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Hair Today, Gone Tomorrow: The Tale of a Retroactively Vacated Consent Injunction

By Jane Shay Wald
March 29, 2010

The U.S. District Court for the Eastern District of New York, apparently in response to plaintiff's plans to use the criminal law system to press for a civil resolution of its motion for contempt, vacated L'Oreal USA Inc.'s 20-year injunction against a re-seller of genuine hair care products. MATRIX Essentials v. Quality King Distributors, Inc., et al., 2009 U.S. Dist. LEXIS 106174 (E.D.N.Y. Nov. 13, 2009) (“MATRIX III“)

The case is significant because the court vacated the injunction retroactively, even though those enjoined had violated its terms for several years. This judicial response arises from a 2007 decision in which the court found that the plaintiff's conduct in seeking redress was far shabbier than the defendants' in selling products in violation of a consent judgment.

The case presents an intertwined array of facts and procedure. The decision issued from the court on remand from the Second Circuit's affirmation on appeal of a 2007 decision in which the Eastern District had found L'Oreal's conduct appalling.

The case is the latest strand in the trilogy marking the shampoo wars between L'Oreal (successor to the 1990 consent judgment entered into by plaintiff MATRIX Essentials, Inc.) and its nemesis, unauthorized re-seller of genuine goods, Quality King Distributors, Inc.

Factual and Procedural History

Here's what happened. L'Oreal labels its MATRIX brand hair products for professional use in salons only, and sells the line through “authorized distributors,” who are typically under contract to sell only to beauty salons and stores selling only to hair care professionals. Quite a few such distributors, despite contractual prohibitions, buy a lot of products, and re-sell their large inventories of genuine goods to jobbers or companies such as Defendant Quality King, for general distribution. Thus MATRIX branded products were at relevant times widely available at retail stores throughout the country, where the amateur hair-washing public purchased them. L'Oreal refers to these sales as sales of “diverted goods.”

MATRIX had sued Quality King for infringement, and in 1990, that suit was resolved by a consent judgment. MATRIX promised, inter alia, not to resell any MATRIX hair care products to anyone other than professionals. L'Oreal, as successor to MATRIX, 14 years later, sought a court order of contempt for defendants' alleged violations of the 1990 injunction. Defendants moved, pursuant to Rule 60(b) of the Federal Rules of Civil Procedure, to vacate the 1990 injunction. That matter was the subject of MATRIX Essentials v. Quality King Distributors, Inc., et al., 522 F. Supp. 2d 470 (E.D.N.Y. 2007) (“MATRIX I“). MATRIX I did not go so well for L'Oreal. The court observed that L'Oreal had focused its resources to hold defendants accountable at law for their contempt, but was not even interested in suing its “authorized distributors” for breach of contract, because L'Oreal was making a fortune in profits from such secondary sales.

The court in MATRIX I was not impressed that L'Oreal knew in 2002 that defendants (contrary to the prohibitions in the 1990 consent judgment/injunction) had resumed re-sales of genuine, untainted MATRIX products to amateur hair-washers for home use, but instead of seeking a contempt order at that time, it attempted to persuade the U.S. Attorney's Office and the FBI to bring an indictment against defendants.

Minutes of a L'Oreal internal meeting refer to the Quality King dispute and state that L'Oreal's lawyers “will be seeking civil redress using the criminal contempt statutes as leverage.” Understandably, this affected the court's view of the plaintiff's equities. No criminal action was brought; the court saluted the U.S. Attorney's Office for its judgment and ethics in spurning this plot, especially as one of L'Oreal's outside counsel pressing for federal criminal action was a former supervisor with the U.S. Attorney's Office.

Against this backdrop, the court, in MATRIX I, vacated the 1990 injunction. It acted on the basis that, among other things, L'Oreal's conduct was outrageous, in attempting to involve federal law enforcement when it knew or should have known that sales of the MATRIX products presented no violation of civil law, let alone criminal law. The defendants' resales of untainted genuine goods were protected by the first sale doctrine. “There is no doubt in the Court's mind that the underlying legality of the conduct at issue is precisely why L'Oreal has chosen to proceed only on the basis of the alleged violation of the injunction.” MATRIX Essentials v. Quality King Distributors, Inc., et al., 522 F. Supp. 2d 470, 480 (E.D.N.Y. 2007.)

There is another reason the court felt comfortable vacating the consent judgment, which is relevant to a much broader audience of IP
litigants and counsel. The court noted: “While this court did, indeed, 'so order' the 1990 Injunction, that order followed neither discovery, a hearing nor trial ' The court agreed merely to implementation of the parties' agreement.” Id.

The Second Circuit Appeal

Not surprisingly, MATRIX/L'Oreal was unhappy with MATRIX I and appealed to the Second Circuit in MATRIX Essentials, Inc. v. Quality King Distributors, Inc., et al., 324 Fed. Appx. 22 (2d Cir. 2009) (“MATRIX II“). There, it urged that injunctions that do not involve significant public rights can be vacated only on “a clear showing of grievous wrong,” citing U.S. v. Swift & Co., 286 U.S. 106, 119 (193). The Second Circuit pointed out that the injunction, if enforced, would keep a significant competitor of Matrix products out of the market, which could drive up prices and harm the public, impacting a significant public right within the meaning of Rufo v. Inmates of the Suffolk County Jail, 502 U.S. 367, 383 (1992). Thus, the Second Circuit was unimpressed with what L'Oreal had advanced as a strong position on appeal.

The Second Circuit (MATRIX II) observed that the District Court hadn't specified whether the injunction was to be vacated retroactively, and didn't discuss the factors to support a retroactive injunction. The Second Circuit construed the District Court's MATRIX I order as “merely a prospective vacatur” and remanded (creating MATRIX III) for consideration of what damages should be awarded for any violations of the injunction that may have taken place while it was still in effect.

The District Court's Decision on Remand

This led to the November 2009 decision, MATRIX III. On remand (“MATRIX III“), the District Court, instructed by the Second Circuit in MATRIX II, took pains to vacate the injunction retroactively. It pointed to evidence that the diversion market during the relevant years 2002 through grant of the Rule 60(b) motion in 2007, was “vastly different from the market in 1990,” bringing L'Oreal “enormous and unprecedented” profits in sales of diverted goods.”

The court again found no evidence that the “diverted” goods were tainted. Re-sale of genuine goods was not remotely unlawful. As to the consent judgment, the court in MATRIX III emphasized if L'Oreal had brought a new action today challenging re-sale of genuine goods as violating the trademark laws, “and that action was subject to full consideration by the Court, L'Oreal would undoubtedly lose.”


Jane Shay Wald is a partner with Irell & Manella LLP in the Los Angeles office and chairs the firm's Trademark Practice Group. She can be reached at 310-203-7017 and [email protected].

The U.S. District Court for the Eastern District of New York, apparently in response to plaintiff's plans to use the criminal law system to press for a civil resolution of its motion for contempt, vacated L'Oreal USA Inc.'s 20-year injunction against a re-seller of genuine hair care products. MATRIX Essentials v. Quality King Distributors, Inc., et al., 2009 U.S. Dist. LEXIS 106174 (E.D.N.Y. Nov. 13, 2009) (“MATRIX III“)

The case is significant because the court vacated the injunction retroactively, even though those enjoined had violated its terms for several years. This judicial response arises from a 2007 decision in which the court found that the plaintiff's conduct in seeking redress was far shabbier than the defendants' in selling products in violation of a consent judgment.

The case presents an intertwined array of facts and procedure. The decision issued from the court on remand from the Second Circuit's affirmation on appeal of a 2007 decision in which the Eastern District had found L'Oreal's conduct appalling.

The case is the latest strand in the trilogy marking the shampoo wars between L'Oreal (successor to the 1990 consent judgment entered into by plaintiff MATRIX Essentials, Inc.) and its nemesis, unauthorized re-seller of genuine goods, Quality King Distributors, Inc.

Factual and Procedural History

Here's what happened. L'Oreal labels its MATRIX brand hair products for professional use in salons only, and sells the line through “authorized distributors,” who are typically under contract to sell only to beauty salons and stores selling only to hair care professionals. Quite a few such distributors, despite contractual prohibitions, buy a lot of products, and re-sell their large inventories of genuine goods to jobbers or companies such as Defendant Quality King, for general distribution. Thus MATRIX branded products were at relevant times widely available at retail stores throughout the country, where the amateur hair-washing public purchased them. L'Oreal refers to these sales as sales of “diverted goods.”

MATRIX had sued Quality King for infringement, and in 1990, that suit was resolved by a consent judgment. MATRIX promised, inter alia, not to resell any MATRIX hair care products to anyone other than professionals. L'Oreal, as successor to MATRIX, 14 years later, sought a court order of contempt for defendants' alleged violations of the 1990 injunction. Defendants moved, pursuant to Rule 60(b) of the Federal Rules of Civil Procedure, to vacate the 1990 injunction. That matter was the subject of MATRIX Essentials v. Quality King Distributors, Inc., et al., 522 F. Supp. 2d 470 (E.D.N.Y. 2007) (“MATRIX I“). MATRIX I did not go so well for L'Oreal. The court observed that L'Oreal had focused its resources to hold defendants accountable at law for their contempt, but was not even interested in suing its “authorized distributors” for breach of contract, because L'Oreal was making a fortune in profits from such secondary sales.

The court in MATRIX I was not impressed that L'Oreal knew in 2002 that defendants (contrary to the prohibitions in the 1990 consent judgment/injunction) had resumed re-sales of genuine, untainted MATRIX products to amateur hair-washers for home use, but instead of seeking a contempt order at that time, it attempted to persuade the U.S. Attorney's Office and the FBI to bring an indictment against defendants.

Minutes of a L'Oreal internal meeting refer to the Quality King dispute and state that L'Oreal's lawyers “will be seeking civil redress using the criminal contempt statutes as leverage.” Understandably, this affected the court's view of the plaintiff's equities. No criminal action was brought; the court saluted the U.S. Attorney's Office for its judgment and ethics in spurning this plot, especially as one of L'Oreal's outside counsel pressing for federal criminal action was a former supervisor with the U.S. Attorney's Office.

Against this backdrop, the court, in MATRIX I, vacated the 1990 injunction. It acted on the basis that, among other things, L'Oreal's conduct was outrageous, in attempting to involve federal law enforcement when it knew or should have known that sales of the MATRIX products presented no violation of civil law, let alone criminal law. The defendants' resales of untainted genuine goods were protected by the first sale doctrine. “There is no doubt in the Court's mind that the underlying legality of the conduct at issue is precisely why L'Oreal has chosen to proceed only on the basis of the alleged violation of the injunction.” MATRIX Essentials v. Quality King Distributors, Inc., et al., 522 F. Supp. 2d 470, 480 (E.D.N.Y. 2007.)

There is another reason the court felt comfortable vacating the consent judgment, which is relevant to a much broader audience of IP
litigants and counsel. The court noted: “While this court did, indeed, 'so order' the 1990 Injunction, that order followed neither discovery, a hearing nor trial ' The court agreed merely to implementation of the parties' agreement.” Id.

The Second Circuit Appeal

Not surprisingly, MATRIX/L'Oreal was unhappy with MATRIX I and appealed to the Second Circuit in MATRIX Essentials, Inc. v. Quality King Distributors, Inc., et al., 324 Fed. Appx. 22 (2d Cir. 2009) (“MATRIX II“). There, it urged that injunctions that do not involve significant public rights can be vacated only on “a clear showing of grievous wrong,” citing U.S. v. Swift & Co. , 286 U.S. 106, 119 (193). The Second Circuit pointed out that the injunction, if enforced, would keep a significant competitor of Matrix products out of the market, which could drive up prices and harm the public, impacting a significant public right within the meaning of Rufo v. Inmates of the Suffolk County Jail , 502 U.S. 367, 383 (1992). Thus, the Second Circuit was unimpressed with what L'Oreal had advanced as a strong position on appeal.

The Second Circuit (MATRIX II) observed that the District Court hadn't specified whether the injunction was to be vacated retroactively, and didn't discuss the factors to support a retroactive injunction. The Second Circuit construed the District Court's MATRIX I order as “merely a prospective vacatur” and remanded (creating MATRIX III) for consideration of what damages should be awarded for any violations of the injunction that may have taken place while it was still in effect.

The District Court's Decision on Remand

This led to the November 2009 decision, MATRIX III. On remand (“MATRIX III“), the District Court, instructed by the Second Circuit in MATRIX II, took pains to vacate the injunction retroactively. It pointed to evidence that the diversion market during the relevant years 2002 through grant of the Rule 60(b) motion in 2007, was “vastly different from the market in 1990,” bringing L'Oreal “enormous and unprecedented” profits in sales of diverted goods.”

The court again found no evidence that the “diverted” goods were tainted. Re-sale of genuine goods was not remotely unlawful. As to the consent judgment, the court in MATRIX III emphasized if L'Oreal had brought a new action today challenging re-sale of genuine goods as violating the trademark laws, “and that action was subject to full consideration by the Court, L'Oreal would undoubtedly lose.”


Jane Shay Wald is a partner with Irell & Manella LLP in the Los Angeles office and chairs the firm's Trademark Practice Group. She can be reached at 310-203-7017 and [email protected].

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