The Charleston Makeup Artist

L’Oréal USA filed suit against a Las Vegas-area Sally Beauty Holdings Inc. affiliate the beauty giant claims diverted salon-only product to the gray market and ultimately to the shelves of Target and CVS Pharmacies.

In a fraud complaint filed Aug. 10 in U.S. District Court in Las Vegas, L’Oréal alleged that Austin, Tex.-based supplier Armstrong McCall LP used its franchise, Nevada Hair Ventures LLC, to sell Matrix-branded hair care products without authorization to wholesaler Cadeau Express Inc.

Armstrong McCall is owned by Denton, Tex.-based Sally Beauty. Neither is named as a direct defendant in the suit.

L’Oréal alleges Hair of Nevada and Armstrong McCall sold Cadeau “millions of dollars worth of Matrix products” from 2005 through 2007 without authorization. According to the suit, Cadeau told the supplier the goods would go to Las Vegas hotels for guest giveaways, but that much of the product went to gray market operators, who then sold it to mass retailers.

The suit further accuses employees at the firms, including Armstrong McCall president Neil Riemer, of taking tens of thousands of dollars of kickbacks in cash and gifts from Cadeau for facilitating the deals.

According to L’Oréal, Armstrong McCall later brokered an authorized sale of $3.2 million in Matrix product to Cadeau for casino gift programs, but many of those deliveries also went to the gray market.

Sally Beauty did not return a call for comment Friday. In a July 30 filing with the Securities and Exchange Commission, however, the company acknowledged L’Oréal had raised nearly identical accusations in a lawsuit in the Superior Court of the State of California.

In response to that suit, it said its board had hired independent counsel to investigate and found insufficient evidence company employees had acted improperly. It said it intended to defend itself vigorously.

L’Oréal says through August 2008, it had found 1,081 bottles of conditioner from the deals at 24 mass market retailers, including at 182 Target stores in 32 states. It called the example a “small sample.”

Cadeau is not named as a defendant in the suit. When reached Friday, a receptionist said its owner, Ramon DeSage, was out of the country.

L’Oréal is seeking an injunction prohibiting the companies from further unauthorized sales and unspecified damages.

by Matthew Lynch

Posted Monday August 17, 2009

From WWD Issue 08/17/2009