Preferred Fragrance Inc.’s Terrible, Horrible, No Good, Very Bad October

FirstNerve has long followed the saga of Preferred Fragrance, the New York company that attracts trademark lawsuits like a discarded fish head attracts flies. On October 18, Prada S.A. filed a federal complaint charging that Preferred’s Party Candy perfume infringed on Prada Candy, a perfume launched in the U.S. back in August, 2011. Specifically, Prada charges Preferred with

trademark and trade dress infringement, unfair competition, deceptive trade practices, and trademark and trade dress dilution.

Prada claims that the similarity in name and packaging between Prada Candy and Party Candy

is calculated to confuse and mislead consumers, create a false impression as to the source and sponsorship of Party Candy, to divert business from [Prada], to pass off the Party Candy product as being authorized and endorsed by [Prada], or to otherwise falsely misrepresent the nature and quality of [Preferred’s] product and misappropriate the goodwill associated with the Prada Candy mark and trade dress.

For marketers of look-alike products, trademark infringement lawsuits might be seen as just a cost of doing business. Preferred Fragrance certainly has plenty of experience defending itself against such charges and may fight this one to a draw—i.e., a negotiated settlement that falls short of what Prada seeks, namely that Preferred stop manufacturing and marketing Party Candy and cough up all profits from the product along with treble damages.

Perhaps more consequential than the Prada lawsuit is one filed a week earlier, also in the U.S. District Court for the Southern District of New York. The plaintiffs in this case are the private equity investors who bought Preferred Fragrances from Ezriel Polatsek and others in 2011, installed Glenn Palmer as the new CEO, and made Polatsek president and COO. Page two of the complaint makes this eye-popping statement:

Due to Polatsek’s illegal behavior, defalcations, multiple violations of Company policy, and overall abysmal employment performance, Plaintiffs terminated his employment, effective October 10, 2013.

Dude!

The new owners are going after a slew of Polatseks, including former president Ezriel, his wife Sarah, and his father Harry, all of whom were or are employees of Preferred Fragrance, Inc. (Mentioned indirectly in the lawsuit are Ezriel’s brothers Abraham, another company employee, and Joel, who owns JP Filling, a company that does business with Preferred.) Four other defendants are former shareholders in the old Preferred Fragrance.

We learn from the court filing that Ezriel Polatsek was hired full time at a base salary of $236,000 (soon to be bumped to $300,000) along with automatic cost of living increases and bonus. So what did he allegedly do to warrant dismissal and a lawsuit charging fraud and breach of contract?

Uni-World claims that prior to completion of the sale, the Polatseks et al. materially changed the terms of arrangements Preferred had with some of its largest suppliers and customers, while failing to inform the new owners. The new terms would have reduced Preferred’s book value; the upshot is that the new owners feel they were deceived into overpaying and they want their money back. In addition, about 300 shipping containers from China were, according to Uni-World, inappropriately classified as non-hazardous material in order to save a couple of hundred bucks per container. The resulting overstatement of company earnings, multiplied by a standard factor in the purchase agreement, is claimed to have cost Uni-World a loss of $350,376. Uni-World also claims the previous owners provided “false and fraudulent” information regarding sales projections.

On a more personal note, Uni-World claims that Ezriel Polatsek on two occasions pocketed cash payments from customers ($11,000 in one instance, and about $14,000 in another). [Cash payments? What business pays another that sort of money in cash?—Ed.] The complaint says that Polatsek failed to show up to two of the company’s quarterly board meetings, and was a no-show at the all-important ASD trade show in Las Vegas last August (he previously attended every year). Other alleged misbehavior includes use of company funds for non-company-related travel; excessive charges for airfare, hotel and personal car service; mismanagement of customer relations resulting in monetary loss; and extending company credit without securing payment (an advance to a colleague’s brother that resulted in a $100,000 write-off).

According to the plaintiff’s timeline, they confronted Polatsek and the other defendants with these issues in April, 2013. Discussions led nowhere and on September 13, 2013 Ezriel Polatsek and the old company filed suit against the new owners in New York state court. They deny breaching the sales agreement, say they are not responsible for the losses claimed, and allege that Uni-World is suing in order to pin its own business failings on them. As a finishing touch, Polatsek wants the court to free him from his non-compete agreement with Preferred.

For its part, Uni-World wants $5.6 million from the defendants and a ruling that its for-cause firing of Ezriel Polatsek and the non-compete clause are valid and enforceable.

Will somebody please fire up the popcorn? This is going to be good.