Professional Beauty Product Diversion, p.4

In this case, even though the manufacturer’s salon-only policy was well known, the manufacturer could not prove that the retailer knew about the contents of the agreement between the manufacturer and the salons or acted unacceptably. In fact, the retailers were trying to make sales like any other business, according to the court.

In contrast, an Internet retailer did have to pay damages for tortious interference with contracts in a case that started in Oklahoma in 2001. The retailer knew that distributors had contracts that prohibited sale to any business other than a salon, and so it set out to undermine that system. The court found that it used fake names to buy products, used names that made it sound as if it operated salons, and said it had salons when it didn’t. The case was decided by a jury that awarded the manufacturer $5 million for lost sales and punitive damages because of tortious interference and other claims.

Even the U.S. Supreme Court had a diversion case in 1998. In that case, the Supreme Court found that a beauty-product manufacturer sold products for export to Malta. The products found their way back to the shelves of a discount retailer here in the United States. The manufacturer argued that the products were gray-market goods and could not be reimported into the United States without infringing on the manufacturer’s copyrighted labels. After a lengthy analysis of the Copyright Act, the Supreme Court said that the importation was legal and there was no Copyright Act violation. Since that case was decided, manufacturers have turned to other legal theories in their quest to stop diversion.

In a case that was brought to trial eight years ago, a manufacturer sued a distributor, asking the court to force the distributor to stop diverting a line of professional products. In that case, the judge had harsh words for the manufacturer when it found that the manufacturer tracked its products and could have stopped shipments to the diverter. The court said that the manufacturer “is content to enjoy the profits associated with diverted product, while paying ‘lip service’ to the notion that they are interested in protecting the professional nature of the brand.” The court later noted that the manufacturer made “unprecedented” profits from condoning diversion.