May 5 (Bloomberg) -- Target Corp. used to sell a teeth-whitener under the retailer’s name that was $15 cheaper than Crest Whitestrips. Then came the call from Procter & Gamble Co.
P&G informed Target it was suing Clio USA Inc., the manufacturer of the store-brand product, and two distributors, accusing them of infringing patents for a strip of material used to apply the whitener on teeth. According to Clio, it was enough to make Target pull the product from store shelves on April 20.
The rift exposed an aggressive strategy by P&G to protect its products from private-label store brands that have been able to siphon off consumers by offering similar quality at a lower price. Analysts say the strength of a name like Crest fades as consumers get used to store brands, an erosion that has already befallen surface cleaners, dishwashing soaps and bleach.
“If they can keep private label out of the game as long as possible, which is a lot of branded consumers’ strategy these days, they can hold on to share,” said Tim Barrett, an analyst with London-based Euromonitor International. “When quality of store brands versus name brands begins to converge, consumers generally start to care about price much more, and store brands will always win that battle.”
P&G, the world’s largest consumer-products company, has never been shy about turning to its trove of more than 40,000 patents. It waged a seven-year “diaper war” with Kimberly-Clark Corp. in the 1980s, sued Coca-Cola Co. in 2004 over the rights to calcium-enriched orange juice, and fought Kraft Foods Group Inc.’s use of a type of plastic Maxwell House coffee container in 2008.
“We did contact Target to let them know we believe the Clio products were infringing, provided the patent numbers and told them we had sued Clio,” said David Weirich, associate general counsel for Cincinnati-based P&G. “That’s pretty common when we have a private-label issue.”
Weirich said P&G is “not interested in licensing the technology” to anyone.
Whitestrips, developed in the late 1990s and first sold in 2000, was “the largest product introduction in the history of Procter & Gamble,” the lead inventor, Paul Sagel, told a federal judge during a November hearing on the case. He likened it to Apple Inc.’s introduction of the iPod music player. Both were listed in the top 10 products of the decade by Advertising Age.
P&G has been able to maintain its market dominance partly because of its patents. Be Well Marketing Inc., which made store-brand whitening strips for Walgreen Co., got out of the market as part of a settlement of a 2012 lawsuit. Johnson & Johnson settled a 2008 case over its Listerine Whitening Quick Dissolving Strips.
Another case is pending against Cao Group Inc., which sells products to dentists. Cao is challenging P&G’s infringement allegations and said its products, including Sheer White, were the result of its own research.
As for Clio, losing its biggest customer in Target has been difficult for a company that takes in about $3 million a year in sales.
“They were satisfied with our product and were surprised at how well it was selling,” said Peter Cho, vice president of Englewood Cliffs, New Jersey-based Clio. P&G “pushed management to discontinue our product.”
Evan Miller, a spokesman for Target, said the Minneapolis-based company had no comment.
Cho said P&G’s only settlement offer was for Clio to get out of the business, an option it wouldn’t accept. Instead, the company has spent more than $1 million in legal costs to fight the lawsuit and challenge the patents at the U.S. Patent and Trademark Office.
P&G spends about $2 billion a year on research and development and reported $84 billion in sales last fiscal year.
Before entering the market, Clio lawyers researched two dozen patents, about half owned by P&G, to make sure its products weren’t infringing, Cho said. Clio found earlier inventions to invalidate the P&G patents, he said. “The P&G patents are very questionable and very vague,” Cho said.
P&G is suing over three patents: two that relate to a strip of material that can be used to apply a whitener to teeth, and a third for a method of whitening teeth.
Both P&G and Clio are waiting on District Judge Timothy Black in Cincinnati to rule on the issue of validity and infringement. Unless the judge grants either of the requests, a trial is scheduled for August.
By all accounts, P&G revolutionized the market for home teeth-whitening products. In the 1980s, consumers had to spend hours in a dentist’s chair undergoing a painful bleaching procedure. In the 1990s, there were dentist-created molds that consumers could use to apply a high concentration of hydrogen peroxide overnight. Those procedures would cost $600 or more.
There are other consumer products, including a mouth guard that’s heated to conform to the general shape of the teeth or laser pens. Crest Whitestrips use a flexible film that molds itself to the teeth, so less of the hydrogen peroxide needs to be used, and for a shorter duration than the overnight guards. Early versions could get a bit mushy, but further innovation has put Whitestrips on a quality level with the dentist without the cost, said Barrett of Euromonitor International.
P&G’s share of the teeth-whitening market was 74 percent in 2011 and private label was less than 10 percent, when sales reached $438.2 million, according to Euromonitor. P&G last year had 67 percent of the market and private label about 14.5 percent, though sales had declined to $368.6 million.
“Their sales are not likely to increase year after year, from now on,” Barrett said.
At the same time, toothpaste and mouthwash have started adding whitening to the list of their many abilities. Given the choice between a $40 whitening kit and a $4 tube of toothpaste, consumers chose the latter, he said.
P&G on April 24 lost an appeals court bid to stop Clio’s patent office review. Cho said his actions in fighting the suit have the backing of Clio’s parent company in South Korea.
“My boss is saying ‘You are doing the right thing, P&G is wrong,’” he said.
Even if the patent agency was to side with Clio on all the claims it made, there are still aspects of the three patents that would remain viable, said Weirich, the P&G lawyer.
The oldest of P&G’s patents, including two of the three asserted against Clio and two of the three asserted against Cao, will begin expiring in 2017, and the company has other patents to cover Crest Whitestrips for years to come.
Litigation “is expensive for us, so we want to be very confident before we go into it, that we have an infringer and we have talked to them,” he said. “We’ve spent a lot of money to get these patents, and if we don’t enforce them, why have them at all?”
To contact the reporter on this story: Susan Decker in Washington at email@example.com