Early this month, Kim Kardashian made headlines in connection with an allegedly impending “collaboration” between her KKW Beauty brand and cosmetics giant Coty, which acquired a controlling stake in sister Kylie Jenner’s $1 billion Kylie Cosmetics last year. Now, Kardashian’s brand is being sued by a former partner in an attempt to prevent the mega-star from sharing “highly sensitive and confidential trade secret information” with Coty, and thereby, threatening to cause “irreparable harm” to the California-based company that helped Kardashian to launch KKW back in 2017.
According to the heavily-redacted complaint filed in a California state court on Friday, Seed Beauty and MM Cosmetics claim that in 2015, a year after they helped to launch sister Kylie Jenner’s Kylie Cosmetics, “Kardashian approached [them] to do the same with her beauty and cosmetics brand.” In the process of building the KKW brand and its range of buzzy beauty products, Seed claims that Kardashian’s company was privy to its trade secret information and now, in light of KKW’s alleged deal with Coty, Seed is at risk of “imminent and material threat of KKW’s misappropriation of [such] highly sensitive trade secret information.”
Defined broadly as any proprietary business information that provides a company with a competitive advantage, trade secrets, which are a form of legally-protectable intellectual property, can take the form of anything from supplier information and customer lists to advertising strategies and distribution methods. While the trade secret information at play here is redacted in the complaint, and thus, not disclosed to the public, Seed Beauty generally asserts that its “business model” as a whole and “the contracts related to its various product lines are maintained as trade secrets.”
Founded in 2014 and responsible for helping to launch Kylie Cosmetics, KKW, and Tati Beauty, among other brand, Seed Beauty asserts that it is “a leading brand-incubator, developer, manufacturer, distributor, and seller of beauty and cosmetics products.” The company claims that its “unique business model has enabled it to create, develop, manufacture, store, sell, and distribute products for multiple direct-to-consumer brands all under one roof and bring products to market in record speed based entirely on consumer demand,” thereby, giving rise to an array of trade secret elements.
Specifically, the company claims that because its business consists of “full scale, one-stop-shop creative and logistical development services for young and/or start-up beauty brands, the details of [its] exclusive relationships with its beauty brand partners necessarily include highly sensitive, confidential and trade secret information regarding these relationships (including key negotiated deal terms), as well as the operation of Seed Beauty and its business model.”
More than that, Seed asserts that its “vertical integration capabilities,” which is one if its “most unique competencies,” and certain undisclosed “deals between [its] and its partners are carefully maintained as trade secrets and are not shared with competitors, [and] the structure of those partnerships, as well as the economic terms, are key differentiators under Seed Beauty’s business model and are important to See Beauty’s success.” They are “not generally known in the beauty industry, and could not be learned by others, if at all, without considerable expenditure of time, effort, or expenses,” according to Seed Beauty, making them valuable and “strictly confidential” trade secrets.
“Seed Beauty derives economic value from [such] information not being made public, and any competitor who acquired such information would be given an unfair competitive advantage,” which is why it says that it goes to great lengths to maintain the confidentiality of such information by restricting access to the information to only certain employees, physically securing its offices and ensuring that its computer systems are not accessible without passwords, and requiring that all employees sign non-disclosure agreements to be sure that such information is kept confidential.
The company claims that its “competitive position would be gravely harmed if one of its competitors were to gain access to the Seed Beauty Trade Secrets, as this would allow the competing company to exploit many years’ worth of highly valuable knowledge and information,” and yet, given Kardashian’s reported deal with Coty, this is precisely what is at stake, Seed claims, arguing that there is “a concrete threat that KKW will disclose Seed Beauty trade secrets to one of Seed Beauty’s largest competitors, Coty, unless KKW is enjoined from doing so.”
Such a risk is imminent for a number of reasons, according to Seed Beauty, which asserts that while co-founder and CEO John Nelson notified representatives for Kylie Jenner’s corporate entity in the midst of Kylie Cosmetics’ acquisition by Coty to ensure that Seed’s trade secret information was not shared with Coty, Jenner’s company “refused” on multiple occasions “to confirm or deny whether it had disclosed [such information] to Coty.” (Seed asserts that Coty’s acquisition of Kylie Cosmetics “violated material terms of [one] the parties’ agreements,” but notes that the complaint at hand is “limited to KKW’s anticipated wrongful conduct.”).
Seed fears that the same thing will transpire in connection with the allegedly looming Coty, KKW deal, one that Seed claims is not merely a “collaboration” as widely reported by the media, but instead, will take the form of “a majority-stake investment in KKW” by Coty in furtherance of which “representatives of Coty have requested certain disclosures from KKW, including but not limited to copies of material commercial agreements,” which Seed says would encompass an array of its trade secret information.
As a result of Jenner’s “previous failures to provide a clear answer related to the disclosure” of such alleged trade secret information, and “because of the imminent discussions between KKW and Coty,” Seed Beauty argues that it is “gravely concerned that KKW will disclosure Seed Beauty trade secrets to Coty,” and asks the court to formally prevent the budding brand from doing so.
While trade secret information is generally part of what a buyer is getting when it acquires another company, in much the same way as it assumes ownership of other key intangible assets, such as trademarks, the situation is complicated here due to the fact that the confidential information at play is not owned by KKW and instead, remains the property of Seed Beauty.
With that in mind, Seed sets out claims of Misappropriation of Trade Secrets in Violation of California Uniform Trade Secret Act and Declaratory Relief, asking the court to immediately and permanently bar KKW from disclosing the confidential information at play “to Coty or any other similarly-situated third party.” The company is also seeking damages and costs to be proven at trial.
The case presents an important element of doing business: how to deal with trade secret information, specifically in the context of acquisitions. While traditionally under-discussed, trade secret misappropriation by acquisition has received increased attention in recent years in light of headline-making matters, such as the since-settled lawsuit between Alphabet’s Waymo and Uber, a case that centered on Uber’s acquisition of self-driving startup Ottomotto, which was launched by former Waymo engineer, Anthony Levandowski. One of the central issues in the case, according to Mark McCareins, a clinical professor of business law at the Kellogg School, was whether Uber’s decision to buy the startup was really just an attempt to poach trade secrets from one of its closest competitors since Levandowski could not actually un-learn the knowledge he acquired while at Waymo.
“Executives should pay attention to this,” McCareins says. “Whether you’re selling a company or buying one, you don’t want the deal to unwind because of a trade secret challenge.” As such, trade secrets can play a notable role in terms of the risks associated with mergers and acquisitions, especially in an age where more and more startups are acquired not necessarily for their assets but their talent. “The danger with these acquisitions is that a company might unintentionally obtain trade secrets and expose themselves to a lawsuit, even the prospect of paying damages.”
UPDATE (June 29, 2020): According to statement from Coty, it “will acquire a 20 percent ownership interest in Kardashian West’s beauty business for $200 million” in furtherance of a “strategic transaction to further develop Kardashian West’s business globally.” Coty “will have overall responsibility for the portfolio’s development in skincare, haircare, personal care and nail products, leveraging its deep understanding of the industry and its commercial and go-to-market expertise.” The company also stated, “Together, Coty and Kardashian West will focus on entering new beauty categories and global expansion beyond her existing product lines. Kardashian West and her team will lead all creative efforts in terms of product and communications initiatives, building on her remarkable global reach capabilities through social media.”
*The case is Seed Beauty, LLC and MM Cosmetics, LLC v. KKW Beauty, LLC, 20VECV00684 (Cal.Sup.).