One February morning in 2011, Kim Etheredge sat staring with disbelief at the e-mail in her inbox. She and her friend Wendi Levy had worked for eight years to develop a brand of hair products for mixed-race women called Mixed Chicks. Annual revenue had hit $5 million. Now, it seemed, everything was on the line.

The e-mail was from a retailer informing Etheredge that Sally Beauty Supply, a Denton, Texas–based retail chain with more than 3,000 stores and revenue of $3 billion, had created its own line of products for mixed-race women—Mixed Silk. The name wasn't the only thing familiar. The bottles were the same shape as Mixed Chicks's, and the packages' design used the same fonts and colors. Even the print ads had a similar composition. In fact, the only significant difference between the two companies' products was the price: Mixed Silk's products retailed for about $8, compared with $14 and $20 for Mixed Chicks's.

Etheredge and Levy were furious. Their first impulse was to sue for trademark infringement. But were they really prepared to get into a legal battle with a multibillion-dollar giant? Was there another way to protect the brand they had worked so hard to build?

1. The backstory: A new product—and a new market

Hair has long been a topic of conversation between Levy and Etheredge. Both women are of mixed race, and both have constantly struggled to tame their unruly curls. They would vent about the way beauty products catered to people's ethnicity—not the actual texture of their hair. "When you are multicultural, you have a blend of hair," says Etheredge. But no products acknowledged that fact.

In 2003, they decided to stop griping and start doing. They brought a box of their favorite products to a chemist, who helped them create a leave-in conditioner designed to work specifically with their type of hair. A year later, they launched Mixed Chicks, now based in Canoga Park, California. Soon their products, which included shampoo and conditioner, were selling in salons and beauty-supply stores nationwide. In 2009, Halle Berry endorsed the brand, listing its wares as "must-have products" in three national beauty magazines.

That year, the two women were working the Mixed Chicks booth at a trade show when a rep from Sally Beauty Supply came by. According to Etheredge, the woman said she liked their idea and suggested that they talk further. The two co-founders were thrilled. A few months later, a Sally Beauty rep called to talk about stocking Mixed Chicks's products. It was an enticing opportunity. But after learning about some of the chain's strict return policies—one provision allowed Sally Beauty to discount Mixed Chicks's products by any amount at any time—Etheredge and Levy declined.

2. The problem: "A generic version of Mixed Chicks"

About an hour after Etheredge learned about Mixed Silk, another retailer called with a similar report. Etheredge and Levy immediately dispatched employees to buy the products. Etheredge tested them that night and was unimpressed. Later, she visited a Sally Beauty store and found Mixed Silk prominently displayed on the checkout counter. When she asked about it, a clerk told her it was "a generic version of Mixed Chicks" and "virtually the same thing." Soon, more retail clients were reporting that customers were balking at buying Mixed Chicks, saying that Mixed Silk cost a lot less.

3. The options: To sue, or not to sue?

The two women mulled the problem for about a month. They researched what business owners in similar situations had done and consulted with a handful of attorneys. They considered sending a cease-and-desist letter, demanding that the chain immediately stop making Mixed Silk. The problem with that approach: If a court ruled against Mixed Chicks, the two women could be forced to compensate Sally Beauty for any lost revenue.

On the other hand, if Etheredge and Levy filed a lawsuit and won, they might be able to get Mixed Silk off the shelves—and collect damages for lost sales and a tarnished reputation caused by customer confusion with what Levy and Etheredge considered inferior products.

But suing could cost $250,000 to $500,000 a year in legal fees—and the case, lawyers warned, could drag on for years. It would also be a major distraction for the women, who had plenty of work to do managing their growing business. On the other hand, if they did nothing, the outcome could be even worse. Could they live with themselves if they did not stand up for themselves?

4. The decision: "They messed with the wrong broads."

In March 2011, Mixed Chicks filed papers to sue Sally Beauty Supply for trademark infringement, trade dress infringement, and unfair competition, alleging that Sally Beauty Supply markets, sells, and advertises imitations of Mixed Chicks's products. "Kim and I felt the same way," says Levy. "There was no way we could just sit there." In court filings, Sally Beauty Supply denies the charges, though it does admit that for a period of time a search for Mixed Chicks on the Sally Beauty website directed a consumer to Mixed Silk's products. The suit seeks damages, punitive damages, attorney fees, and repayment of any profits from Mixed Silk. (Citing the litigation, Sally Beauty Supply declined numerous requests to comment for this story.) "They messed with the wrong broads," says Etheredge.

5. The aftermath: Strong sales, uncertain outcome

Mixed Chicks is still embroiled in the lawsuit. But Etheredge and Levy remain passionate about what they see as an important cause: setting a precedent for small businesses that might be too afraid to take on a multibillion-dollar company. Says Etheredge: "You can't just bully little companies."

The two co-founders decline to say how much money the lawsuit has cost them so far. But they admit the case has taken a toll. The women had planned to visit Europe in 2011 to explore an international expansion. Instead, they flew to Dallas for a three-day deposition, leaving behind their families and 15 employees. The stress pervades home and work. "When you go to sleep, you start dreaming about it," says Etheredge. A trial is scheduled for May 15.

Despite the suit, Mixed Chicks's business has continued to grow. The company added seven products in 2011 and is now distributed to 3,000 retail stores. As more hair care companies start catering to mixed-race consumers—several brands aimed at African American women recently have broadened their marketing to include mixed-race women—the two friends have wondered for a fleeting moment if their money could have been better spent on advertising. But neither woman has any regrets about pursuing legal remedies. "Dealing with attorneys is stressful," says Levy, "but this is the choice we made. We're multitaskers, and we have to do it."

The Experts Weigh In

Don't sue—market

It's important to take emotion out of these kinds of situations, as it can cloud your judgment and lead to bad decisions. Rather than sue, Etheredge and Levy could have repositioned their product as the premium offering and ridden the wave of publicity and market growth created by Sally Beauty. Smart marketing would enable them to boost prices and margins and benefit substantially. In a way, Sally Beauty's entering the market could be the best thing that ever happens to the business.

James T. Noble | Founder | James T. Noble, London

Expect knockoffs

I've been in product development in the personal care industry for 40 years, and trying to ride the coattails of a winner is a pretty standard mode of operation. We generally tell clients that they should expect people to cross the line. You should do everything you can to protect your product, and I applaud Levy's and Etheredge's courage in laying it all on the line to keep what they consider theirs. Unfortunately, what has happened to them will probably happen again the next time they come up a market leader.

Mort Westman | President | Westman Associates, Oak Brook, Illinois

Go to the media

If Etheredge and Levy had come to me for advice, I would have told them that a lawsuit was necessary. But I also would have advised them to take their story to the bloggers and the media—this is a great tale of David and Goliath, of a smaller business that has been crushed unfairly by a big one. But it's tough to say if their lawsuit will be successful. Discovery can be an incredibly arduous process, and a multibillion-dollar company can bleed a small company dry. It takes time, money, and resources, and sometimes it's death by a million cuts.

Carlos F. Gonzalez | Partner | Diaz, Reus & Targ, Miami