The Start-Up That Was an Upstart

Lisa Shuchman

Corporate Counsel

02-01-2013

Two women who started a company that makes specialized hair care products were furious when they discovered that Sally Beauty Supply, a much larger company, had begun selling a competing product that was all too similar. Despite the daunting challenges of litigation, the women decided that they had no choice but to sue. And, against all odds, the case actually went to trial, and they won a jury verdict of more than $8 million. Then they settled for even more.

David vs. Goliath tales that result in big wins for the underdog are rare in the world of intellectual property, where the time and cost of litigation are especially daunting to small businesses. But Wendi Levy and Kim Etheredge, who cofounded Mixed Chicks, which makes hair care products for women of mixed race, felt that taking on the beauty supply giant was something they had to do. "We were warned the case was not a slam dunk, that it would be expensive and time-consuming, and we were told the payoff, if we won, might not be large," says Etheredge. "But it was about the principle for us."

In November a jury in federal district court in Santa Ana, California, found that Sally Beauty, the largest retailer of professional beauty supplies in the world, had infringed Mixed Chicks's product and awarded the start-up more than $8 million. A short time later the multimillion-dollar company agreed to settle for $8.5 million to preempt requests for attorney fees and disgorgement of profits.

"This is one of the largest trademark verdicts ever in the Central District of California," says Kenneth Parker of Irvine, California–based Haynes and Boone, adding that Sally Beauty has also ceased selling its Mixed Silk products, which were the focus of the suit.

Like the founders of most small startups, Etheredge and Levy had worked hard to get their company going. The two women, who are both biracial, stumbled on their idea for a specialty hair care company when they realized they had both struggled with curly and often unruly hair most of their lives. They complained to each other that to get their hair under control they had to buy numerous shampoos and conditioners from both the "ethnic" aisle and the generic hair care aisle of drugstores. "We would have to use 10 different products instead of one," Etheredge says.

They launched a Web-based business in 2004, and soon they were selling their products to salons and beauty supply stores across the country. In 2009 they got a huge boost when Halle Berry endorsed their products.

A short time later, the Sally Beauty retail chain proposed stocking Mixed Chicks in its stores. After studying the proposal, however, the women declined, realizing that the chain's policies would require them to provide large amounts of inventory, to acquiesce to deep discounting, and to accept all returns. "We wanted to make sure we had control of our merchandise and inventory," Etheredge explains.

In early 2011, Sally Beauty rolled out its own product line for multiracial women, which it called Mixed Silk. Levy and Etheredge first learned about it from clients and customers, who were calling and asking why there was a product on the market that looked so much like theirs but went under a different name and was less expensive.

"The color and size of the bottles were the same, the color of the liquid was the same, the scent and texture of the products were almost identical," says Parker, who formerly was corporate counsel for Callaway Golf Company. Even the advertisements seemed to resemble the Mixed Chicks promos, which feature a photo of Levy and Etheredge. In addition, the Sally Beauty website was programmed in such a way that when a consumer typed in "mixed chicks," the only results it returned were the Sally Beauty "mixed silk" product line.

In March 2011 Mixed Chicks sued, alleging that Sally Beauty "intentionally, knowingly, and willfully" infringed the Mixed Chicks trademark and trade dress. These suits rarely go to trial, as the parties typically settle. But Etheredge and Levy weren't satisfied with Sally Beauty's offers, and the large retailer continued to sell the infringing products. So the case went before a jury.

Sally Beauty testified that similarities were coincidental. (Its attorneys, Jonathan Gordon and Casondra Ruga of Alston & Bird, could not be reached for comment.) The jury didn't buy it. After deliberating for six hours, it found that Mixed Chicks had suffered $839,535 in actual damages, and that Sally Beauty had acted willfully, resulting in a punitive damages award of $7.27 million.

"Others will enter the market, but we're not afraid of competition—as long as it's fair competition," Etheredge says.