Not so Pretty: Cosmetic Company Acquisitions Lead to Contentious Trade Secret Spat

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At the end of 2019, Coty Inc. (“Coty”) expanded its brand portfolio by closing a notable $600 million deal for a majority stake in reality star Kylie Jenner’s young cosmetics company, King Kylie LLC (d/b/a Kylie Cosmetics). The purchase placed the valuation of the Kylie Cosmetics at $1.2 billion. Drama soon followed the acquisition as reports questioning Ms. Jenner’s net worth (and consequently, the value of her cosmetics empire) surfaced in May 2020, overshadowing Coty’s launch of the Kylie Skin beauty line in Europe. On June 29, 2020, Coty announced a 21% investment in KKW Beauty (Ms. Jenner’s sister’s company) for $200 million. Prompted by these deals, the manufacturer behind both Kylie Cosmetics and KKW, Seed Beauty, LLC, filed two trade secret lawsuits in Superior Court in Los Angeles, California.

On June 22, 2020, Seed Beauty filed a lawsuit against KKW because it was concerned that KKW would disclose confidential information to Coty. Relatedly, on June 30, 2020, Seed Beauty and its subsidiary BETA Beauty, LLC (collectively, “Seed Beauty”), filed an action against Coty, HFC Prestige Products, Inc. (a subsidiary of Coty), and King Kylie. In its Complaint against Coty, Seed Beauty describes itself as the “leading brand-incubator, developer, manufacturer, distributor, and seller of beauty and cosmetic products.” It further maintains that it has a “unique business model” that has “skyrocketed young start-up brands.” While the complaint is heavily redacted, Seed Beauty discloses that since 2016 it has served as the “sole developer, manufacturer, and supplier” of Kylie Cosmetics and KKW color cosmetics products. These business relationships involved the promotion, marketing, distribution, display, and sale of cosmetic products.

Instead of focusing on product formulas or packaging, Seed Beauty insists that its business model and contracts with Kyle Cosmetics and KKW are protected trade secrets. Specifically, Seed Beauty alleges that its relationship with its beauty brand partners necessarily includes the exchange of highly sensitive, confidential and trade secret information. The detailed scope of the protected information is not publicly available. Still, Seed Beauty claims that it derives economic value from this proprietary information and that any competitor who acquires such information would be given an unfair competitive advantage. To date, Seed Beauty claims that it has not received assurances from Kylie Cosmetics or KKW about not sharing its highly confidential and proprietary trade secrets with Coty.

As a result of these lawsuits, Seed Beauty obtained a temporary injunction to block KKW and Kylie Cosmetics from releasing any trade secret information to Coty. Such information generally includes license use, marketing obligations, product launch and distribution, revenue sharing, intellectual property ownership, specifications, ingredients, formulas, plans, and other information about Seed products. The underlying claims against Coty, include (i) misappropriation of trade secrets in violation of the California Uniform Trade Secret Act and (ii) intentional interference with contract. The complaint also contains a breach of contract claim against King Kylie for, among other things, partnership with Coty to develop or manufacture color cosmetics.

Even though the nuances of Seed Beauty’s trade secrets are redacted from the complaint, this litigation highlights the economic value of business strategy in the cosmetics industry. Notably, the complaint seeks to largely protect Seed Beauty’s proprietary development plans and relationships. This is unlike other trade secret disputes we have seen involving cosmetic companies, which typically concern product formulas, as well as other claims such as trade dress (aka product packaging) infringement. In an age where company success is highly contingent on celebrity status and social media followers, brand strategies may prove to be more valuable (and worth fighting for in court) than the products themselves. Seed Beauty’s success in obtaining preliminary injunctive relief suggests its claims may have merit, and we’ll be eagerly awaiting any additional insight as to what it seeks to keep top secret from Coty.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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