Seed Beauty has sought to do away with the case that it filed against Kim Kardashian’s KKW Beauty, and the one that it waged against Coty and Kylie Jenner’s corporate entity King Kylie, LLC, lodging a request for dismissal in both cases with a California state court on August 3. The filings from Seed Beauty – the beauty brand incubator responsible for helping to launch and manufacture Kylie Cosmetics and KKW Beauty’s products – come a little over two months after the defendants alerted a California Superior Court in Los Angeles of settlements in the respective trade secret misappropriation cases that have been underway since last year.
The cases got their start in June and July 2020, when Seed Beauty filed suit against KKW and then against Coty and Jenner, asserting that by virtue of their partnership, both KKW and King Kylie, LLC were privy to an array of Seed’s trade secret information, and that such valuable information was at risk in light of Coty’s acquisition of sizable stakes in KKW and Kylie Cosmetics. (Coty acquired majority stake in Kylie Cosmetics in November 2019 for $600 million, and announced plans to take a 20 percent stake in KKW in June 2020.) In both suits, Seed argued that some of its “highly sensitive trade secret information” was at risk of “imminent and material threat of misappropriation” by the defendants.
These trade secrets – which Kylie Cosmetics and KKW allegedly had access to as a result of their close ties to Seed – are “essential to Seed Beauty’s competitive position in the beauty and cosmetics industry,” the company argued in its complaints, asserting that the information consisted of protectable elements of its business that 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.”
Seed went on to assert that the risk of misappropriation was particularly high due to Coty’s alleged desire to copy its “unique business model” – which “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,” per Seed – for its own benefit, and also due to Coty’s alleged willingness to “cross the legal line when it decided to rebuild itself by stealing every aspect of Seed’s pioneering business model” by way of the KKW and Kylie Cosmetics acquisitions.
With such alleged harm in mind, Seed sought a temporary restraining order (“TRO”) to prevent KKW “and all those acting in concert with it … from directly or indirectly disclosing, misappropriating, or facilitating the disclosure or misappropriation of, or sharing in any way any details related to the Seed-KKW Beauty business relationship or arrangement with Coty.” In light of “the imminent threat of harm that Seed was likely to sustain without injunctive relief,” the court granted its request for a TRO, and thereafter, in August 2020, the court extended that relief to Coty in connection with the subsequently-filed King Kylie case.
All the while, Kylie and KKW initiated arbitration against Seed, which characterized the proceedings in an April 2021 motion as little more than “compulsory counterclaims to [its] original claims, [as] they involve the same contracts, the same business relationships, and the same parties,” and argued that the court should stay or dismiss the arbitrations due to “the significant ‘possibility of conflicting rulings on a common issue of law or fact,’ and a severe risk of prejudice to Seed.”
Fast forward to August 3, and it seems that the parties have managed to settle their suits, which, nonetheless, provide takeaways for companies in the midst of an ongoing fashion and luxury industry M&A boom. Among other things, the case serves as a reminder that “companies seeking to acquire other businesses should consider the risk of trade secret misappropriation claims brought by third parties,” according to Knobbe Martens attorneys Charlene Azema, Catherine Holland, and Alexander Zeng, who note that such claims may arise in connection with parties conducting due diligence on targets for potential acquisition, and in particular, “when the target had a prior relationship with competitors of the acquiring company, as was the case between Seed and Coty.”
Not the only cases of this kind to come into fruition as of late, Le Tote filed a trade secret misappropriation suit against Urban Outfitters in June 2020 after the retailer allegedly gained access to an array of valuable information under the guise of a potential acquisition, and then abandoned the M&A talks and launched a copycat rental service of its own to “compete directly with Le Tote,” using that “stolen” information. That case is still underway, with Judge Petrese Tucker of the U.S. District Court for the Eastern District of Pennsylvania siding with Le Tote in an order and corresponding memo dated June 24, in which she held that despite Urban’s arguments to the contrary, Le Tote “appropriately pled a claim for misappropriation of trade secrets under both the federal Defend Trade Secrets Act and its Pennsylvania state law analogue.”
And before that, Olaplex filed suit and then landed a $66 million win in the trade secret suit that it filed against L’Oreal in January 2017, in which the haircare startup accused the beauty titan of pilfering confidential information about its products during potential M&A discussions for a deal that never came to be.
Ultimately, this recent bout of trade secret cases may only end up growing further in number in light of the enduring industry consolidation that has come in the wake of the COVID-19 pandemic, thereby, demonstrating that “the risk for acquiring companies” – or potentially acquiring companies – “might be higher than [acquiring parties] think,” says Mark McCareins, a clinical professor of business law at Northwestern’s Kellogg School of Business. This is true regardless of whether the deal actually comes into fruition (which was the case for the Kardashian/Jenner and Coty transactions) or not, the latter of which is what played out in the Le Tote and L’Oreal cases.