The latest in budding beauty takeovers is seeing cosmetics giants like Unilever and Puig vying for the Charlotte Tilbury brand. L’Oreal, Estée Lauder Cos., and Japanese beauty company Shiseido have also made presumably sizable bids for Tilbury’s 7-year old company, months after the British-born makeup artist to the stars first reportedly received a $1 billion takeover offer from Estée Lauder Cos. this past summer. According to Bloomberg, the company could ultimately “fetch more than $1.2 billion” in the sale. 

Founded in 2013, Charlotte Tilbury – which is known for its skincare products and matte lipsticks – has found fans in celebrities, consumers, and investors, alike, first raising an undisclosed sum in a 2014 funding round led by the Samos Investments and Venrex Investment Management in 2014, according to the PitchBook platform, followed by a similarly-undisclosed investment from venture capital firm Sequoia Capital in 2017. 

The impending sale “comes at a time when big beauty companies have been on an acquisition spree, as they seek to court younger shoppers with upstart brands,” according to Bloomberg. It follows from Coty Inc.’s headline-making acquisition of a 51 percent stake in reality star-turned-makeup mogul Kylie Jenner’s Kylie Cosmetics for $600 in November, putting a cool $1.2 billion valuation on the 6-year old cosmetics startup. 

That same month, Estée Lauder Cos. boosted its one-third stake in Have & Be Co., the South Korean skincare company that owns Dr. Jart+ cosmetics to assume full ownership, putting Have & Be Co.’s “total enterprise” valuation at approximately $1.7 billion. Also in November, private equity firm Advent International agreed to acquire prestige and professional hair care brand Olaplex, although the financial details of the transaction were not disclosed.

Meanwhile, a month prior, in October 2019, Japanese beauty conglomerate Shiseido acquired Drunk Elephant for $845 million, adding the “clean” skincare brand to its arsenal of brands, which includes Nars, Laura Mercier, and Bare Minerals, among others, in furtherance of its quest to expand its global presence.

Still yet, that summer, consumer goods giant Unilever – which owns Kate Sommerville, Murad, and Dermalogica – acquired California-based, Japan-developed skincare company Tatcha for a reported $500 million, and General Atlantic announced a “partnership and strategic growth investment” in Morphe Holdings. The latter saw the New York-based private equity firm acquire a majority stake in Morphe “alongside existing investor Summit Partners and co-founders Chris and Linda Tawil,” giving the influencer-driven beauty brand a valuation of more than $2.2 billion valuation.

Bloomberg notes that “a successful sale [of the Charlotte Tilbury brand] would show that large consumer companies still have an appetite to acquire independent brands despite the coronavirus pandemic, which has ended a decades-long boom in deals” following a particularly busy year for beauty M&A in 2019. Much of that activity was driven by “strategic acquisitions by larger players aiming to expand their scale and enhance capabilities to meet changing consumer preferences,” according to Ernst & Young, particularly as the industry “has been disrupted by the growth of direct-to-consumer channels such as e-commerce platforms and the use of social media to engage directly with consumers.”

In its January 2020 Personal Care M&A Overview Canada and US Market Insights report, EY further pointed to the “shift in consumer preferences” that the personal care market is experiencing, in much the same way as other consumer product segments. “Innovative start-ups are selling on trend natural, organic, clean and cruelty-free products, predominantly to millennial consumers, who are more informed and seek transparency in ingredients, packaging, sustainability and ethical sourcing,” leaving a lot of room for M&A activity by established names looking to bolster their roster of brands.

However, at least some of that deal-making has been put on hold, according to Reuters, with “German conglomerate Henkel and U.S. buyout fund KKR are holding off bidding for a portfolio of beauty brands that Coty is trying to sell as they fret over the fallout of the coronavirus pandemic.” The sale of the Coty-owned brands, which was expected to fetch about $7 billion earlier this year, has reportedly “hit a snag as hair salons and nail bars remain shut in most countries around the world.”

One thing is almost inevitable when it comes to famous, consumer-facing brands. The names and other easily-identifiable elements of the identity of these marketplace entities will be co-opted by bad actors looking to piggyback on and profit from such established appeal. With that universal truth in mind, the notion of bad faith has becoming an enduring issue in connection with trademark law, prompting countries across the globe to reflect on their own laws either via legislation or case law. That was precisely the case in 2018 when the Canadian government implemented its intellectual property strategy.

In 2018, the Canadian Trademarks Act was amended to add bad faith as a ground for the invalidation of a trademark registration and as a ground of opposition. The registration of a trademark is invalid if the application for registration was filed in bad faith. Similar considerations apply in the opposition of a trademark application. To date, no Canadian decisions have considered “bad faith” under the amendments but it is just a matter of time before this occurs. Similarly, in Europe, the topic of bad faith filings has been on the rise. To be exact, there have been several recent decisions which have considered “bad faith” allegations.

These decisions have clarified how the concept will be applied in the European Union and may be helpful in applying the Canadian provision, as well as similar provisions in other jurisdictions.

What Is Bad Faith?

In the European Union the concept of “bad faith” is undefined as it is in Canada. The Court of Justice of the EU, the EU’s highest court, in Koton Mağazacilik Tekstil Sanayi ve Ticaret v EUIPO has said that the meaning and scope of the words must be determined by considering their usual meaning in everyday language while considering the context in which the words are used and the objectives pursued by the legislation. In ordinary terms, the concept of “bad faith” assumes a dishonest state of mind or intention but the concept must be applied in trademark law which deals with the course of trade.

Trademark law in the EU is intended to contribute to a system of undistorted competition in which each competitor must, to attract and retain customers by the quality of its goods or services, be able to obtain a registered trademark which enables the consumer without confusion to distinguish the goods of each competitor from those of other traders. If an applicant applies not to engage fairly in competition or in a manner inconsistent with honest practices to obtain rights for purposes that do not fall within the functions of a trademark these will be potential acts of bad faith.

Finally, the intention of an applicant is a subjective matter which must be determined objectively by the court and any claim of bad faith must be subject to an overall assessment of all the factual circumstances of the case

The Sky PLC Decision

In Sky plc v. SkyKick UK Ltd, the Court of Justice further clarified its approach. Sky PLC is a well-known media and broadcasting company. SkyKick UK Ltd is a much smaller software company. Sky has a reputation for vigorously enforcing its trademark rights. It commenced an action for infringement against SkyKick in the UK. Sky owned trademark registrations that extended to the provision of software although it did not actually carry on business in this area. A reference was made by the trial judge to the Court to answer questions relating to the action and bad faith.

In answering the questions referred to it, the Court applied the approach described in its Koton decision. The Court said that the registration of a trademark by an applicant with no intention to use it in relation to the goods and services covered by the registration may constitute bad faith, where there is no rationale for the application, given the functions of a trademark as set out in the Koton decision. 

Such bad faith may be established only if there are objective, relevant and consistent indicia showing that, when the application for a trademark was filed, the applicant had the intention either of: a) undermining, in a manner inconsistent with honest practices, the interests of third parties, or b) obtaining, without targeting a specific third party, an exclusive right for purposes other than those falling within the functions of a trademark.

The court also concluded that where the ground for invalidity exists regarding only some goods or services for which the trademark is sought to be registered, the trademark should be declared invalid only for those goods or services.

John McKeown is counsel at Goldman, Sloan, Nash and Haber LLP. He focuses on providing advocacy and advice concerning intellectual property and related matters, including protecting trademarks, copyrights, patents, confidential information and misleading advertising and claims under the Competition Act.

Among some of the “most widely recognized works” of Damien Hirst come from a series a spot-centric paintings. A printed version of one of those colorful and dizzyingly grid-like works – which first appeared in the mid-1980s and have been produced almost every year since (as of 2012, Hirst said that he had been producing an average of 60 spot paintings a year) and which largely come with names “titles that are taken arbitrarily from the chemical company Sigma-Aldrich’s catalogue ‘Biochemicals for Research and Diagnostic Reagents,’ a book Hirst stumbled across in the early 1990’s” – is now the center of another largely controversial work. 

As it turns out, while 54-year old, British-born Hirst was busy creating a rainbow design to “pay tribute to the wonderful work [the United Kingdom’s National Health Service] staff are doing in hospitals around the country,” a group of American artists were crafting something of their own. Brooklyn-based creative collective MSCHF, which managed to purchase a limited print of Hirst’s $30,000 spot painting L-Isoleucine T-Butyl Ester, which Hirst created in 2018, decided to “indulge in a bit of creative destruction.” (The actual spot painting themselves usually sell for upwards of $1 million).

In other words, the group cut out each of the Damien Hirst-constructed spots –  88 in total – and sold them individually for $480 apiece, making a statement in the process, one that protests the treatment of artworks as “the archetypal value sink” with investors pooling together to buy art, which they then store and ultimately “flip [to another buyer or group of buyers] like a giant bill in a colorful currency arbitrage.” 

“Could there be a more tailor made [sic] vehicle for the affluent to store their wealth?,” MSCHF asks. 

(Veteran art dealer Michael Findlay touched on this (albeit from a slightly different angle) in his book, The Value Of Art: Money, Power, Beauty, in which he said that many artworks, particularly Hirst’s largely-mechanically-created spin paintings “come, like Starbucks coffee, in three sizes,” making them “more or less interchangeable and sold as branded items . . . rather than as unique works of art,” and thus, turning them into “commodities in the artist’s brand, or his signature, has replaced the artist’s hand as the foremost signifier of a work’s value and meaning” and “the strength of the artist’s name alone determines the value of the work”). 

MSCHF – which is heavily funded (it has raised “more than $11.5 million in outside investments since the fall of 2019”) and known for its “news-making stunts that straddle the lines of conceptual art, contemporary design, and internet gaggery,” according to Artnet – sold off the 88 individual 3.5-inch-wide spots within a matter of hours, while the ravaged canvas, itself, complete with 88 holes, is being auctioned off. The current bid on MSCHF’s site is $144,250. 

Reflecting on the art statement-turned-sale, the Telegraph states that MSCHF “decided to deface the work to illustrate their distaste for the commodification of art,” and in doing so, the group has made headlines across the world. Despite the widespread media attention, element of MSCHF’s venture has gone undiscussed: VARA. 

image via MSCHF

relatively obscure federal law, the Visual Artists Rights Act of 1990 (“VARA”) provides certain artists – such as those behind single or limited edition paintings, drawings, prints, photographs, or sculptures – with the right to sue of their “moral rights” in a work are violated. 

In other words, the law enables artists to prevent the destruction of a work of art if it is of “recognized stature” and allows artists to control the use of their name in connection with alterations of their works (and the sale of altered works), among other things, even after they have sold their creations. While copyright and physical ownership are property rights that can be freely transferred, moral rights stay with the artist no matter what. 

Unlike trademark-bearing products and most copyright-protected works, which, once they are sold by the rights holder’s, his/her rights to sue on infringement grounds are extinguished, VARA provides artists with an interesting remedy. 

Hardly a sweeping catch-all that protects all artworks and their creators, VARA “applies only to a restricted category of visual artworks, extends only limited rights, and is subject to loopholes, exclusions, and waiver provisions that substantially erode its powers,” according to former National Endowment for the Art general counsel Cynthia Esworthy. One instance that fits neatly within the bounds of VARA, per Esworthy? “You are a well-known painter. You discover that a company that has purchased one of your canvasses is advertising one-inch square portions of it so that buyers can ‘own an original painting’ by you.”

Sounds a bit familiar, doesn’t it. 

No mention has been made (to date, at least) that Hirst – who is famous “for pushing the boundaries of art, himself,” as Art Critique puts it – has any intention to take on MSCHF over its sale of the “single spots cut from Damien Hirst Spot Painting ‘L-Isoleucine T-Butyl Ester,’” as they describe the individual pieces of art on VARA grounds. However, if he were, he would have to establish that his print is of “recognized stature” and that MSCHF’s cut-and-sale of the work is “prejudicial to his honor or reputation.” 

If he could prove that, he would be looking at damages under VARA that consists of actual damages or statutory damages ranging from $300 to $30,000 per work that can be increased up to $150,000 per work for willful violations. Although, it likely would not be about the money for Hirst, who has routinely been labeled as the most commercially successful artist in the world.

As for whether MSCHF’s potentially transformative – and thus, fair – use of Hirst’s original work is relevant in a VARA setting, it might be. Cathay Smith asserted in her 2019 paper, “Creative Destruction: Copyright’s Fair Use Doctrine and the Moral Right of Integrity,” that while VARA “includes language explicitly making the right of integrity” – which applies when “separated panels of a single work of art are sold,” for instance – “’[s]ubject to’ copyright’s fair use doctrine, there have been no decisions in the U.S. interpreting how the doctrine might apply to a moral right of integrity claim.” 

Good data on the workings of multi-national brands’ supply chains is difficult to come by. For years, fashion and apparel brands, alike, have promised to police their supply chains in order to identify and root out unsafe labor conditions and abuse, particularly in the wake of the Rana Plaza tragedy in 2012, which saw the collapse of a structurally unsound building that housed garment suppliers for major Western brands, and which resulted in the death of more than 1,100 individuals. The headline-making tragedy made it clear that many of the market’s biggest brands could not accurately pin-point where – and in what conditions – their products were being made. 

As a result, a barrage of major brands joined various labor-and-supply chain-centric initiatives and rolled out glossy information campaigns to save face and drive home messages about the need to, and their willingness to participate in the clean up of their vast networks of suppliers in furtherance of a larger movement towards transparency in the $545 billion-or-so global clothing industry, which sees fashion brands make and sell as many as 150 billion garments each year. 

But the many promises and sustainability-centric campaigns, many of which landed big brands in top spots on various headline-making “transparency” and “sustainability” rankingsnew research from Cornell University’s School of Industrial and Labor Relations shows that many of fashion’s manufacturing problems still exist. Of particular interest for the Cornell researchers? The fact that much of the information given to the auditors that brands pay to inspect their suppliers’ factories was patently inaccurate, particularly in China and India. 

According to the latest information coming out of Cornell’s New Conversations Project, an independent research and action program that focuses on private and public regulation systems needed in order to end abusive labor practices in global supply chains, “more than half of the 31,652 factory audits conducted in those two countries over a seven-year period were based on falsified or unreliable information.”

As Jason Judd, the executive director, of the Cornell University ILR School New Conversations Project, and Sarosh Kuruvilla, a professor of Industrial Relations and Asian Studies and Public Affairs at Cornell, revealed in a recent article, “The unreliable audits showed laborers working fewer hours per week and suggested much higher compliance with local wage laws than the more reliable audits.” In one instance, they note that “labor audits of the same supplier by the same auditing firm in the same time period produced very different results.”  

“The share of inaccurate audits was lower in the other 11 countries in the study, but still the average unreliability of all of the 40,458 audits examined was about 45 percent,” which Judd and Kuruvilla say “means that brands cannot see the results of the many corporate social responsibility programs intended to track and improve working conditions in their suppliers’ factories.” As a result, there has not been “enough effort [to] improve conditions,” and thus, “consumers who want to use their spending to improve working conditions don’t have reliable information to inform their purchases.”

In order to ascertain the accuracy and reliability to the aforementioned audit information, a team at Cornell University’s School of Industrial and Labor Relations spent two years “building trust with apparel companies, suppliers and other groups and persuading them to let the researchers analyze their data.” In exchange, the Cornell team says that they signed nondisclosure agreements, thereby, enabling them to “work with unique, massive data sets never before available to researchers, [and] making it possible to see the inner workings of large-scale labor compliance programs and help them measure their impacts.” 

With “more reliable” information at hand, “a clearer picture begins” to arise, according to Judd and Kuruvilla, who note that “a recent analysis demonstrates how bad data on the fashion industry’s environmental impacts distorts efforts to change them.” For instance, “questionable facts plague the conversation around sustainability and fashion, and that makes the industry harder to regulate.” 

Reflecting on existing research and the findings from their own study, Judd and Kuruvilla state that “a mandatory system of due diligence – rather than the current voluntary one – may be necessary to fix the problem,” pointing to the fact that the European Commission “is considering a proposal that would require apparel, food and mining companies, among others, to implement human rights due diligence and accountability along their global supply chains and report publicly about their efforts.”

All the while, they assert that “better reporting by itself will not solve the problem, [and] workers and unions need to play a bigger role.” They point to a separate Cornell analysis, which found that “compliance with safety and labor laws increases significantly when workers are able to bargain with managers over working conditions,” something that may be bolstered in the not too distant future “as part of a new agreement with governments and brands like Adidas and H&M [that is] aimed at protecting the garment industry and its workers from a drop in demand due to the coronavirus recession.”

Amazon did not manage to avoid placement on an official U.S. government intellectual property “black list” of bad actors. On the heels of formal urgings from an apparel and footwear industry trade group and in light of reports late last year that the Trump Administration was considering adding some of the foreign offshoots of Jeff Bezos’ e-commerce empire to the U.S. Trade Representative’s annual “Notorious Markets” report, a number of Amazon’s “foreign domains” are, in fact, name-checked on the an annual report that identifies “specific markets” across the globe that are “reported to be engaging in and facilitating substantial copyright piracy and trademark counterfeiting.”

After reportedly skirting placement on the U.S. Trade Representative (“USTR”)’s 2018 Review of Notorious Markets for Counterfeiting and Piracy, a handful of Amazon’s international e-commerce arms are specifically cited on the 2019 Review, which was released on Wednesday. In connection with its inclusion of Amazon’s platforms in Canada, the United Kingdom, Germany, France, and India, the USTR asserted that “submissions by right holders expressed concerns regarding the challenges related to combating counterfeits with respect to e-commerce platforms around the world.”

One submission, in particular, presumably from the American Apparel and Footwear Association (“AAFA”) – which formally called on the USTR late last year to include “amazon.co.uk (United Kingdom), amazon.ca (Canada), and amazon.de (Germany), amazon.fr (France) and amazon.in (India)” on its list – “highlighted examples of the challenges right holders face with alleged high levels of counterfeit goods on the [aforementioned Amazon] e-commerce platforms.”

(Responding to the AAFA’s October 1, 2019 letter to the USTR, Brian Huseman, Amazon’s Vice President of Public Policy, sent a letter of his own to the USTR, detailing Amazon’s approach to counterfeiting, and also accusing the AAFA of “conflating concerns about counterfeits with questions like the ‘unauthorized’ distribution of authentic products,” and thereby, undermining their “shared goal of combatting counterfeiting.”)

The USTR’s Review says that the government agency – which is tasked with developing and recommending U.S. trade policy conducting trade negotiations at bilateral and multilateral levels, and coordinating trade policy within the government – “did not request submissions on U.S. based e- commerce platforms and online third-party marketplaces, such as Amazon.com,” although the Trump Administration “has been looking further at their role” in the larger counterfeiting landscape. Instead, the USTR’s list focuses exclusively on international markets and alleged “bad actors” within those markets. 

Specifically addressing Amazon, the nearly 50-page report states that “as the scale and sophistication of the counterfeiters have continued to grow and evolve over the years, right holders indicate that Amazon should commit the resources necessary to make their brand protection programs scalable, transparent, and most importantly, effective,” particularly given the allegation that “anyone can become a seller on Amazon with too much ease because Amazon does not sufficiently vet sellers on its platforms.” 

According to the report, one Amazon-specific submission pointed to the fact that “Amazon’s counterfeit removal processes can be lengthy and burdensome, even for right holders that enroll in Amazon’s brand protection programs,” making “additional actions [by Amazon] to address such concerns” – such as the $1 trillion e-commerce titan “being more responsive to complaints of counterfeits by right holders, and being more proactive in preventing counterfeit goods from appearing on the platform” – absolutely critical. 

The potential inclusion of Amazon’s international arms on the U.S. government’s list, a first for the e-commerce behemoth, was characterized as a “watershed event” late last year by the Wall Street Journal, largely due to the company’s American heritage.

Beyond Amazon, the USTR’s Review highlights a number Chinese e-commerce marketplaces – from Alibaba’s TaoBao platform, which holds the title of the largest online marketplace in China, to DHgate, the largest business-to-business cross-border e-commerce platform in China, and Pinduoduo, which is China’s second-largest e-commerce platform based on number of users. While the report asserts that “Alibaba has reported that Taobao has taken a number of actions to implement [the recommendations previously set forth by the USTR], Taobao remains one of the largest sources of counterfeit sales in China.” 

Inclusion on the USTR’s list does not carry any direct penalties, and instead, is used to encourage foreign entities and nations to crack down on piracy and counterfeiting. Nonetheless, being name-checked on the list is generally considered to take a reputational toll in the individual company, particularly for the likes of Alibaba, which has been steadfastly working to shed perceptions that its websites are riddled with fakes – a key to gaining a bigger international customer base and taking market share from global competitors, such as eBay and Amazon, as well as domestic rivals. 

The WSJ echoed this sentiment earlier this year when it asserted that inclusion can be “a public-relations problem for companies on the list,” and “bring significant pressure to Washington’s international negotiations and interactions with them and their home countries.”

As for Amazon, which is also on the government’s radar in connection with a sweeping, multi-company antitrust probe, a spokesperson said on Wednesday, “We strongly disagree with the characterization of Amazon in this USTR report. This purely political act is another example of the Administration using the U.S. government to advance a personal vendetta against Amazon. Amazon makes significant investments in proactive technologies and processes to detect and stop bad actors and potentially counterfeit products from being sold in our stores.”

Specifically, the spokesman stated that in 2019, alone, Amazon “stopped over 2.5 million suspected bad actors from opening Amazon selling accounts before they published a single listing for sale, blocking more than 6 billion suspected bad listings before they were published to our stores,” and noted that “more than 99.9% of pages viewed by customers on Amazon have never had a report of counterfeit, and this is a testament to our continued innovation, collaboration, and commitment to fighting counterfeits.”