Dr. Zein Obagi, Preeminent Inventor of Skin Care Products, Challenges Anti-Competitive Practices of Obagi Medical Products, a Company He Founded in 1988 and Later Sold to a Stonington Partners Private Equity Fund
BEVERLY HILLS, Calif., Jan. 7 -- 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™.
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, www.zoskinhealth.com.
CONTACT: Lisa Cohen, +1-310-395-2544, for ZO Skin Health, Inc.
SOURCE ZO Skin Health, Inc.