GRAY ZONE

CHAPIN CLARK / Additional reporting: JOEL ELSON

Although it is invisible to shoppers, a war is being waged in health and beauty care aisles nationwide.

The dispute concerns the gray-market industry that has risen around the practice of diverting merchandise meant exclusively for sale in one class of trade to stores in another class. The combatants are the manufacturers of high-end fragrances or hair care products, meant for department stores or salons, and the distributors, supermarkets, drug chains and mass merchandisers that somehow have gained access to the product and are selling it.

At issue is whether retailers should be free to sell whatever goods they want to meet customer demand, or whether manufacturers should be able to dictate where their products are sold. It is a difficult call, with significant financial consequences for all involved.

Retailers and distributors scored a major victory in March when the U.S. Supreme Court decided unanimously in favor of Quality King Distributors, Ronkonkoma, N.Y., and against L'anza Research International, an Azusa, Calif., maker of professional hair care products that had accused Quality King of copyright infringement.

Quality King had purchased discounted L'anza products from an authorized dealer in the United Kingdom -- the products were intended for sale in Malta and Libya -- and then sold them to retailers in the United States.

In deciding the case, the court invoked the doctrine of "first sale." That is, in the words of Justice John Paul Stevens, "Once the copyright owner places a copyrighted item in the stream of commerce by selling it, he has exhausted his exclusive statutory right to control its distribution."

In August, however, manufacturers struck back, when a Travis County, Texas, jury ordered Randalls Food Markets, Houston, to pay $6 million to John Paul Mitchell Systems, Beverly Hills, Calif., for selling the company's salon-only products in its stores.

One nonfood director at a supermarket wholesaler, who requested anonymity, said he felt the Randalls-Paul Mitchell case was decided unfairly.

"This court case against Randalls is such a joke, because this chain and others have sold salon-only hair care items for some time, and the manufacturer was aware of this," he said. "What probably happened in this case was some salon operators complained to the manufacturer and pressured it into taking legal action against the chain."

A Paul Mitchell official did not respond to a request for comment. The wholesaler said his company will be adding salon-only products to a new 4-foot set for its retailers in order to meet consumer demand.

"In HBC, we buy many diverted products across the board," he said. "Retailers should have the absolute right to carry whatever products they want to meet demand. Why not?"

For manufacturers working aggressively to stamp out diversion, the question is one of quality control, said Aaron Graham, a former Drug Enforcement Administration agent and now director of assets protection at Matrix, a Solon, Ohio, maker of professional hair care products. "You as a consumer don't know what you're buying -- is it counterfeit, is it compromised, is it nonefficacious?" he said.

"And diverters will say, 'We're like Robin Hood,' that our distribution system is a means to gouge the public, but diverted product hits the shelves at the same price."

Typically, Graham said, salons themselves make diversion possible by selling inventory, excess or otherwise, to "collectors," who then sell to the distributors that get the product to food, drug and mass outlets. And he conceded that some manufacturers, wary of dampening sales and alienating customers, look the other way.

"There are companies who worry more about the bottom line than the integrity of the industry," he said.

Graham said that by the end of this year Matrix will have spent about $400,000 in legal fees to fight diversion. The company's assets-protection department alone has an annual budget of a little more than $1 million, he said.

"Our lawyers are now communicating with Kroger's lawyers," said Graham, citing the Cincinnati chain as one of Matrix' biggest headaches. He added that H.E. Butt Grocery Co., San Antonio, recently pulled professional hair care products from shelves as a result of the Randalls-Paul Mitchell decision.

Kroger and H-E-B officials were unwilling and unavailable, respectively, to comment.