One recently settled New York federal court case was brought by a consortium of beauty salons. The salons sued several major beauty-product manufacturers, alleging that they were promoting diversion of haircare products and so “salon only” labels were false advertising. According to the complaint, manufacturers reap several benefits from labeling their products for salon sales only. That labeling enhances the image of professional products and allows the manufacturers to rely on salon recommendations instead of investing heavily in advertising. The plaintiffs alleged that the product manufacturers encouraged diversion so they could have a larger market for products while at the same time acquiring exclusive cachet. The salons said diversion harms them by damaging their reputations with customers who find the same products labeled “for sale in salons only” in chain drugstores. Customers blame salons for the false labels according to the plaintiffs. The plaintiffs alleged that the manufacturers knew that the “salon only” labels were false. The salons had the same issue with ads and claims the manufacturers made on their websites. They said the ads, labels and claims on websites are intended to confuse consumers; and said that the websites are false when they say the manufacturers oppose diversion.
The manufacturers asked the court to dismiss the case on several theories, including that the salons weren’t injured because salon-only labels, ads and websites encourage consumers to purchase products at salons and so they actually help the salons make sales. The court refused to dismiss the case on this ground and said that the plaintiffs might have been injured and could argue that consumers’ negative views of salon-only advertising could harm the salons. The manufacturers also argued that consumers don’t take the salon-only labels into account when they make purchases, but the court said that the salon-only claims could make the professional products stand out from mass-market products in consumers’ minds. As a result, the court allowed the case to go forward.
The judge in the case noted recently that the salons didn’t agree on what they wanted out of the litigation. Some wanted manufacturers to keep the salon-only labels on their beauty products and prevent diversion, presumably so they could have the profits from more product sales. Other salons wanted the manufacturers to take off the salon-only labels because of the distrust they engendered with customers. This highlighted that the case was brought to stop false advertising, but some of the salons were more interested in stopping diversion than in stopping the manufacturers from claiming that the products were for sale only in salons.
The salons and manufacturers settled the New York case at the end of March, and so the court did not have a chance to make law on whether salon diversion can be stopped on the theory that salon-only labeling is false advertising if diversion exists.
Salon diversion is a controversial topic for many industry participants, no matter which side of the issue they are on. The only thing that’s for certain is that there will be more lawsuits in the future. If those lawsuits are anything like the ones so far, they will be creative and important to follow.
This copyrighted article is intended to help make you aware of some of the issues that you may face, but it is not exhaustive and does not constitute legal advice. You should consult your lawyer for legal advice about the particular circumstances of your beauty business.
Jean Warshaw is a lawyer in private practice in New York City. She provides advice on business and environmental law. She can be reached at 212.722.2240.