The battle between hydroponic heavyweight Hawthorne, a subsidiary of Scotts Miracle-Gro (NYSE: SMG), and Luxx Lighting is heating up.
The relationship between the two companies began in 2021 when Hawthorne agreed to buy Luxx Lighting in a deal valued at $215 million. Hawthorne said in its court complaint that it agreed to set aside $28.5 million in an escrow account to cover any issues regarding product quality or returns. If there were no problems with the lights, Hawthorne would release that money to Luxx.
Hawthorne alleged in its complaint that Luxx didn’t provide accurate information regarding product quality and customer complaints. Hawthorne claimed that it discovered significant quality and compliance issues with several models of Luxx’s fixtures.
For example, the complaint stated that some fixtures had an ETL listing mark that was in fact not manufactured at an ETL-approved facility. The complaint also noted that some of the units were found to have been manufactured in Malaysia, which is not an ETL-authorized manufacturing location.
“This is significant because the ETL mark indicates that a product meets specific testing standards,” Hawthorne said.
In addition, the case alleged issues with a product coating material that was prone to flaking and corrosion, which caused the product to fail before the warranty period was over. Some lights also were sold as having water intrusion protection, but Hawthorne claimed that there were no tests to support those claims of protection.
The company went on to claim that Luxx materially understated the actual number of product returns. Hawthorne said that if it knew the true nature of the returns and product issues, it would’ve negotiated a better price and put more money into escrow to cover those problems.
Hawthorne says that losses due to the inferior lights cost it $32 million.
Hawthorne has already begun receiving an unexpectedly high number of returns and complaints from customers about potentially defective products relating to these quality issues. Hawthorne reasonably expects to continue to receive an increasing number of customer returns and/or warranty claims in the near future.
The company said it told Luxx in March 2022 and August 2022 that it wanted the company to address the product issues and indemnify it for the losses. Hawthorne claims Luxx refused to comply with its obligation to indemnify Hawthorne against the losses.
Luxx Lighting and its founders Brandon Burkhart and Ivan Van Ortwick are fighting back, claiming that their business grew to become a rival of Hawthorne’s. Burkhart had years of hydroponic experience, and Ortwick is a cannabis pioneer known for his Jungle Boys brands.
The relationship between the two companies initially began as adversarial, when Hawthorne sued Luxx in 2020 for patent infringement against its Gravitas lights.
Even as that patent battle was active, executives at Hawthorne reached out to buy the Luxx brand. Luxx claims that once it agreed to be acquired, the patent lawsuit was dropped. Luxx says in its countersuit that it was enticed by the grand promises Hawthorne made about turning the company into a $400 million business.
“Instead of competing fairly with Luxx for customers in the cannabis lighting market, Hawthorne engaged in aggressive campaigns to first enjoin, then acquire, then ‘acquikill’ (acquire and then kill) its competitor, Luxx,” the response said.
Luxx’s complaint stated that Hawthorne’s president, Chris Hagedorn, and his father, Jim Hagedorn (CEO of Hawthorne’s parent, Scotts Miracle-Gro), never had any interest in Luxx. The countersuit alleges that Hawthorne always planned to buy the company and then kill it off to protect its market share and its own products.
The counterclaim also suggests that the Hagedorns wanted to be associated with the Jungle Boys brands in order to gain credibility within the cannabis cultivation culture.
Finally, the Luxx countersuit pointed out that Hawthorne did a year’s worth of due diligence on the then four-year-old company and knew everything about the company. It suggested that Ernst & Young had access to all of the company’s information and books.
It also claims that Hawthorne was aware of all the product information as a result of the patent infringement case. Luxx also states in its case that the ETL issue was discussed prior to the acquisition closing.
Ultimately, Luxx wants the escrow money released to the company.
Riv Capital’s Role
Riv Capital (TSX: RIV) (OTC: CNPOF) also makes an appearance in the countersuit filed by Luxx. The case claims that the Hagedorns wanted control over Riv Capital and were going to put Ivan Van Ortwick, co-owner of Luxx, on the board to help achieve this goal.
Luxx alleges that Hawthorne wanted to use the escrow money to buy an 11% equity stake in the company through the subsidiary The Hawthorne Collective. Van Ortwick would then vote with the Hagedorns, securing control.
Van Ortwick said he wouldn’t agree to the deal and felt that the Hagedorns were treating the escrow money as personal funds. He said in the case that he believes the acquisition of Luxx was done in order to get him into Riv Capital and the New York market.
In August 2021, Riv Capital entered into an agreement with The Hawthorne Collective for the purchase of a $150 million unsecured convertible note. The investment established Riv Capital as The Hawthorne Collective’s preferred vehicle for investments not currently under the purview of The Hawthorne Gardening Company.
In March 2022, RIV Capital acquired New York medical operator Etain and has faced its own lawsuits regarding that acquisition.