Dr. Zein Obagi, Preeminent Inventor of Skin Care Products, Challenges Anti-Competitive Practices of Obagi Medical Products, a Co
January 07 2010 - 5:33PM
PR Newswire (US)
Lawsuit Presents Evidence that OMP, the World' s #1 Professional
Skin Care Product Company, Has Improperly Attempted to Prevent
Consumers from Obtaining Access to Dr. Obagi's Newest Skin Care
Line BEVERLY HILLS, Calif., Jan. 7 /PRNewswire/ -- ZO Skin Health,
Inc. ("ZO"), a company formed to give consumers access to
world-renowned dermatologist Dr. Zein Obagi's non-prescription skin
care products, today filed suit in California Superior Court
challenging the anti-competitive practices of Obagi Medical
Products, Inc. ("OMP") (NASDAQ:OMPI). The lawsuit presents evidence
that OMP, the world's top distributor of physician-dispensed,
prescription skin care products, has engaged in a wide range of
unlawful activities to prevent ZO from providing the general
consumer market with access to the newest anti-aging skin care
products invented by Dr. Obagi. Summary of the Case Dr. Zein Obagi
is a world-renowned dermatologist who has, over the course of his
more than 30-year career, invented some of the most enduringly
effective anti-aging skin-care products ever. In 1988, Dr. Obagi
founded Worldwide Products Distribution, Inc. ("Worldwide"), the
company that would later form the core of Obagi Medical Products,
Inc. ("OMP"). OMP provides medical skin-care products to doctors
for use on their patients around the world. In 1997, Dr. Obagi sold
a controlling share in OMP to outside investors. A Stonington
Partners private equity fund acquired a majority interest in OMP
and later took the company public. Even to this day, Dr. Obagi's
Nu-Derm System, which he invented in the 1980s, continues to be the
economic foundation of OMP's business. And Dr. Obagi remains OMP's
second-largest shareholder. Dr. Obagi recently created a new line
of anti-aging skincare. His plan is to make these newly
formulated--and highly effective--skin-care products widely
available to consumers who do not have the need for, or access to,
the physician-dispensed products that OMP sells. Dr. Obagi first
offered OMP the opportunity to market and distribute his new
consumer product line because these products are designed to
complement and enhance OMP's existing physician-dispensed skin-care
lines. And, as OMP's second-largest shareholder, Dr. Obagi wants
OMP to realize continued success. After a lengthy round of
discussions--during which Dr. Obagi and ZO shared with OMP highly
confidential information -- OMP declined to pursue Dr. Obagi's new
products. Instead, ZO distributed Dr. Obagi's new consumer product
line. ZO has already had tremendous success, with products now
available to consumers at Nordstrom and at leading spas, such as
Vdara Hotel and Spa at CityCenter Las Vegas. OMP responded to ZO's
success by engaging in a far-reaching and legally improper campaign
to prevent ZO from marketing and selling its line of products. In
addition, OMP wrongfully scuttled the sale of ZO to a major
Japanese pharmaceutical company. OMP has attempted to justify its
campaign against ZO by referring to non-compete clauses--clauses
that are unenforceable as a matter of California law and contravene
OMP's own Code of Ethics. ZO's goals in filing this lawsuit are (i)
to halt OMP's illegal campaign against ZO, (ii) to permit ZO's new
products to be widely distributed to consumers without threats and
wrongful interference, and (iii) to secure just compensation for
the damage that OMP's improper campaign has already caused. OMP's
Bad Faith Negotiations with ZO ZO Skin Health's lawsuit asserts
that Dr. Obagi first gave OMP the opportunity to market his new
consumer product line. ZO was then formed with OMP's knowledge and
expressions of support. But according to the complaint filed today
in court, "despite OMP's repeated promises that it was interested
in collaborating with ZO on the development, marketing and sales of
the ZO Line, and its requests for trade-secret and confidential
business information that ZO accommodated, OMP's actions
demonstrate that it never acted in good faith and never truly was
interested in collaborating with ZO." OMP's Unlawful Attempts to
Prevent Others from Doing Business with ZO The lawsuit alleges that
OMP prevented distributors from selling ZO Skin Health's products.
OMP, according to the lawsuit, "told a Canadian distributor that it
could not distribute ZO products because such an arrangement
supposedly would violate a non-compete clause in a contract between
OMP and Dr. Obagi." The lawsuit also indicates that OMP "prevented
ZO from using a distributor in Europe by making the same assertion
in bad faith. Upon information and belief, OMP has similarly
dissuaded other potential customers from working with ZO." Finally,
according to the complaint, "one of the biggest skin-care and
cosmetic e-commerce companies signed an agreement to purchase and
distribute the ZO Line. Upon information and belief, OMP instructed
the e-commerce company that it was not allowed to sell ZO products
because of a non-compete agreement between OMP and Dr. Obagi. This
company has since refused to sell the ZO Line as a result of the
claims and threats made by OMP." OMP's Improper Reliance on an
Illegal Non-Compete Clause According to the lawsuit, the
non-compete clause relied on by OMP is clearly unenforceable
because it is "void and against California public policy." In
addition, such non-compete clauses violate OMP's own corporate
policy, which states clearly that "no agreement will contain any
provisions not to compete or to boycott certain buyers, sellers, or
competitors." OMP's Illegal Interference with ZO's Attempt to Sell
the Company The lawsuit also alleges that OMP unlawfully interfered
with ZO Skin Health's attempt to sell its business to a Japanese
firm, Rohto Pharmaceutical Co., Ltd., for millions of dollars. The
complaint says that after ZO accepted Rohto's written intent to
purchase ZO's business in September 2009, OMP worked to scuttle the
deal "by accusing ZO and Dr. Obagi of violating agreements not to
compete and threatening Rohto if it were to pursue the agreement.
OMP told Rohto that it would refuse to permit ZO to be sold to any
other interested company, and would limit any outside investment in
ZO to merely a passive investment." In response to OMP's threats,
according to the complaint, "Rohto told ZO that Rohto still admired
Dr. Obagi's methods and products, still wished to pursue expansion
of the ZO Line throughout the world, and still believed the deal
with ZO had great business potential. Nevertheless, Rohto told ZO
that it was backing out of the agreement due to OMP's conduct and
interference." Violations of California Law and the Misleading of
Shareholders The lawsuit filed by international law firm O'Melveny
& Myers LLP, alleges that OMP's anti-competitive practices
violate California state laws, including: -- California Business
and Professions Code: "OMP's intentional, bad faith and wrongful
reliance on the void non-compete clauses in its contracts with Dr.
Obagi to interfere with the economic relationships between ZO and
Rohto and ZO and product distributors constitutes independently
wrongful conduct in violation of California Business &
Professions Code Section 16600. OMP knew these non-compete clauses
violated not only California Business & Professions Code
Section 16600 but its own Code of Conduct." -- California's Unfair
Competition Law: According to the complaint, OMP's actions
"constitute unlawful, unfair and/or fraudulent business practices
within the meaning of California's Unfair Competition Law ("UCL")
... because OMP's anti-competitive behavior is designed and
attempts to restrict ZO's ability to market, distribute, and sell
the ZO Line. OMP wrongfully and in bad faith relied on void and
unlawful non-compete clauses in its contracts with Dr. Obagi, in
violation of OMP's own Code of Conduct and California Business
& Professions Code Section 16600, in order to: (1) prevent ZO
from selling through various distributors; (2) prevent ZO from
selling its line through third-party skin care websites; and (3)
interfere with the contract for the multi-million dollar sale of
ZO's business to Rohto." -- Misleading Shareholders, Customers and
the Public: According to the lawsuit, "OMP's actions were
fraudulent in violation of the UCL because OMP misled its
shareholders, customers, health care professionals, ZO and the
public at large by falsely claiming in its Code of Conduct that it
supports fair and ethical competition in the marketplace and does
not enter into contracts that contain non-compete provisions. In
fact, an important part of OMP's strategy is to compete unfairly by
using void non-competition covenants to threaten other skin care
product developers, manufacturers, and distributors." Request for
Injunctive Relief, and Compensatory and Punitive Damages The
lawsuit asks the California Superior Court to enter preliminary and
permanent injunctive relief against OMP's unlawful practices and to
order OMP to pay compensatory and punitive damages to ZO Skin
Health. ABOUT ZO SKIN HEALTH ZO Skin Health develops, produces and
markets anti-aging skincare products worldwide. The products
combine high concentrations of active ingredients to visibly
improve skin health by stimulating cellular function. Dr. Zein
Obagi's thirty years of experience and creation of a leading
physician-dispensed skincare brand presented him with the vision to
create ZO SKIN HEALTH(TM). ZO Skin Health products are available at
selected Nordstrom stores and department stores, resort,
destination and day spas throughout the world. For more
information, see the company's website,
http://www.zoskinhealth.com/. CONTACT: Lisa Cohen, +1-310-395-2544,
for ZO Skin Health, Inc. DATASOURCE: ZO Skin Health, Inc. CONTACT:
Lisa Cohen, +1-310-395-2544, for ZO Skin Health, Inc. Web Site:
http://www.zoskinhealth.com/
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