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Manely for Professionals

Hair-Care Firms Fight Sales by Unauthorized Retailers

March 24, 1998|STEPHEN GREGORY | SPECIAL TO THE TIMES

Calls from salon owners worried they will lose their competitive edge continue to flood phone lines at L'Anza Research Inc. two weeks after the Supreme Court struck down the hair-care company's challenge to unauthorized retail of its products in drug stores and supermarkets.

A weary Robert De Lanza, the Azusa company's president, personally fielded more than 100 calls. Salons "took the decision as a sign L'Anza will be available at grocery stores, which is absolutely incorrect," De Lanza said. "I assured them we are absolutely committed to keeping it only in the professional market."

De Lanza said he plans to continue to fight unauthorized retail sales with lawsuits filed on different charges from those the high court struck down.

A former state chemist for Communist Poland, De Lanza launched his company from his San Gabriel Valley garage 14 years ago. L'Anza now grosses more than $15 million a year with sales in 21 countries.

Salons carry hair-care products meant to be used and sold only by professional stylists, De Lanza said. Owners worry when the same products turn up for sale outside their shops because it compromises their niche with customers.

"Why come to me when you can buy the same stuff at Vons and do it at home," said Curtis Chung, who carries the full line of L'Anza products at his Studio 55 salon in Pasadena.

L'Anza's attorney Ray Goettsch estimates unauthorized distributors make millions each year buying L'Anza products from authorized wholesalers, and sometimes salons themselves, and diverting them to unapproved retailers.

This so-called "gray market" diversion of products, he said, is one of the biggest obstacles L'Anza and other companies in Southern California's hair-care product industry face. "The problem is very far reaching," he said.

So too is the fight against it. Companies such as Sebastian International Inc. in Woodland Hills and Joico Laboratories Inc. in City of Industry together spend millions of dollars a year to combat diversion, even though the practice doesn't directly cut into their revenue.

"It is lethal when a manufacturer is perceived as selling its products outside of salons," Joico general counsel Bill Conkle said. "We feel very strongly that the people who made the company what it is are the salons. We can't stab them in the back."

One of the main weapons in the arsenal against diversion has been lawsuits. In the last five years, John Paul Mitchell Systems of Santa Clarita alone has filed 50 lawsuits against distributors, unauthorized retailers and even salon owners.

"We spend an enormous amount of time and energy in trying to control our distribution channel," Mitchell General Manager Luke Jacobellis said. "The key person in our industry is the stylist. We would defeat the purpose of our strategy if we allowed our products to be sold in open retail."

De Lanza said he took the same sentiments to heart when his company filed a copyright-infringement lawsuit against New York wholesaler Quality King in 1993 for diverting Europe-bound shampoo and conditioner back to the United States and selling it to retailers such as Vons.

A jury awarded L'Anza $132,000 in damages in 1995, and the U.S. 9th Circuit Court of Appeals upheld the verdict. Earlier this month, however, the Supreme Court overturned the lower court decision, ruling that L'Anza's copyright does not allow the company to restrict distribution of its products once they've been sold initially. The case was followed closely by manufacturers of other goods plagued by diversion such as books, sunglasses and audio and video recordings.

While disappointed with the decision, L'Anza attorney Goettsch said the original jury verdict and the appeals court decision were instrumental in winning agreements from 13 major chain retailers to not carry L'Anza products. "It's not a complete loss," he said.

Goettsch and representatives from other local hair-product companies said they would continue to pursue legal action against diversion primarily with breech of contract and inducing breech-of-contract suits. More flagrant diversion could even be charged as racketeering.

Companies have also become more proactive in stamping out unapproved sales, visiting potential distributors and running extensive background checks before agreeing to contract with them.

"We need to be much more careful who we sell to," De Lanza said.

Such measures are crucial for L'Anza given the company's plans to add 15 new distributors to its current roster of 45 as part of expansion efforts in Asia and Latin America.

Jacobellis said John Paul Mitchell is also considering expanding but plans to weigh the cost of policing distribution in those markets before moving forward. "We will expand into markets only where it makes good economic sense," he said.

In the meantime, companies will continue to invest more money on elaborate tracking systems with coded bottles that can tell investigators where a wayward product was supposed to go and hopefully who diverted it.

Such coding was on 150,000 bottles of L'Anza products that were hijacked at gunpoint en route to the Port of Long Beach last year, De Lanza said. None of those bottles has yet been recovered, and De Lanza suspects they were diverted overseas.

Still, he said, the diversion problem does have a bright side.

"At least, we know have a good quality product," he joked. "There's a demand for it."

Freelance writer Stephen Gregory can be reached at (213) 237-7001.

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