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If you want to get the strongest medicine, you go to a doctor. Believe it or not, manufacturers of high-end hair care products use this prescription-only analogy to explain their salon-only marketing strategy. According to Geoffrey Potter, an IP litigator at New York’s Kramer Levin Naftalis & Frankel who represents specialty hair care products manufacturer John Paul Mitchell Systems, these companies don’t have the resources to compete with giants like The Procter & Gamble Company. So they rely on the cachet of their products — an appeal heightened by their limited availability. It’s a strategy that has worked well. Beauty product sales in salons amount to about $5 billion annually, according to Nancy Flinn, president of Weston, Conn.-based NF Marketing Resources Inc., a specialist in the area. But it’s also a strategy that has made the business attractive to counterfeiters and others eager to fulfill demand for the products using non-salon distribution channels. Counterfeiting in general is a ubiquitous problem with a global cost of a half-trillion dollars per year, says Lewis Kontnik, a lawyer and principal of London-based Reconnaissance International, a consulting firm specializing in product protection. But more than just lost revenue is at stake. While counterfeiters devote a lot of energy to aping the packaging, they put little effort into duplicating an item’s contents. The result: a lousy product in a familiar bottle — what Potter calls “every brand manager’s nightmare.” Revenue and reputation are also dented by diversion: “Diverters” buy up authentic product from salons at a discount, remove identifying codes, and resell the items to retail outlets. Makers of premium hair care products each spend up to $1 million a year fighting diversion and counterfeiting, estimates Flinn. Unlike Apple, with its combination of high-tech surveillance and resolutely old-fashioned threatening letters, Los Angeles-based Sebastian uses investigators and high-tech solutions to keep its intellectual capital secure. It’s an approach that led to an important federal court victory last spring. In 1997 the company began applying a 1-inch-square label to each can of its most popular product, Shaper Hairspray. The left half of each label contained a bar code and a unique, six-digit, alphanumeric code; the right half sported a hologram. The codes allowed the company to keep track of which cans were in which boxes, which boxes were on which pallets, and where they all went, explains Mark Riedel, general counsel of Sebastian and personal care product maker Wella Corporation (the two merged last January). The numbers were fed into a tracking system produced by Columbia, Md.-based PEAK Technologies. Sebastian also gave a list of codes to its independent distributors (who handle roughly 50 percent of its sales domestically). Armed with the new data, the company rooted out what Riedel calls the “faithless salons — the people who are disloyal to the salon concept.” Total “terminated” in the last four years? Six distributors and over 70 salons. Riedel and the other lawyer in Sebastian’s legal department also made a federal case of their bottle protection plan and won last spring. In Sebastian International Inc. v. Vincenzo Russolillo, then-U.S. District Judge Carlos Moreno (now on the California Supreme Court) ruled that a California statute that makes it illegal to sell products that have had their serial numbers cut off also applies to hair care products. While the codes protected against diverters, Sebastian sought additional protection against counterfeiters. That’s what prompted the holograms. Two years ago a counterfeiter in Italy made 2 million cans of fake — and shoddy — Sebastian hairspray. “It was essentially glue,” says Riedel. Enraged e-mails from customers having really bad hair days flooded the company. Because the counterfeiters couldn’t copy the hologram, however, Italian police were able to identify and seize 400,000 cans of the bad stuff before any more hair was wrecked. Thanks to the court decision, it’s become riskier for criminals to tamper with bottles. As Riedel puts it, briefly laying aside his lawyerly tone: “It’s really bad mojo to mess with lot codes.”
Sebastian International (Wella USA)
Number of Federal Trademark Lawsuits as Plaintiff: 1991 – 1 1992 – 1 1993 – 3 1996 – 1 1998 – 1 2000 – 1 Number of Federal Trademark Lawsuits as Defendant: 1999 – 1 Source: CaseStream
Top Outside Firms for Trademark Suits: Lilling & Lilling: 2 cases Hunton & Williams: 2 cases
Headquarters:Los Angeles, California
Corporate Parent:Wella AG, Darmstadt, Germany
Sebastian CEO:Manolis Lekkas
Sebastian GC:Mark Riedel
Revenue (Wella AG) 2000, in billions:$2.7
Share Price 52-week high/low (euros):33.2/55.75
Share Price, November 26 (euros):51

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