DIVERSION BILL SPLITS HAIR INDUSTRY

Byline: Julie Naughton

NEW YORK — The shampoo wars continue — and the hostilities are about to spill onto the floor of Congress.
Legislation that could affect sales of salon or professional hair care brands in unauthorized nonsalon retailing environments is ready to head to the House floor by mid-October — and both the professional and mass channels are taking sides in a battle reportedly worth more than $100 million a year to the $4.1 billion salon products industry. House Resolution 2100, the Anti-Tampering Act of 1999, was introduced in the House June 9 by Rep. Bob Goodlatte (R, Va.) and Rep. Zoe Lofgren (D, Ca.) HR2100. It would criminalize the actions of diverters who damage, deface or cover batch, bar or other manufacturing codes on products, making such actions a Federal offense.
Such legislation addresses the issue of diversion, which has polarized the salon or professional industry and the retail beauty industry for more than 20 years.
Salon, or professional beauty brands, are intended by their manufacturers for sale only in salons and beauty supply stores, and those manufacturers cite both consumer safety and the products’ images in their fight to keep items exclusive. They argue that they have the right to sell their products where they want — and for years have put restrictions in their distributor contracts preventing resale to outlets outside the salon industry.
Opponents argue that such regulations restrict free trade and penalize legitimate secondary markets.
Proponents of the upcoming legislation say it would help stem diversion because it would make illegal one of the chief aids to product diversion — removal of coding that allows manufacturers to trace a product to the final buyer, said Michael A. Spano, executive director of the Beauty and Barber Supply Institute.
BBSI, which represents product distributors, and a manufacturers’ organization called the American Beauty Association, are leading the professional industry fight.
Batch codes generally contain information on specific batches of products, including where and when the products were bottled and to whom they were sold. Bar codes include stockkeeping unit information, prices and more.
Middlemen who purchase merchandise and resell it to drugstores, grocery stores and other retail outlets often scrape off bar or batch codes so they cannot be traced to the salon or distributor that originally purchased the products, said Spano.
“In our industry, batch codes make sure that consumers get properly mixed product that conforms to the laws of the various states, they help keep consumers from using professional-only products, which sometimes contain chemicals or dyes that should be applied only by trained and licensed cosmetologists, and they help trace tainted or stolen goods,” said Spano.
Opponents of the bill say it will restrict legitimate secondary-source selling through intimidation.
The mass market industry — in particular, the National Association of Chain Drug Stores — opposes the legislation. According to David Lambert, NACDS vice president of government affairs, many mass merchants obtain products from legitimate secondary sources.
“If company ‘A’ buys too many widgets [from the manufacturer] and then resells them to company ‘B,’ we don’t want the manufacturer coming back and refusing to sell to company ‘A’ because they don’t like where the product ended up,” Lambert said.
“Our argument is that once the product has left the hands of the manufacturer, that should be the end of the manufacturer’s control over the product. Otherwise, you are giving the manufacturer an excessive amount of control over distribution, which hampers free trade.”
However, Lambert emphasized, “While we oppose HR2100, we do not support the sale of counterfeit or stolen products. In fact, retailers — including the chain drugstore industry in particular — suffer from counterfeit products as much as anyone else. We have no desire to sell products that have been obtained illegally, and we are exceptionally concerned with public safety. Our concern is only that legitimate secondary markets may be impeded by HR2100.
“Among those in favor of HR2100, it is frequently mentioned that these codes would facilitate recalls and insinuate that we’re scratching them off,” he continued.
“In fact, there are many product codes used to recall products, and they are not generally removed on products in the legitimate secondary market. We have been characterized by some as being callous regarding counterfeit products, when, in fact, we are not. Instead, we are concerned with retaliation by manufacturers against retailers.”
Lambert said since such codes apply to items other than beauty products, the proposed legislation could impede retailer operations.
“Under HR2100, if you cover one code — which could happen, say, if you have two products shrink-wrapped together with a third stockkeeping code for the set — you could be in violation of the law. Also, the language is very vague. We expect to oppose it in its current form, and we think other retailers groups will, also.”
The legislation will be considered first by the subcommittee on courts and intellectual property of the House Judiciary Committee, probably in early to mid-October, and could be voted on by the full House by late October or early November, said John Bliss, a lobbyist for the professional beauty industry.
There is more than lofty ideals at stake — like money. Estimates vary widely as to how much product diversion to the mass industry costs the professional industry each year. However, it probably tops $100 million, according to estimates from the BBSI.
J. Aaron Graham, director of assets protection for Matrix Essentials, a division of Bristol-Myers Squibb and a proponent of the bill, insisted it’s about much more than money.
“The issue is not about price and it never was,” he said. “It’s solely about protecting the consumer from potentially serious bodily harm resulting from the sale of counterfeit, expired or adulterated consumer merchandise. Salon clients can purchase their salon products in authorized salons, where the salon and the manufacturer guarantee the quality of the merchandise.”
According to Spano, chief proponents of HR2100 include the professional beauty industry, the Coalition to Protect the Integrity of American Trademarks and allies like the pharmaceutical industry.
If the bill passes, it would affect several other industries, including the pharmaceutical industry, he said.
This isn’t the first time such legislation has headed to the floor. An earlier version, HR3891, the Anti-Counterfeiting Bill, narrowly missed passing the House on Sept. 28, 1998.
That bill, however, was on a “fast-track” system that required that it pass a House vote with a two-thirds majority — and proponents of the new bill said they were confident it would pass this time because only a simple majority is required.
“We think that this time, it will be put on the regular calendar,” said Bliss. “And, in fact, we were only 78 votes shy of getting a two-thirds majority in the House last time, so we feel pretty confident.”
Spano said HR3891 had been drafted by a coalition of clothing, fragrance and chemical companies.
“The professional beauty industry came in after that bill was written,” he said. “Also, while Congress doesn’t see counterfeit apparel as a risk to public safety, they acknowledge that tainted hair color or baby formula could hurt consumers, and the new legislation specifically includes these items.”
While Spano acknowledged the legislation was unlikely to eradicate diversion — “Wherever there is a demand, you’re going to see diversion happen,” he said — he insisted the passage of such a law would “dramatically stem the problem, and it will send a message that we are serious about facing this issue.”
HR2100 has gained support from a number of beauty manufacturers.
“Such a law would allow law enforcement officials to make arrests and seizures of products,” said Graham.
“Ten years ago, there weren’t many effective ways to deal with this problem,” Graham continued.
“You started a letter-writing campaign, someone got their wrist slapped and it started all over again. But with a law? When there are handcuffs coming your way, people are quicker to acquiesce. No one wants to go to jail for shampoo.”
Paul Dykstra, executive director of the ABA, said the legislation would send a message that consumer safety is paramount. “First and foremost, we are concerned with consumers,” said Dykstra.
“We want them to be confident of their safety. Bills like this would help assure that.”
Unlike the current initiative, previous legal and legislative efforts to restrict the sale of professional products in other channels have usually focused on trademark infringement and copyright issues.
In many of these cases, state and Federal courts have ruled in favor of mass marketers, “which has prevented other industry manufacturers from using such issues to restrict or prevent the sale of goods in secondary markets,” said Spano.
Previous rulings have also stated that copyright law does not protect U.S. manufacturers that export products from having their products shipped back by an unrelated company.
In 1998, the U.S. Supreme Court ruled against L’anza Research International in such a case. According to published statements made by L’anza at that time, it had sued Quality King Distributors, arguing that it was deprived of its “first sale rights” under copyright law when Quality King bought L’anza products intended for distribution in Malta and Libya at a deep discount from a L’anza distributor in the United Kingdom and then resold them to a Carmel, Calif., drugstore chain.
L’anza won $3.4 million in a lower court ruling, but the decision was later overturned by the U.S. Supreme Court.
More recently, Albertson’s grocery chain, based in Boise, Idaho, filed a Federal antitrust lawsuit against professional manufacturer Sebastian International in March, charging obstruction of free trade. The suit is pending.
There are some laws at the state level. According to Graham, at least two states have laws that prevent anticounterfeiting or code tampering.
A Texas statute prohibits the alteration or removal of batch codes, he said.
Similar legislation was passed earlier this year in Oklahoma; Title 21, Section 1990 of Oklahoma law “protects consumers against traffickers of counterfeit consumer goods” in such categories as infant formulas, health and beauty aids and over-the-counter medications, said Graham.
According to Graham, Matrix has already seen results from that law.
“Using the weapons of Oklahoma’s new anticounterfeiting legislation and our aggressive antidiversion staff, we persuaded Tulsa’s Drug Mart and May’s Drug, a related company, as well as several other unauthorized retailers of salon-only hair care products, to remove all professional hair care products from their retail shelves,” said Graham. “We’re very anxious now to make sure that HR2100 gets passed.”
Earlier this year, the beauty industry formed The Professional Beauty Federation, a nonprofit group that raises money to lobby on industry issues, and hired Bliss, the former president of the International Anti-Counterfeiting Coalition, as its lobbyist.
The federation’s founding members were five salon industry groups: the International Chain Salon Association, The American Association of Cosmetology Schools, the BBSI, the National Accrediting Commission of Cosmetology Arts and Science and The Salon Association.
Spano said the BBSI has encouraged all its members to call their Congressional representatives and has raised more than $200,000 for awareness campaigns and lobbying efforts from member distributors, board members and professional manufacturers, including Nexxus, Cosmair’s Redken Fifth Avenue division, The Wella Corp. and John Paul Mitchell Systems.
Professional beauty firms have taken such measures as developing involved tracking systems, creating embedded or holographic bar coding, initiating lawsuits — and in some cases, hiring former FBI agents as “shampoo cops” devoted solely to scouting out sales to unauthorized retailers.
Some manufacturers, such as Shiseido’s Brands Exclusive Zotos International division, are offering cash for information on diverters.
In May, Bezi announced it would give a $1,000 reward to anyone reporting verifiable information that stopped sales of diverted products.

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