Case: Citizens of Humanity, LLC v. Costco Wholesale Corp., Cal. Court of Appeal, Second District No. B204117 (2/11/09)

The One Sentence Summary: In a manufacturer’s suit challenging Costco’s sale of high end jeans intended for sale only at authorized retailers, Costco was allowed to keep secret the names of its suppliers as a trade secret.

What They Were Fighting About: Citzens, a manufacturer of high fashion jeans sold only in exclusive retailers, learned that some of its jeans were being sold at Costco. After buying the jeans at Costco, Citizens learned from tags on the jeans that the Costco jeans must have come from three to five of Citizens’ authorized retailer customers. Citizens surmised that the jeans must have been stolen, and sued Costco for selling stolen goods.

Citizens sought discovery from Costco identifying the suppliers of the jeans to Costco. Costco refused to identify its suppliers, claiming that the identity of its suppliers was a valuable trade secret. The trial court ordered Costco to provide discovery about the transactions where it obtained the jeans, but granted a protective order allowing Costco to remove the names of its suppliers from the production.

After discovery, Citizens amended its complaint to allege sale of stolen goods, conspiracy to commit fraud, and unfair competition. The trial court sustained a demurrer to the amended complaint, and Citizens appealed.

Second District Court of Appeal Holdings:

  • The court began by characterizing this case as a form of “unacceptable retailer” claim where a manufacturer attempts to prevent discount retailers or other types of outlets from selling the manufacturer’s products. Noting that California courts had not ruled upon “unacceptable retailer” cases, the court surveyed cases from other states, identifying the “hurdles” that a manufacturer faces:

    As a general rule, our society favors competition. Once the manufacturer has sold its goods to a distributor, the manufacturer can have no control over the retailers to whom the distributor resells the goods. If the manufacturer wishes to retain this control, it can best do so by means of its contract with its distributors. Even then, the manufacturer’s remedy is generally against its distributor for breach of contract; the manufacturer can only pursue the retailer if the retailer maliciously induced the breach.

    (Slip Opinion at 12). The court observed that plaintiff Citizens attempted to bypass these rules by avoiding tort claims for interference with contract or trademark. Rather, Citizens claimed that Costco knowingly sold stolen goods or conspired to commit fraud to obtain the jeans through misrepresentations.

  • The court next affirmed the trial court’s ruling that allowed Costco to keep secret the identities of its suppliers of Citizens’ clothing. Costco had shown that the identity of its suppliers was a trade secret, i.e., valuable information not known to Costco’s competitors that Costco took reasonable measures to protect.
  • Citizens did not establish that it needed disclosure of the trade secret identities of Costco’s suppliers in order to prove its claim that the jeans were stolen. Citizens did not need information from Costco because tags on the jeans identified only a small number of authorized retailers to which Citizens supplied the jeans, and Citizens could inquire of those retailers whether a theft had occurred.
  • The appellate court ruled that the trial court should not have sustained the demurrer dismissing plaintiff’s claim alleging knowing sale of stolen goods.
  • The court rejected Costco’s causation argument that Citizen’s injury was not related to the alleged theft of the jeans, but rather to Costco’s sale at a warehouse store rather than at a high end retailer. In rejecting this argument, the court noted that the purpose of section 496(c) of the Penal Code was to allow anyone harmed by the sale of stolen goods to bring a civil action.
  • The court rejected Costco’s argument that harm to Citizens’ goodwill from the discount sale of its jeans could not be “actual damages” under section 496(c) of the Penal Code.
  • The court affirmed dismissal of Citizens’ fraud claim because Citizens failed to allege with particularity who made what misrepresentations or failures to disclose, and whether those misrepresentations were express or implied. Citizens had control of the information necessary to allege fraud because it knew which of its authorized retailers had received Citizens’ jeans, and Citizens therefore knew what representations were made as to resale of the jeans.
  • The court affirmed dismissal of Citizens’ statutory unfair competition claim under section 17200 of California’s Business and Professions Code because Citizens lacked standing. The court held that standing to bring a suit under section 17200 is limited to those who have lost money or property that could be restored by an order of restitution. Because harm to goodwill cannot be the basis of restitution, Citizens did not have standing under section 17200.