PROS AND CONS TO INDUSTRY PARTICIPANTS
Even before we get to the legal principles, there are rational business arguments on all sides of this issue. Manufacturers point out that diverted products may be counterfeit, tampered with or handled improperly, resulting in stale, dented and out-of-date products. All of these arguments highlight that companies that deal in diverted products are not complying with the manufacturers’ policies and so manufacturers can’t guarantee that the products are handled in accordance with their recommended best practices. In fact, many manufacturers only guarantee their products if they are purchased from salons.
The distributors and retailers selling diverted products publicize their opinions less often, but they point out that there are few legal restrictions on reselling products to any purchaser willing to buy them. They have defended themselves in lawsuits by pointing out that they don’t know if the companies that purchase products from them simply turn around and resell to supermarkets. Salon owners maintain that the real issue is the exclusive reputation of professional products; not tampering or counterfeiting. They claim that they will lose customers if their clients see “salon only” products in discount retailers because the products lose their attractiveness. They also lose the profits they would have made if the products hadn’t been diverted. The judge in one recent case noted that product sales are an important revenue source for salons and the profit margins on product sales are higher than the margins on haircare services.
Many professional-product manufacturers have taken steps to stop diversion. They often have contracts with distributors that require the distributors to sell only to salons and no other person or business. At least one manufacturer sells its products to salons under contracts that call for penalties of $100 per unit of product diverted by the salon. Another manufacturer’s contract calls for damages of $25,000 for any instance of diversion by a distributor. Still others put tracking codes on each unit so they know who bought each one from the factory. That is followed up by sending test shoppers to chain drugstores and supermarkets to read those tracking codes to try to figure out how those products got on the retailers’ shelves.