Ventures v. Custom Nutrition Labs., L.L.C., Case No. 12-13850
| Decision Date | 28 September 2015 |
| Docket Number | Case No. 12-13850 |
| Court | U.S. District Court — Eastern District of Michigan |
| Parties | INNOVATION VENTURES, L.L.C. f/d/b/a LIVING ESSENTIALS, a Michigan limited liability company, Plaintiff/Counter-Defendant, v. CUSTOM NUTRITION LABORATORIES, L.L.C., a Texas limited liability company, Defendant, and NUTRITION SCIENCE LABORATORIES, L.L.C., a Texas limited liability company, and ALAN JONES, Defendants/Counter-Plaintiffs. |
Hon. Terrence G. Berg
Before the Court is Defendants', Alan Jones's ("Jones,") and Nutrition Science Laboratories' ("Nutrition Science,") joint motion for summary judgment on the bifurcated issues filed on January 26, 2015. (Dkt. 199.) The matter has been fully briefed and the Court heard oral argument on September 14, 2015. For the reasons explained below, Nutrition Science's motion for summary judgment is GRANTED as to Counts IV, VI, and DENIED WITHOUT PREJUDICE as to Count VIII.Nutrition Science's motion for summary judgment is DENIED as to Counts I and VII. Jones's motion for summary judgment is DENIED as to Counts I and IV.
At its root, this is a breach of contract case. In 2004, Plaintiff Innovation Ventures, L.L.C., f/d/b/a Living Essentials ("Living Essentials"), a Michigan corporation, contracted with Defendant Custom Nutrition Laboratories ("Custom Nutrition"), a Texas L.L.C., to create a liquid energy drink. Through this collaboration, Living Essentials developed the market-leading energy drink "5-hour Energy." Three years later, the relationship soured and the former business partners became adversaries in litigation in state and federal court.
In August 2009, the parties reached a settlement agreement (the "Settlement Agreement"). 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. These covenants include what the Court will call "the Choline Family restrictions," provisions which prohibited the CNL Parties from using any ingredients in the Choline Family in their energy drink formulas. Living Essentials insisted upon these covenants because it had recently introduced a new choline-based ingredient, citicoline, into 5-hour Energy and it wanted to prevent the CNL Parties from using that ingredient, citicoline or its derivatives or equivalents, as well as several other ingredients.
Just two months after signing the Settlement Agreement, Custom Nutrition developed serious financial problems, and so it agreed to sell substantially all of its assets to Defendant Nutrition Science in October 2009. This transaction was also memorialized in a contract (the "Asset Purchase Agreement"). Nutrition Science, with Jones's help, then began to produce energy liquids in a manner that Plaintiff alleges violated the Choline Family restrictions.
Claiming violations of the Settlement Agreement, Living Essentials brought this suit against Custom Nutrition, Nutrition Science, and Jones in his individual capacity.
Living Essentials is the maker and distributor of the popular liquid dietary supplement 5-hour Energy. (Plaintiff's Second Amended Complaint, Dkt. 187, p. 3.) In 2004, Living Essentials contracted with Custom Nutrition to develop, produce, and package 5-hour Energy. (Id. at p. 4.) Custom Nutrition had experience developing liquid dietary supplements and had previously created its own two-ounce energy drink called "Shotz." (Declaration of Alan Jones, Oct. 12, 2012, Dkt. 202, Ex. 5, p. 2.) Jones, a Texas resident, was the President and CEO of Custom Nutrition at the time of the contract. (Dkt. 187, p. 4.)
In October 2007, Custom Nutrition and Living Essentials terminated their relationship and filed lawsuits against each other.1 (Dkt. 187, p. 4.) On or about August 17, 2009, they resolved these suits by negotiating and signing the Settlement Agreement. 2 The parties also stipulated to the entry of a consent judgment in the Eastern District of Texas enjoining Custom Nutrition and Jones from ever again manufacturing, producing, selling, or marketing 5-hour Energy. (Id.)
Living Essentials seeks to enforce the Settlement Agreement, particularly its restrictive covenants, against Nutrition Science and Jones. The Settlement Agreement was entered into by the "CNL Parties,"3 the "UL Parties,"4 and the "LE Parties."5 Jones is expressly named as one of the CNL Parties.
The parties had different reasons for negotiating the restrictive covenants. The CNL Parties agreed to the restrictive covenants in exchange for a $1.85 million payment from Living Essentials to Custom Nutrition. (§ 5.) Custom Nutrition had a strong financial interest in securing this payment because it faced the prospect of bankruptcy if it did not reach a settlement with Living Essentials. (Declaration of Alan Jones, Oct. 12, 2012, Dkt. 202, Ex. 5, p. 3.)
In contrast, Living Essentials sought to protect what it considered an important innovation in 5-hour Energy's formula. In 2007, Living Essentials changed its 5-hour Energy formula by including a new ingredient: citicoline. (Plaintiff's Response Brief, Dkt. 201, p. 7.) This ingredient distinguished 5-hour Energy from its competitors because it was one of the first energy drinks to contain citicoline. (Deposition of Living Essentials' Matthew Dolmage, Dec. 15, 2014, Dkt. 201, Ex. 3, pp. 37-38.) According to Living Essentials, citicoline improves concentration and focus. (Id. at p. 37.) Living Essentials thus sought to prevent the CNL Parties from capitalizing on their prior knowledge of Living Essential's formula by producing a "knock off" 5-hour Energy with citicoline. (Id. at p. 90.)
Against this backdrop, the CNL Parties agreed not to produce, manufacture, or distribute any "energy liquid"6 containing an ingredient in the "Choline Family."7(§ 5(c).) The CNL Parties also agreed that they would not assist third-parties in the production, manufacturing, distribution, or sale of energy liquids containing a Choline Family ingredient.8 (Id.) This restriction was to last "the same length of time that an issued patent would provide protection as if such patent were filed on the date of this Agreement . . . ." (Id.)
Section 5(c) provides a comprehensive framework designed to prevent the CNL Parties from using Choline Family ingredients in any way. Although under § 5(c)(ii) the restrictions only apply to "new products" and not to "existing products,"9 they effectively constitute a complete prohibition because Custom Nutrition did not utilize any Choline Family ingredients prior to the execution of the Settlement Agreement. (See Defendants' Motion for Summary Judgment, Dkt. 199, p. 6.) Nor did the CNL Parties possess Living Essentials' new formula containing citicoline during their business relationship with Living Essentials. (Id.) Thus, any productcontaining a Choline Family ingredient would constitute a new product and hence be prohibited.10
Living Essentials also seeks to rely on §16 to bind Nutrition Science to the Settlement Agreement. Section 16 states that the restrictive covenants "shall be binding upon . . . any person or entity that acquires substantially all of their [the parties'] assets" and "shall survive any merger, acquisition, restructuring and/or reorganization, and the surviving entity shall be fully bound hereby."
As for Jones, Living Essentials argues that Jones is personally bound as a signatory to the Settlement Agreement. Jones unquestionably signed that agreement, but the parties dispute whether his signature in his capacity as President and CEO of Custom Nutrition, in a signature block for Custom Nutrition and the CNL parties, is sufficient to bind Jones in his individual capacity. The Settlement Agreement only contains one signature line—for both the entity Custom Nutrition and for all of the CNL Parties.11 Similarly, the Settlement Agreement contains only one signature line purporting to bind Living Essentials and a numberof other parties12, including real persons and corporate entities, signed only by Scott Henderson as the President of Living Essentials.
Months before the execution of the Settlement Agreement, in late February or early March 2009, Jones met Don Lovelace ("Lovelace") at an industry trade show in California. (Dkt. 199, p. 4.) Lovelace is the owner of Lily of the Desert, a company that produces liquid drinks. (Id.) Lily of the Desert had developed a powder-based energy drink, but lacked the capacity to manufacture it. (Id.) Because Custom Nutrition had this capacity, Jones and Lovelace entered into contract negotiations for Custom Nutrition to produce Lily of the Desert's new product. (Declaration of Don Lovelace, Jan. 26, 2015, Dkt. 200, Ex. 2, p. 1.) Although they engaged in a series of negotiations, Jones and Lovelace failed to consummate a manufacturing agreement through the end of August 2009. (Dkt. 199, p. 5.)
Custom Nutrition was eager to reach an agreement with Lovelace because the company was in a precarious financial condition. (See id. at p. 5.) Although it had recently received $1.85 million from Living Essentials, this cash infusion had not been sufficient to enable the company to regain its financial footing. According to Jones, after paying for attorneys' fees and costs, Custom Nutrition only received$970,000 of the $1.85 million settlement proceeds from Living Essentials. (Supplemental Declaration of Alan Jones, Mar. 5, 2015, Dkt. 204, Ex. A, p. 1.) Jones also alleges...
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