December 28, 2022
Buyer Beware: $215 Million Acquisition Goes Sideways
Alleged false claims of IP rating, ETL compliance, warranty activity. Brand is shutting down.
One year ago, Hawthorne Hydroponics – a subsidiary of The Scotts Miracle-Gro Company – acquired assets of horticultural lighting company Luxx Lighting for $215 million. Founded in 2018, California-based Luxx Lighting is a producer and distributor of LED, high-intensity discharge (HID) and high-pressure sodium (HPS) lighting fixtures used in horticultural lighting applications.
This week, in the United States District Court for the District of Delaware, Hawthorne filed a lawsuit against the sellers claiming that they were fraudulently deceived during the due diligence and negotiation processes. Hawthorne claims that Luxx Lighting co-owners Brandon Burkhart and Ivan Van Ortwick damaged them through breach of contract, fraud and willful misconduct.
In another major development, it appears that one year after making the $215 million purchase, that Hawthorne has decided to shut down the Luxx Lighting brand. A notice on the Luxx Lighting home page states, in part, "Due to difficult market conditions, the Luxx brand will no longer be available after December 31, 2022."
According to the court filing, Hawthorne entered into negotiations with Luxx Lighting, and based on information Luxx Lighting provided to Hawthorne regarding the characteristics, quality, compliance and condition of its lighting fixtures, Hawthorne agreed to acquire certain assets of Luxx Lighting for $215 million. The defendants are accused of numerous deceptive practices including the following:
Based on the information Luxx Lighting provided to Hawthorne prior to closing regarding the quality and characteristics of its products, product returns, and consumer complaints, Hawthorne agreed to an escrow amount of $28.5 million. Based on Luxx Lighting’s representations and other information provided, Hawthorne reasonably believed that amount would be sufficient to address any liabilities.
Soon after the transaction closed, Hawthorne discovered significant quality and compliance issues in multiple models of Luxx Lighting’s fixtures. Some of the fixtures manufactured before the closing contain markings representing that the fixtures provide a certain level of water intrusion protection, but Hawthorne discovered that Luxx Lighting did not have test reports to substantiate the claim and that the fixtures did not meet those requirements.
Other fixtures exhibited a quality issue relating to the printed circuit board delaminating (or separating) from the fixtures themselves, leading to failure of the diode, which is an electrical component of the fixture.
Yet another issue that Hawthorne discovered post-closing involved certain fixtures with an ETL listing mark that were in fact not manufactured at an ETL-approved facility, and therefore were not ETL approved.
Rather than properly track returns in the traditional and expected manner of using a return merchandize authorization (RMA) process, as Luxx Lighting led Hawthorne to believe it was using prior to closing, Luxx Lighting instead categorized numerous product returns as “zero cost replacements”—meaning such returns were not captured in the RMA data Luxx Lighting provided to Hawthorne. Only after Hawthorne acquired Luxx Lighting’s assets did it discover the company’s zero cost replacement data, which revealed a significantly higher number of product returns.
Hawthorne is petitioning the court for “all damages to the fullest extent permitted by law, including those incurred or expected to be incurred as a result of Defendants’ fraudulent and willful misconduct.” The defendants have thirty days to file a response to the legal complaint. inside.lighting could not locate reliable contact information for the defendants, thus, they were not given the opportunity to comment on the allegations.