In the world of Mary Kay Cosmetics, recruiting new victims into the multi-level marketing (MLM) system and frontloading them with large inventory packages is critical to the survival of the company. The company and the upper levels of the pyramid rely on repeated ordering of products by beauty consultants, and little attention is paid to whether or not the consultants actually sell the products.

Hundreds of thousands of consultants lose money each year, and nearly half a million quit the “business” each year. Quitting consultants can return unsold inventory to the company, but only as much as has been purchased from Mary Kay in the last 12 months. Often, quitting consultants are left with hundreds or thousands of dollars of inventory they haven’t been able to sell and can’t return to Mary Kay.

In addition, this emphasis on constant ordering to meet group goals, earn prizes, or get to a higher commission level means that consultants who don’t want to quit also have lots of inventory they can’t sell.

In steps an inventory liquidator like Touch of Pink Cosmetics. They buy inventory for about 1/2 of what the consultant originally paid for it. That’s not a great deal if you’re a consultant, but it’s better than nothing. The liquidator then sells the products to the general public, giving them a generous discount off the suggested retail price of the products.

Mary Kay Inc. wants this stopped. The company apparently believes the work of the liquidators is cutting into their business. So they’ve begun suing the resellers. Fortunately, Touch of Pink Cosmetics and owners Amy and Scott Weber are well-represented by counsel. The case is proceeding to trial later this year, but Touch of Pink won some important points in their motion for summary judgment this week. Here’s how it all shook out…

Here is the judge’s opinion in full, for your reading pleasure. (Warning: It’s long!)

In the first part of the opinion, the judge rules on the Webers’ objections to some of the evidence Mary Kay wants to present at trial. One of the issues here is that Mary Kay is alleging that consumers are confused by the Touch of Pink website and think that TOP is affiliated with Mary Kay. This is an interesting issue, because essentially Mary Kay’s position is that if anyone mistakenly assumes TOP is affiliated with MK (despite a clear disclaimer on their “about” page on their website) then TOP is doing something wrong. TOP’s position is that it’s not their fault if consumers are too dumb to read their website and comprehend it.

It seems to me that if Touch of Pink makes it clear they’re not affiliated with Mary Kay, then they shouldn’t be held responsible for ignorant consumers. TOP wanted an email demonstrating the ignorance of one customer thrown out of the case, and the judge denied that argument. The email is going to be presented at trial as evidence, and the judge tips us off to his leaning in Mary Kay’s direction on this whole issue of confusion when he writes:

“The court finds the e-mails are relevant because they tend to show that consumers were confused about’s affiliation with Mary Kay.”

One other interesting part of the case is the Webers’ objection to a survey that Mary Kay had done for purposes of this case. Mary Kay hired an expert to survey 303 consumers about whether they believed TOP was “affiliated with” Mary Kay.

The Webers raise a very important point here: They say that the way the survey was conducted ensured unreliable results. Consumers were asked if they thought TOP and MK were “affiliated” without defining what that word meant. Consumers could have been well aware that TOP and MK were two completely separate companies, but since they knew TOP sold MK brand products, may have said they believed the companies were “affiliated.”

The judge ruled that Mary Kay can’t present evidence that 45% of those surveyed believed the companies were affiliated because that figure includes those who thought there was an affiliation simply because TOP sold MK branded products. The jury will only be allowed to hear about the consumers who were “confused” about the affiliation between TOP and MK for other reasons.

Then we get into the real substance….

Touch of Pink says that their sales are protected under “The First Sale Doctrine.” Essentially, they aren’t committing trademark infringement against Mary Kay because they’re allowed to sell Mary Kay products that contain the Mary Kay name.

But there’s a problem, because Mary Kay says the products TOP sells are “materially different” from the products MK sells. Blogger Eric Goldman explains:

From a legal standpoint, the trademark infringement claim looks easy to dispose of. Due to the First Sale doctrine, IBCs and any downstream resellers should be free to resell legitimate goods at whatever price they want; and they should be free to let consumers know of the availability of those goods. However, the First Sale doctrine applies only when the resold goods are not “materially different.” Mary Kay argued that the goods were materially different because “(1) they are expired, (2) they do not carry the same product guarantee, and (3) they are old, used, discontinued, or otherwise defective.” Some of these arguments are questionable (why are discontinued but unmodified goods “materially different”?), but everyone agreed that Weber was reselling expired goods, and with perishable goods this could matter. Not being a cosmetics consumer, I’m not sure how perishable cosmetics are; I suspect some aren’t, even if they are stamped with an expiration date. In any case, the court denies summary judgment, making this a fact question for the jury.

The Webers also assert that their use of the Mary Kay trademark is fair use, because they’re allowed to truthfully identify the products they’re selling with the brand name. (How else would anyone be able to accurately identify the products if they were prohibited from mentioning Mary Kay?)

This one gets interesting. It seems to me that the Webers should easily win on this issue. But the judge disagrees with me.  Mary Kay has argued that TOP has done more than “identify the products it sells.” They say that by purchasing Google advertising using “Mary Kay” as a keyword, they’ve gone beyond fair use. The Webers, of course, say that it’s simply a form of advertising and they haven’t done anything with the Google keywords to make consumers think they’re endorsed by or affiliated with Mary Kay Inc.

The judge mentioned the case of Tiffany Inc. suing eBay for trademark infringement because eBay purchased Google advertising linked to the keyword “tiffany.” eBay won that case and the court ruled there that the use of the keyword in the advertising didn’t suggest any affiliation or sponsorship. Rather, the use of the keyword merely identified the products being sold on eBay.

It seems that the judge and I agree up to this point. But the judge goes on to say that although the simple use of a keyword isn’t wrong, the way that the Webers use that keyword “improperly suggests affiliation.”

One Google ad from Touch of Pink Cosmetics read:

Mary Kay Sale 50% Off: Free Shipping on Orders over $100 Get up to 50% Off — Fast Shipping

This ad was appearing at the top of the list of sponsored links. The judge says that this language “…does imply that Mary Kay is hosting the sale.” And he says that other advertisements for the same keywords do not “…suggest affiliation or sponsorship.”

The judge writes:

The overall message of the defendants’ ad is only that some entity — whose website, it bears noting, includes the word “pink,” a color often associated with Mary Kay — is offering Mary Kay products at 50% off. One could easily conclude from this ad that the entity offering the sale either is Mary Kay, or has Mary Kay’s approval. Thus, the court finds there is a genuine issue of material fact on the applicability of the fair use defense. A reasonable juror could conclude that the Webers, through the language of their sponsored link advertisement, improperly suggested affiliation with Mary Kay. Were the jury to reach that conclusion, the fair use defense would not apply. The defendants are not entitled to summary judgment on the grounds that the fair use defense protects their use of the Mary Kay name to advertise their website.

The jury is going to have to decide this issue and whether the Google advertisements of TOP improperly suggested that they were affiliated with Mary Kay.

Probably the most important ruling in this opinion is on the issue of Mary Kay’s claims that TOP was tortiously interfering with the contracts of beauty consultants. The judge says the fact that the Webers knew consultants have contracts with Mary Kay, and knew what those contracts said, doesn’t necessarily mean that they’re interfering with the contracts. Just knowing about the contract isn’t enough. Mary Kay has to prove that TOP actively persuaded people to breach their contracts.

The Webers say they never know for sure who is still under contract and who is not when they’re purchasing Mary Kay products.  The court threw out this claim by Mary Kay, saying:

Here, the Webers are plainly reaping the benefit of IBCs’ willingness to breach their contracts with Mary Kay. However, those IBCs contact the Webers of their own volition. Although the defendants undisputedly advertise their willingness to buy Mary Kay products to anyone who sees their website or newsletter, the ultimate decision to breach the contract is made by the IBCs. More importantly, the record does not show that the Webers exert any influence over those IBCs as they make that decision.

The opinion also says:

…despite the Webers’ knowledge of Mary Kay’s closed distribution system, they were ultimately nothing more than willing participants in the IBCs’ decisions breach their contracts with Mary Kay.

This ruling is very good news for the Webers and other inventory liquidators.

Mary Kay also went after TOP on the issue of tortious inteference with prospective contracts. They’re essentially saying the Webers interfered with MK signing up new consultants. The court laughed at  Mary Kay and threw this out.

Finally, Mary Kay had a claim of “unjust enrichment” against Touch of Pink, saying essentially that the Webers have benefitted because they’ve committed fraud or done something else wrong. Mary Kay says that TOP is improperly using Mary Kay’s name and trademark, and making money from doing so. The judge threw out this silly claim as well.

The Webers fared very well in this round of litigation.

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