Menard-Trump trial lays bare celeb-endorsement business

On the same day Eric Weber, the former president of Indianapolis-based New Sunshine LLC, was in California discussing a marketing agreement with the Kardashian sisters, he received an email firing him.

The email came from Matt Cotton, who until then had been manager at the Menards hardware store in Avon, but was installed in March by Menard Inc. to replace Weber as manager of New Sunshine.

The email exchange from March 1, revealed Tuesday in a trial in federal court in Indianapolis, points up the clash of business perspectives at the heart of a contract dispute between New Sunshine and Melania Trump, the former model and now wife of Donald Trump. A license agreement signed by Weber was quickly canceled by Cotton and his superiors at Menard, prompting Melania Trump to sue for $50 million in damages.

That dispute is part of a larger fight between Steve Hilbert, the Indianapolis businessman who used to control New Sunshine, and his former business partner, John Menard, the billionaire founder of the home improvement retail chain, who won a court order ousting Hilbert in February.

Menard has accused Hilbert of duping him into creating the private equity fund back in 2005 and then signing a series of self-serving deals—including the one with Melania Trump’s company, New York-based Melania Marks Skincare LLC.

“Melania Marks knew all along this was a one-sided deal,” Kevin Tyra, an Indianapolis attorney representing Menard and New Sunshine, said in his opening statement Tuesday before Judge Jane Magnus-Stinson. “Therefore, the license agreement is void.”

But Hilbert, along with his wife, Tomisue, have accused Menard of launching a wave of litigation against them and their friends as retaliation for Tomisue Hilbert’s refusal of sexual advances from Menard.

There are now 11 pending lawsuits that in some way involve the dispute between John Menard and Steve Hilbert.

“Melania Marks was not part of the dispute, but tragically she became damaged by the dispute collaterally,” Norman Funk, the attorney representing Trump, said in his opening statement.

New Sunshine is a tanning and skincare products company which until earlier this year had about 275 employees and about $100 million in annual revenue. It was one of several companies owned by MH Private Equity, an investment firm co-founded by Hilbert and Menard.

Because profit was declining on New Sunshine’s traditional tanning bed business, Hilbert and Weber decided to diversify into high-end skincare products.

A consultant hired by New Sunshine first suggested that they hire Katie Stam, the former Miss America from Indiana, to market skincare products on the QVC television channel. But that idea was rejected in favor of paying Melania Trump to be the celebrity spokeswoman for the new skincare products.

After more than 13 months of negotiations, the two sides finally struck a deal on Nov. 1, 2012. The license agreement included upfront payments by New Sunshine of $1 million and also gave the Hilberts and their friends the right to receive $50,000 in free skin-care products each year.

Representatives of Menard didn’t know about the contract until late February, when they gained control of New Sunshine following a three-month court fight in Wisconsin, said Rod Smith, director of financial analysis and investments for Menard Inc., in testimony on Tuesday morning. When they saw it, they immediately thought it was one-sided.

“I felt like the contract was written by New Sunshine for the benefit of Steve Hilbert,” Smith said.

Smith is also the manager and sole employee of Merchant Capital LLC, a subsidiary of Menard Inc., which John Menard used to invest $495 million in MH Private Equity.

Smith contended that the contract New Sunshine signed with Melania Trump was also invalid because Merchant Capital had removed Hilbert as the manager of MH Private Equity, citing financial mismanagement, via two letters in June 2012. Hilbert simply refused to leave until a judge ordered him to do so in February.

But Funk, the attorney representing Trump, countered that the New Sunshine contract with Trump was signed by Weber, not by Hilbert. He also said neither Merchant Capital nor Hilbert informed anyone else about Hilbert’s removal until after the contract was signed Nov. 1.

“The parties that negotiated the contract both believed that contract was fair,” Funk said. He noted that, on the day the contract was signed, Melania Trump promoted the skin-care product during filming of “Celebrity Apprentice,” a television showing starring Trump’s husband, Donald.

That exposure would normally cost more than $1 million, Funk contended, but New Sunshine paid roughly $100,000 for it as part of its agreement with Melania Trump.

And even if the deal is considered poor, Funk said, that does not entitle Menard and Merchant Capital to a do-over.

“The freedom to contract includes the freedom to make bad deals,” Funk said.

Smith acknowledged that Menard and Merchant Capital have tried to renegotiate all of New Sunshine’s contracts in order to get better terms. But he said the license agreement signed with Trump was, on its face, a negligent deal for New Sunshine.

He noted, for example, that the contract was signed initially even though New Sunshine had secured no sales agreements with retailers. Even though New Sunshine did receive a purchase order form the Lord & Taylor stores March 27, Smith said that only 10 stores are selling the skincare product and that sales have been slow.

“They’re very poor,” Smith said. “I believe last week we sold three units.”

But Funk countered that sales are slow because New Sunshine, under Menard’s control, has failed to pay Melania Trump the amounts it promised her to promote the product. Therefore, she has not been promoting it.

He questioned whether Smith or Cotton or anyone else at Menard had any experience structuring celebrity spokesperson deals.

“No,” Smith said.

Cotton, who took the stand just before the court took a lunch recess, talked about his whirlwind nine months as New Sunshine’s CEO.

He was managing the Menards store in Avon in late February, when he was summoned to company headquarters in Wisconsin and ferried there by the company plane.

That’s where Cotton, a veteran hardware-store manager, was told he would become CEO of New Sunshine.

Cotton testified that one of his first orders of business when he took over a few days later was collecting 55 corporate credit cards and requesting all outstanding contracts. One of them, the licensing deal with Melania Trump’s company, he described as “very beneficial to Melania.”

Cotton also dismissed Weber in an e-mail, saying only that he was being fired for "just cause." However, Smith testified that Weber was dismissed because the Menard staff perceived that he had "breached his fiduciary duties."

"We essentially terminated him for gross negligence," Smith said.

IBJ Managing Editor Cory Schouten contributed to this story.