SEBASTIAN RULING VIEWED AS WEAKENING SUPPLIER CONTROL
Byline: Vicki M. Young
NEW YORK — A California trial court in Los Angeles has ruled that a drugstore chain can continue to sell a manufacturer’s “salon-only” hair care products, based in part on the so-called “first sale” doctrine.
The decision, in a summary judgment that was based solely on legal documentation submitted to the court, said that Sebastian International Inc. did not meet its requisite burden of proof to move the dispute against Drug Emporium Inc. to the next level, which would have been a trial on the merits. William C. Conkle of Conkle & Olesten, an attorney for Sebastian, said an appeal would be filed within a week.
In a ruling issued on Dec. 20 that wasn’t immediately available, Judge Emilie Elias noted that the “first sale doctrine and principles of free alienability of goods” applied in the case. Under the doctrine, Sebastian is barred from preventing Drug Emporium’s purchase and resale of its hair care products. “Sebastian,” the judge explained, “voluntarily parted with possession and ownership of all products at issue by selling them at the asking price.”
In addition, because the drugstore chain didn’t purchase the products from anyone under contract with Sebastian, the judge ruled that Drug Emporium did not have to answer to any interference of contract claims filed by the hair care manufacturer.
Some industry observers, however, are concerned that other parts of the judge’s decision could have even more profound implications on a manufacturer’s ability to control its distribution channel.
The decision of the court said that it “rejects Sebastian’s contention that the sale of a product without a hologram or other product tracking code constitutes unfair competition or a ‘fraudulent, unfair or unlawful’ business practice.” The court went on to specify that it “rejects the argument that a Sebastian product is not genuine or subject to the first sale doctrine if a hologram or tracking code was removed from the product.”
Leland Hirsch, president and co-founder of Artec Worldwide, which manufactures professional hair care products, observed: “We want to keep our products professional. What I don’t like about the whole idea of diversion is that there’s no quality control for the consumer. I was counterfeited a few years back, and there was bacteria and feces in the fake product that was sold in the drugstores. What is the quality control when companies such as drugstores go out and buy the product in the gray market? The consumers want to buy the product, but they really don’t know what it is that they’re buying.”
Allan Mottus of Mottus & Associates, a beauty industry consultant, observed: “The decision leaves wide open the issue of no recourse for the manufacturer over to whom it is selling the product. According to the legal decision, there’s now no reason to put a bar code on a product if it could be resold to anyone. Why bother even selling to salons to begin with if a manufacturer can’t control the distribution to just that channel. It’s a very unfavorable way of doing business.”
Jane Lagusch, vice president for administration at Drug Emporium, disagreed. She said, “It’s a huge victory for us and for all other chain drugstores. These products are available at almost every drug chain in the country, including those with 400 doors. We’ve been fighting this for four years. Obviously, we believe that we have the right to an equal playing field to compete with the other chains who are not a part of the suit. Sebastian doesn’t believe that we have the right to sell the product because of their distribution system.”
Mark Riedel, general counsel for Sebastian, said: “We think the judge was wrong on her rulings. This decision doesn’t prove Drug Emporium’s right to sell diverted products. It shows that Drug Emporium doesn’t care about their customers.”
So what do companies such as Artec do about the problem?
According to Hirsch, “We’re lobbying in Congress to pass a bill that would keep our products professional.” The first attempt, H.R. 2100, failed to pass, and a new bill is expected to be introduced shortly.
Sebastian filed its lawsuit on Aug. 8, 1997, according to court records. The lawsuit — filed against the drugstore chain and others, including salons and individuals — charged the defendants with unfair competition, conversion and interference of contract. Claims of racketeering were also filed against a salon and some of the individual defendants. The lawsuit against the other defendants is still pending, according to Riedel. A preliminary injunction barring Drug Emporium from selling the offending product was issued on Oct. 9, 1998. Had the court not ruled in the drugstore chain’s favor, the dispute would have gone to trial on Feb. 26.