Late last year, budding online retailer Honey Bum filed suit against Fashion Nova, accusing its much-larger rival of engaging in a scheme to monopolize the fast fashion market and “stifle its newest competitor,” the now-4-year-old Honey Bum. In its December 2020 complaint, which was filed with U.S. District Court for the Central District of California, Honey Bum alleged that Fashion Nova was engaging in a “conspiracy to restrain trade” by getting more than a dozen of their shared vendors to “unexpectedly” cancel and.or refuse to fill existing purchase orders, and reject new orders from Honey Bum on the basis that it is “a threat to Fashion Nova’s low-cost fast fashion image, and, more importantly, its profit margins.”
In light of its “immediate success” – including “hundreds of thousands of dollars in sales” within its first few months, and generating “total sales in excess of $600,000” in its first 6 months of operation, Honey Bum claims that it “did not go unnoticed by the dominant player in the market, Fashion Nova,” which “holds approximately 70 percent market share as sales to Fashion Nova constitute approximately 70 percent of each [of the Los Angeles-based] fast fashion vendor’s sales.” (Honey Bum asserts that it “held approximately 2 percent market share in 2017 and the first quarter of 2018 and was trending towards holding 10 percent or more market share thereafter.”)
With its swiftly-growing business in mind, and revenues that were expected to exceed $130 million by 2020, Honey Bum argued in its complaint that Fashion Nova and its founder Richard Saghian sought to maintain their dominant position in the market by “entering into agreements, or conspiracies, with certain [Los Angeles-based] vendors to prevent each from supplying Honey Bum with inventory,” namely by threatening to cancel its own orders with those vendors if they continued to do business with Honey Bum. According to Honey Bum, “Absent an express or implied agreement among the vendors, it would have been economically irrational for any vendor to agree to [Fashion Nova’s] nefarious scheme,” as the agreements with Fashion Nova deprived the vendors of “a profitable sales outlet.”
Given the critical nature of maintaining a local supply chain in order to “quickly produce clothing to meet a retailer’s specific needs” in furtherance of the fast fashion retail model (sometimes “in the matter of a few days”), Honey Bum claims that it has been damaged – potentially to the tune of millions of dollars – by Fashion Nova’s “monopolistic and anti-competitive” tactics. And more than that, Honey Bum – which argues that its entrance into the online fast fashion market would “have helped diversify customers, increase supply outlets and reduce dependence on Fashion Nova” – asserts that Fashion Nova’s “conspiring and/or contracting to impose restraints on trade” by way of agreements with various vendors “has injured the market for Los Angeles-sourced fast fashion more generally.”
With that in mind, Honey Bum – which has been likened to Fashion Nova by social media users as a result of its digitally-native model, and sweeping array of low-priced, trend-specific wares – accused Fashion Nova and Saghian of violating sections 1 and 2 of the Sherman Antitrust Act and of engaging in tortious interference with business and contract, and seeking various monetary damages and injunctive relief. In response to Honey Bum’s suit, Fashion Nova filed a motion to dismiss the matter in February, arguing that Honey Bum failed to make its case on all counts, and seeking a dismissal of the matter in its entirety.
Fast forward to late last month and a California federal judge agreed with Fashion Nova to an extent, holding that while Honey Bum “sufficiently alleged a claim for violation of Section 1 of the Sherman Act and tortious interference with business relations, it failed to state a claim for violation of Section 2 and for tortious interference with contract.”
Siding with Honey Bum on its Section 1 claim, Judge Gary Klausner stated in his March 26 order that the company “plausibly alleged that Fashion Nova and the L.A. vendors engaged in a concerted refusal to deal with Honey Bum” and that Fashion Nova is a “‘dominant purchaser’ of fast fashion clothing from [those] vendors,” as it purchases 70 percent of their products. Moreover, the court found that Honey Bum alleges that the L.A. vendors “entered into vertical agreements with Fashion Nova, whereby [they] agreed to refrain from doing business with Honey Bum,” and also entered into horizontal agreements among themselves “at least implicitly, if not explicitly …. to participate in the group boycott” of Honey Bum.
In terms of the latter element, which is what Fashion Nova took issue with, the judge states that “Honey Bum’s allegations that the vendors’ contemporaneous refusal to deal with [it], coupled with additional plus factors alleged in the complaint, give rise to a reasonable inference that the vendors agreed, at least tacitly, to engage in a group boycott of Honey Bum.” As such, the court stated that Honey Bum adequately pled a claim for per se violation of Section 1 based on “a theory of a group boycott carried out pursuant to a conspiracy.”
As for its Section 2 monopolization claim, the court determined that Honey Bum did not meet the requirement that it establish that the defendants have “market power within a ‘relevant market.’” The court took issue with Honey Bum’s definition of the relevant market and products as the “Los Angeles-sourced fast fashion online clothing retail market” and “clothing that is produced quickly in response to prevailing fashion trends.” It held that “there is simply no basis to infer from the complaint that online fast fashion retailers located in New York and elsewhere do not compete for the business of the same customers to whom Honey Bum and Fashion Nova sell their fast fashion online.” At the same time, the court determined that Honey Bum’s allegations “provide no basis to infer that ‘clothing that is produced quickly in response to prevailing fashion trends’ that happens to be sourced in Los Angeles differs from such clothing hat is sourced elsewhere with respect to ‘price, use, and qualities.’”
As such, Judge Klausner held that Honey Bum failed to plead its monopolization claim under Section 2. The court goes on to side with Honey Bum on its tortious interference with business relations claim, and against it in regard to the tortious interference with contract claim, because, among other things, Honey Bum “does not clearly allege in its complaint that [its] order from vendors amounted to contracts, nor does [it] clearly allege that the vendors’ cancellation of those orders amounted to a breach of contract.” For instance, the court states that in its complaint, Honey Bum “merely states that in November 2018, Tic Toc (one of [its] vendors) ‘refused to fulfill any new orders],'” and does “not allege or even give rise to a reasonable inference that Tic Toc had a contractual obligation to fulfill any new orders from Honey Bum, [or] that Tic Toc breached any order contract prior to November 2018.”
Speaking about the significance of the case on the heels of the court’s partial motion to dismiss decision, Honey Bum’s counsel McDermott Will & Emery partner Michelle Lowery said that the case “provides important safeguards for market entrants from entrenched monopolists and protects an emerging fast fashion industry in the Los Angeles area,” noting that she and Honey Bum “look forward to following this case through to hold the defendant fully liable.”
In his March 26 order, the judge granted Honey Bum leave to amend its complaint “with respect to the tortious inference with contract claim only,” and Honey Bum has since filed an amended complaint, asserting that both Fashion Nova and Saghian “had knowledge of the contracts that existed between Honey Bum and clothing vendors in Los Angeles” and intentionally “acted to cause the breach and/or disruption of Honey Bum’s contracts with [those] vendors.”
The case is Honey Bum, LLC v. Fashion Nova, Inc., 2:20-cv-11233 (C.D.Cal.)
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