Magic Link Garment Ltd. v. ThirdLove, Inc.

Background

Magic Link Garment Ltd., a Hong Kong-based contract manufacturer, and ThirdLove, Inc., a San Francisco-based online retailer, had worked together since 2012. Their dispute concerned purchase orders for bras, including TL 50A bras manufactured at Magic Link’s Cambodia facility.

Magic Link’s remaining claims were for breach of agreement based on unpaid invoices, canceled products, and invoice deductions, and for violation of California Business and Professions Code § 17200 based on alleged efforts to misappropriate trade-secret information and interfere with supplier and vendor relationships. ThirdLove’s remaining counterclaims alleged breach of contract and breach of the implied warranty of merchantability based on defective products and unauthorized subcontracting.

Magic Link moved for summary judgment on ThirdLove’s counterclaims and partial summary judgment on selected facts or elements of Magic Link’s claims. The court applied the Uniform Commercial Code as enacted in the California Commercial Code because the dispute involved transactions in goods.

Rulings on Magic Link’s Claims

The court granted partial summary judgment establishing that ThirdLove accepted shipped bras worth $1,460,281.82. ThirdLove did not dispute that it ordered, received, and failed to pay for those bras, although the court stated that this ruling did not prevent ThirdLove from presenting its estoppel defense at trial.

The court also granted partial summary judgment establishing that ThirdLove deducted $51,565.05 in purported finance charges from invoices without Magic Link’s authorization. The ruling established that the deductions occurred, but the court distinguished that fact from whether ThirdLove’s estoppel defense might avoid liability.

The court denied partial summary judgment on whether ThirdLove failed to provide adequate assurance of payment for the $725,367.98 in withheld bras. Under California Commercial Code § 2609, whether a party had reasonable grounds for insecurity and whether the assurance was adequate depends on commercial standards. The court found a triable issue because Magic Link did not provide evidence of the relevant commercial standards.

Rulings on the Contract Counterclaim

The court rejected Magic Link’s argument that ThirdLove’s acceptance of the PO 542 bras automatically prevented a breach-of-contract counterclaim. Under the court’s analysis, a buyer that accepted goods may still pursue a contract claim if it justifiably revoked acceptance.

The court granted summary judgment on ThirdLove’s breach-of-contract counterclaim as to the 39,960 PO 542 bras that ThirdLove sold to customers. Selling those bras was inconsistent with Magic Link’s ownership, and the court found no triable issue that ThirdLove irrevocably accepted them.

The court denied summary judgment as to the remaining 25,116 PO 542 bras. It found that ThirdLove accepted those bras, but a reasonable jury could find that ThirdLove timely revoked acceptance. Evidence concerning customer complaints, inspections, reported defects, expert opinions, and quality-control records created a triable issue about whether the defects substantially impaired the value of those bras.

Ruling on the Implied-Warranty Counterclaim

The court denied summary judgment on ThirdLove’s breach-of-implied-warranty-of-merchantability counterclaim. It rejected Magic Link’s argument that pre-shipment reviews by Bureau Veritas prevented the warranty claim because the reviews occurred after the parties entered into the PO 542 agreement and did not necessarily constitute the type of examination that would exclude the warranty.

The court also rejected Magic Link’s argument that ThirdLove’s design specifications displaced the implied warranty. Magic Link did not explain why the specifications were inconsistent with the warranty of merchantability, so the specifications did not bar the counterclaim.

Lost Profits

The court denied Magic Link’s request for partial summary judgment against ThirdLove’s lost-profits damages theory. It concluded that ThirdLove could assert lost profits as a reasonable way to measure losses from an alleged breach in this retail commercial relationship. The court did not decide the amount of any damages.

Other Motions and Sealing

The court denied ThirdLove’s motion to strike evidence submitted with Magic Link’s reply because the evidence responded to an argument raised in ThirdLove’s opposition. The court granted ThirdLove leave to file a sur-reply.

The court denied Magic Link’s motions to seal all submitted exhibits except Exhibit Y, which contained sensitive financial information. The court granted the sealing motions only as to Exhibit Y.

Disposition

The court granted in part and denied in part Magic Link’s motion for partial summary judgment and summary judgment. Specifically, it established certain facts concerning ThirdLove’s acceptance of shipped bras and unauthorized deductions; granted summary judgment on the contract counterclaim for the 39,960 bras sold to customers; and denied summary judgment on the payment-assurance issue, the contract counterclaim concerning the remaining 25,116 bras, the implied-warranty counterclaim, and ThirdLove’s lost-profits theory.