Innovation Ventures, LLC v. Custom Nutrition Labs., LLC

• Decision Date: 20 December 2018
• Docket Number: Nos. 17-1734/1771/1911,s. 17-1734/1771/1911
• Citation: 912 F.3d 316
• Parties: INNOVATION VENTURES, LLC, a Michigan Limited Liability Company, Plaintiff-Appellant/Cross-Appellee, v. CUSTOM NUTRITION LABORATORIES, LLC, Defendant, Nutrition Science Laboratories, LLC, a Texas Limited Liability Company; Alan Jones, Defendants-Appellees/Cross-Appellants. Innovation Ventures, LLC, a Michigan Limited Liability Company, Plaintiff-Appellant, v. Nutrition Science Laboratories, LLC, a Texas Limited Liability Company; Alan Jones; L.O.D.C. Group Limited ; L.O.D.C. Incorporated, Defendants-Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

912 F.3d 316

INNOVATION VENTURES, LLC, a Michigan Limited Liability Company, Plaintiff-Appellant/Cross-Appellee,
v.
CUSTOM NUTRITION LABORATORIES, LLC, Defendant,

Nutrition Science Laboratories, LLC, a Texas Limited Liability Company; Alan Jones, Defendants-Appellees/Cross-Appellants.

Innovation Ventures, LLC, a Michigan Limited Liability Company, Plaintiff-Appellant,
v.
Nutrition Science Laboratories, LLC, a Texas Limited Liability Company; Alan Jones; L.O.D.C. Group Limited ; L.O.D.C. Incorporated, Defendants-Appellees.

Nos. 17-1734/1771/1911

United States Court of Appeals, Sixth Circuit.

Argued: August 3, 2018
Decided and Filed: December 20, 2018
Rehearing Denied January 24, 2019

ARGUED: John J. Bursch, BURSCH LAW PLLC, Caledonia, Michigan, for Innovations Ventures. Baxter W. Banowsky, BANOWSKY & LEVINE, P.C., Dallas, Texas, for Nutrition Science Laboratories, Alan Jones, and L.O.D.C. ON BRIEF: John J. Bursch, BURSCH LAW PLLC, Caledonia, Michigan, Matthew T. Nelson, WARNER NORCROSS & JUDD LLP, Grand Rapids, Michigan, E. Powell Miller, Martha J. Olijnyk, THE MILLER LAW FIRM, P.C., Rochester, Michigan, for Innovations Ventures. Baxter W. Banowsky, BANOWSKY & LEVINE, P.C., Dallas, Texas, for Nutrition Science Laboratories, Alan Jones, and L.O.D.C.

Before: SILER, GRIFFIN, and STRANCH, Circuit Judges.

JANE B. STRANCH, Circuit Judge.

Some years ago, Plaintiff Innovation Ventures (Innovation), manufacturer of 5-Hour Energy, settled a lawsuit with the now-defunct Custom Nutrition Laboratories (Custom Nutrition) by entering into a noncompete agreement. When Nutrition Science Laboratories (NSL) subsequently purchased Custom Nutrition’s assets, it did not abide by the restrictive covenants in that noncompete agreement. Innovation

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initially sued Custom Nutrition; NSL; and Alan Jones, an officer of both Custom Nutrition and NSL, and later added a suit against a related company, Lily of the Desert (collectively, Defendants). After protracted litigation, Innovation was awarded nominal damages for its core breach of contract claim. For the reasons explained below, we AFFIRM in part, REVERSE in part, and REMAND to the district court for further proceedings consistent with this opinion.

I. BACKGROUND

A. Factual History

The story of the parties’ business relationship and its subsequent deterioration is lengthy and complex, and many of its details are hotly disputed. The district court ably described the relevant events in some detail in one of its summary judgment orders. See Innovation Ventures, LLC v. Custom Nutrition Labs., LLC (Innovation Ventures II ), No. 12-13850, 2015 WL 5679879, at *1–7 (E.D. Mich. Sept. 28, 2015). The following is a summary of the critical facts.

1. Breakdown of the Manufacturing Relationship

Plaintiff Innovation is the maker and distributor of 5-Hour Energy, a well-known "energy shot." In 2004, when Innovation was doing business as Living Essentials, it contracted with Custom Nutrition to manufacture and package 5-Hour Energy. Defendant Alan Jones was the President and CEO of Custom Nutrition at the time and had previously manufactured a two-ounce energy shot called "Shotz." When Living Essentials ended the business relationship some years later—abruptly and unfairly, according to Defendants—Custom Nutrition had a surplus of ingredients and packaging. Jones used the surplus to continue manufacturing 5-Hour Energy for an unspecified amount of time after the relationship ended. Jones averred that his use of the surplus was mitigation of damages protected by the Uniform Commercial Code.

The companies then sued one another, with each claiming that the other had breached the contract, stolen trade secrets or intellectual property, and committed assorted torts. The protracted litigation came to an end almost two years later when, according to Jones, Custom Nutrition was on the verge of bankruptcy. The companies then entered into the Settlement Agreement that is at the center of this litigation.

The Agreement contains an admission that Custom Nutrition and Jones "wrongfully manufactured" products bearing the 5-Hour Energy label, provides that Living Essentials owns the 5-Hour Energy formula, and forbids Custom Nutrition from manufacturing any new "Energy Liquid" that "contain[s] anything in the Choline Family." According to Innovation, ingesting choline and related substances improves focus, and including them in the 5-Hour Energy recipe was a critical innovation. In return for these restrictions and admissions, Living Essentials paid Custom Nutrition $1.85 million. Specific provisions of the Settlement Agreement are discussed in more detail below.

2. NSL Purchases Custom Nutrition’s Assets

In the words of the district court, Custom Nutrition was "in a precarious financial condition," and the cash infusion was insufficient "to enable the company to regain its financial footing." Innovation Ventures II , 2015 WL 5679879, at *4. Jones therefore spoke with Don Lovelace, owner of Lily of the Desert, about the possibility of Lily acquiring Custom Nutrition. Lovelace

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instead agreed to purchase Custom Nutrition’s assets and formed a new corporation, Defendant NSL, which entered into an Asset Purchase Agreement with Custom Nutrition.

The Asset Purchase Agreement provides that NSL acquires Custom Nutrition’s listed assets but is not "responsible for any liabilities, liens, security interests, claims, obligations, or encumbrances" of Custom Nutrition except for those listed on an attached schedule—principally, debt Custom Nutrition owed to a bank. The Asset Purchase Agreement includes one reference to the Settlement Agreement: "[T]he formula for energy drinks manufactured by [Custom Nutrition] and certain related trademark and copyright matters are limited by the settlement agreement between [Custom Nutrition] and Living Essentials."

After the execution of the Asset Purchase Agreement, NSL went into the energy shot business. Jones became an employee of Lily and represented himself as President of NSL. NSL marketed itself as a continuation of Custom Nutrition and took on Custom Nutrition’s old orders and customers. Over the next few years, NSL produced and distributed energy shots containing choline citrate, choline bitartrate, betaine, and alpha glycerolphosphorylcholine (alpha GPC). The first two substances are listed in the Choline Family definition in the Settlement Agreement; the latter two are, according to Innovation, chemical equivalents to choline covered by the definition’s catch-all clause.

B. Proceedings Below

1. Lead Case (Nos. 17-1734/1771)

Innovation sued Custom Nutrition,¹ NSL, and Jones for breaching the Settlement Agreement and for tortious interference. Proceedings in the district court were protracted.

After rejecting two motions to dismiss raising objections to personal jurisdiction, the district court addressed whether NSL had violated the Choline Family restrictions. It granted partial summary judgment to Innovation based on Defendants’ admitted production of energy shots containing choline bitartrate and choline citrate. See Innovation Ventures, LLC v. Custom Nutrition Labs., LLC (Innovation Ventures I ), No. 12-13850, 2014 WL 4829582, at *3 (E.D. Mich. Sept. 29, 2014). The court concluded that whether betaine and alpha GPC (which Defendants also admitted to using) were included in the catch-all clause in the Choline Family definition was ambiguous as a matter of law. See id. at *2–3. A jury trial was convened to determine whether the two ingredients were included in the clause’s scope; the jury concluded that both were.

The district court then turned to issues related to liability under the Settlement Agreement. The court concluded that: (1) NSL was bound by the Choline Family restrictions in the Settlement Agreement by virtue of their incorporation into the Asset Purchase Agreement, see Innovation Ventures II , 2015 WL 5679879, at *16–19 ; (2) Jones was bound by the Settlement Agreement because he signed it, see id. at *20–21 ; and (3) the twenty-year duration of the Settlement Agreement was unreasonable under Michigan law, necessitating reformation of the contract to last only three years, see id. at *24–25.

After another round of briefing, the district court turned to the remaining issues, concluding that: (1) Innovation was not entitled to summary judgment as to liability on its main breach of contract claim because NSL’s affirmative defense of laches

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raised factual disputes, see Innovation Ventures, LLC v. Custom Nutrition Labs., LLC (Innovation Ventures III ), 256 F.Supp.3d 696, 704 (E.D. Mich. 2017) ; and (2) Innovation’s three proposed methodologies for calculating damages were impermissible, although Innovation could "still recover lost profits under a non-patent-infringement specific method of calculation," see id. at 710–12 & n.8.

That order was handed down about one month before the final jury trial was scheduled to begin. According to Innovation, the order left it "without any theory of actual damages to present to the jury, leaving only the theory of nominal damages" on which it could recover...