Salon supplier claims companies diverted products from casinos

By Steve Green

Wednesday, Aug. 12, 2009 | 3:13 p.m.

Beauty salon supplier L'Oreal USA claims high-end hair care products intended for sale to Las Vegas hotel-casinos instead were diverted without authorization through a nationwide gray market to mass marketers like Target and CVS Pharmacies.

L'Oreal, based in New York, filed a lawsuit Monday in U.S. District Court in Las Vegas against two Las Vegas companies it claims were involved in the alleged scheme: Hair Casino Venture LLC and Nevada Hair Ventures LLC.

Neither of the defendants could be reached for comment Wednesday.

L'Oreal says it sells products through distributors under the Matrix brand for the professional hair care market. These include colorings, dyes, shampoos, conditioners and styling products and are generally sold to professional salons.

L'Oreal charges in its lawsuit that the Las Vegas defendants and others illegally diverted Matrix products to Cadeau Express Inc., a Las Vegas company headed by Ramon DeSage.

Cadeau is described in the lawsuit as a wholesaler of gifts and specialty items -- including exclusive hair products -- to hotels, casinos and other hospitality venues around Las Vegas. The hotels provide Cadeau products to selected guests as gifts and complimentary room amenities, the lawsuit says.

In 2005, a company called Armstrong McCall, LP (AMLP) and Cadeau negotiated a "covert distribution agreement" for Cadeau to acquire Matrix and other products from AMLP for resale to casinos and other hospitality venues, the lawsuit charges.

A company called Hair of Nevada LLC -- sharing common ownership with the defendants -- was AMLP's Las Vegas-area franchise and was involved in the deal, the suit says.

Cadeau paid kickbacks to executives of AMLP and Hair of Nevada in exchange for the deal involving deep discounts on Matrix products, the suit charges.

Millions of dollars of Matrix products were sold to Cadeau by L'Oreal through AMLP, Hair of Nevada and related company Hair Casino Venture, the suit charges.

"Substantially all of the Matrix products sold by AMLP, Hair of Nevada and defendants to Cadeau were diverted into the gray market for resale by mass-market retailers," the suit charges.

L'Oreal says it later approved a casino distribution deal and was assured by AMLP that Cadeau would supply products under the casino contract only to casinos and that the products would only consist of travel-size 4.2-ounce bottles appropriate for hotel-room distribution.

"AMLP concealed from L'Oreal the fact that it had already sold millions of dollars worth of Matrix products, including full-size bottles, to Cadeau," the lawsuit charges, adding AMLP and Hair of Nevada officials concealed the alleged cash kickbacks from Cadeau.

Believing Cadeau was selling products strictly to casinos, L'Oreal says it later agreed to sell $3.2 million of Matrix products to Cadeau including 110,000 full-size bottles of Color.smart shampoo and conditioner and more than 42,000 travel-size bottles of various Matrix products. These goods were shipped to Cadeau's warehouse on East Sunset Road, the lawsuit alleges.

"Cadeau unlawfully resold the Matrix products that it obtained under the guise of the casino deal" to a San Antonio wholesaler and they later ended up on the gray market, finally being sold to mass-market merchandisers such as Target and CVS Pharmacies, the lawsuit charges.

Through August 2008, L'Oreal repurchased 1,081 bottles of Color.smart conditioner and, using coding techniques, traced them back to the Cadeau casino deal program, the suit says. L'Oreal bought the products at 24 "gray-market" retailers, including 182 Target stores in 32 states, the lawsuit says.

Those 1,081 bottles were just a small portion of tens of thousands of bottles that were diverted into the gray market by the defendants, Cadeau, AMLP and Hair of Nevada, the lawsuit charges.

The lawsuit alleges conspiracy to commit fraud that has "damaged L'Oreal by causing a loss of goodwill and injury to the Matrix brand name" as well as lost sales.

The suit seeks unspecified damages and an injunction against the defendants blocking them from violating the terms of L'Oreal sales contracts.

Armstrong McCall and Cadeau Express are not named as defendants in the lawsuit.

But Cadeau Express was sued over similar allegations in Clark County District Court in Las Vegas in March.

California-based Sexy Hair Concepts LLC charged in that suit that Cadeau Express violated an agreement to sell Sexy Hair products solely to the hospitality industry and primarily to casinos.

But attorneys for Cadeau said a Sexy Hair official was aware that there may be circumstances where Cadeau would sell products to entities other than casinos and the official had permitted and participated in such sales in the past.

DeSage added in an affidavit: "Cadeau does not sell, nor has it ever, sold to over-the-counter retail outlets such as CVS, Rite-Aid, Walgreens or Walgreens.com."

That suit is pending.