Home Depot recently found itself the focus of a class-action lawsuit filed in Ca

Question

Home Depot recently found itself the focus of a class-action lawsuit filed in California Superior Court. The suit, filed by Jimin Chen, accuses the retail chain of using shoplifting charges and threats of criminal prosecution to shake down customers for arbitrary and unjust monetary (damages) awards. The lawsuit stems from a June incident involving a shopping trip by Chen at a Home Depot in San Leandro, California. According to court documents, Chen used store merchandise, a pair of work gloves, to assist in loading lumber into a cart for purchase.  At the time of checkout, all merchandise was scanned, except for the gloves. Chen asserts that he had placed the gloves on top of the lumber, mistakenly forgetting they were there during the checkout process.  It is alleged in Chen’s lawsuit that he did not intend to steal the gloves at any time, nor did he attempt to conceal the gloves, which remained in plain view of Home Depot employees at all times. The total purchase amounted to $1,445.90, which Chen paid using his Home Depot credit card. Prior to exiting the store, Chen was stopped by a security guard, who accused Chen of stealing the gloves. Court documents further allege that Chen was taken to a room for aggressive questioning, where he later suffered an asthma attack and was placed in handcuffs. Chen was confined to the room for approximately 30 minutes, and allowed to leave only after agreeing to sign a document promising to stay out of the store for a 90 period. The police were never called and no arrest was ever made.

As a result of the incident, Chen received a collection letter from Orlando based law firm Palmer, Reifler & Associates. To Chen’s great surprise, the letter demanded payment of $350 to settle claims that Chen shoplifted from the California Home Depot.  When Chen failed to make the $350 payment as demanded, he received a second letter, this one demanding payment of $625. It is worthy to note that the gloves that sparked this controversy retail for less than $5.

Language included in the demand letters, reproduced in Chen’s class-action lawsuit, read as follows: “Should full or partial payment not be made on time, we may review the matter for the possibility of recommending that our client take further civil action and depending on the state law, may choose to make a higher settlement request on behalf of our client. Home Depot may in the future consider filing a lawsuit, in which case it will likely seek any available attorney’s fees, court costs and other legal expenses throughout such litigation. Any defending party to such a lawsuit would likely be served by a process server with a summons requiring the party or the party’s attorney to respond and/or appear in court to defend the action. If successful in any such litigation, we estimate that Home Depot would be seeking a final judgment of damages, court costs and/or attorney’s fees up to the maximum amounts allowed by law which might exceed the amount demanded above.” [Emphasis added].

In support of its claims and demand letters to Chen, Home Depot relied on Penal Code Section 490.5 of California’s Civil Shoplifting Law. Under Section 490.5, merchants may bring a civil action to recover (1) the value of any merchandise unlawfully removed from the premises, if not recovered in merchantable condition, and (2) damages of not less than fifty dollars ($50.00) nor more than five hundred dollars ($500.00) plus costs. However, according to legal arguments and case law submitted by Chen’s attorneys, in order to maintain an action under this statute, the merchant must establish at a minimum (1) the unlawful taking (2) of merchandise (3) from the premises (4) by an adult or emancipated minor. In addition, Chen’s attorneys assert Section 490.5 does not authorize the merchant or its agents to recover late payment fees, installment fees, convenience fees, or attorneys’ fees.

As a result, Chen accuses Home Depot of using the law to intimidate consumers into paying arbitrary settlements, and likens Palmer Reifler to a “demand letter mill.” Chen alleges that the firm sends more than a million letters a year to consumers accused of shoplifting by Home Depot, using threats and a “smoke screen of legalese.” When alleged shoplifters are detained at a Home Depot store, they are given a written Notice, stating they may “face both criminal charges and a civil claim” and be obligated to pay a “fine … and/or a civil penalty.” Court documents further state, “The demand letters are crafted to frighten consumers into believing that failure to pay the amount demanded may result in criminal prosecution, subject them to a civil suit, and put them at risk of liability for significant additional damages that the merchant has no legal right to recover. Consumers, fearful and ignorant of the falsity of these threats, pay millions of dollars each year in satisfaction of these misleading and unlawful demands.”

Does prosecution of these civil claims reflect a legitimate attempt by certain retailers to recover costs in industries traditionally characterized by low margins, or is it indicative of a more sinister trend, whereby retailers have devised a way to turn shoplifting into a profit center?  

Instructions

Please respond to the following:

Is Mr. Chen criminally liable? Cite specific facts to support your answer.

Is Home Depot acting ethically by using a law firm to from Home Depot shoplifters?

From a strategic perspective, should Home Depot eliminate this practice? Why or why not?

Please be accurate as much as you can.

Thank you

Explanation / Answer

The suit claims that the big box retailer is using California's Civil Shopping Law as "a profit center" by arbitrarily seeking "damages" from accused customers.

According to the complaint, filed in Alameda, Calif., Superior Court, Jimin Chen and a friend went shopping at a Home Depot in San Leandro on June 6. Before loading lumber onto a cart, each man put on a pair of $3.99 work gloves, to protect their hands.

Before Chen's $1,445.90 purchase was rung up, says the complaint, he removed his gloves and left them on top of the merchandise in his cart, where they were plainly visible. The checkout personnel, however, failed to scan the gloves.

Immediately after Chen paid, and before he had left the store, he was accosted from behind, according to the complaint, by a Home Depot security guard, who told him he had failed to pay for the two pairs of gloves. Chen and his friend were taken into custody by Home Depot security for about 30 minutes, during which time Chen, because of stress and lack of air in the holding room, suffered an asthma attack.

"As panic set in due to plaintiff's asthma attack," says the complaint, "Home Depot's security guard placed plaintiff, who weighs about 115 pounds, in handcuffs."

Watch: How Much Does Shoplifting Cost You?

The suit alleges that the two accused shoplifters were told they would be allowed to leave only if they submitted personal identifying information and signed a document agreeing to stay out of the store for 90 days. They complied. Upon their release from Home Depot detention, said the complaint, they were given a one-page document titled "Notice of Intent to Exercise the Rights and Potential Remedies of Home Depot."

They were not arrested, and the police were never called, according to the complaint.

Nevertheless, according to the complaint, the notice warned them that "You may face both criminal charges and a civil claim related to this incident." It also stated, "You will soon receive further information from the Home Depot's attorneys, (law offices of Palmer, Reifler and Associates) regarding demand for the civil penalty." Failure to respond promptly, it warned, might subject them to further liability.

On or around June 10, according to the complaint, Chen received a letter from the law firm demanding that he pay $350 within the next 20 days or else risk being sued by Home Depot for theft of merchandise. This "first demand letter," stated the lawsuit, "is a standard form letter that has been and continues to be sent to hundreds, if not thousands, of individuals accused by Home Depot of shoplifting from its stores in California."

When Chen did not respond, the suit alleges that he received a "second demand letter" dated July 5 telling him he now had to pay $625. It repeated the threats contained in the first letter, which included that he might be sued by Home Depot, and, that if he lost, Home Depot would seek "damages, attorney's fees and court costs up to the maximum amounts allowed by law, which could possibly exceed the amount demanded above." If Chen opted to pay by credit card, a "convenience fee" of $14.50 would apply.

Christian Schreiber, of the Mill Valley law firm Chavez & Gertler, is one of the attorneys representing Chen. In court papers, he calls the demand letters a "fraudulent business practice" because they are "likely to deceive members of the public as to their legal rights and obligations."

Schreiber told ABC News that these demand letters are specious. He claims Home Depot in the past four years has brought not a single lawsuit under California's anti-shoplifting law, which allows merchants to recover the cost of stolen items. Nor in that same time, he said, had Palmer, Reifler sued a single Home Depot customer accused of shoplifting.

Why not?

Home Depot and the law firm, he said, were playing a numbers game: They don't need to go to the trouble and expense of suing. They just need to scare enough people, whether guilty or innocent, into settling their claims. About 20 percent of people who get the threatening letters, he said, settle and pay the demanded fees. That practice, he said, nets the law firm, which provides the same service for other retail clients, millions of dollars. The firm remits about 75 percent of what it collects to clients, such as Home Depot, and keeps the rest, he says.

Since clients pay the law firm nothing, the money from demand letters amounts to gravy, said Schreiber.

According to the National Association for Shoplifting Prevention (NASP), more than $13 billion worth of goods are stolen from retailers every year--more than $35 million per day. More than 10 million people have been caught shoplifting in the past five years, says NASP.

In response to a request for comment from ABC News, a spokesman for Home Depot said that although the retailer had not yet had time to review the complaint, "We do disagree that the general practice of [making] civil demands is unlawful."

Palmer, Reifler, asked for comment by ABC, did not respond. The law firm is not named as a party to the class action.

Natt Reifler, one of Palmer, Reifler's principals, was deposed in 2007 for an unrelated lawsuit. Asked how much money Palmer, Reifler collects on behalf of its clients, he replied, "under $10 million a year." The firm's typical contingency fee, he said, was between 18 percent and 30 percent. Asked to name the firm's biggest clients (as of January 2007), he responded, "The top five would probably include Walmart, Kmart, J.C. Penny, Walgreens, possibly. It's hard to say who the fifth would be."

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