Enforcing Rights Against Product Diversion

Some manufacturers intend to distribute their products in limited markets. Examples include manufacturers of professional hair care and beauty products who intend their products only for salon use and sale, or other manufacturers who intend their products to be sold only by select full service retailers. “Product diversion” (which is also sometimes referred to as “gray market” or “parallel distribution”) severely disrupts the channels of distribution established and supported by manufacturers and authorized distributors. Because the products usually cannot be obtained outside of the authorized distribution channels through any legitimate means, diverted products are often acquired by deception and fraud. Discount and warehouse retailers such as Costco and Target Stores, supermarket chains such as Kroger and American Stores, and drug store outlets such as Drug Emporium, Fred Meyer and CVS, are often eager to handle diverted merchandise so that they can profit from the efforts of the manufacturers and authorized distributors to develop and support the market for their products. The diverters’ conduct harms manufacturers, distributors, retailers and, ultimately, consumers.

Conkle, Kremer & Engel enforces the rights of manufacturers and authorized distributors to control the channels of distribution of their products. Conkle, Kremer & Engel has pursued claims against all of the retailers mentioned above. We bring unfair competition and other claims against the participants, to remedy the wrongful acts involved in product diversion. We often obtain immediate injunctive relief, in which a court orders particular wrongful activity stopped. We have also recovered damages, including disgorgement of the defendants’ profits and reimbursement of attorneys’ fees.

A Few Conkle, Kremer & Engel’s Cases Involving Enforcing Rights Against Product Diversion, Parallel Channel Distribution and Gray Market Goods

Conkle, Kremer & Engel’s recent matters involving stopping product diversion activities include:

Sebastian International, Inc. v. Russolillo, United States District Court Civil Action No. 00-03476-CM

Conkle, Kremer & Engel has represented Sebastian International against numerous businesses involved in sales of diverted Sebastian professional hair care products, including Quality King Distributors, Damian Christopher, CVS, Rite Aid and others. Several important published decisions have been entered in this action, including the following:

Retailers of diverted professional hair care products can be liable for interference with the manufacturer’s contractual relations with distributors and salons [162 F.Supp.2d 1198 (USDC CD CA 2001)

Conkle, Kremer & Engel has obtained an adjudication for its client, Sebastian International, Inc. that retailers such as CVS and Rite Aid, who sell diverted Sebastian hair care products, may be liable for interference with Sebastian’s contractual relations under California law. The retailers claimed they had no liability for interference because they “merely purchased the products on the open market.” The Court held that retailers can be liable if they knew with “substantial certainty” that a “necessary consequence” of their actions would be that the manufacturer’s performance of its contractual relations with distributors and salons would be made more expensive or burdensome.

Sales of diverted hair care products with manufacturers’ codes removed, altered or covered violates California criminal law[151 F.Supp. 2d 1215 (USDC CD CA 2001)]

Transactions in gray market hair care products violate California Penal Code Section 537e, which prohibits the purchase, sale, possession or disposal of any personal property with its manufacturer’s codes removed, covered, altered or obliterated. The United States District Court held in favor of Conkle, Kremer & Engel’s client, Sebastian International, that Section 537e applies to prohibit such decoding of any and all personal property. Sebastian contends that product diversion involving such decoded product constitutes unfair competition.

Gray market product diverters may be liable for racketeering, even if wire and mail communications were not themselves fraudulent. [128 F.Supp. 2d 630 (USDC CD CA 2000)]

The United States District Court for the Central District of California agreed with Conkle, Kremer & Engel and its client, Sebastian International, that a defendant in a racketeering (RICO) case need not have itself made false statements in wire or mail communications. A defendant may be liable if someone involved in the fraudulent scheme used mail, telephone, fax or private or public carrier in furtherance of the plan. The decision is a major blow to those who engage in racketeering activities, including fraudulent product diversion in interstate or foreign commerce.

• Injunctions and judgments in major litigation action by Conkle, Kremer & Engel against more than 40 defendants involved in diverting professional hair care products manufactured and distributed by Joico Laboratories.

• Court injunctions against Costco’s wrongful diversion of gray market goods, professional hair care products manufactured and distributed by Joico Laboratories and Sebastian International. Costco violated those injunctions by continuing prohibited activity, and was held in contempt of court

• Numerous judgments against faithless distributors who were involved in product diversion.