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Legal Issues within Professional Hair Distribution


As with certain other industries, the USA marketplace for “salon grade” hair products continues to be characterized largely by what is commonly referred to as a “professional distribution” model. Essentially, brand owners sell their goods to “professional distributors” who in turn mark the goods up and re-sell them to hair salons or directly to licenced cosmetologists who then either use the goods in the performing of services or sell them to end consumers.

Specifically with respect to the sale of hair care/styling products, we’ve witnessed a fairly significant evolution of this distribution model over the past few years. This shift was driven initially by the move by salon owners away from the traditional “commission salon” model toward a “booth renter” model[1], but has since been impacted additionally by the growth of ecommerce[2], the emergence of specialty mass retailers focused on the beauty industry[3] and the consequent re-definition of the marketplace in which the term “salon grade” has been increasingly replaced by the term “prestige hair care”.

Nonetheless, the professional distribution market remains virtually the only distribution channel for the sale of certain professional product categories[4] and continues to be a huge segment for the sale hair care/hair styling products.

The professional distribution marketplace continues to see significant consolidation efforts by its leading players. Driven largely by industry titans BSG and Salon Centric, the last 20 years have witnessed the disappearance of many “independent” professional distributors, to the point where the USA marketplace is now dominated by the two aforementioned behemoths along with perhaps 8-12 significant regional players. This consolidation is important as brands seeking to grow within the professional distribution channel now often encounter regional quasi monopolies (or at best duopolies) with a great deal of negotiating leverage. Distributors have always had a great deal of bargaining power in their dealings with up-and-coming brands, but never as much as nowadays. Different distributors take different approaches when negotiating distribution agreements with newer brands, and intimate knowledge of the distributor landscape maximizes the likelihood that a brand will end up with the best possible deal under a given set of circumstances.

Brands focused on the professional distribution channel also face the additional challenge of preventing the diversion of their products into unauthorized distribution channels. As such, the agreements that they negotiate and sign should include robust provisions with respect to this issue so as to provide the brand holder with the tools necessary to prevent the unwanted diversion of their products and to punish parties involved in such diversion.

That said, and having drafted dozens of these types of agreements over the years in representing brands globally the following are the issues that every professional hair product brand needs to consider when drafting and negotiating their distribution agreements.

Appointment of Distributor

Due to the growth of the booth renter share of the market, many professional distributors divide their sales operations between what’s known as “street” vs. “store”. Their “street” operations focus on suppling salons, while their “store” operations tend to focus on supplying the needs of individual cosmetologists who shop in-store for the beauty product supplies needed to run their personal business. In those instances where more than one distributor has a substantial market presence in a territory, a brand needs to be very careful regarding the nature of the appointment. Depending on the strength of your company’s brand equity, you may feel you have the leverage and market power to negotiate a non-exclusive distribution arrangement. To the extent that you are able to negotiate a non-exclusive arrangement it goes without saying that this should be stated explicitly in the appointment section. It’s important to bear in mind however that exclusivity in the context of this industry is often further disaggregated between “street” exclusivity and “store” exclusivity, as it often occurs that two distributors with geographically overlapping business are sometimes stronger or weaker in one of these two sub-channels.

Limitations on Distribution Rights Granted

It’s in this section of the agreement that the brand needs to ensure that bright lines are drawn with respect to the manner in which their products will be distributed by the distributor. Special care must be made to include language clearly restricting those parties to which the brand’s product may be sold, and in anticipation of potential future litigation I’ve always found it to be best practice to include language whereby both parties acknowledge the benefits of these restrictions. The parties to which products may be sold should be restricted to “Salons”[5] and “Licensed Cosmetologists”,[6] and the distributor should be precluded from selling any products to such permitted purchasers until such time as each such purchaser shall have executed a “Salon Contract or a Stylist Contract” in each case in the forms prescribed by, and attached as exhibits to, the distribution agreement.

Product Purchase Requirements

These provisions are always tricky because it’s not unheard of for unneeded inventory purchases to wind up floating out the back-door of a distributor’s warehouse. But some measure of certainty as to sales can be a very important business consideration for any company, so these provisions are often insisted on by brands. To the extent that you include this kind of a provision, I would recommend the following provisions be included as well. First, be sure to require that the product purchase requirement be spread out across the year so as to even out revenue and to provide a potential breach opportunity in the event of a failure to do so. Second, beyond the period of time for which product purchase requirements have been agreed to in this section, provide for a mechanism for the negotiation of future product purchase requirements beyond that period of time, and try to ensure that the failure by the parties to agree on any future product purchase requirements triggers a “for cause” termination right in favor of the brand.

Reservation of Distribution Rights

Be careful to ensure that, to the extent that the market for your products continues to evolve, that you will not be caught flat-footed and unable to change direction. Typical reservations often include the right to sell directly to a large salon chain, the right to sell directly to consumers via the internet or the right to sell to certain specialty beauty retailers.

Orders, Price, Payment, Delivery and Returns

With respect to the acceptance of product orders, brands often want to have orders placed exclusively through one communication channel (often a dedicated email address), and to have such order subject to rejection by the brand within a specified period of time (the longer the better!). To the extent that a brand is low on inventory it wants to be able to control which distributor orders are given priority based upon the brand’s business considerations at any given time.

When it comes to pricing, typical discounts range from 45%-50% off of MSRP for open stock inventory and 40%-45% discount off of MSRP on all promotional inventory, whether pre-packed or not. With respect to changes to MSRP, a brand should try to negotiate as short a time period as possible before such changes are effective. I’ve seen as low as 30 days, but the distributors will try to extent that to 90 days or more if they can get away with it.

As with any distribution agreement the negotiated payment terms will reflect the relative bargaining power of each of the parties to the agreement. It isn’t unusual to see Net 30 day terms, however I’ve seen brands with enough bargaining power to require payment in full prior to shipping.

Resale Price Maintenance

At one time, resale price maintenance (“RPM”) was considered per se illegal and exposed an upstream seller of goods to an anti-trust enforcement action. This changed dramatically with the US Supreme Court’s 2007 decision in Leegin Creative Leather Products, Inc. v. PSKS, Inc. (Kay’s Closet). From that point onwards resale price maintenance was no longer per se illegal, though depending on the specific facts of the case it could still be determined to be. In its decision in Leegin, the US Supreme Court acknowledged scenarios in which RPM can be pro-competitive in nature and when it can be deemed anti-competitive, and attempted to outline a roadmap of sorts meant to assist manufacturers in determining when their arrangements may subject them to anti-trust enforcement. Depending on the specific facts relating to a brand I do recommend the insertion of a RPM clause in all cases where diversion may be an issue, and recommend its insertion was well within all agreements signed between the distributors and salons selling to end consumers.

There are many additional factors to consider in drafting an ideal professional distribution contract and it’s always recommended to contact an experienced attorney to assist you in preparing one. Please feel free to reach out should you need any advice in this regard.

[1] Particularly in certain markets such as Texas and California [2] Mostly Amazon.com [3] ULTA Beauty and Sephora [4] Hair coloring products, and certain hair treatments [5]Salon” means an operating government-licensed business entity located at a commercially zoned physical civic address, whose business operations are characterized by the following: (i) at least one (1) full-time, Licensed Cosmetologist (whether they be an employee, independent contractor or booth renter) regularly performs Cosmetological Services on patrons on the premises; (ii) at least one shampoo bowl and one styling chair are located therein; (iii) a general appearance indicating that its principal business is the sale of Cosmetological Services rather than the retail sale of hair products; and (iv) derives at least fifty percent (50%) of its revenues from the provision of Cosmetological Services [6]Licensed Cosmetologist” means an individual licensed by a state, province or territory to perform Cosmetological Services;

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