Estée Lauder Faces Lawsuit Over Gray Market Sales in China

A federal court has allowed a securities fraud lawsuit filed against The Estée Lauder Companies to proceed. Judge Arun Subramanian of the U.S. District Court for the Southern District of New York found shareholder plaintiffs have plausibly alleged that the beauty giant misled investors by “cover[ing] up” its practice of funneling massive product volumes through gray market channels to sustain sales amid global store closures and travel restrictions during the COVID-19 pandemic. The decision allows claims against Estée Lauder, former CEO Fabrizio Freda and CFO Tracey Travis to move forward. 

In December 2023, Estée Lauder shareholder Bridgett McAlice filed suit against the New York-based company and its executives on behalf of herself and others who purchased Estée Lauder stock between February 2022 and October 2023 (the “class period”). According to the complaint, Estée Lauder violated federal securities laws by making false and misleading statements about its inventory levels, supply chain management, and financial outlook – and in particular, its reliance on China’s daigou market. 

Daigou refers to the sale of gray market goods by individuals or groups who purchase goods outside of Mainland China for customers in China in order to avoid import duties and taxes. 

The Complaint

McAlice and other plaintiffs alleged in an amended complaint that during the class period, Estée Lauder – whose brands include Tom Ford, Too Faced, The Ordinary, La Mer, Balmain Beauty, Bobbi Brown Cosmetics and MAC, among others – issued optimistic revenue projections and reassured investors about recovery and inventory improvements, particularly in Asia. During that time, ELC allegedly ramped up its reliance on gray market daigou sales to offset slumping demand in traditional retail channels. However, that practice became unsustainable following a government crackdown on daigou in 2022, and instead of coming clean on the impact of the crackdown, the plaintiffs contend that ELC attributed resulting sales declines to temporary factors like COVID lockdowns and inventory shifts.

The Fallout

ELC admitted in November 2023 that “changes in government and retailer policies related to unstructured market activity” in China were among the primary causes of the decline in sales. That announcement resulted in a 19% decline in ElC’s stock price.

In a motion to dismiss in May 2024, Estée Lauder, Freda, and Travis sought to escape the claims lodged against them on the basis that their statements were either accurate, too vague to be actionable, or protected as forward-looking under the PSLRA’s safe harbor. Beyond that, they argued that the plaintiffs failed to plead that they acted with fraudulent intent.