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.). 

Johnson & Johnson says it will stop manufacturing a range of skin-whitening products, which it has been selling by way of its Clean & Clear and Neutrogena brands. The multinational consumer packaged goods company announced on Friday that it will bring its Clean & Clear Fairness line of products to a halt, according to Reuters, after such products – which are particularly popular among consumers in Asia and the Middle East – “have come under renewed social pressure in recent weeks amid a global debate about racial inequality.” 

Conversations over the past few weeks highlighted that some product names or claims on our dark spot reducer products represent fairness or white as better than your own unique skin tone,” a spokesman for Johnson & Johnson said, referring to Clean & Clear’s “Fairness” line of products, which is marketed as capable of “lightening and brightening your skin,” as well as its recently-discontinued Neutrogena “Fine Fairness” collection. “This was never our intention – healthy skin is beautiful skin,” the company asserted. 

The recent ban by Johnson & Johnson – which says it will “no longer produce or ship,” but which “might still appear on store shelves until stocks run out,” per Reuters – comes amid a larger push against the sale of such products, which, according to the World Health Organization can cause liver and kidney damage, and cancer, as well as “anxiety, depression or psychosis and peripheral neuropathy.” As of late 2018, Rwanda put its foot down on the widespread sales of skin bleaching products, banning all sales and non-medical uses of skin bleaching creams after first cutting down on the use of certain products, such as those that include topical skin-bleaching agent hydroquinone, in 2016. 

In implementing such a ban, Rwanda followed in the footsteps of Ivory Coast and Ghana, both of which had previously banished legally-accessible skin-lightening creams from their markets.

Meanwhile, Somali-American activists decided to take on the sale of skin-lightening products by Amazon, as members of the non-profit The Beautywell Project teamed up with the Sierra Club to convince the online retail giant to stop selling whitening products that contain mercury. As of this spring and after more than a year of protests, “This coalition of antiracist, health, and environmental activists persuaded Amazon to remove some 15 products containing toxic levels of mercury,” thereby putting what Lynn M. Thomas, a Professor of History at the University of Washington, calls “a small but noteworthy dent in the global trade in skin lighteners, estimated to reach $31.2 billion by 2024.” 

Josie Maran does not want unauthorized parties selling its all-natural cosmetics on Amazon. The brand asserts in a new lawsuit that it maintains a strict resale policy that limits the extent to which resellers can use its trademarks, “only permit[ting] sales of [its] products to retail consumers and expressly prohibiting sales to customers that intend to resell the products” in order to avoid “brand dilution, tarnishment, and confusion as to the origin of the products.”

In the complaint that it filed in a California federal court this week, Josie Maran claims that an Amazon seller named Morning Beauty is on the hook for trademark infringement in connection with its unauthorized sale of authenticJosie Maran products. According to Josie Maran, since at least November 2018, Morning Beauty has been running afoul of its resale policy by offering up products bearing its trademarks but without authorization and without a few key elements associated with the authorized sale of Josie Maran products, namely, strict “quality controls related to packaging, storing and shipping of the products,” a “certain level of customer service,” and the consumer warranty that it provides in connection with its products. 

Because its resale policy “specifies that any warranties associated with [its] products are only valid when sold by [authorized] resellers and are void if sold by resellers such as the defendant,” Josie Maran argues that the otherwise authentic products are now “non-genuine” and potentially of “inferior quality,” and thus, Morning Beauty is on the hook for various trademark-centric causes of action.

In case its own resale policy is not enough, Josie Maran points to Amazon’s marketplace rules, which “require that any product that is listed as ‘New’ come with the ‘Original manufacturer’s warranty, if any.’”  Maran argues that despite the fact that the products that Morning Beauty is offering for sale “do not come with [the brand’s] warranty” as a result of the terms of its resale policy, Morning Beauty is nonetheless “listing the products as ‘New’” on Amazon’s Marketplace. 

With the foregoing in mind, Josie Maran sent four letters to Morning Beauty between February and April 2020, alerting the seller to the allegedly infringing nature of its activities, and demanding that it cease sales of products bearing the Josie Maran name and other trademarks, but did not receive a response. All the while, Morning Beauty continued to sell the cosmetics, save for when the company “briefly took down its [Amazon] listing,” which Josie Maran argues is a “presumed acknowledge of the validity of [its] claims.” 

Morning Beauty has resumed its sale of the products, including a Josie Maran Argan oil, and “continues to sell” them. 

Fast forward to May 18, and a lawyer representing Morning Beauty responded to Josie Maran’s latest cease and desist letter, “indicating that Morning Beauty would agree to settle [the] dispute.” However, Josie Maran claims that “settlement discussions [have since] ceased, and [Morning Beauty’s] counsel is no longer responding to [its] correspondence,” prompting the brand to file suit. 

Counsel for Josie Maran claims in its complaint that “because [Morning Beauty] does not abide by [its] quality controls or provide the necessary customer service, and because the products sold by [Morning Beauty] do not have a consumer warranty, these products are not genuine and are materially different from products sold by [Josie Maran] or [its authorized] resellers,” thereby, giving rise to a claim of trademark infringement.”

The element of “material difference” is critical here. Given that Josie Maran does not cite claims of counterfeiting and in fact, does not assert that the products that Morning Brew is selling are outright fakes (i.e., products that were not made by the brand and/or its manufacturers), it is safe to assume that the products are authentic ones that Morning Beauty purchased from an authorized retailer of Josie Maran’s and is not reselling them on its own. 

On its face, such a scenario fits neatly within the First Sale doctrine, a trademark (and copyright) tenant that states that once a trademark owner, such as Josie Maran, releases its goods into the market, it cannot prevent the subsequent re-sale of those goods by their purchasers. In other words, if a purchaser of a product decides to resells it, he/she cannot be sued by the rights holder (again, Josie Maran) for trademark infringement for doing so.

It would likely appear that Morning Beauty would be shielded by the First Sale doctrine from trademark infringement liability in connection with its sale of Josie Maran products on Amazon. However, there is a catch: the First Sale doctrine does not apply when the product is “materially different” than the product sold by the trademark owner or its authorized dealers.

While the “material difference” exception most immediately applies to the products, themselves, and their packaging, Vorys attorney Whitney Gibson notes that generally, “courts have recognized that certain benefits accompanying the authorized sale of a genuine product can constitute material differences.” One such benefit? A warranty or money-back guarantee. 

Because Morning Beauty is offering up products bearing the Josie Maran name without all of the benefits that the company provides with the sale authorized sale of those goods, Josie Marant’s argument is essentially that the First Sale doctrine does not apply, and Morning Beauty is engaging in trademark infringement. 

As for consumer confusion, which is the central issue in a trademark infringement matter, Gibson states that confusion “can easily result when unauthorized resellers are offering the same products without the same associated benefits,” and that is precisely what is happening here, according to Josie Maran. 

In addition to setting out claims of trademark infringement and dilution, and unfair competition, and seeking injunctive relief and monetary damages in connection with Morning Beauty’s alleged infringement, Josie Maran addresses what it says is the larger problem at play here: “In this e-commerce age, unauthorized resellers can obtain a manufacturer’s products from a variety of sources and sell them anonymously online.” This issue, according to the brand, is exacerbated by the fact that “the explosion of e-commerce websites, particularly Amazon, has created problems for manufacturers in terms of ensuring that products being sold are genuine, defect-free products.”

Josie Maran is the latest name on a growing list of brands to take issue with the sale of seemingly authentic – but “materially different” – products by a third party or a professional reseller. In furtherance of its rocky relationship with the resale economy, Chanel is currently facing off against luxury goods resale companies what Goes Around Comes Around and The RealReal for selling allegedly authentic but altered products, while Rolex recently settled suit the suit it filed against watch customizer La Californienne. And still yet, 3M has filed a number of trademark-centric cases against sellers of authentic N95 masks, which they were selling at “excessively inflated” prices. 

This string of cases, which continues to grow, appears to show how at least some brands are coping with the rise and success of digitally-native companies and third-party marketplaces, and how these new(ish) market entrants have disrupted the ability that they once had to exclusively control how and where their products were sold, and at what prices.

UPDATED (August 14, 2020): Before Morning Beauty filed its answer, the parties appear to have settled their differences out of court. On the heels of a voluntary dismissal filing from counsel for Josie Maran, Judge Josephine Stanton ordered that “this action [be] dismissed without prejudice,” stating that the court had been “advised by the Plaintiff that this action has been resolved by a Notice of Voluntary Dismissal.”

*The case is Josie Maran Cosmetics v. Morning Beauty, 8:20-cv-01032 (C.D.Cal.).

Recent high-profile beauty M&A deals, coupled with current economic uncertainty, have brought renewed interest in the “lipstick index.” Leonard Lauder, the former chairman of Estee Lauder, coined the term during the 2001 recession upon seeing the rise in lipstick sales, which, in his mind, “indicated that women facing an uncertain environment turn to beauty products as an affordable indulgence while they cut back on more-expensive items,” such as Gucci handbags or Chanel garments.

The lipstick index was heavily cited during the Great Recession in the mid-2000s in light of a rise in beauty sales, and now, there are signs that the global beauty industry may once again prove resilient in the face of economic uncertainty and market volatility, with nailcare products, for instance, being among some of the most heavily sought-after COVID-19 era beauty-related products, following double digit growth.

Attractive Opportunities

The global beauty industry – which was worth around $532 billion prior to the onset of COVID-19 and is expected to be worth $805 billion by the end of 2024, according to Euromonitor data – has demonstrated recession-resilience with continued growth, driven largely by digitalization, social media, and increasing demand from emerging economies. Investors are taking note — beauty deals offer attractive opportunities in growing companies with potential to generate significant margins at scale. (Private equity accounted for 47 percent of beauty M&A deals in 2019).

However, the beauty market has changed rapidly in recent years and the key issues in acquisition/investment deals have evolved. Brand and other intellectual property rights are still important, but in an era of digitalization, premiumization and product authenticity, celebrity and social media endorsements, and more direct customer engagement, companies and their legal teams must take a fresh approach to the drivers of value in beauty deals.

Recent Deals Highlight Importance of Celebrity, Social Media

One striking element in recent deals in this space: famous founders. Many M&A deals have targeted the next generation of beauty success stories by going after the rapidly changing face of the beauty industry, where the impact of social media has exploded and the power of YouTube and Instagram influencers has proved transformative. Coty, Inc.’s 2019 purchase of a controlling stake in Kylie Jenner’s cosmetics company for $600 million is one key example of this. 

Potentially seeking to double-down on famed brands, Coty, Inc. is reportedly eyeing a deal with Jenner’s sister Kim Kardashian and her beauty brand KKW. 

Others in the space, such as Instagram makeup artist-turned-beauty mogul Huda Kattan, for instance, have been able to secure significant valuations for their businesses in large part due to the traction they garner as a result of their sizable (and oftentimes, heavily devoted) social followings. 

Trade Secrets & Due Diligence

Investing in an industry that has always been underpinned by brand value now requires an even more sophisticated strategy towards protecting market share. Many beauty brands do not own the often generic or unprotectable formulas used in their products, and instead, rely on exclusive manufacturing agreements to prohibit the manufacturer from making a competitive product or formula for anyone else. The robustness of these agreements can be critical to protecting innovative products, and also safeguarding brand reputation, particularly amid growing demand for ethical production and sustainable ingredient sourcing.

Many beauty companies (and beyond) are now digitally native, which means that in addition to the products, themselves, it is not uncommon for a brand’s marketing strategy to exist exclusively online, using celebrity and blogger endorsements. This means that while conducting traditional diligence – such as ensuring that intellectual property rights, including trademarks and in some cases, patents, are appropriately protected – is still important, firms should conduct digital due diligence on marketing communications to confirm control of key names and social media accounts, and the role of any individual influencer in driving value. 

This should include a deep dive into previous media campaigns and the individual brand founders and affiliated influencers, themselves, and any previous incidents that could impact consumer opinion about a product, campaign, or the brand as a whole.

In many deals, maintaining a strong working relationship with the individual behind the brand (regardless of the ownership breakdown that follows from the merger or buyout) is critical, so a solid legal backdrop around restrictive covenants, as well as name and image licensing rights is vital. Kylie Cosmetics is arguably a lot less valuable without Kylie (and her 181 million Instagram followers), after all. 

Scientific & Technological Developments 

Beauty brands are also leveraging scientific developments and using emerging technologies, including artificial intelligence and augmented reality, as well as existing digital communication technologies to create personalized and customized services and products. L’Oréal’s recent launch of augmented reality lenses for Snapʼs desktop app allows customers to virtually try on looks from its brands. Shiseido’s “Optune” is employing the Internet of Things and science to connect devices and apps to analyze skin condition, temperature, humidity, and sleep data etc. to choose the best product mix. These developments mean that data protection and software ownership, issues not typically associated with beauty deals, are now increasingly relevant.

In our view, deal teams must remain alert to developments — maximizing new beauty opportunities will require more than just lipstick to engage customers and remain appealing in this competitive market.

David Walker is an M&A lawyer at Latham & Watkins. Laura Kichenside is an associate in the Corporate Department of Latham & Watkins. (Edits/additions courtesy of TFL)

Walmart has vowed to “stop keeping personal care products designed for people of color in locked display cases,” Reuters reported on Thursday, “after the practice drew flak online with many saying it suggested customers for these products cannot be trusted.” In a statement this week, the retail titan said, “We have made the decision to discontinue placing multicultural hair care and beauty products in locked cases,” confirming that the practice was in place in approximately a dozen of its nearly 5,000 stores across the U.S. to deter theft. 

“The criticism of the retailer comes at a time when the U.S. has been rocked by protests against racial discrimination, following the killing of an unarmed black man, George Floyd, on May 25,” the publication reported, but it is worth noting that the backlash against Walmart predates recent unrest. In fact, Walmart, which maintains the title of the world’s largest physical retailer with sales of $514.4 billion in 2019, was sued in March 2018 for allegedly locking “hair and body products meant for African-Americans … behind glass shelves and segregating [them] from products for non African-Americans.”

In her complaint, which was filed in a California State court, Southern California-based Essie Grundy claimed that Walmart ran afoul of the Unruh Civil Rights Act and California’s Business and Professions Code, the latter of which prohibits any “unlawful, unfair or fraudulent business act or practice,” by systematically “singling [consumers] out because of their race.” 

The case appears to have ultimately settled out of court (after being removed to federal court), with counsel for Grundy filing a joint stipulation to voluntarily dismiss the case in November 2019. However, before the parties quietly resolved the matter in a confidential capacity (Grundy was seeking monetary damages and a court order to permanently enjoin Walmart from “denying full access to consumer products for African-Americans by unlocking products from glass cases/boxes and/or displaying them in [a dissimilar] manner as non-African-American products”), Walmart was publicly called out by identical claims from another consumer. 

In August 2019, Jasmine Saunders accused the retailer of allegedly separating products at another one of its California locations. In order to access an array of cosmetics and beauty products marketed exclusively to Black men and women, store-goers need assistance from a Walmart employee, Jasmine Saunderstold NBC of her experience at a Walmart store in Riverside, California. After a customer makes his/her selection from the locked case, Saunders asserted that “a Walmart employee walks the items to the front of the store to be held until they are purchased,” thereby, further serving to alienate Black customers.

A spokesman for Walmart said at the time that the company does not tolerate discrimination of any kind in its stores and that “certain items are kept locked up for security reasons because they are more likely to be stolen.” 

This week, the company stated, “We’re sensitive to the issue and understand the concerns raised by our customers and members of the community.” 

UPDATED (June 12, 2020): “Drugstore chain CVS Health Corp joined Walmart in announcing it will stop keeping beauty and personal care products designed for people of color in locked display cases, after the practice drew criticism online,” Reuters reported. “We have a firm-nondiscrimination policy that applies to all aspects of our business and our product protection measures have never been based on the race or ethnicity of our customers,” CVS said in a statement, asserting that its “product protection measures have never been based on the race or ethnicity of our customers.” The company also stated that it has expanded its stock of products that “appeal to communities of color” by 35 percent over the past year.

At the same time, Walgreens Boots Alliance Inc., which owns Walgreens and Duane Reade, as well as Boots, an international chain, similarly stated that it will stop employing such measures in its sweeping network of stores.