DOUBLE WHAMMY: Nerium sued by product supplier
Yesterday we reported on Dennis Windsor, co-founder of Nerium, suing the company for $22 million dollars.
Today we cover another lawsuit filed against Nerium, this time by their product supplier.
Nerium Biotechnology is the parent company of Nerium Skincare.
Nerium Skincare is
a corporation organized and existing under the laws of the state of Texas and is a member of Nerium International, LLC.
Specifically, Nerium Skincare have a 30% ownership stake in Nerium the MLM company (Nerium International, LLC).
The other 70% is owned by Nerium co-founder Jeff Olson’s company, JO Products, LLC.
So the story goes,
Several years before the formation of the Company, Nerium Biotechnology, Inc. (“Biotech”), Nerium SkinCare’s parent, was engaged in researching, developing and testing products using extracts of the Nerium oleander plant that appear to have unique health benefits.
During that process, Biotech discovered that the unique properties of the Nerium oleander plant provided remarkable age-defying results when applied to the skin.
Biotech patented an extraction process to create a Nerium oleander extract product called NAE-8.
Biotech created Nerium SkinCare to develop, formulate and manufacture natural skincare products, some of which would contain the NAE-8 extract.
Having developed a first-of-its-kind product, with a patented extraction process that yields a beneficial extract, Nerium SkinCare considered marketing alternatives and was introduced to Jeff Olson (“Olson”).
Nerium Skincare and Olson went on to launch Nerium International, ‘to market and sell Nerium SkinCare products‘.
Nerium SkinCare develops and produces the Product Line and Nerium International sells and distributes the Product Line.
Part of the Nerium agreement is a Perpetual Distribution and Licensing Agreement (DLA),
to delineate the exclusive and non-exclusive rights of Nerium International to market the Product Line and to grant certain intellectual property rights to Nerium International “to the extent reasonably necessary for the marketing, distribution and sale of the Product Line.”
This DLA is a source of contention between Nerium Skincare and Nerium International, with Nerium Skincare claiming Nerium International has
failed and refused to enter into the DLA which, among other things, has frustrated the purpose of the Company Agreement and caused irreconcilable damage to the parties’ relationship.
Basically Nerium International are supposed to exclusively market Nerium Skincare products. Which according to Nerium Skincare, they haven’t.
Around April 2014, Nerium debuted an Optimera line of products in Canada.
Without Nerium SkinCare’s consent Nerium International began selling imitation products overseas that were not manufactured by Nerium SkinCare and do not contain the proprietary oleander extract NAE-8.
Nerium International refers to the imitation products as the “Optimera Line.”
Nerium International promotes the Optimera Line of skincare products as similar and equivalent to those in the Product Line, despite the fact that they are not manufactured by Nerium SkinCare and they do not contain the proprietary oleander extract NAE-8.
The Optimera Line has become directly competitive with the Product Line.
In September 2014 Optimera was rolled out to Mexico. The products have also been marketed and sold in the US.
Nerium Skincare allege that Optimera’s rollout is the cause of a $12 million decline in sales of their NAE-8 based product line.
Furthermore, Nerium Skincare allege, as a 30% owner of Nerium International, that they are not being fairly compensated for Optimera sales.
Article V of the Company Agreement requires Nerium International to allocate profits and make distributions to all Members, on a pro-rata basis, according to the Members’ respective Percentage Interest.
Nerium International has allocated Nerium SkinCare 30% of Nerium International’s costs and expenses but only 20% of the profits from the Optimera Line.
The same is true for the EHT product beginning in 2015.
As a 30% Member of Nerium International, Nerium SkinCare is entitled to 30% of the net income from the sale of the Optimera Line and the EHT product.
This incorrect allocation of costs and revenue has resulted in unpaid distributions to Nerium SkinCare in excess of $4 million in violation of Article V of the Company Agreement.
Additionally the agreement stipulates Nerium Skincare will be awarded an increased share of revenue, should “gross cash proceeds from the sale of the Product Line” exceed predetermined thresholds.
Without disclosing what those thresholds are, Nerium Skincare alleges
the relevant thresholds have been exceeded since August 2013, yet Nerium International has not made the requisite payments to Nerium Skincare … in violation of the Company Agreement.
To date, Nerium Skincare allege Nerium International has stashed over $16 million in off-shore accounts. Nerium Skincare claim this has resulted ‘in reduced distributions to’ the company.
Nerium Skincare claim payments made to Olson’s JO Products have been ‘in excess of JO’s pro-rata share‘. In a nutshell, they allege Jeff Olson has been “enriching” himself ‘to the further detriment of Nerium International‘.
In an attempt to further investigate the matter, in July 2015 Nerium Skincare
made a written demand, as a 30% member of Nerium International, to examine the Company’s books, records of accounts, and other information regarding the business affairs and financial condition of Nerium International.
To date, Nerium International has failed and refused to grant Nerium Skincare access to these materials in violation of the Texas Business Organizations Code.
As a result of the actions of Nerium International and Olson as its sole manager, Nerium SkinCare has suffered and continues to suffer damages.
In a lawsuit initially filed on August 21st, 2015, Nerium Skincare are suing Nerium International for
- breach of contract (Nerium International and Jeff Olson)
- breach of fiduciary duty (Jeff Olson)
- declaratory judgement (Nerium International, Jeff Olson and JO Products) and
- legal costs
Nerium Skincare further asks the court to acknowledge that Nerium International has “non-exclusive distribution rights” to their products, meaning Nerium Skincare are free to supply them to third-parties (excluding acne products).
Permission to examine Nerium International’s books (including accounting), under the Texas Business Organizations Code, has also been sought.
Perhaps most damaging of all however, is Nerium Skincare’s request that Nerium International be “wound up and terminated”.
It is not reasonably practicable to carry on (Nerium International’s) business conformity with its governing documents.
The Court should order the winding up and termination of Nerium International as a remedy for Olson’s breach of fiduciary duty (and) Nerium International’s material breach of the Company Agreement.
Should Nerium Skincare prevail, Nerium International’s termination as a company would be overseen by a ‘qualified person not affiliated with‘ Nerium International, Jeff Olson or JO Products.
According to a second amended complaint filed on April 4th, 2016, the sum total of damages sought by Nerium Skincare is “not less than $1 million”.
A day later on April 5th, Nerium International filed a counterclaim and third-party petition against Nerium Biotechnology.
In their counterclaim, Nerium International argue the company has
more than honored its part of the bargain—generating over $1 billion in sales, record-breaking expansion, and a network of hundreds of thousands of independent sales representatives across the United States and beyond.
Despite receiving tens of millions of dollars, Nerium SkinCare is now suing Nerium International for an even bigger piece of the pie.
Whether the money paid to Nerium Skincare by Nerium International was in accordance with the Company Agreement is unclear, or paid less as Nerium Skincare allege, is unclear.
Nonetheless, Nerium International claim to have “succeeded”, despite Nerium Skincare’s repeated failures.
Although it promised to develop and produce international products and represented it could do so, Nerium SkinCare stumbled and then stonewalled in producing a marketable international product.
Worse, Nerium SkinCare has underperformed and sought to bilk its own business partner from the very beginning.
As per their counterclaim, Nerium International have adopted the position that they are the wronged party and “entitled to damages”.
The picture painted by Nerium International, is one of Nerium Biotechnology and Nerium Skincare on the verge of collapse.
Biotech, Nerium SkinCare’s Canadian parent company, was formed primarily to research cancer treatments from the Nerium Oleander plant.
Through that research, Biotech discovered that its Nerium Oleander extract (NAE-8) also had significant anti-aging effects. Biotech formed Nerium SkinCare to research, develop, and produce a skincare product.
But by 2011, Biotech was floundering. According to its SEC filings, the company had “insufficient cash to fund its operations and execute its business plan” and unless it could raise desperately needed capital, Biotech would be “unable to continue as a going concern.”
Meanwhile, Nerium SkinCare had not found an acceptable distributor to rescue its cash-strapped operations.
Along came Jeff Olson, an industry leader in direct-marketing with an established track record of success.
Olson was impressed by the product and hopeful his direct-selling expertise could create a global market for the product.
Olson was unaware at that time of Nerium Skincare and Nerium Biotechnology’s dire financial situation, nor did they disclose to Olson that their products could not be sold in international markets.
And if you’re wondering why NAE-8 products can’t be sold outside of the US, resulting in Nerium International marketing Optimera…
The dispute underlying Nerium SkinCare’s current purported claims arose when Nerium International began to expand outside the United States as contemplated from the outset, and Nerium International learned that Nerium SkinCare’s products could not, in fact, be distributed in international markets, a particular problem for a company called Nerium International.
The Company Agreement has always required Nerium SkinCare to use best efforts to (i) research, develop, and expand the Product Line; and (ii) procure governmental and regulatory approval in any market Nerium International determines is appropriate.
But Nerium SkinCare had not disclosed its inability to deliver a marketable international product.
When it later claimed to have developed one, Nerium SkinCare variously ignored or stonewalled Nerium International’s repeated requests to review and evaluate its international product, not disclosing even limited information until February 2016, months after this lawsuit began and even then under restrictions so limited that the information was not usable.
Without sufficient information about testing, quality, and safety, Nerium International has been prevented from the possible expansion of its international product line to include this version of Nerium SkinCare’s products.
Meanwhile, Nerium SkinCare began advertising on its website that its product was supposedly approved in various countries outside the United States, notwithstanding the fact that Nerium International has the exclusive right to purchase any such product, should Nerium SkinCare ever provide information to back-up its claims.
Due to Nerium SkinCare’s failure to deliver an acceptable product or seriously pursue research and development, Nerium International was forced to procure an alternative product called Optimera.
If Nerium Skincare did manage to overcome regulatory challenges in overseas markets, for whatever reason they didn’t seem to want Nerium International marketing their products there.
Overall Nerium International’s portrayal of Nerium Skincare and Nerium Biotechnology is one of gross mismanagement.
Overcoming Nerium SkinCare’s quality-control problems has been par for the course.
For example, within the first year of business, Nerium SkinCare delivered defective products that forced a widespread withdrawal of products and nearly put Nerium International out of business.
And just last spring, Nerium SkinCare ran out of a product entirely, causing Nerium International to hemorrhage nearly 10,000 preferred customers and millions of dollars in associated sales.
Nor has Nerium SkinCare made any serious effort to research, develop, and expand the Product Line as it promised to do.
Biotech’s public consolidated financial statements show it spent roughly $426,000 on research and development out of $39 million in revenue in 2014.
Indeed, Nerium International has only been able to deliver high-quality products by helping Nerium SkinCare do its job and providing financial support to keep them afloat.
And, at least according to Nerium International, they weren’t the only ones striking deals with third-parties:
Although directly prohibited by the agreements between Nerium International and its Brand Partners, CEO Dennis Knocke and other Nerium SkinCare representatives including Michael Scott have met directly with Nerium International’s Brand Partners.
In at least one case, Nerium SkinCare purportedly met with a competing direct-sales company to discuss distributing Nerium International’s exclusive products.
Even the rumor of that prohibited arrangement was enough to alarm thousands of Brand Partners and cause seismic damage to Nerium International’s sales network.
If true, Nerium Skincare’s whinging about Nerium International going behind their back to procure Optimera is a bit rich.
From the very beginning, Nerium SkinCare has sought more than it deserves under the agreement.
In another glaring example of Nerium SkinCare’s wrongful conduct, Nerium International discovered that Nerium Skincare had ignored the required pricing formula under the Company Agreement, and was intentionally overcharging Nerium International for its products by nearly double.
An independent audit of Nerium SkinCare’s books by KPMG, based in part upon Nerium Biotech’s public, audited financial statements (which likewise reflected an overcharge), demonstrated Nerium SkinCare owed Nerium International $22 million to reimburse it for wrongfully inflating the cost of its products.
Despite receiving direct written notice of its overcharging practices from Nerium International, Biotech failed to appropriately disclose that information in its public financial statements for an extended period of time.
With both parties claiming the other owes them money and that the other is in breach of the Company Agreement, what a mess!
That Nerium SkinCare now portrays itself as the victim is a complete fiction. Nerium SkinCare’s effort to smear its business partner through this lawsuit is a transparent attempt to distract from its own shortcomings and cause significant disruption and damage to the Company’s business operations.
Only Nerium International is entitled to recover damages for Nerium SkinCare’s repeated failures, breaches of the agreement, and bad faith conduct throughout this business relationship.
Damages sought by Nerium International in their counterclaim pertain to
- breach of contract
- declaratory relief and
- attorney fees
With these filings made in the last week, what happens next at this stage is unclear.
What I can say though is that between Nerium Skincare and former President Dennis Windsor, Nerium’s going to have to push their lawyers hard if they want to survive as a company.
If either lawsuit prevails, Nerium International as we know it today will cease to exist.