A number of U.S. states are banning the sale of cosmetics that have been tested on animals, with Virginia becoming the newest name on a slowly growing list. On the heels of California, Nevada and Illinois taking an official stance against animal-tested products, such as makeup, skincare, and haircare goods in recent years, beginning in 2018 with California (which piggybacked on an existing 2002 law that focused on animal testing), Virginia Governor Ralph Northam signed the Humane Cosmetics Act into law on March 16, formally prohibiting cosmetics manufacturers from “conducting or contracting for cosmetic animal testing [within the state]” and from selling animal-tested products beginning on January 1, 2022. 

The rise in state-specific anti-animal testing legislation in California, Nevada, Illinois, and now Virginia is expected to be part of a larger effort on a state-by-state basis, as ABC reports that “several other states, including New Jersey, Maryland, Rhode Island, Hawaii and New York may also pass similar laws” in the not-too-distant future. Such legislative activity is also expected to translate to a federal bill, with Congressional Representative Don Beyer of Virginia revealing on Twitter this month that he intends to “reintroduce federal legislation to make this the standard across the country.” 

The push is being celebrated by consumers and animal advocacy groups, alike. “This fantastic news illustrates a growing momentum in efforts to end unnecessary testing on animals in the United States and around the world for products like shampoos, mascara and lipstick,” the Humane Society of the U.S.  asserted on the heels of the passage of the Virginia state legislation, noting that “consumers are scanning labels and demanding products free of animal testing, cosmetics companies are listening to them and changing their practices, and lawmakers are solidifying these changes into permanent policy.”

But how much will such efforts really change the business status quo? Chances are, a lot less than you might expect – at least when it comes to sales of cosmetics products in the U.S. and some other major Western markets. As it turns out, many companies have already distanced themselves from animal testing – hence, the wave of “cruelty free” cosmetics, and thus, rely on other methods to prove the safety (and efficacy) of their products. Cosmetics stalwart Estee Lauder Co., for instance, boasts that it was “one of the first cosmetics companies to eliminate animal testing as a method of determining product safety” more than 30 years ago, while newer market entrant Drunk Elephant made its name beginning in 2012 based on the fact that none of its ingredients, formulations, or finished products are tested on animals.

Looking Beyond the U.S.

With brands having already adopted a cruelty-free approach to testing (and in a swiftly growing number of instances, offering up vegan products to meet mounting consumer demand), this budding trend of anti-animal testing legislation is not expected to cause substantial disruptions from a practical standpoint. There is one place where these laws have proven to be consequential: China. As international brands well know, China has long-maintained a requirement that most cosmetics sold in that nation of more than 1.4 billion people must undergo testing on animals by Chinese regulators before hitting the market. 

With such stringent Chinese regulations in mind, these state laws have not been without significance. For one thing, they have made it difficult for non-native cruelty-free brands to enter the Chinese market without working with an established cross-border e-commerce company, such as Alibaba, or by making changes to their own processes (and risking consumer pushback as a result) . But beyond that, the growing number of state animal testing laws is noteworthy, according to the Associated Press, in that such legislation “draws a line in the sand” when it comes to China and its burgeoning beauty market given China’s requirement of pre-market testing of imported cosmetics. Such domestic legislation has aimed, in large part, to “put pressure on the U.S. government to pass a nationwide ban” and help end China’s animal testing requirements, the AP asserted last year. (To date, “the only exception” to China’s animal-testing rules has existed for companies whose cosmetics are sold through cross-border e-commerce sites, such as Alibaba’s Tmall and JD.com.)

Interestingly enough, a recent declaration from China’s National Medical Products Administration seems to indicate that a nation-wide ban in the U.S. is not necessary to get China to ease on some of its animal testing rules. In an announcement in early March, the Chinese government agency tasked with ensuring the safety of food, health food and cosmetics revealed that it will implement new regulations, including an exemption to the otherwise mandatory pre-market animal testing of certain imported general-use cosmetics, this spring. As of May 1, 2021, importers of general cosmetics – as distinct from “special-use” cosmetics, such as hair dyes, skin whitening products, and sunscreens, etc. – will not need to submit to animal testing if they can produce: (1) a certification issued by the authorities in the country of origin regarding a quality management system for cosmetics production; and (2) product safety evaluation results that can sufficiently prove the product’s safety.

China is not swearing off animal testing across the board, as the newly-revised rules apply only to pre-market animal testing (i.e., they do not change the requirements around secondary animal testing requirements in case of customer complaints or product recalls) and to general use cosmetics. Nonetheless, Shanghai-based attorney Maarten Roos says that the new “specifications are a clear sign that China is relaxing its principled stance on the issue” of animal testing. 

The Rise in Cruelty-Free

Roos notes that China’s adoption of new regulations in the beauty space – including providing for a simplified filing system for new ingredients and reducing “special-use” categories, among other things – “clearly indicate that China is trying to streamline its regulatory framework for the industry.” And they come as part of a larger efforts to stomp out animal testing, which coincides with consumers across the globe increasingly scrutinizing the labels on their cosmetics, and prioritizing various alternatives to traditional beauty products, including cruelty-free ones. As such, the market for cruelty-free cosmetics has grown significantly in recent years in the U.S., alone, and is expected to reach $10 billion in value by 2024, according to a recent Market Research Future report. 

In China, where consumers were responsible for a reported $62.8 billion in annual sales in 2020, the market for cruelty-free and natural beauty products is currently experiencing a “coming of age” moment. Despite years of mandated animal testing, AgencyChina states that “the majority of Chinese consumers” are, in fact, interested in natural beauty products, including ones that are free of animal testing and/or animal byproducts, and are “willing to pay a premium to access” these products. The Shanghai-based e-commerce and marketing consultancy notes that such a budding affinity for a wider pool of cosmetics “is being stoked through social media platforms, where users can read reviews about niche brands that have strong word of mouth, garnering more interest for cruelty-free skincare in China.” 

While regulatory hurdles have made this difficult for many brands to date, changes in Chinese law are expected to lead to an influx of international cosmetics brands that wish to expand into China’s sweeping cosmetics market (which is the second largest in the world behind the U.S.) on their own and without needing to rely on third-party platforms to do so.

On the heels of CVC announcing early this month that it would buy Shiseido’s shampoo and affordable skin-care business for a whopping $1 billion, as the Japanese giant looks to focus exclusively on its upmarket offerings, and Function of Beauty touting a $150 million strategic minority investment from L Catterton before that, Estée Lauder Companies Inc. revealed that it is the latest mover in the beauty M&A (mergers and acquisitions) market. The New York-based cosmetics titan revealed in a statement on Tuesday that it has entered into an agreement to increase its investment in the burgeoning DECIEM Beauty Group Inc. from approximately 29 percent to roughly 76 percent. 

75-year-old Estée Lauder Co. confirmed on Tuesday that the deal with 8-year old DECIEM – a Toronto, Canada-based, vertically integrated, multi-brand company, whose labels include NIOD and The Ordinary, among others – is expected to close in the quarter ending June 30, 2021, with the cosmetics giant saying that it has “agreed to purchase the remaining [24 percent] interest after a three-year period” to complete the second phase of the transaction. The deal, as a whole, puts a $2.2 billion valuation on DECIEM, which generated net sales of about $460 million for the fiscal year ending on January 31, 2021. 

Founded in 2013 by Brandon Truaxe, the late “visionary who set out to change the beauty industry through authenticity and transparency,” according to Estée Lauder Co., DECIEM is one of the most successful skincare companies that has come from “an explosive growth in independent ‘disruptor’ brands” that were able to scale rapidly in recent years, driven in large part by their embrace of social media and e-commerce (oftentimes in a direct-to-consumer capacity), UDL Intellectual Property consultant Mark Green stated, reflecting on the boom in skincare and beauty startups, and the rise in trademark filings (and other protections) that have come with them. 

Relatively “cheaper manufacturing costs have reduced the barriers to entry” for many modern brands, according to Green, who says that many savvy companies were able to avoid traditional – and eye-wateringly expensive – advertising methods to reach digitally-connected millennial and Gen-Z consumers. More than that, in addition to bringing something different to the table (affordability paired with “authenticity and transparency” in skincare in the DECIEM-owned The Ordinary’s case), many of the most successful players in the burgeoning beauty industry regularly “engage with their customers,” giving them to ability to identify and “react quickly to their needs and trends,” he says, in order to produce and/or pivot as necessary.  

“I believe this is the coolest, most interesting category around right now,” Ross Blankenship, a venture capitalist at Angel Kings, told Crunchbase News a few years ago, in reference to the skincare and beauty industry that was growing outside of the traditional realm of cosmetics titans. “The profit margins of beauty and cosmetics are so high, especially compared to perishables, which attracts investors” – and in some cases, most established market players – “to these fresh startups long-term.” And this remains true. It is, after all, precisely what has happened for DECIEM and other similarly-situated upstarts, such as Kylie Cosmetics, 51 percent of which was scooped up by cosmetics titan Coty, Inc., for instance, her sister Kim Kardashian’s KKW brand, which struck a similar deal with Coty, and Charlotte Tilbury’s eponymous label, which was snapped up by fragrance giant Puig

Certainly, the digitally-friendly nature – and the young(ish) consumer pools – of these acquirees is a draw for big beauty companies, which “have been on an acquisition spree” in recent years, per Bloomberg, in furtherance of an industry-wide quest “to court younger shoppers with upstart brands.” At the same time, the intellectual property assets of these formerly-indie brands are a big driver for buyers. After all, “If there is no IP,” there is “no brand protection, [and] no value,” Green says, asserting that indie brands – no matter the market segment – “need to build up their brand protection” in order to be “ready for investment and buy-outs [and thereby], make the next market leap.” (This is something that millennial beauty unicorn Glossier clearly understands).

This is significant not only because “brand and brand image is [a] paramount” factor for consumers when it comes to cosmetics (and fashion, too, of course), but it is also noteworthy given that such M&A activity is expected to continue in 2021 in light of a larger move towards consolidation, spurred at least in part by the onset and impact of COVID-19. Unilever, for one, expects to double-down on deals in the beauty space, with CEO Alan Jope saying at the Consumer Analyst Group of New York Conference this month that the American consumer goods behemoth is in the process of making “strategic choices,” including in the beauty space, for “organic investment and particularly, for acquisitions.” 

Jope revealed that Unilever has achieved “good progress” in terms of building out is beauty division, citing acquisitions of Dermalogica and Tatcha, and plans to continue its focus on skincare and upmarket beauty products in order to woo millennial and Gen-Z consumers, while also boosting its e-commerce capabilities since that channel has grown to account for more than half of “prestige” beauty product sales since the pandemic.  

With such enduring M&A at play in the beauty space and beyond, Green encourages brands to prioritize their efforts on the legal front: “Securing strong protection through trademarks is the first thing brand owners should do when going to market.” 

A couple of skin-lightening products marketed to Chinese consumers have landed Chanel on the wrong side of market regulators. The French luxury titan has been hit with a $30,500 administrative penalty and a formal order barring it from making unsubstantiated claims in connection with its marketing of its Le Blanc Masque Healthy Light Creator Mask and Sublimage La Crème Ultimate Skin Regeneration Texture Suprême products, the Jing’an District Administration for Market Regulation recently announced. 

After receiving consumer complaints about the effectiveness of Chanel’s Le Blanc Masque and Sublimage La Crème, namely, in connection with the products’ advertised skin-lightening capabilities, the Jing’an District Administration for Market Regulation initiated a probe and found that despite Chanel’s marketing messages, neither of the two creams “contain ingredients [capable of performing] such functions.” Moreover, the market regulator stated that Chanel could not provide clinical substantiation to prove the merit of its product-performance claims, such as that they could “inhibit melanin” and “fade dark spots.”

In levying the fine and advertising ban on Chanel in a decision dated November 12, the Jing’an District Administration for Market Regulation cited violations of the Advertising Law of the People’s Republic of China, namely Article 28, which prohibits “any advertisement that defrauds or misleads consumers with any false or misleading content shall be a false advertisement,” as reported by Shanghai Daily. Specifically, the market watchdog pointed to paragraph 2 as applicable in the case at hand, as it defines a “false advertisement” as one in which there is “any inconsistency [between] the actual circumstances” of a product and the advertising claims made as to the product’s “performance, functions, place of production, uses, quality, specification, ingredient, price, producer, term of validity, sales condition, and honors received, among others, or the service’s contents, provider, form, quality, price, sales condition, and honors received, among others, or any commitments, among others.” 

Chanel has since amended its advertising in China, according to the Jing’an District Administration for Market Regulation. 

It is worth noting that Chanel’s descriptions for the same skincare products on the U.S. e-commerce site do, in fact, make mention of lightening and dark spot “diminishing” effects, thereby, raising potential substantiation questions in the U.S., which would fall within the realm of the Federal trade Commission. The description of the Le Blanc Masque Healthy Light Creator Mask, for example, cites lightening properties, describing the cream as “a three-in-one revitalizing, brightening and restoring formula [that] works overnight to cool as it helps restore skin’s healthy pure light.” It further states in connection with that product that “upon waking, the complexion is luminous and refreshed. Skin is 23 percent more radiant, 40 percent more hydrated and 23 percent more even-toned,” based on a “clinical evaluation of 23 women after four weeks of use.”

As for the Sublimage La Crème, Chanel’s e-commerce site lists in connection with the product that “skin is 52 percent more radiant and 36 percent more firm, while dark spots appear diminished by 32 percent” as a result of use, based on clinical evaluations of between 19 and 31 women for four weeks.

The Broader Picture for Chinese Cosmetics

Hardly the first company to come under fire in China in connection with its skincare offerings, La Mer was taken to task – or better yet, court – two years ago in China on false advertising grounds. Hao Yu, a well-known Chinese beauty blogger, filed a pre-lawsuit writ against La Mer and Estee Lauder in September 2018 in a civil court in Shanghai, alleging that despite La Mer’s representations about its marquee product, its pricey Crème de la Mer does not “restore damaged skin,” such as burn scars.

Alleging that Estée Lauder Co.-owned La Mer was making such “exaggerated” warranties on its official website in China (but not in the U.S. or other international versions of its site), Yu claimed that the $1 billion skincare company and its parent were running afoul of China’s false advertising law. In addition to a court order forcing La Mer to alter its advertising language in regards to the effects of its Miracle Broth™ and Crème de la Mer product, Yu asked the court to require La Mer to apologize to Chinese consumers who he claims have been deceived by the brand’s advertising statements, and compensate those who have purchased the products due to its misleading claims.

While the outcome in Yu’s case has not been publicized by the court, what is clear is that Chinese lawmakers have been working overtime in their efforts to overhaul regulations that govern China’s booming cosmetics industry. In February 2019, for instance, China’s Food and Drug Administration issued several new regulations in the cosmetics space, including an outright ban on companies’ abilities to marketing their cosmetics as having “medical benefits.”

More recently, in June 2020, the Chinese State Council released the Cosmetic Supervision and Administration Regulation (“Regulation”). A significant and long-awaited overhaul to the 30-year-old Cosmetics Hygiene Administration Regulation, the new Regulation will make a sweeping number of changes to the previously-existing law – from the inclusion of e-commerce-specific updates to addressing how the process of gaining approval for new ingredients will be handled, all of which place an emphasis on compliance throughout the entire life cycle of individual cosmetics and beauty products, and increases responsibilities of cosmetic license holders to ensure product safety and quality for the ultimate benefit of Chinese consumers. 

Aiming to “strengthen the management of cosmetic product safety and quality by shifting more of the burden to registrants and notifiers,” according to Keller and Heckman LLP’s David Ettinger, Yin, Dai, and Jenny Xin Li, the new Regulation will require registrants and notifiers of new cosmetic ingredients/products “to publish their reference materials in support of the product’s function claims on designated government websites” and fine annual reports for three years on the ingredient’s safety and usage to the local authority.

Slated to go into effect on January 1, 2021,the Regulation will also “classify cosmetic products into two categories per their inherent risk levels, i.e., ‘special cosmetics’ vs. ‘general cosmetics,’” and subjects “special cosmetics” – such as skin lightening products – to pre-market registration, while general cosmetics are subject to notification to the local administrative agencies.

Retail sales of cosmetics in China – from native Chinese companies to the cosmetics divisions of Western luxury goods purveyors, skincare companies, and big-names in beauty goods – increased by approximately RMB 40 billion ($5.72 billion) between 2018 and 2019, alone, valuing the market at a whopping RMB 300 billion ($42.91 billion) or more as of last year. 

A year ago, Sunday Riley caught the attention of federal regulators after a former employee revealed that the buzzy skincare company was engaging in a scheme to dupe consumers about its products by way of fake reviews on e-commerce sites like Sephora. After the former employee leaked an internal email from the company to a number of employees, which called on the individuals to go to great lengths to hide their identities and then leave glowing reviews about its products on Sephora.com in order to entice consumers to purchase its skincare goods, a rep for Sunday Riley confirmed that the company’s eponymous founder had, in fact, sent the email. 

In addition to causing a media frenzy, the Sunday Riley email and the alleged practices that it revealed – which involved the intentional non-disclosure of individuals’ status as employees of the company in connection with their “fake” product reviews – prompted an investigation by the Federal Trade Commission (“FTC”). On the heels of a formal probe, the FTC filed a complaint against Sunday Riley in October 2019, alleging that “between November 2015 and August 2017 Sunday Riley Skincare managers, including Ms. Riley, posted reviews of their branded products on the Sephora site using fake accounts created to hide their identities, and requested that other Sunday Riley Skincare employees do the same thing.” 

In its complaint, the FTC pointed to a July 2016 email that Ms. Riley allegedly wrote to her staff directing them to “create three accounts on Sephora.com, registered as different identities” as proof that the company’s management also “requested that other Sunday Riley Skincare employees” post fake reviews endorsing the brand’s products. The email “included step-by-step instructions for setting up new personas and [how to] use a VPN to hide [an individual’s] identity.” It also “directed employees to focus on certain products,” to “[a]lways leave 5 stars” when reviewing Sunday Riley Skincare products, and to “dislike” negative reviews. “If you see a negative review – DISLIKE it,” Ms. Riley wrote, “After enough dislikes, it is removed. This directly translates into sales!!”

According to the FTC, a federal entity tasked with promoting consumer protection, and eliminating and preventing anti-competitive business practices, the actions taken by Sunday Riley’s founder and employees give rise to two violations of the FTC Act, including: 1) making false or misleading claims that the fake reviews reflected the opinions of ordinary users of the products; and 2) deceptively failing to disclose that the reviews were written by Ms. Riley or her employees.

The parties ultimately reached an agreement to settle the matter, which would require Houston, Texas-based Sunday Riley to refrain from “misrepresenting the status of any endorser or person reviewing [its] products” and from “making any representation about any consumer or other product endorser without clearly and conspicuously disclosing any unexpected material connection between the endorser and any respondent or entity affiliated with the product.”

Weighing in the proposed agreement on October 21, 2019, three of the FTC’s Commissioners voted in favor, while two – Commissioner Rohit Chopra and Commissioner Kelly Slaughter – dissented on the basis that the settlement terms simply are not strong enough. Commissioners Chopra and Slaughter asserted in a separate statement that the proposed settlement falls short as it “includes no redress, no disgorgement of ill-gotten gains, no notice to consumers, and no admission of wrongdoing.” While “Sunday Riley and its CEO have clearly broken the law,” the two Commissioners argued that “the proposed settlement is unlikely to deter other would-be wrongdoers,” and instead, actually “sends the wrong message to the marketplace: dishonest firms may come to conclude that posting fake reviews is a viable strategy, given the proposed outcome here.”

The two Commissioners were not alone in their sentiments about the proposed settlement; consumers largely agreed that the settlement simply was not enough to remedy Sunday Riley’s alleged wrongdoing. In furtherance of the required 30 day public comment period (after which the FTC is able to decide whether to make the proposed settlement final or not), consumers called the proposed settlement terms “disgusting,” “deeply disappointing,” and lacking in “actual consequences.” At the same time, at least some urged the FTC to levy an “appropriate but considerable fine to stop the company, and entire skincare industry, from deceiving consumers,” noting that “companies won’t change unless it affects their bottom line.”

A “No-Money, No-Fault Settlement”

Despite such pushback from two Commissioners and the public, alike, the FTC announced this month that it has finalized the Sunday Riley settlement. In a statement on November 6, the FTC revealed that it “has approved a final consent agreement settling charges that Sunday Riley Modern Skincare, LLC (Sunday Riley Skincare) and its CEO, Sunday Riley, misled consumers by posting fake reviews of the company’s products online, at the CEO’s direction, and by failing to disclose that the reviewers were company employees.” 

As a result of the settlement, Sunday Riley Skincare and Ms. Riley are formally prohibited “from misrepresenting the status of any endorser or person reviewing a product they are selling,” and required to ensure that “ any unexpected material connection between endorsers and Sunday Riley Skincare, Ms. Riley, or any entity affiliated with the product” is “clearly and conspicuously disclosed.” Additionally, Sunday Riley is required to provide “each employee, agent, and representative with a clear statement of his or her responsibilities to disclose clearly and conspicuously and in close proximity to any endorsement in any online review, social media posting, or other communication endorsing any [of the company’s] products, the employee’s, agent’s, or representative’s connection to the product, and obtaining from each such recipient a signed and dated statement acknowledging receipt of that statement and expressly agreeing to comply with it.”

The settlement does not levy any monetary penalties on the brand or its founder. 

The move to settle the matter on those terms again saw a 3-2 breakdown among the FTC Commissioners, with Chopra and Slaughter voting against the FTC’s “doubling down on its no-money, no-fault settlement with Sunday Riley, who was charged with egregious fake review fraud.” The two Commissioners call the “weak settlement is a serious setback for the Commission’s credibility as a watchdog over digital markets.” 

Commissioner Chopra points, in particular, to an objection filed during the 30 day period by Consumer Reports, which he says “was correct in arguing that the Commission can seek monetary relief in cases such as this one,” noting that the FTC “can seek monetary relief in federal court, through either Section 13(b) or Section 19,” which is why the agency “been able to recover funds in cases involving fake reviews without time-consuming litigation” in the past. 

Instead of using the matter to “signal that disinformation campaigns have costs,” Chopra claims the Commission’s “decision to finalize this flawed settlement” while “disinformation [is] pervading the digital world and fake reviews [are] polluting online marketplaces” is “more than a missed opportunity, it is a serious setback for online shoppers, honest sellers, and the Commission’s credibility.” 

Reflecting on the “FTC’s divided decision, which signals competing views on the agency’s role in enforcement of the promotion of competition and protection of consumers in the online marketplace,” Hunton Andrews Kurth attorneys Phyllis Marcus and Emma Hutchison encourage brands to ensure that they “have robust compliance programs [in place] to oversee user-generated content and employee endorsements, including up to the executive level.” They also note that “with new Democratic leadership expected in January 2021, [brands] should expect a more active FTC that is less willing to entertain arguments that non-monetary sanctions alone can address consumer harm.” 

L’Oreal and Drunk Elephant have managed to settle a high-stakes fight over their respective Vitamin C products two years after the case was filed. According to a joint stipulation of dismissal filed with the U.S. District Court for the Western District of Texas late last month, the parties alerted the court that they have agreed to “dismiss all claims against [Drunk Elephant] in this matter with prejudice, and all counterclaims against [L’Oreal] in this matter without prejudice, [with] each party to bearing its own costs, attorneys’ fees, and expenses.” The court formally disposed of the case a day later on October 27. 

The dismissal comes on the heels of the American arm of French giant L’Oreal slapping its smaller rival Drunk Elephant with a headline-making suit, accusing Drunk Elephant of infringing one of its valuable utility patents by way of the cult-followed 8-year-old brand’s award-winning and highly-buzzed-about $80-per-ounce Vitamin C serum. In its November 2018 complaint, L’Oreal asserted that Drunk Elephant’s C-Firma Day Serum contains a patent-protected chemical makeup that mirrors that of L’Oreal-owned brand Skinceuticals’ more expensive C E Ferulic Serum. As a result, L’Oreal argued that Drunk Elephant was directly infringing a utility patent (no. 7,179,841) that it has held since 2007. 

In its complaint, L’Oreal alleged that its patent-protected compound – namely, “stabilized ascorbic acid compositions and methods” that “provide enhanced stability, enhanced solubility and an enhanced photo-protective effect [for ascorbic acid] as compared to prior compositions” – is embodied in Skinceuticals’ $180 C E Ferulic serum. By manufacturing and offering for sale the C-Firma Day Serum, L’Oreal said that Drunk Elephant was making use of the invention at the center of its ‘841 patent without the authorization to do so. (The exact problem with Drunk Elephant’s product, according to L’Oreal? It contains a specific “single-phase solution composition” of a cinnamic acid derivative selected from p-coumaric acid, ferulic acid, caffeic acid, sinapinic acid; cis and trans isomers; an alkanediol; and water and mirrors that of L’Oreal’s patent-protected composite.”)

“Despite knowledge of the ’841 Patent as early as September 21, 2018, when L’Oréal informed Drunk Elephant of [such] infringement via letter,” L’Oreal alleged that Houston, Texas-based Drunk Elephant “continues to encourage, instruct, enable, and otherwise cause its customers to use its products, which infringe the ’841 Patent.”

In its initial response to the lawsuit in June 2019, Drunk Elephant “specifically denied” that its C-Firma Day Serum “infringes any valid claim [included in L’Oreal’s] ’841 patent,” and explicitly rejected L’Oreal’s argument that the patent prevents it from “manufacturing and selling any Drunk Elephant products,” including the C-Firma Day Serum.

Inequitable Conduct 

Last month’s dismissal comes almost exactly a year after the court tossed out one of the counterclaims that Drunk Elephant’s lodged against L’Oreal, in which the now-Shiseido-owned company attempted to sidestep liability by asserting that at least part of L’Oreal’s patent was invalid. In its June 2019 answer, Drunk Elephant asserted several counterclaims, including one that accused L’Oreal of engaging in inequitable conduct, thereby, making its ‘841 patent unenforceable.

To be exact, Drunk Elephant asserted that L’Oreal failed to properly alert the U.S. Patent and Trademark Office” (“USPTO”) of two previously-issued patents that were “material to the patentability of [its own] ‘841 patent,” and that would have caused the USPTO to refused to “allow at least one claim of the ‘841 Patent had [it] been aware of them, alone or in combination with other prior art, and based on the state of the art at the time.” Drunk Elephant argued that the existing patents were owned by “entities ‘related’ to L’Oréal USA,” and thus, L’Oréal “knew about the withheld patents during prosecution of and prior to the [USPTO’s] issuance of the ‘841 patent.”

By knowing about and failing to cite the existing patents in connection with its own patent application for the Vitamin C compound, Drunk Elephant argued that L’Oréal “breached their duty of disclosure by intentionally withholding the [patents] from the USPTO with the intent to deceive the Patent Office into granting the ‘841 patent.” 

In response, L’Oreal argued that Drunk Elephant failed to sufficiently establish that it “made an affirmative misrepresentation of material fact, failed to disclose material information, or submitted false material information, and [that it] intended to deceive the [USPTO].” Specifically, L’Oreal asserted that Drunk Elephant “fails to identify any individual associated with the prosecution or filing of the application that issued as the ‘841 patent and therefore, [that it] owed a duty of disclosure to the USPTO.” The beauty giant argued that Drunk Elephant fell short in setting forth “facts that would plausibly suggest that any individual(s) associated with the filing or prosecution of the ‘841 patent had actual knowledge of” the two previously-issued patents held by entities related to L’Oréal.

Drunk Elephant’s “allegations are conclusory,” L’Oreal argued, and its attempt “to impute collective knowledge” on L’Oreal about the existing patents – and with it, a duty of disclosure to the USPTO – are “deficient.” 

Fast forward to November 2019 and the court dismissed Drunk Elephant’s inequitable conduct counterclaim for failure to state a claim. And fast forward again by a year and the case has come to a close in its entirety, with the parties’ out-of-court resolution remaining confidential. (It is worth noting that Drunk Elephant’s blockbuster C-Firma remains on shelves).

Beauty and the Dupe

As for the case, as a whole, it sheds light on the ultra-competitive nature of the $500 billion-plus global beauty industry, which is rapidly evolving as Gen Z and millennials prioritize wellness, clean beauty, and the adoption of more proactive skincare regimens, complete with buzzy ingredients, such as niacinamide, hyaluronic acid, and various different vitamins. This shift has forced established names, such as L’Oreal, to revamp their offerings as traditional makeup products have largely fallen out of favor among younger consumers, and in several key cases, to acquire digitally-friendly startups, thereby, leading to an M&A spree in the beauty space

In October 2019, for instance, Japanese giant Shiseido revealed that it would pay $845 million for a 100 percent stake Drunk Elephant in what was called “the most anticipated beauty M&A deal of 2019.” That deal came amid a flurry of others, including 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 2019; Coty’s subsequent deal with Kim Kardashian’s KKW brand; Estée Lauder Company’s taking full ownership of Have & Be Co., the South Korean skincare company that owns Dr. Jart+ cosmetics to assume full ownership; and Puig’s reported $1.5 billion acquisition of Charlotte Tilbury, which was confirmed in June. 

Aside from its place in the larger landscape of beauty M&As deals aimed at enabling stalwart beauty names to court younger shoppers with upstart brands, Drunk Elephant and its allegedly infringing product is demonstrative of another existing trend largely brought about by demand from younger consumers: dupes. Far from a little-known practice, dupes – or cheaper alternatives to higher-end beauty products – have become a mainstay of the beauty industry. For years, mass-market beauty brands, capitalizing on consumer enthusiasm for affordable cosmetics and beauty goods, have been offering products with the same characteristics or qualities as the popular products of their higher-end competitors. 

The practice has accelerated in the recent years, as “some of the best-loved products in the beauty industry are incredibly expensive,” Cheryl Wischhover previously wrote for Vox. As such, “There is an enthusiastic group of superfans who will test (or “swatch”) products like eye shadow and lipstick to find cheaper versions that are good matches for the pricier originals,” and post their findings on dedicated Instagram pages and popular makeup review blogs. 

As many of the most in-demand products in the beauty/cosmetics space have shifted beyond hot-selling lipsticks and contouring kits to vitamin and mineral-dense skincare products, which can be far more expensive than even their expensive makeup counterparts, dupes have readily evolved, too. 

In terms of the legal ins-and-outs of duping, those can vary. In many cases, dupes are legally on the up-and-up since neither the design of standard makeup palettes, for example, nor the idea of a tube of lipstick or a generic pink blush are protected by law. Moreover, brand owners certainly cannot initiate trademark proceedings over a rival’s use of descriptive terms, such as “nude,” “highlight,” or “shine” –  which are some of most commonly used cosmetics terms.

That does not mean that brand owners are entirely without recourse when they are ripped off, though. Causes of action may arise when these dupe-offering companies re-create other brands’ packaging, as the non-functional elements of product packaging fall within the bounds of trade dress or design patent protection. So, when the distinctive, non-functional design elements of a makeup compact, for instance, are replicated, that could give rise to trade dress infringement claims, but only if those elements serve a source-identifying function in the minds of consumers.

Patent protection – both of the design and utility type – may be options, as well, as the case at hand indicates. And still yet, in some cases, such as the one that Charlotte Tilbury filed against British company Aldi (and won), copyright infringement claims can come into play connection with dupes. 

*The case is L’Oréal USA Creative, Inc. v. Drunk Elephant, LLC, 1:18-cv-00982 (W.D.Tex.)