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Judge tosses L'Oreal case against Quality King
(Newsday (Melville, NY) (KRT) Via Thomson Dialog NewsEdge) Nov. 27--A federal judge has blasted the L'Oreal company, and former federal law enforcement officials it employs, for trying to bolster what he said was a very weak civil case by attempting to get former Justice Department colleagues to prosecute criminally a longtime business opponent.
But L'Oreal USA, a cosmetics giant, and its lead attorney, George Stamboulidis -- who was the chief federal prosecutor on Long Island from 1998 to 2001 -- vehemently deny they did anything wrong, adding their case was very strong and they are considering an appeal.
U.S. District Judge Leonard Wexler in Central Islip recently ruled against Manhattan-based L'Oreal in a 2004 civil lawsuit brought by the company against Ronkonkoma-based Quality King Distributors, a $3-billion-a-year distributor of hair-care and other products, as well as its spinoff company, New Jersey-based Pro's Choice. The suit was the most recent round of an ongoing 17-year legal battle between L'Oreal and Quality King.
L'Oreal sought in its suit the enforcement of a 1990 injunction that barred Quality King and Pro's Choice from buying and reselling an upscale line of hair shampoos and conditioners, sold by L'Oreal under the names Matrix and ARTec.
L'Oreal maintains that to keep the value, integrity and status of the products, they are supposed to be sold only by company-trained professionals in fashionable salons. Matrix alone "has been the number one professional hair brand on the market, with an estimated 16 percent market share," L'Oreal said in court papers.
Quality King and Pro's Choice, however, were obtaining the products in violation of the injunction by buying them, or, as it is called, diverting them, from middlemen and reselling them to nonqualified dealers, L'Oreal contended.
In his opinion, Wexler declined to enforce the old injunction, in effect, throwing out L'Oreal's case against the two companies.
The judge said that if L'Oreal wanted seriously "to stop diversion of Matrix products," it could terminate those of its distributors who are the sources of the diverted products.
Wexler also wrote that when it was approached in 2003 to prosecute Quality King criminally, "The United States attorney's office showed commendable judgment and ethics in deciding not to pursue the matter, especially in light of the fact that the request to prosecute originated from a former supervisor in the office."
Wexler noted in his decision that L'Oreal's chief of security, former New York City FBI agent Charles Domroe, had written an internal company memo that said L'Oreal's lawyers were meeting with the U.S. attorney's office "to see if criminal processes could be applied to help our pending civil lawsuit along its way."
Wexler said that in a second memo, Domroe wrote that the company's lawyers "will be seeking civil redress using the criminal contempt statutes as leverage."
Domroe said he could not comment, and referred the matter to L'Oreal's public relations department.
Rebecca Caruso, a L'Oreal spokeswoman, said in a prepared statement that the company is reviewing its options, but "we strongly disagree with many of the court's factual findings. ... We will not tolerate diversion of our products, and we will continue to pursue all legal options to protect our legitimate channels of distribution."
Quality King attorney Linda Margolin said this may be the end of an almost 2-decades-old legal battle. "We're delighted with the outcome," she said.
In court papers, Stamboulidis, the head of litigation at Baker Hostetler in Manhattan, dismissed Domroe's e-mails as the former agent's overly "enthusiastic 'law enforcement style' of writing."
Stamboulidis has in the past been chosen by the courts or the Justice Department to serve as the overseer of major businesses that have gotten into legal trouble, including Merrill Lynch, the Bank of New York and Mellon Bank.
In an interview, Stamboulidis said there was nothing improper about his contacting law enforcement if L'Oreal felt a crime was being committed, and former prosecutors should not be barred from doing what ordinary citizens are regularly allowed to do.
"L'Oreal, as any responsible U.S. corporation, citing apparent [crimes being committed], referred its case to law enforcement," he said.
In court papers, Stamboulidis noted that the FBI and other law enforcement agencies initially took L'Oreal's claims seriously enough to launch an independent investigation before the criminal case was dropped by the Justice Department.
Gary Brown, who was head of the Long Island office in 2003 when the prosecution was dropped, declined to comment. He is now head of litigation for CA Inc., the company formerly known as Computer Associates.
THE BATTLE
THE SUIT
L'Oreal USA sought the enforcement of a 1990 injunction that barred Ronkonkoma-based Quality King Distributors and its spinoff, New Jersey-based Pro's Choice, from buying and reselling an upscale line of hair shampoos and conditioners sold under the names Matrix and ARTec. The suit is the most recent round of a 17-year legal donnybrook between L'Oreal and Quality King.
THE CONTROVERSY
L'Oreal's chief of security, a former New York City FBI agent, wrote an internal memo that company lawyers were meeting with the U.S. attorney's office "to see if criminal processes could be applied to help our pending civil lawsuit along its way." U.S. District Judge Leonard Wexler blasted L'Oreal for trying to bolster what he said was a weak civil case by attempting to get Justice Department officials to criminally prosecute a longtime business opponent.
THE OUTCOME
The court
declined to enforce the injunction, and, in effect, threw out L'Oreal's case against the two companies. Lawyers, at left, for Quality King: Anthony Viola, Linda Margolin and Alfred Paliani
OF INTEREST
L'Oreal data show that the diversion of Matrix products has grown from $18.4 million in sales in 2002 to more than $90million in 2006, according to the judge in the case.
To see more of Newsday, or to subscribe to the newspaper, go to http://www.newsday.com
Copyright (c) 2007, Newsday, Melville, N.Y.
Distributed by McClatchy-Tribune Information Services.
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