Over the past two decades the Seattle-based coffee company Starbucks has become a major source of influence and inspiration for the Beauty industry. Why?
The consumer experience of GenZ and Millenials with Starbucks has been one based on the perpetual need for coffee and accessibility. Naturally, who would want to miss out on the seasonal cups, limited-edition beverages, and social media hype that has made Starbucks a coffee house and a trend?
The result was coffee-flavoured fragrances such as YSL’s Black Opium a rich amber-vanilla scent built around a roasted coffee note and a personal favourite by designer Carolina Herrera, Good Girl a coffee-themed floral scent and like Starbucks, Herrera also offered seasonal variations to the original scent.
Makeup and Beauty companies followed suit, with coffee-coloured palettes becoming more popular. And don’t get me started on the massive line of skincare and body care products with coffee.
Yet, Starbucks seems to have landed in hot water with its venture into the cosmetics business. In 2019, Starbucks unveiled its “Smore’s Frappucino Sip Kit.” The Sip Kit was launched as part of a marketing scheme after Dunkin Donuts launched its Munchkin-themed lip balms. The Sip Kit offered four liquid lip shades: Chocolicious Bliss (a dark purple-toned brown), Marshmallow Glow (a clear with silvery-white shimmer), Graham Glam (a bronzy taupe), and Campfire Spark (a champagne gold).
The Coffee company has been sued for the third time in 2024, by Balmuccino LLC alleging “Breach of Implied-in-Fact Contract, Breach of Oral Contract, Breach of Confidence and Trade Secret Misappropriation under the California Uniform Trade Secret Act.”
What Went Wrong? Starbucks’ 2019 S’mores Sip Kit Controversy Starbucks Lip Balm Lawsuit
Starbucks was founded in 1971 in Seattle, Washington, USA, and is identified with quality coffee and a different mood of coffee consumption. Over the years, the company has not only added an array of merchandise to its array including mugs, tumblers and food products but also extended its line of products beyond the traditional coffee. The latest product portfolio diversification into the beauty industry with coffee-flavoured lip balms and lipsticks was considered the next step in brand evolution for Starbucks while repurposing its well-known coffee flavours into the type of product that can be directly applied to customers’ lips. The idea of venturing into lip balm and lipsticks was proposed in light of the company’s diversification strategies.
The products created were intended to have the coffee aroma reminiscent of its popular coffee drinks and in the form of daily-use beauty products, targeting both regular Starbucks consumers and makeup enthusiasts interested in novelty cosmetics.
Balmuccino alleged that it began developing a line of coffee-flavoured lip balms in 2016, and after investing substantial time and resources sought investments and partnership opportunities to launch its products in the market. Samantha Lemole (managing member of Balmaccino) through American TV personality Mehmet Cengiz Oz (also known as Dr Oz) connected with CEO Howard Schultz (Starbucks). Starbucks Lip Balm Lawsuit
Accordingly, in 2017 a meeting was arranged between Balmuccino and Starbucks, wherein the former presented a pitch deck with fully realised prototypes of its product line. Balmuccino alleged that it requested the Starbucks representative to sign a Non-Disclosure Agreement (NDA) however the same was not realised. It then went on to allege that during the meeting, it shared relevant information concerning the concepts and products, the creation process of lip balms, and different flavour possibilities including names and locations of the material suppliers and manufacturers that had been involved in the development of Balmuccino’s lip balm products along with fully realised product prototypes.
After receiving no positive response from Starbucks, Balmuccino learned that the former R&D personnel had contacted one of its suppliers to create a prototype for a “Starbucks-branded lip balm”- type product and cases using specifications that matched its products. After that, the products were actualised in 2019 into the S’mores Sip Kit.
Since then, Starbucks has been sued by Balmuccino thrice over the same matter. However, the earlier suits were dismissed due to jurisdictional errors before filing a suit in New York in August, followed by an appeal in the federal court in September.
Understanding the Breach of Implied-In-Fact Contracts and the Role of NDAs
The Balmuccino case in the is based on six counts of action: breach of implied-in-fact Contract, Breach of Oral Contract, Breach of Confidence, and Trade Secret Misappropriation Pursuant to the California Uniform Trade Secret Act, Trade Secret Misappropriation, and Defend Trade Secrets Act. Starbucks Lip Balm Lawsuit
What is peculiar in this case is that it was a “pitch” meeting, which means Balmuccino approached Starbucks under the pretext of an “offer to invest” in their business idea, and there had been no actual promise on the part of Starbucks. So the question herein is if the Starbucks representatives' actions at any point satisfy the conditions of an “implied-in-fact” contract or create an oral agreement.
An implied-in-fact contract is formed when parties’ promises are inferred from their intentional conduct and one party knows or has reason to know the other party will interpret the conduct as assent or an agreement.
An implied-in-law contract is the restitution recovery at law, which imposes a legal obligation to an unjustly enriched party to compensate the other party. It is not only applied when there is no contract but also applied when there is a total breach of contract. There are no requirements for the meeting of the minds or mutual assent. Once the plaintiff has conferred a measurable benefit on the defendant without gratuitous intent and the defendant gets the unjust enrichment, the court will imply a quasi-contract as a method of recovery. The measure of recovery is not the contract price, but the reasonable fair value of the benefit conferred.
Balmuccino's argument lies in the fact that Starbucks had “unjustly enriched” itself by essentially using Balmuccino’s pitch and the information provided concerning the suppliers. Accordingly, Balmuccino aims to claim the fair value of the benefit value incurred by Starbucks as a result of using its information.
However, this would mean that if Starbucks can provide evidence that the resultant S’mores Kit was not created through the information or contacts it got from Balmuccino then the conditions of an “implied-in-fact” contact might not be met.
Further, concerning Trade Secret Misappropriation, Balmuccimo had voluntarily divulged information regarding the making of its products, including the names and contacts of the suppliers, and while they had presented an NDA to Starbucks, the same was not signed.
Under intellectual property law, trade secrets hold value only if they are controlled and contained appropriately by the owner/business entity. Accordingly, business entities ensure proper NDAs at every stage. However, an NDA is not a complete guarantee that the persons involved will not reveal or share the trade secret. Still, NDAs imposing heavy legal sanctions and enormous damages may at least discourage the perpetrators from divulging the information to any third party.
California vs. Washington: Jurisdictional Clash
While the lower courts ruled in favour of the coffee chain and the case was subsequently dismissed, the appeal focused on the applicability of the varying laws on “equitable tolling” of California, where Balmuccino is based, and Washington, where Starbucks has its headquarters and jurisdiction.
Equitable tolling is a legal principle evolved from the common law of equity. The principle of equitable tolling provides that the statute of limitations will not bar a claim if the individual, despite reasonable care and diligent efforts, did not discover the injury until after the limitations period had expired. Courts have the authority to provide “equitable” remedies in situations where it would be unjust or unfair not to provide relief to a party as appropriate. If the court applies the doctrine, the failure to meet the deadline is excused and the individual will be allowed to proceed as if the time to meet the deadline had not expired. Generally, when the time to meet a deadline is “tolled”, it means that the time to meet the deadline has been stopped. Tolling the time to meet a deadline provides additional time to meet that deadline.
The interesting bit is that the applicability of the laws of California and Washington will have different outcomes since Washington does not allow equitable tolling.
The Court when deciding on the matter concluded that the laws of Washington would be applicable since the place of performance, location of the subject matter of the contract and the place of incorporation, residence and place of business of the parties were centred in Washington.
While the present case was dismissed without actually going into the claims raised by Balmuccino, it does act as a cautionary tale for business owners, startups and entrepreneurs behind the importance of written contracts. It is imperative that when approaching investors or potential clients, business owners stress the importance of NDAs and plan their pitches to not overindulge their core business technology or key supplier information. While mutual understanding and trust are big factors in business collaborations, one cannot ignore the importance of the written word and agreements to prevent any exploitation in the future.
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