Price-Costco, which operated Costco warehouse stores, was found in contempt for violating a court order to stop illegal diversion of professional hair care products. Price-Costco’s President and CEO, James D. Sinegal, was ordered to appear in court on October 1, 1996 for the sentencing hearing.

Conkle, Kremer & Engel represented Sebastian International, one of the leading companies in the professional hair care products industry. Sebastian manufactures and distributes a popular line of hair shampoos, conditioners and styling aids for use by professional hair stylists in salons and for resale to salon patrons. Sebastian’s agreements with its distributors prohibit any product diversion, directly or indirectly, to persons outside of professional salons.

Sebastian filed a lawsuit against Price-Costco, Inc. in Los Angeles Superior Court, alleging that Price-Costco obtained Sebastian products by fraudulent means and sold the products in Price Club and Costco warehouses. Sebastian asserts that, when general merchandisers like Price-Costco obtain and sell Sebastian’s products as gray market goods, it damages Sebastian’s popularity and goodwill and reduces Sebastian’s sales.

Sebastian asked the Court to order Price-Costco to stop a number of different types of illegal conduct. On January 5, 1996, the Court entered an Injunction prohibiting Price-Costco from several types of activities involving diverted Sebastian products. Price-Costco asked the Court to reconsider its Order, but the Court denied Price-Costco’s request to modify the Injunction.

Subsequently, Price-Costco violated the Court’s Order by continuing to sell Sebastian products across the United States in disregard of express terms of the Court’s Injunction. Conkle, Kremer & Engel asked the Court to hold Price-Costco in contempt, and the Court directed Price-Costco to explain why it should not be held in contempt. A trial of the contempt charge was held and on August 28, 1996 the Court ruled that Price-Costco had “willfully violated the Court’s Order on at least eight counts.”

The Court reaffirmed that its injunction is proper, and that its terms “are clear and unambiguous to a reasonable person, and in particular to defendant” Price-Costco. The Court concluded that Price-Costco had the ability to comply with the Injunction, but deliberately chose to violate it. As a result, the Court adjudged Price-Costco in contempt of court.

Price-Costco’s response to the contempt citation, as reported in an article by The Seattle Times, was that the Court’s injunction “is illegible, it’s incomprehensible,” and that “Price-Costco is not doing anything wrong.” However, when the contempt hearing was held, Mr. Sinegal apologized to the Court and assured the Court that Price-Costco’s transgressions would not happen again.

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Price-Costco’s Settlement Check to Joico

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