The opinion of the court was delivered by: Denise Cote, District Judge:
This case concerns whether hair care products manufacturers' labeling of their products as available exclusively in salons results in lost sales and damage to the reputation and goodwill of the salons that carry those products. The plaintiffs move for class certification pursuant to Rules 23(a), (b)(3), and (b)(2), Fed. R. Civ. P. For the following reasons, the motion is denied.
The defendants are manufacturers of hair products which they market and sell to salons under their respective brands. The plaintiffs are salons which sell the defendants' hair products. Sales of hair care products represent an important revenue source for salons; indeed, the profit margin on these products is generally higher than the margin for the hair care services provided in the salons.
The first amended class action complaint (the "Complaint") asserts three causes of action: false advertising and unfair competition under the Lanham Act, and injunctive relief. The Complaint alleges that the defendants each represent, through their product labels, on company websites, and in print advertisements, that their hair care products are available for purchase exclusively through salons and not through mass-market retailers such as CVS and Walgreens. According to plaintiffs, although the defendants maintain that they offer their products exclusively through salons, since at least 2004 the defendants have engaged in widespread diversion of their products to mass retailers. "Diversion" here is defined as the sale of products marketed as salon-only through stores that do not have salons on the premises. Diversion now accounts for "more than $1 billion of the beauty industry's $5 billion in annual sales of salon-only products." Plaintiffs contend that the defendants' false "salon-only" advertising damages their reputation with consumers who purchase products at their salons, only to discover that the products are also available at mass retailers.
The plaintiffs seek to certify a class for each of five defendants,*fn1 consisting of [A]ll professional hair salons and licensed cosmetologists that purchased [a defendant's] professional products for resale to their customers within the United States from July 1, 2004, to the present. Excluded from the class are any salons [a defendant] previously identified as having diverted [its] professional products during the class period.
The primary reason that this motion to certify a class fails is the unresolved tension between the legal claims brought by the plaintiffs and their theory of damages. While the claims emanate from a theory of false advertising, the plaintiffs' evidence of damage arises from the phenomenon of diversion and not from any false advertising. As a consequence, the plaintiffs have failed to satisfy the requirements for pursuing their claims as representatives of a class.
A. The Defendant Hair Care Product Manufacturers Defendant L'Oreal USA, Inc. ("L'Oreal") manufactures and sells several lines of hair and skin care products, including the Matrix, Kerastase, Redken, and Pureology lines of products. Prior to 2011, Matrix products were labeled "For sale only in professional beauty salons." Kerastase products are labeled "For professional use only"; Pureology products advise that they are "Available Only at Fine Salons and Spas." A sample distribution contract between L'Oreal's distributor and a salon notes that diversion damages L'Oreal's goodwill with consumers. The contract provides for liquidated damages in the amount of $100 per unit of L'Oreal product diverted by the salon.
Defendant TIGI Linea, LP ("TIGI") manufactures and sells the Bed Head line of hair products. Bed Head products are labeled as "Sold Only in Professional Salons."
Defendant Conair Corporation ("Conair") manufactures and sells the Rusk premium line of hair care products. Rusk products contain the label "Sold exclusively in professional salons."
Defendant John Paul Mitchell Systems ("Paul Mitchell") manufactures and sells the Paul Mitchell line of hair care products. The packaging of these products contains the following warning: "Guaranteed only when sold by a professional hairdresser, otherwise it may be counterfeit, black market, and or tampered with." Paul Mitchell advertisements in magazines advise readers that products are available "Only in salons and Paul Mitchell schools." A sample contract between a Paul Mitchell distributor and a salon states that diversion "seriously damages the reputation and good will established by [Paul Mitchell] and the Distributor and interferes with their business relationship with other SALON customers as well as the consumer." The contract provides that the distributor or Paul Mitchell shall be entitled to at least $25,000 in liquidated damages for any diverted products.
Defendant The Wella Corporation ("Wella")*fn2 manufactures the Sebastian line of products, which are labeled "Guaranteed only when sold by an authorized salon." A sample contract between Wella and a salon for the distribution of Wella hair care products provides that diversion "damages Wella's brands, trademarks, and goodwill and damages its contractual relations with its distributors and other salon customers." Wella's contract also provides for liquidated damages in the event that the salon is found to be diverting Wella products.
B. The Plaintiff Salons The plaintiffs are a group of salons located in Georgia and Alabama, as well as a non-profit organization founded to address the problem of diversion of hair products to mass retailers.
1. Salon FAD Salon FAD is a non-profit organization founded by Linda
Pelfrey ("Pelfrey") in 2008 to "advance the interests of salons in the face of the large-scale diversion of professional products into non-professional retail channels." "FAD" stands for "Fight Against Diversion." Pelfrey is also the owner of J Beverly Hills of Georgia, a company that distributes the J Beverly Hills line of professional hair care products.
Salon FAD is the assignee of the claims of the Daily Trends salon in Georgia. Daily Trends has in the past sold the Bed Head line of products, which are manufactured by TIGI.
2. Cindy's Hair Salon Plaintiff Cindy's Hair Salon ("Cindy's") is owned by Cindy
Poss ("Poss") and is located in Augusta, Georgia. Poss testified that Cindy's has sold the L'Oreal product lines Matrix and Redken. When asked to explain how diversion harms her salon, Poss stated that "I feel like the products are sitting on my shelf more than what they used to be" and that for this reason she had had a harder time paying rent and utilities.
3. Chu's Hair Salon Plaintiff Chu's Hair Salon ("Chu's") is located in
Columbus, Georgia and owned by Hyon Chu Jarmon ("Jarmon"). Chu's sells hair products manufactured by L'Oreal, TIGI, Paul Mitchell, and Wella. Jarmon testified that she stopped purchasing several hair care lines when she learned that they were also sold by mass retailers. Jarmon explained that she "will lose profit" and that her "reputation not good" with consumers because of diversion. Jarmon estimates that she has lost 15% of her customers because she no longer carries certain lines of diverted products.
4. Carastro & Company Hair Design Plaintiff Carastro & Company Hair Design, a Marietta, Georgia salon owned by Sheri Carastro and Dr. Lawrence Carastro ("Dr. Carastro"), has at one time sold L'Oreal, Conair, TIGI, Paul Mitchell, and Wella products. Dr. Carastro testified that diversion harms his salon "monetarily" and that his customers have started to lose confidence in him and accuse him of being a "rogue salesman."
5. EnV Studio Salon LLC Plaintiff EnV Studio Salon LLC ("EnV"), a salon located in
Roswell, Georgia and co-owned by Gena NeSmith, sells L'Oreal, TIGI, and Paul Mitchell products. According to NeSmith, diversion harms her salon due to lost profits and lost "credibility" with customers. NeSmith testified that she is "offering [her customers] exclusive products in my salon and when they find it somewhere else, it is not exclusive to them any longer."
6. New Millennium Salons L.L.C. d/b/a Salon 2000 New Millennium Salons L.L.C. d/b/a Salon 2000 ("New Millennium"), a Milledgeville, Georgia, salon, sells L'Oreal, Wella, Conair, and TIGI hair products. New Millennium's owner, Linda Marrow, testified that at least one of her customers had complained about diversion when she purchased a product at New Millennium that she later discovered on the shelves of a mass retailer. Marrow acknowledged, ...