Estée Lauder sues Walmart, alleging sales of counterfeits

Estee Lauder defendant Walmart in federal court in California over allegations that the big-box retailer sold counterfeit beauty products on its website and did not do enough to ensure that only authorized, authentic products were offered to consumers.

Estée Lauder said it purchased, inspected or tested a number of products sold on Walmart.com that used the Le Labo, La Mer, Clinique, Aveda, Tom Ford and Estée Lauder trademarks, but they were determined to be counterfeits, according to the lawsuit filed Monday.

The products include counterfeit versions of Estée Lauder's Advanced Night Repair serum, a Le Labo fragrance, a Clinique eye cream, a La Mer lotion, an Aveda hairbrush and a Tom Ford fragrance.

It's unclear when Estée Lauder purchased and tested the products, but the lawsuit comes several months after CNBC published an investigation into counterfeit beauty products and fraud at Walmart.com.

Two of the counterfeit products cited in the CNBC investigation — Estee Lauder Advanced Night Repair serum and Clinique Smart Clinical Repair wrinkle-correcting eye cream — were also named in the Estée Lauder lawsuit. It is unclear whether the products cited in the lawsuit are the same counterfeits that CNBC provided to Estée Lauder.

In response, Walmart initially told CNBC in a statement that it requires “all sellers to offer only authentic and legal merchandise” and that it does not tolerate “bad actors” on its platform. He then recalled the message and sent an abbreviated statement to CNBC two hours after removing that language.

“We are aware of the complaint and have zero tolerance for counterfeit products,” the revised statement said. “We will respond appropriately to the court when notified.”

Estée Lauder did not respond to a request for comment.

While the products were sold by third-party sellers on Walmart's online marketplace, Estée Lauder said the company played an active role in facilitating those sales to shoppers on demand. The former beauty company called Walmart's conduct “extreme, outrageous, fraudulent… despicable and harmful.”

Counterfeit products were promoted and advertised to buyers on the platform, Estee Lauder trademarks were used in search engine optimization tools to drive traffic to listings, and Walmart profited from the sales, according to the complaint.

Additionally, “a person shopping on Walmart.com would have reasonably believed that Walmart, and not third-party sellers, was the seller” of the item, which could have caused confusion among buyers, the complaint states.

At the center of CNBC's investigation into Walmart's online marketplace were steps the company took, or failed to take, to vet its third-party sellers and the products they offered to prevent fraud and the sale of counterfeits on the platform.

In its complaint, Estée Lauder said Walmart promoted the “reputation and professionalism” of sellers authorized to operate on the platform, but said the retailer actually does “very little to ensure that only authorized and authentic products are available for sale.”

“This is easily evident given the [counterfeits] were allowed to sell on Defendants' website despite their stated careful selection process regarding who they choose as a seller/marketplace partner,” the lawsuit states. “Accordingly, Defendants know or had reason to know that the sellers with whom they partner and 'regularly review[ed]'They sold products that infringed the Estée Lauder trademarks.'

Walmart's online marketplace has become a key part of its strategy to grow profits faster than sales and better compete against its longtime rival. Amazon. The online platform's rapid growth helped fuel Walmart's rise to a $1 trillion market capitalization last week, placing it in an exclusive club made up almost entirely of technology companies.

However, the strategy carries risks, the CNBC investigation revealed. Offering counterfeit and potentially dangerous products to shoppers through third-party marketplace sellers exposes Walmart to liability and could erode customer trust in the core of its brand.

Since a 2010 court ruling that arose after Tiffany sued eBay over counterfeit goods on the platform, it may be difficult for brands to hold platforms accountable for their role in selling counterfeit goods. Sometimes they avoid lawsuits unless the conduct is extreme or particularly egregious, experts previously told CNBC.

The Shop Safe Act, a bipartisan federal bill that aims to curb the sale of counterfeits on online marketplaces, is designed to address some of the issues raised by the Tiffany v. eBay by encouraging platforms to better vet sellers and the products they offer. When platforms comply with certain anti-counterfeiting measures, they could be protected from liability if a seller offers a fake product.

Brands widely supported the legislation, but it has failed to pass at least three times so far. That's partly because Walmart and other online marketplaces like Amazon, Etsy and eBay have lobbied against some aspects of it, two U.S. Senate aides, who spoke on condition of anonymity because the discussions were private, previously told CNBC.