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LOreal Net Profit Reaches Record Level

California Startup Born in a Garage Beats L’Oreal in Patent Feud

“David versus Goliath,” Joe Paunovich said, locked in a fight over “corporate greed.”

In the final moments of his rebuttal to L’Oreal SA’s closing argument in a trade-secrets trial, a lawyer for California startup Olaplex LLC told jurors they would choose the victor in a courtroom battle of biblical proportions.

“David versus Goliath,” Joe Paunovich said, locked in a fight over “corporate greed.”

L’Oreal was the giant. Olaplex, born in a Santa Barbara garage to a pair of polymer chemists, was David. And even if it wasn’t the first time that particular trope had graced an American courtroom, it appears to have been effective.

On Monday afternoon, in federal court in Wilmington, Delaware, the jury told L’Oreal to pay the startup $91.3 million for stealing its trade secrets, breaching a contract and infringing two patents related to a popular, three-step system that protects hair during bleaching treatments.

Since a party can’t recover money for the same wrong more than once, Paunovich said in an interview after the verdict, Olaplex expects to net about $37.4 million once U.S. District Judge Joseph Bataillon has combed through the damages. The jury also found that L’Oreal’s acts were intentional, leaving the door open for Bataillon to substantially increase the damages if he chooses.

“We are incredibly proud that Olaplex’s rights have been vindicated after a very long and hard-fought litigation,” Paunovich said afterward.

A spokeswoman for L’Oreal said the company strongly disagrees with the verdict, which it plans to appeal, and noted that the decision applies only to the U.S. market.

“We continue to believe that Olaplex’s accusations against us are unfounded,” Lauren Riezman said. Olaplex “had no basis for a patent infringement claim against us, nor did we misuse sensitive business information,” Riezman said.

Olaplex had accused L’Oreal of stealing the secrets in a meeting in California in 2015, when the companies were in talks for L’Oreal to buy the startup. L’Oreal, during a weeklong trial, said it independently conceived the use of a critical acid in August 2014 and developed its products on its own.

In April, Bataillon agreed to block sales of the products at issue until the dispute was resolved, calling them “an insignificant portion of L’Oreal’s overarching business.” Olaplex, he wrote, “presented evidence showing actual monetary harm.” He didn’t issue a corresponding order, saying in court documents he would “likely enter the entire judgment in the case,” including any injunction, after the trial.

The judge ruled in late June that L’Oreal’s products had infringed the two patents at issue. One question the jury had to decide was whether the patents, owned by co-plaintiff Liqwd Inc. and licensed exclusively to Olaplex, were valid to begin with. Another was whether L’Oreal had stolen the trade secrets. A third was whether it had broken nondisclosure agreements relating to them.

In the end, the answer to all three was yes.

Olaplex has no physical store, employs fewer than 30 people and does little traditional advertising. Yet its core products, launched on the company’s website in June 2014 after a trial by top hair colorists such as Tracey Cunningham, quickly built a following. Olaplex says they strengthen and reconnect protein bonds during bleaching.

L’Oreal, whose hair-dyeing innovations go back more than a century, reported more than $30 billion in sales last year. The product lines in question, which all involve the three-step hair-protection system, are just one part of a division with about 12% of L’Oreal’s 2018 revenue, according to data compiled by Bloomberg. But they are sold under the prestigious Matrix, Redken and L’Oreal Professionnel labels, important to the overall brand’s identity.

By November 2014, one of the largest wholesale beauty-supply distributors in the country, SalonCentric, had put Olaplex on U.S. shelves, propelling it to an early success. SalonCentric is owned by L’Oreal, which noticed the product’s performance and buzz on social media and tried to hire away the two scientists who invented the process, according to Olaplex’s lawsuit.

Outsiders to the industry, the pair had worked out of the requisite California-startup garage, pouring their product from five-gallon buckets into small bottles, and decided to stay put.

Monday’s verdict doesn’t spell the end of the dispute between the companies. In July, Olaplex sued L’Oreal over its trade secrets again, asking a Los Angeles federal court to reassign to it a L’Oreal patent it contends “embraces” those secrets. That case is pending.

By Christopher Yasiejko

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