NEW YORK — The beauty industry is being treated to a new legally mandated gift-without-purchase promotional tactic valued at $175 million, thanks to a settlement of a five-year-old lawsuit.

Eight retailers and at least six cosmetics manufacturers on Wednesday settled the class-action lawsuit that was filed in 1998 in a California state court over price-fixing allegations.

This story first appeared in the July 18, 2003 issue of WWD. Subscribe Today.

A lawyer for one of the defendants said the lawsuit’s claims of “collusion” centered on how prices seemed to be set up. He explained that the way beauty products have been marketed for the last 50 years came under attack because of consumers’ perceptions concerning the uniformity of prices when shopping from one retailer to another.

Another source familiar with the case said one of the perceptions involved “promotional scheduling,” in which different brands stage and time sales promotions at various stores. Both allegations seemed to spring from an impression of manipulation.

The source pointed out that in this case, the parties had never gone to trial on the merits during the lawsuit’s five-year history in the California court system. Moreover, the more than a dozen defendants had “vigorously denied” the allegations in the lawsuit.

The plaintiffs in the class-action lawsuit were California consumers who at first filed the lawsuit against eight retailers. The lawyers for the consumers subsequently dragged in prestige cosmetics firms, one source said. According to other sources, the retail defendants are Dillard’s Inc., Federated Department Stores, Gottschalks Inc., May Department Stores, Neiman Marcus Group, Nordstrom Inc., Saks Inc. and Target Corp. The cosmetics firms are Boucheron, Chanel, Clarins, Concopco, The Estée Lauder Cos. Inc. and L’Oréal.

The settlement, which does not involve any admission of guilt by the defendants, requires a giveaway of products by manufacturers to consumers. While the total retail value of the freebies to consumers is $175 million, none of the defendants have chosen to publicly disclose what is their respective share in the settlement pie. One of the prestige beauty firms pointed out that the actual cost to the firm is “not great” relative to the “retail value of the settlement.”

According to a defense lawyer for one of the cosmetics firms, the plaintiffs will refile the lawsuit in a federal district court in San Francisco within a few days. That move, he explained, accomplishes several goals. The state court action is deemed closed, while the federal court filing allows the settlement to be considered a “nationwide settlement.” It would be the federal court judge that would determine whether to approve or reject the settlement, a process that he said could take several months.

Once approved, the plaintiffs’ claims would be dismissed, with prejudice, in their entireties. As part of the settlement, the defendants also will pay about $24 million in plaintiffs’ legal costs.

Still to be determined is the structure of how the free products will be disbursed to consumers. The lawyer said that working out the details, as well as giving the firms time to manufacture sufficient merchandise for the giveaway, could take another 12 to 18 months beyond the court approval date. He said the giveaway would probably last one week, and customers are likely to be notified of the opportunity via advertisements in print publications, through a toll-free number or on a company Web site.

A source at a different cosmetics firm described the logistics involved in working out the details as “complicated.” She said her company was still working on the details.

According to several of the beauty firms, however, the likely scenario would be for customers to simply walk up to a cosmetics counter and request the freebie. None were willing to discuss how consumer claims will be validated, and one representative didn’t have a problem with the risk that there may be savvy customers who end up getting more than one free giveaway.

A spokeswoman for Federated Department Stores said, “We’re pleased to have reached a mutually agreeable settlement of this matter and we’ll be seeking soon to have it accepted by a federal court so that its implementation will be national.”

Other retail defendants, such as May Department Stores and Saks Fifth Avenue and Saks’ department store group, declined comment.

L’Oréal USA Inc. said in a statement, “We agreed to participate in the settlement to avoid the time and expense of litigation. There were no findings that any defendant violated any state or federal law or committed any unlawful business practice.

“Under the terms of the settlement,” the statement continued, “defendants as a group have agreed to give class members who purchased department store cosmetics between May 29, 1994, and April 30, 2002, an agreed upon amount of free cosmetics products.”

Lauder, through a spokeswoman, said, “We strongly deny any wrongdoing. We settled the case because we are eager to get on with the business of offering products to our customers, as opposed to getting tangled in a protracted lawsuit.”

Word of the settlement was first disclosed through a regulatory filing by Lauder to the Securities and Exchange Commission, via a Form 8-K, on Wednesday.

According to the filing, Lauder will take a special pretax charge of $22 million, or $13.5 million aftertax, equal to 6 cents a diluted share in the fourth quarter for the fiscal year that ended June 30, 2003. The charge, which includes cash and noncash items, will not have any material adverse effect on Lauder’s financial condition, according to the SEC filing.

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