switch.
"It was certainly an unfortunate error," he said in an interview.
"We have no desire to compromise our own brand, which we are very proud of, by confusing it with a competitor' product."
Although the value of the mislabelled products was "not material," he said the company was treating the matter seriously to ensure it never happens again.
Gildan manufactures and sells T-shirts and fleece, but is trying to expand retail sales of its own Gildan branded socks, underwear and activewear.
It has about 30 per cent market share in socks, but is very small in underwear and activewear. Construction of its Rio Nance 5 manufacturing facility in Honduras has given Gildan the capacity to consistently supply new low-cost products to retail mass merchants.
Sellyn denied that Gildan is targeting any particular competitor but said the company hopes to attract more retailers to switch their private label suppliers.
"We feel we have a major opportunity to lever the same competitive strengths that have made us successful in the screenprint market to drive market share in retail," he said.
In addition to seeking to expand its Gildan brand, it is trying to harness the potential of its Golden Toe acquisition by adding new products. The deal made it the exclusive supplier of New Balance socks in the U.S. It is now adding performance T-shirts through its printwear distribution channel.
Analyst Derek Dley of Canaccord Genuity described Gildan's legal battle with Russell as "unfortunate" but said the apparel manufacturer appears to be making headway replacing entrenched brands.
"I don't know if they need to be worried but Gildan is definitely making retail a greater focus than it has been in the past by going after these branded products and that's something that Hanesbrands and Russell are going to have to deal with going forward," he said in an interview.
On the Toronto Stock Exchange, Gildan shares hit a new 52-week high in trading Tuesday morning, before closing up $1.08 or 3.3 per cent, to C$33.53.
Analyst Martin Landry of GMP Securities recently raised his target price for Gildan stock by US$4 to US$40. He said the company has benefited from sustained U.S. screenprint industry price increases and market share gains.
"In addition, the product introductions for 2013 appear to have been well-received and should provide Gildan with additional avenues for organic growth above industry growth rates," he wrote in a report.
Sellyn said Gildan's earning's recovery is due to lower cotton prices, strong market demand and its own efforts to reduce costs and grow sales volume by investing to add new production capacity.
"While this is a regrettable incident that we wouldn't want to reoccur, the positive side is that we are being successful in obtaining new branded program for retailers at the expense of competitors," he said.