Not surprisingly, industry participants have sued many times to try to stop diversion. Some have been very successful and some have not. The arguments cover a variety of legal theories, and this column will review several of the notable cases.
In a 1979 case, a manufacturer sued discount retailers because they sold hair dye to consumers even though the hair dye was packaged for salon use and did not have the consumer labeling and allergy warnings required by the U.S. Food and Drug Administration. The court found that the discounters had engaged in unfair competition. The plaintiff did sell products labeled for consumer use, but charged a higher price. The court concluded that the discounters should not buy the cheaper product that didn’t have adequate labeling and sell it to consumers. Consumer labeling has not been a significant issue since this early case was decided, and most cases focus on products already labeled for individual sale.
In a 1994 case, a manufacturer sued a mass-market retailer. The U.S. District Court said that the manufacturer was trying to control distribution after it made its first sale. The manufacturer in that case didn’t have a contract with the retailer, so the court concluded that the retailer didn’t violate the law and couldn’t be found responsible for diversion. The manufacturer did have a contract with two salons that diverted products to the retailer, and those contracts prohibited diversion. The manufacturer argued that under the legal doctrine of tortious interference, the retailer was liable for a breach of the manufacturer’s contracts with the salons, but the court said that the facts didn’t support it.
Under the doctrine of tortious interference, the manufacturer would have had to prove that the retailer knew about the contract that prohibited diversion, intentionally interfered with it, acted intentionally and socially unacceptably, and caused damage. Only then could the retailer be responsible for a breach of contract even though it never agreed to prevent diversion.