Ventures v. Custom Nutrition Labs., L. L.C.
| Citation | 451 F.Supp.3d 769 |
| Decision Date | 31 March 2020 |
| Docket Number | 4:12-CV-13850-TGB |
| Parties | INNOVATION VENTURES, L.L.C. f/d/b/a Living Essentials, Plaintiff, v. CUSTOM NUTRITION LABORATORIES, L.L.C., Nutrition Science Laboratories, L.L.C., Alan Jones, Defendants. |
| Court | U.S. District Court — Eastern District of Michigan |
Ann L. Miller, E. Powell Miller, Kevin F. O'Shea, Marc L. Newman, Martha J. Olijnyk, Melvin B. Hollowell, The Miller Law Firm, P.C., Rochester, MI, Kevin J. Watts, The Oakland Law Group, Darin J. LeBeau, Farmington Hills, MI, Matthew T. Nelson, Warner Norcross + Judd, Grand Rapids, MI, for Plaintiff.
Mark C. Pierce, Pierce, Duke, Bloomfield Hills, MI, Baxter W. Banowsky, Scott D. Levine, Banowsky & Levine, P.C., Dallas, TX, for Defendants.
DENYING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT (ECF NO. 406);
DENYING DEFENDANTS' MOTION FOR SUMMARY JUDGMENT (ECF NO. 400);
GRANTING IN PART PLAINTIFF'S MOTION TO CONSOLIDATE CASES (ECF NO. 403);
AND DISMISSING ALAN JONES AS A DEFENDANT WITH PREJUDICE
This matter is before the Court on the parties' third round of cross-motions for summary judgment. ECF Nos. 400, 406. Also before the Court is Plaintiff's motion to consolidate cases and for clarification of Alan Jones' status as a defendant. ECF No. 403. For the reasons stated herein, the Court will DENY Plaintiff's motion for summary judgment, DENY Defendants' motion for summary judgment, GRANT IN PART Plaintiff's motion to consolidate, and find that Alan Jones is not personally liable under the Settlement Agreement, as held by the Sixth Circuit.
The facts of this case are set out in detail in this court's prior opinions (ECF Nos. 219, 343) and in the Sixth Circuit's opinion (ECF No. 392), but a brief overview follows.
Some sixteen years ago, Plaintiff Innovation Ventures, L.L.C., f/d/b/a Living Essentials ("Living Essentials"), the manufacturer of the two-ounce energy shot 5-Hour Energy, contracted with now-defunct Custom Nutrition Laboratories ("Custom Nutrition") to manufacture and package 5-Hour Energy. Innovation Ventures, LLC v. Custom Nutrition Labs. , 912 F.3d 316, 324 (6th Cir. 2018). The relationship soured and litigation ensued. In August 2009, the parties reached a settlement agreement ("Settlement Agreement" or "noncompete agreement") when, according to Alan Jones, a Custom Nutrition's officer, Custom Nutrition was on the verge of bankruptcy. Under the Settlement Agreement, in exchange for a $1.85 million payment to Custom Nutrition, the "CNL Parties"—defined to include Custom Nutrition and its CEO Alan Jones—agreed to a number of restrictive covenants. As relevant here, the noncompete agreement prohibited the CNL Parties from using any ingredients in the "Choline Family." Living Essentials had recently introduced a new choline-based ingredient, citicoline, into 5-Hour Energy, which according to Living Essentials was a "critical innovation" that it wanted to keep the CNL Parties from using. Id.
In October 2009, Custom Nutrition was failing financially, and Jones spoke with Don Lovelace, owner of a company called Lily of the Desert, about acquiring Custom Nutrition. Instead of acquiring Custom Nutrition, Lovelace agreed to purchase its assets and formed a new corporation, Defendant Nutrition Science Laboratories ("NSL") to do so. NSL and Custom Nutrition entered into an Asset Purchase Agreement to complete the sale. After the Asset Purchase Agreement was executed, NSL began selling energy shots. Jones became an employee of Lily of the Desert and represented himself as President of NSL. Over the next few years, NSL sold energy shots containing Choline Family ingredients and substances that Living Essentials contended were chemical equivalents to choline prohibited under the restrictive covenant's catch-all clause. Living Essentials sued, naming Custom Nutrition, NSL, and Alan Jones as Defendants. Id. at 324-25.
On an initial round of summary judgment motions in 2015, this Court granted partial summary judgment in favor of Living Essentials, concluding that NSL violated the Choline Family restrictions because the Defendants admitted to producing energy shots containing two ingredients listed in the Choline
Family definition in the Settlement Agreement. A jury later concluded in the first phase of a bifurcated jury trial that two other ingredients admittedly used by Defendants were also included in the catch-all clause in the Choline Family definition of the Settlement Agreement (Betaine and Alpha-glycerolphosphorylcholine or "Alpha-GPC"). Regarding liability, this Court concluded first that NSL was bound by the Choline Family restrictions in the Settlement Agreement by virtue of its incorporation into the Asset Purchase Agreement. Second, it concluded that Jones was bound by the Settlement Agreement because he signed it. And third, the Court concluded that the twenty-year duration of the Settlement Agreement was unreasonable under Michigan Law ( M.C.L. § 445.774(a)(1) ). The Court reformed the duration of the noncompete agreement to three years, as authorized by § 445.774(a)(1). See Innovation Ventures, LLC v. Custom Nutrition Labs., LLC , 2015 WL 5679879, at *16-25 (E.D. Mich. Sept. 28, 2015) ; see also ECF No. 219.
On a second round of summary judgment motions in 2017, this Court concluded that Plaintiff was not entitled to summary judgment as to liability on its primary breach of contract claim because NSL's affirmative defense of latches raised factual disputes. Second, it concluded that Plaintiff's three proposed methodologies for calculating damages were impermissible but Living Essentials could "still recover lost profits under a non-patent infringement specific method of calculation." Innovation Ventures, LLC v. Custom Nutrition Labs., LLC , 256 F. Supp. 3d 696, 704, 710-12 & n.8 (E.D. Mich. 2017).
Living Essentials disagreed with the Court's ruling on damages and wanted to find a way to appeal. Living Essentials believed the order left it "without any theory of actual damages to present to the jury, leaving only the theory of nominal damages" to recover on its primary breach of contract claim. 912 F.3d at 326. To expedite appeal of the prior orders and judgment, the parties submitted a proposed judgment awarding nominal damages to Living Essentials, which this court entered.
While the case against Custom Nutrition, Jones, and NSL ("Lead Case") was proceeding, Living Essentials had sought to add Lily of the Desert as another defendant, but the Court did not permit the complaint to be amended. In order to get around the Court's ruling, Living Essentials brought a new lawsuit against NSL ("Secondary Case"), adding Lily of the Desert and including many of the same claims that the Court had dismissed in the Lead Case. The new complaint alleged that discovery in the Lead Case revealed that Lily of the Desert was also liable under the Settlement Agreement because of its relationship to NSL. Because the parties agreed that judgment in the Lead Case rendered the claims in the Secondary Case "effectively moot," this Court also entered Judgment in favor of Defendants. Innovation Ventures, LLC v. Nutrition Science Labs., LLC , No. 16-11179, 2017 WL 4553429, at *1-2 (E.D. Mich. July 17, 2017) ; see also ECF No. 343. The cases were consolidated on appeal.
A. Sixth Circuit Opinion
On appeal, the Sixth Circuit Court of Appeals affirmed in part and reversed in part. First, the court concluded it had appellate jurisdiction over the claims because the parties sought formal dismissal only to expedite appeal of an order which in effect dismissed Living Essentials' claims. 912 F.3d at 327-32. NSL also sought conditional review of this Court's personal jurisdiction; the Sixth Circuit determined that this objection was waived in both the Lead and Secondary Cases. Id. at 332-33. Second, the court concluded that this Court appropriately dismissed Defendants' antitrust counterclaim because it did not relate back to the original complaint. Id. at 333-34. Third, it concluded that Jones was not bound by the Settlement Agreement in his individual capacity because he did not sign the document twice as a corporate officer and as an individual, but agreed with this Court that NSL was bound by the Choline Family restrictions of the Settlement Agreement (§ 5.c.1) by virtue of its incorporation into the Asset Purchase Agreement. Id. at 335-39. The Sixth Circuit also agreed with this Court that that whether Betaine and Alpha-GPC are covered by the catch-all clause in the Choline Family definition was ambiguous as a matter of law. Id. at 339.
Citing a Michigan Supreme Court decision that had not yet been decided at the time of this Court's prior order, Innovation Ventures v. Liquid Manufacturing , 499 Mich. 491, 885 N.W.2d 861 (Mich. 2016), the Sixth Circuit determined that when this Court found the 20-year duration of the Settlement Agreement to be unreasonable and reformed the contract, it applied the incorrect standard. It should have evaluated the noncompete agreement under the "rule-of-reason test," 912 F.3d at 340, rather than analogizing the parties' business-to-business noncompete agreement to employer-employee noncompete agreements under M.C.L. § 445.771a(1). The court of appeals also held that the burden of showing the existence of an unreasonable restraint on trade lies with the Defendants (i.e., the party alleging the restraint on trade)." 912 F.3d at 341-42. Because the Sixth Circuit determined that neither party had fully briefed the application of the rule-of-reason test, and that this "fact intensive determination" fell within this Court's area of expertise, it remanded the Lead Case "so that the parties may provide the detailed record information necessary for the court to apply the rule-of-reason framework." Id. at 342. With respect to the Secondary Case, the Sixth Circuit determined that because it was reversing and remanding the Lead Case, it would likewise remand...
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