Metropolitan News-Enterprise


Thursday, February 12, 2009


Page 3


Court of Appeal Revives Claim for Sale of Stolen Jeans


By STEVEN M. ELLIS, Staff Writer


A high-end apparel manufacturer who sued Costco after discovering current season products on the low-price warehouse store’s shelves can try a claim for sale of stolen property, but cannot compel the retailer to disclose its sources, this district’s Court of Appeal ruled yesterday.

Reversing a trial court’s order sustaining the store’s demurrer, Div. Three concluded that Citizens of Humanity’s complaint alleging Costco knowingly sold stolen jeans set forth a cause of action, but held that the retailer’s suppliers’ identities were a protectable trade secret.

The manufacturer brought suit in 2006, contending, alternatively, that Costco was selling jeans stolen from Citizens’ customers, or that the retailer had conspired with some of those customers to obtain the merchandise by fraud.

Citizens contended that it only sold current season apparel to retailers it believed would “provide a high level of customer service and…convey a prestigious image,” and said that its customers represented or implied they were purchasing the apparel for sale in their own stores, and not for resale to other retailers.

However, when the manufacturer sought to discover Costco’s vendor information, the store produced evidence that the names had economic value and that it made substantial effort to keep them secret and Los Angeles Superior Court Judge Mary Thornton House ruled that the information was privileged.

House then agreed with Costco that Citizens could not pursue an action for sale of stolen property because it did not own the property when it was allegedly stolen, and concluded that the manufacturer’s claims for fraud and unfair competition were based on “unsubstantiated conclusions” lacking the requisite specificity.

On appeal, Justice H. Walter Croskey noted the “hurdles…faced by any manufacturer who attempts to sue an ‘unacceptable’ retailer for selling the manufacturer’s goods,” and that manufacturers generally have no control over third-party retailers to whom distributors sell goods placed into the stream of commerce.

Observing that Citizens—which was able to trace the possible resellers based on identification numbers in the jeans it found at Costco—could have reduced the number of potentially involved customers to five or less, and could have asked customers whether they had experienced any thefts, he wrote that Citizens failed to show disclosure was necessary to a then-pending cause of action because its motion to compel came before the fraud count was added.

But Croskey said that Citizens’ claim for sale of stolen property survived the demurrer—despite the justices’ “substantial doubts as to the evidentiary support”—because the manufacturer’s contentions set forth all of the elements of a cause of action under Penal Code Sec. 496(c).

Explaining that the statute allows anyone injured by the sale of knowingly stolen property to bring a civil action against the seller in order to reduce thefts by eliminating the market for stolen goods, and that harm to goodwill constitutes “actual damages,” Croskey reasoned that Citizens’ action appeared to be within the law’s intended scope.

The justice, however, agreed with Costco that Citizens’ broad allegations of a conspiracy between the store and “Customer Does” or “Source Does” did not identify fraud with the requisite specificity necessary to allow courts to “weed out nonmeritorious actions.”

He wrote:

“Citizens could, at the very least, allege how, when, and it what manner its customers generally promised not to resell the jeans to Costco, or had a duty to disclose any secret intentions to so resell.”

Croskey similarly opined that Citizens lacked standing to pursue a claim for unfair competition under Business and Professions Code Sec. 17200 because the alleged harm to the manufacturer’s goodwill was not a loss of “money or property” that would entitle it to restitution.

Presiding Justice Joan D. Klein and Justice Patti S. Kitching joined Croskey in his opinion.

Attorneys Gary A. Freedman of Los Angeles and John A. Schwimmer of Sussman Shank in Portland, Ore., represented Citizens, while Norman H. Levine, Aaron J. Moss and Rachel Wilkes of the Los Angeles firm Greenberg Glusker Fields Claman & Machtinger represented Costco.

The case is Citizens of Humanity, LLC v. Costco Wholesale Corporation, 09 S.O.S. 845.


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