P&G Head & Shoulders waste disposed free-of-charge via Ianco deal -- Quality King.

P&G CANADA HAD ARRANGEMENT FOR FREE-OF-CHARGE DISPOSAL OF HEAD & SHOULDERS waste product with Ianco Envirotech, Quality King alleges in a Feb. 9 countersuit filed in the U.S. District Court for the Eastern District of New York. According to the Quality King filing, since at least 1992, Procter & Gamble Canada has not been disposing of Head & Shoulder scrap product and sub-par product "in licensed landfills as it had in years past." Instead, Quality King said, P&G saved money by delivering it free of charge to certain companies, such as Ontario-based Ianco.

Quality King claims that P&G Canada "appointed Ianco its exclusive agent for disposing of waste products" after Ianco "expressed its willingness to accept both the `good' and `bad' waste products that P&G Canada had to offer." Quality King announced its countersuit in a Feb. 8 press release ("The Tan Sheet" Feb. 12, p. 14).

The allegations made by Quality King are part of a larger imbroglio that began Aug. 11 when P&G announced that counterfeit Head & Shoulders shampoo contaminated with bacteria was on the market and that it was suing Quality King for counterfeiting as well as trademark and package design infringement ("The Tan Sheet" Aug. 14, 1995, p. 18). P&G later amended its original complaint against Quality King to include contempt of a May consent order reached between the two firms under which Quality King agreed to "first make a reasonable inquiry" that a P&G product was legally obtained before buying or selling the product ("The Tan Sheet" Aug. 28, 1995, p. 16).

At about the same time P&G filed its suit, the company initiated a public relations campaign consisting of half-page ads in USA Today and newspapers in the top 26 U.S. markets that cautioned consumers about the existence of contaminated, counterfeit product. The company also set up a toll-free number for consumers to report counterfeit products.

According to Quality King, "Ianco was supposed to dispose of...surplus product and waste by mixing it with water, dye, salt, perfume and/or other ingredients and reselling it to retailers or consumers as a non-Procter & Gamble product." The "bastard" products, the suit contends, were made and sold "with the full knowledge and consent" of P&G Canada.

P&G's Canadian arm "even informed Ianco where it could obtain the ingredients necessary to `bastardize' the products," and "on rare occasions" P&G Canada "representatives would visit Ianco's facilities and observe...[the] operation," according to Quality King.

P&G's Canadian unit did not impose upon Ianco "any restrictions or requirements" regarding the bastard products except that they "were not to be identified as Procter & Gamble products," the suit maintains. During the first year of the arrangement, Quality King claims that P&G Canada saved roughly $300,000 in disposal costs.

Based on the relationship between Ianco and P&G Canada, the Quality King document charges that P&G Canada "knew or should have known that the waste products, including the Head & Shoulders,...would be resold to consumers for use as shampoos or conditioners."

In a Feb. 14 statement, P&G said its contract with Ianco "excludes the use of [scrap product] for animals or humans." In an earlier statement, P&G had acknowledged that "some of the counterfeit [Head & Shoulders] contained scrap product, made by P&G, which we supplied to a company for disposal."

Finding alternative uses for scrap product "is a common industry practice," P&G pointed out in the Feb. 14 statement. "So far, we [have] no reason to believe that our contractor would not honor our signed agreement." The waste Head & Shoulders "was perfectly fit for use as a general, industrial cleaner or in asphalt manufacturing," P&G added.

The Quality King suit also accuses P&G Canada of supplying Ianco "from time to time" with "waste products that were not in bulk but in individual retail containers or bottles." If Ianco did not debottle the retail containers to create bastard products and "instead sold them in the individual containers, P&G Canada would merely charge Ianco the wholesale price for that product," the filing maintained.

Quality King also asserts that "Ianco was not prohibited from reselling such products to consumers even though they were waste products." P&G said it never sold bottled P&G products to Ianco at wholesale.

According to Quality King's account, "in late 1994 or early 1995" a former employee of Ianco "manufactured certain bastard products that looked like Head & Shoulders...and bottled it in white bottles shaped like Head & Shoulders." The "Head & Shoulders-type" product, of which "several thousand 15 oz. bottles" were assembled, contained both Head & Shoulders waste product and "in part other shampoos which may have been waste products from the Hamilton facility," according to Quality King.

The former Ianco employee then sold the products to A. Gruda Products in the Toronto area, the suit claims. According to Quality King, they were then sold to an individual who "apparently... labeled them as Head & Shoulders" and sold them to Zoeller International. The counterfeit Head & Shoulders was then sold to Florida-based Rapid Air & Ocean, which, in turn, sold the product to Omnisource International, another defendant in P&G's lawsuit, who sold the goods to Quality King. The suit acknowledges that Quality King sold the counterfeit product.

Quality King is charging P&G and its Canadian subsidiary with trade libel, breach of express warranty, prima facie tort, tortious interference with business relations, deceptive trade practices, unfair competition and contributory infringement and is requesting $25 mil. in compensatory damages and $25 mil. in punitive damages.

Quality King said it has lost several "major customers." Kroger's, Genovese Drugs and Walmart, three of the firm's "largest" customers, "have terminated or severely reduced their business relationships with Quality King" due to P&G's actions, the filing claims.

Quality King also is arguing that it was singled out by P&G because of earlier run-ins with the company. The lawsuit maintains that although Omnisource sold the counterfeit Head & Shoulders to distributor Allou Health & Beauty Care, P&G "has not sued Allou or disclosed in its advertisements that Allou bought the same waste products as Quality King." P&G declined to comment on Allou's alleged role in the counterfeiting.