Luxx Lighting Founders Amend Their Counterclaim in Lawsuit With Hawthorne Gardening Company

Luxx Lighting has amended their counterclaims from March 13, 2023, against industry gardening and equipment giant Hawthorne Gardening Company, which sued them in Dec of 2022.

There has been talk in the industry ever since Luxx Lighting was purchased by Hawthorne that the purchase was just a move to acquire and stop Hawthorne’s biggest lighting competitor, Luxx Lighting from taking market share away from them. Now, there is more information in this counter claim explaining that scenario, only with much more detail.

The amended counter claim alleges:

“Luxx’s sales went from $71,000 at launch in 2017 to $105 million in 2021, threatening to radically displace Hawthorne’s market share.”

“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.”

“As part of its ultimate acquisition of Luxx, Hawthorne, its President Chris Hagedorn, and his father, Jim Hagedorn (CEO of Hawthorne’s parent, Scotts Miracle-Gro) engaged in bad faith negotiation and contract formation tactics to drive down the amount they would actually pay for Luxx through an escrow mechanism, and thereafter acted in a commercially unreasonable manner to kill the company they had just acquired and to invite product warranty claims, all as a scheme to effectively pay a drastically reduced purchase price for Luxx by reclamation of the escrow funds at issue in this lawsuit.”

This could be viewed as a large corporate entity like Miracle Grow the parent company to Hawthorne Gardening Company, with very little cannabis culture and grassroots substance, attempting to buy its way into a more favorable public viewpoint. Then, when that didn’t work out as planned, they bought it and killed it.

“In a stunning admission by Jim Hagedorn’s son, Nick, it was revealed post-close that Hawthorne, Scotts Miracle-Gro, and the Hagedorns never had an interest in Luxx or its assets. Instead, the Hagedorns viewed the deal as the first step in a scheme to induce Mr. Van Ortwick into a larger deal for cannabis-related assets that the Hagedorns viewed as critical to their industry dominance.”

A Look at The Original Lawsuit Filed By Hawthorne in Dec 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 $25.8 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.

The Amendments to The Countersuit

“Luxx seeks relief in this Court as follows. First, Luxx seeks a declaration concerning its rights to the $25.8 million in escrow because Hawthorne’s product warranty claims are contrary to both law and fact, including claims Hawthorne itself caused by:

First, (i) failing to seek redress from a newly onboarded factory for the factory’s labeling errors, (ii) firing customer service and quality control employees and implementing manifestly irresponsible warranty returns procedures, (iii) refusing to replace Luxx fixtures at the customers’ request, i.e., forcing customers to take Gavita branded lights instead of Luxx fixtures, and (iv) improperly announcing to the market that certain Luxx products were defective.

Second, Luxx and its owners seek relief for breach of the implied covenant of good faith and fair dealing based on Hawthorne’s and Scotts Miracle-Gro’s arbitrary and bad faith conduct.

Third, Luxx and its owners assert a claim for fraudulent inducement as it now appears that Hawthorne, Scotts Miracle-Gro, and the Hagedorns never intended to pay the $215 million purchase price for Luxx’s assets and always intended to recoup a substantial sum through the escrow mechanism, planning to use those claims to shut down the company and as leverage to obtain additional cannabisrelated assets from Luxx’s owners.

Fourth, Counterclaim-Plaintiffs assert a claim for civil conspiracy against Hawthorne, Scotts Miracle-Gro, and the Hagedorns for their conspiracy to defraud Counterclaim Plaintiffs. Finally, Counterclaim-Plaintiffs assert a claim for breach of contract for Hawthorne’s failure to release the unchallenged portion of the escrow to Counterclaim Plaintiffs.”

The Hagedorns’ Boundless Ambitions

The amened countersuit further claims:

“This case is about a company and its management with ambitions greater than their principles, a company and its management engaging in no-holdsbarred strategies to dominate the lucrative and emerging cannabis market.

Hawthorne, a third-level wholly-owned subsidiary of Scotts MiracleGro, set about in 2014 to acquire numerous cannabis companies around the world. This strategy was led by Jim Hagedorn, CEO of Scotts Miracle-Gro, and Chris Hagedorn, Jim Hagedorn’s son and the President of Hawthorne. In 2013, a few years before Luxx was founded, Jim Hagedorn publicly stated that it was his ambition to expand Scotts Miracle-Gro’s business interest into the emerging and lucrative cannabis market. Jim Hagedorn’s decision to aggressively pursue the cannabis market did not sit well with some members of the Board of Directors of Scotts Miracle-Gro, a publicly traded company. In fact, according to Forbes, six members of the Board stepped down after Jim Hagedorn announced his ambitions to take over the cannabis market.”

“In 2016, Scotts Miracle-Gro executed on Jim Hagedorn’s vision and began a years-long cannabis-company buying spree. The Hagedorns set their sights not just on companies in the U.S. but upon interests around the world, from Amsterdam to Jamaica.

Counterclaim Plaintiffs would later learn that major aspects of the Hagedorns’ strategy include (i) acquiring companies that have credibility in the cannabis culture and community and (ii) “acquikilling” them, i.e., acquiring cannabis-related companies only to kill them off in order to protect brands in the Hagedorns’ own existing portfolio. The ultimate objective of the Hagedorns’ business plan was to create a conglomeration of cannabis-related entities, from hydroponics to plant-touching cultivation and dispensaries, all ultimately owned by Scotts Miracle-Gro, a company more commonly known for gardening products and lawn care fertilizers.”

Hagedorns’ Pursuit of Ivan Van Ortwick and Jungle Boys

“Because they sought respect within the close-knit legal cannabis community, the Hagedorns aggressively pursued a partnership with Mr. Van Ortwick, a deeply respected, world-renowned pioneer in the cannabis market. Mr. Van Ortwick’s company, Jungle Boys, is one of the most well-known and successful brands in the legalized cannabis growing industry. Jungle Boys garners a cult-like following among hydroponics and cannabis entrepreneurs. Mr. Van Ortwick has also amassed a significant social media presence with millions of followers who respect his endorsements and views on the industry. Chris Hagedorn repeatedly
referred to Mr. Van Ortwick as the “marketing machine”.

In 2017, Mr. Burkhart and Mr. Van Ortwick joined forces to create Luxx. The company hit the market with a bang, garnering immediate customers, following, and huge revenues. Luxx’s success only fueled the Hagedorns’ desire to partner with Mr. Van Ortwick. Specifically, the Hagedorns wanted to be associated
with the Jungle Boys brand and the LA-based cannabis enterprise, as well as Mr. Van Ortwick’s influence and credibility with growers.”

The Unsuccessful Patent Infringement Lawsuit

“The Hagedorns went about trying to capture this prize in their characteristically aggressive manner. When Mr. Burkhart and Mr. Van Ortwick rebuffed the Hagedorns’ efforts to lure them into a business relationship, the Hagedorns caused a Hawthorne affiliate to file a patent lawsuit against Luxx, seeking an injunction against the sale of Luxx’s innovative fixtures.

While Hawthorne’s Gavita brand had a larger share of the cannabis growth market, Luxx was growing quickly and was on a trajectory to soon take over as the market leader.

Hawthorne went on the offensive, filing a patent lawsuit alleging that Luxx’s lights infringed its patents, and seeking an injunction. (HGCI, Inc. v. Luxx Lighting, Inc. (C.D. Cal. 5:19-cv-00570). Hawthorne’s lawsuit was spurious from the outset, but this became apparent after a claim construction order was issued in September 2020, which rendered Hawthorne’s allegations of infringement and requested injunction a near impossibility.”

Luxx Acquisition

“Even while the patent litigation was still pending, on February 27, 2021 the Hagedorns invited Luxx’s management team, including Mr. Burkhart and Mr. Van Ortwick, to meet them and the Hagedorn family at their mansion in Stuart, Florida. Present at the meeting were Jim and Chris Hagedorn, and Jim Hagedorn’s twin sister, Katherine Hagedorn Littlefield. During the Scotts Miracle-Gro’s quarterly earnings calls, Jim Hagedorn explained that Scotts’ finance committee and the Board of Directors meetings are “run” by his sister, Mrs. Littlefield. Family business indeed.

At their mansion, the Hagedorn family made a pitch to acquire Luxx and Athena (a nutrient company founded by Mr. Burkhart and Mr. Van Ortwick) as a precursor to doing a larger deal with Jungle Boys—later known and referred to as “New York” or “RIV Capital”—as discussed below. The Hagedorns pitched the idea that Hawthorne would acquire Luxx and Athena for 10 times EBITDA, expanding the brand and taking it to the next level. That deal would have been worth up to $400 million.

At that meeting in Stuart, Florida on or about February 27, 2021, Jim Hagedorn and Chris Hagedorn each stated to Mr. Burkhart and to Mr. Van Ortwick that their intent in acquiring Luxx was to build and expand the company and brand. Mr. Burkhart and Mr. Van Ortwick each believed then and thereafter that these
statements were true and relied on them in making their decision to sell the Luxx brand to Hawthorne. Counterclaim Plaintiffs later learned that the Hagedorns had no interest in operating Luxx. Rather, they viewed the acquisition as a way to entice Mr. Van Ortwick into a deal whereby the Hagedorns would finally acquire control of a Canadian company building a leading cannabis consumer packaged goods
platform, RIV Capital.

The parties thereafter entered into a letter of intent (“LOI”) term sheet. Only after Mr. Burkhart and Mr. Van Ortwick had agreed to sell Luxx did Hawthorne dismiss the patent lawsuit.

The Hagedorns continued to praise the culture and success of Luxx, repeatedly telling Mr. Burkhart and Mr. Van Ortwick that they hoped Luxx’s culture would change Hawthorne’s culture for the better. These statements were consistent with and underscored what the Hagedorns had stated at the initial meeting regarding their intent to continue Luxx after the transaction closed.

Mr. Burkhart and Mr. Van Ortwick would have never sold Luxx to Hawthorne had they known that the Hagedorns’ covert plan was to kill off the company to increase the market share of Gavita almost as soon as the Luxx assets were acquired.”

The Parties Reach an Agreement and Hawthorne Attempts to Renegotiate the Purchase Price

“The parties reached an agreement on a $215 million purchase price divided between cash and Scotts Miracle-Gro stock. Hawthorne agreed to pay the cash portion of the purchase price and Scotts Miracle-Gro funded the stock portion.

As negotiations progressed, Hawthorne and Scotts Miracle-Gro sought to renegotiate the purchase price, proposing a reduction from $215 million to $170 million. Hawthorne cited the above “common” and easily remedied “labeling issues” among its concerns.

These claims were unfounded for several reasons.

Luxx reminded Hawthorne that Chris Hagedorn expressly told Mr. Van Ortwick that the labeling issue could be solved by “slapping stickers” on the fixtures and that Hawthorne had the same issue when they acquired Gavita.

Further, Luxx had experienced remarkably low product quality issues and returns. As of the end of December 2021, Luxx had sold approximately 670,000 units with an overall return rate (including the so-called “zero cost” returns) (“Product Return Rate”) of 1.62%, far below the industry average of 3.5%.

Luxx had achieved this success, not only by selling a quality lighting product, but also through developing a responsive and effective customer support system. This involved troubleshooting customers’ issues rather than assuming that every customer service inquiry represented a product defect.

By way of background, user error is common in the fledging cannabis cultivation industry, which has an abundance of eager but inexperienced cannabis growers. Cannabis growers sometimes use warehouses with poor quality electrical power (e.g., prone to power spikes) and inadequate designs and electrical
configurations. This often results in the fixtures failing not because of defects but due to other issues that need to be addressed in the warehouses. The Luxx founders and customer service team knew the industry backward and forward, the common causes of error (user), and appropriate remedies. User error and misuses were quickly and competently addressed by Luxx through its customer response processes that were developed in-house.

Hawthorne knew that Luxx’s return rates and product failure rates were less than half the industry averages. Hawthorne acknowledged that in the due diligence process: “Returns and Credit rate ranges between 3% – 4% based on known industry experience. We are experiencing approximately 3.5% in the HGC [Hawthorne Growth Collective] business.” Again, Luxx’s warranty return rate was 1.62%.

For all of these reasons, and because Luxx knew it had quality products, Luxx’s owners rejected Hawthorne’s attempt to renegotiate the purchase price, as well as the premise on which it was based.”

The Main Reason For the Amended Countersuit is to Collect the 25.8 Million in Escrow Still Owed by Hawthorne

“Hawthorne and Scotts Miracle-Gro then pushed for an unreasonably high escrow amount— 20% which is much higher than is typical in these types of transactions. Hawthorne and Scotts Miracle-Gro insisted that this amount would be placed in escrow to address any issues. Again, Luxx refused to agree to a 20%
escrow over what Hawthorne’s compliance manager described as “common” labeling issues.

In December 2021, a compromise was reached. The parties agreed to place $25.8 million of the $215 million purchase price in an escrow account to address issues that might arise after the close of the transaction. Thus, if there were compensable issues relating to proven defects in Luxx’s products and certain other conditions were met, Hawthorne would receive compensation paid out of escrow for those issues, and Sellers (Luxx, Mr. Burkhart, Mr. Van Ortwick) would then receive the balance remaining in escrow.

Mr. Burkhart and Mr. Van Ortwick agreed to the escrow account concept because they understood that, if Hawthorne acted reasonably, continuing to operate the business in a commercially responsible manner, Luxx would continue to thrive on its current trajectory and experience low product returns in 2022 and
beyond. Had Hawthorne continued to follow Luxx’s procedures and policies for managing complaints and returns (instead of acting to encourage warranty claims), many of the warranty issues of which Hawthorne complains would not exist.

Mr. Burkhart and Mr. Van Ortwick also agreed to the escrow arrangement because the transaction included a Transition Services Agreement (“TSA”). Under the TSA, for six to twelve months, depending on the complexity of the issue, Luxx would provide training to Hawthorne on the proper procedures and mechanisms to handle manufacturing issues, vendor issues, returns, and similar issues. Through the TSA, Hawthorne could understand how to manage returns and claim credits from suppliers for any failed lights, consistent with Luxx’s pre-transaction commercially reasonable business practices as disclosed to EY.

For all of these reasons and because they believed that Hawthorne was acting in good faith, Mr. Burkhart and Mr. Van Ortwick understood that the $215 million purchase price was the real purchase price, not some mirage that could be effectively wiped out by Hawthorne failing to operate the business in a commercially reasonable manner. At no point in the negotiations did the Hagedorns or the Hawthorne or Scotts Miracle-Gro representatives disclose the covert plan to kill the company or a scheme to act unreasonably with respect to product returns so that Hawthorne could recover from the escrow.

Throughout the deal, the Hagedorns assured Luxx that the brand would be an ongoing concern. Chris Hagedorn repeatedly told Mr. Burkhart and Mr. Van Ortwick that they would be obligated to stay on at Luxx to assist with branding, culture, and marketing. Chris Hagedorn bragged about the size of the contract that Mr. Van Ortwick would need to sign. Tellingly, agreements to bind Mr. Burkhart and Mr. Van Ortwick to ongoing work for Luxx never materialized. Indeed, the Purchase Agreement has marketing agreements that purported to keep certain social media employees and the like employed under the Luxx brand, but Hawthorne never engaged those employees.

The deal closed on December 30, 2021. Minutes after closing, Chris Hagedorn texted Mr. Van Ortwick saying, “Big day. Congrats, and look forward to whatever comes next.” One minute later, Chris Hagedorn texted again, stating that they should talk about “NY” (code for RIV Capital, a Canadian private equity firm that invests directly in “plant touching” cannabis businesses in New York that the Hagedorns had recently purchased through a new Scotts Miracle Gro entity, The Hawthorne Collective (“THC”),5 THC being short for tetrahydrocannabinol, the psychoactive component of marijuana (cannabis)).

After closing, Counterclaim Plaintiffs learned that the Hagedorns viewed the Luxx acquisition as a path to finally obtaining long sought control of RIV.”

The Escrow Agreement and Purchase Agreement

“The Purchase Agreement provides that Hawthorne would purchase certain of Luxx’s assets in exchange for $215,000,0000 paid “90% in cash and 10% in shares of [Scotts Miracle-Gro] stock.”

In addition to purchasing assets of Luxx, Hawthorne assumed certain liabilities of Luxx, including liabilities “arising from facts or circumstances or underlying conditions or events or activities first occurring after the Closing that are either in respect of the Purchased Assets or the conduct of the Business. Hawthorne also explicitly assumed liability for “all open purchase orders.””

Hawthorne Terminates the Transition Service Agreement

“In addition to the quality of its fixtures and the demonstrably low return and failure rates therefor, Mr. Burkhart and Mr. Van Ortwick agreed to a $25.8 million escrow because of a Transition Services Agreement (“TSA”) agreed to by the Parties. Exhibit 1.

Under the TSA, for six to twelve months, Luxx would teach Hawthorne the right procedures and mechanisms to handle manufacturing issues, vendor issues, returns, etc. Exhibit 1.

For example, Luxx would teach Hawthorne how to manage returns and claim credits from suppliers for any labeling issues, failed lights, or any other issues experienced by Luxx’s customer base per the normal course of business, and as disclosed to EY.

But Hawthorne refused to participate in the TSA, refused to follow Luxx’s established procedures, and effectively shut down the Luxx TSA after three months.

When Hawthorne and Luxx together discovered that one newly onboarded Malaysian factory had an adhesive problem for one fixture (the alleged delamination issue), the General Manager of Luxx (now Burk Ortwick)—then working with Hawthorne as part of the purported TSA—provided detailed instructions for how to quickly remedy the issue. Hawthorne ignored his advice. This further demonstrated that Jim and Chris Hagedorns’ and Hawthorne’s andn Scott’s Miracle-Gro’s actual intent was to intentionally refuse to mitigate damages, drive up the costs associated with Luxx, and unfairly reclaim the escrow.”

Post-Closing Actions

“As soon as the transaction closed, immaterial and manageable issues that Hawthorne had identified prior to the closing became purportedly material and major.

For example, Hawthorne expressed surprise that one of the products had been manufactured by a Malaysian factory that was not ETL certified. But this issue had been expressly disclosed during due diligence and, as described above, Hawthorne noted it was easily remedied.

Instead, as if to invite customer complaints and claims, reduce future sales, and drive up losses, Hawthorne issued a press release and went on social media with statements that there were issues with the Luxx products it had just acquired, including mislabeling and quality issues.

Around the same time, the Hagedorns assured Scotts Miracle-Gro investors that, even though they had acquired Luxx, their real loyalty was to the Gavita line. For example, in the Q1 2022 earnings call, Chris Hagedorn announced the acquisition of Luxx, and in the very next sentence he explained that Gavita was
the premier brand:

“You probably saw our announcement last month about the acquisition of Luxx Lighting and True Liberty Bags, but let me give you some more context. There is no doubt that Gavita is the premier lighting brand in the indoor cultivation space.”

At this point, it became clear that the Hagedorns, Hawthorne, and Scotts Miracle-Gro never planned on standing behind their newly acquired brand Luxx.

This decision made little business sense. For example, while Hawthorne was representing to the market that Gavita was its favored brand, major retailers were considering dropping Hawthorne’s flagship fixture brand, Gavita, in favor of Luxx branded fixtures.”

The LA Tarmac Tirade

“After raising its pretextual labeling and delamination issues, in March of 2022 (just three months after the transaction closed), Chris Hagedorn contacted Mr. Burkhart and Mr. Van Ortwick, ostensibly to discuss the losses Hawthorne was allegedly facing over the Luxx brand. He represented then that the cost of the issues was in the range of $60 million, and that his father, Jim Hagedorn, was flying out to California to meet with Mr. Burkhart and Mr. Van Ortwick.

Jim Hagedorn then flew his private plane to Burbank, California and insisted that Mr. Burkhart and Mr. Van Ortwick meet him on the plane to address what was termed a serious situation. Sending a clear signal that Scotts Miracle-Gro was making all decisions regarding the Luxx acquisition, Jim Hagedorn was joined
by Scotts Miracle-Gro’s Chief Operating Officer, Mike Lukemire and its General Counsel, Dimiter Todorov. Jim Hagedorn greeted Mr. Burkhart and Mr. Van Ortwick dressed in a Luxx Lighting sweatshirt.

Jim Hagedorn reiterated the false narrative about Hawthorne’s losses over the Luxx brand. Jim Hagedorn then engaged in a bizarre combination of profanity-laced threats while at the same time courting Mr. Van Ortwick for future opportunities in the Hagedorns’ cannabis conglomerate. On the one hand, using
graphical and obscene imagery, Jim Hagedorn made lewd threats, while at the same time assuring Mr. Burkhart and Mr. Van Ortwick that this would all go away if Mr. Van Ortwick agreed to make a deal with the Hagedorns and Scotts Miracle-Gro so that they could finally take control of RIV Capital and, with it, the Canadian and New York plant-touching businesses they viewed as essential to their domination of
the cannabis industry.

First, Jim Hagedorn demanded 25% of Mr. Burkhart and Mr. Van Ortwick’s nutrient company, Athena. Second, Jim Hagedorn wanted more control of RIV Capital (the cannabis-focused Canadian private equity firm that Chris Hagedorn had texted about the day of closing). To that end, Jim Hagedorn wanted Mr. Van Ortwick to join the Board of RIV as his patsy.

In subsequent discussions including August and September of 2022, Jim Hagedorn proposed that Mr. Van Ortwick could convert the escrow amount from the Luxx purchase ($25.8 million) and use it to “buy” an 11% equity interest in RIV Capital. Jim Hagedorn made clear that, while Mr. Van Ortwick would be the
record owner of the shares, he would have to vote in a manner dictated by the Hagedorns, thereby giving them control of RIV Captial.

Jim Hagedorn’s conduct further revealed that the escrow at-issue was not needed to make Hawthorne whole; the Hagedorns saw the escrow as their personal money, funds that could be used to—for example—increase their control over RIV Capital.

Mr. Van Ortwick refused. But these exchanges made the Hagedorns’ master plan crystal clear. Just as the IP litigation was a mere precursor to the larger play to acquire Luxx, the Luxx acquisition was a mere stepping stone to killing the company to favor Gavita, renegotiating the purchase price via false escrow claims, and then using threats of grabbing the $25.8 million escrow as an intimidation tactic to persuade Mr. Van Ortwick to join the Hagedorns in their pursuit of cannabisrelated assets.

The day after the tarmac meeting, the General Manager for Luxx (now Burk Ortwick), working for Hawthorne as part of the TSA, wrote a detailed email to Mr. Burkhart explaining how to solve the IP66, delamination, and ETL issues. Mr. Burkhart provided those detailed, inexpensive, and speedy solutions to Hawthorne, including to Chris Hagedorn and the Chief Operating Officer of Hawthorne. Hawthorne employed none of the recommended solutions. The TSA, like the marketing arrangements, was a mirage.”

Hawthorne Continues to Drive Up Phony Losses

“Consistent with their strategy to create leverage for a future deal, Hawthorne (at the direction of the Hagedorns and Scotts Miracle-Gro) continued to run the Luxx brand into the ground. Having abandoned the TSA, Hawthorne acted entirely inconsistently with how a company would act if seeking to advance its own economic interests. Hawthorne laid off the employees most capable of engaging in customer service, including the essential troubleshooting of cannabis growers’ problems.

Luxx’s established quality control methods and prior troubleshooting efforts—which had been effectively implemented to drastically reduce product claims, and resulted in a 1.62% return rate, were replaced by Hawthorne with a practice of giving credits, no questions asked, and with little to no troubleshooting
provided. On further information and belief, Hawthorne issued refunds for any claim, knowing that it would claim those funds from the escrow account.

As a result of these changes, and not because it acquired defective inventory, Hawthorne reported that it had a failure rate of 9.23%, compared to the 1.62% failure rate that Luxx had experienced prior to the transaction.

Hawthorne’s practices incentivized returns, even when the Luxx fixtures were problem free. In 2022, the cannabis market was crashing, and Hawthorne was announcing to the market that it would accept any return, no questions asked. New customers who had purchased fixtures in a falling market were all too ready to take Hawthorne’s free money. And Hawthorne was all too happy to take any and all returns, no questions asked, because it intended to make Luxx the fall guy. In fact, Hawthorne did not even require its customers to actually return the Luxx fixtures. Customers could obtain a refund and were told to simply
destroy their fixtures themselves. Again incentivizing unjustified “returns”.”

It will more than likely be a while until we see the results of this counterclaim. We will keep you updated on any further developments.

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