Still Underway Amid Drunk Elephant’s $845 Million Acquisition Deal: An Ugly Legal Battle with L’Oreal
image: Drunk Elephant
Following months of reports that Drunk Elephant was nearing an acquisition deal, Japanese giant Shiseido has been revealed as the purchaser of the buzzy beauty brand in what is being called “the most anticipated beauty M&A deal of 2019.” In exchange for $845 million, Shiseido will take a 100 percent stake in the 7-year old clean beauty brand, whose revenues for 2018 were reportedly close to $100 million, a deal that “underscores the Japanese buyer’s ambitions to globalize its beauty offerings,” per WWD.
In addition to serving as the latest in a string of major acquisitions within in the booming $500 billion beauty industry, as “first fueled by a growing market for makeup, and big beauty conglomerates’ willingness to pay high prices for these hot companies, like It Cosmetics, which sold to L’Óreal for $1.2 billion in 2016, a valuation of more than six times sales,” Forbes notes, the deal, itself, also seems to suggest that “purchase prices for beauty brands may be calming down.” After all, Drunk Elephant – which has proven popular amongst Gen-Zers and older beauty buyers, alike – was reportedly eyeing a valuation of more than $1 billion.
The deal – by virtue of the fact that Shiseido will purchase all existing holdings in the Drunk Elephant, including from current holders, such as San Francisco-based VMG Partners, per Axios – means that in addition to acquiring Drunk Elephant’s assets, such as its valuable intellectual property, the Japanese beauty co. will also take on its liabilities, including those of a legal nature. The most glaring of such legal matters is the headline-making lawsuit that Drunk Elephant is currently facing after allegedly ripping off one of L’Oreal’s award-winning and highly-buzzed-about Vitamin C serums.
According to the complaint that the American arm of French giant L’Oreal filed in a Texas federal court almost a year ago, Drunk Elephant – by way of its $80 C-Firma Day Serum – “has infringed and continues to infringe claims” one of L’Oreal’s patents for a specific Vitamin C compound. To be exact, L’Oreal claims that the C-Firma Day Serum contains a patent-protected chemical makeup that mirrors that of L’Oreal-owned brand Skinceuticals’ more expensive C E Ferulic Serum, and as a result, Drunk Elephant is directly infringing a utility patent (patent no. 7,179,841) that it has held since 2007.
In its formal response to the lawsuit in June, Drunk Elephant “specifically denied” that its C-Firma Day Serum “infringes any valid claim [included in L’Oreal’s] ’841 patent,” and as a result, explicitly rejected L’Oreal’s argument that the patent prevents it from “manufacturing and selling any Drunk Elephant products,” including the C-Firma Day Serum.
Aside from denying that has engaged in infringement and asking the court to dismiss L’Oreal’s suit as a result, Drunk Elephant set forth claims of its own, asking the court to declare that its “making, using, selling, offering for sale, marketing, or importation of C-Firma Day Serum does not infringe the ’841 patent.” Even more significantly, though, Drunk Elephant has asked the court to declare that the patent at issue and all of its individual claims are invalid because “they fail to comply with the requirements of patentability” set forth by law, including the requirements that any patent-protected invention must be novel and nonobvious.
Drunk Elephant claims that L’Oreal knew that there “was nothing inventive about producing an ‘aqueous composition’ or other solution containing ‘L-Ascorbic acid’ that had a ‘pH below about 3.5” – claims that are at the center of its patent – which is why the beauty giant “withheld material prior art references” from the U.S. Patent Office in order to “deceiving the Office into issuing the ’841 patent … despite its duty” to provide it with all relevant prior art.
With that in mind, Drunk Elephant has asked the court to not only determine that it has not infringed L’Oreal’s patent by way of its C-Firma products but to declare that the ‘841 patent “and all of its claims are invalid” and unenforceable, a potentially much bigger loss if it comes to be.
Despite the removal of DrunkElephant Holdings, LLC from the list of defendants, the case is still underway between L'Oreal USA Creative and Drunk Elephant, LLC, and in fact, given the deal between Drunk Elephant and Shiseido, in furtherance of which the Japanese titan will officially shallow up its much smaller new acquisition target by the end of this year, the lawsuit has seemingly transformed into something of a battle of the giants.
While with $10.15 billion in annual revenues, Shiseido is still quite a bit smaller than the $29.67 billion per year L’Oreal, the potential for spending-on-legal-fees and thus, the playing field as whole, has arguably been leveled quite a bit.