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October 24th Court of Appeals Decision: The Non-Compete Lawsuit Involving 5 Hour Energy.

November 26, 2014 1 comment

Happy Thanksgiving!

This Case was too interesting to pass up writing about.

I have posted a series on covenants not-to-compete and a friend and fellow lawyer (Eric Guerin, Varnum Law – check him out, great business/real estate litigator) sent me this recent unpublished Michigan Court of Appeals decision involving the makers of 5 Hour Energy Drink  and their failed attempt to enforce a covenant not-to-compete against a competitor, “Eternal Energy“.

The CaseInnovation Ventures, L.L.C. v. Liquid Mfg., L.L.C., No. 315519, 2014 WL 5408963, (Mich. Ct. App. Oct. 23, 2014)

A. Synopsis:

As the Court of Appeals states, this case “primarily concerns plaintiff’s business dealings and contracts with two entities, defendant K & L Development and defendant Liquid Manufacturing.” Id.

Innovation Ventures engaged Defendant to bottle its 5 Hour Energy Drink. Innovation later ended its relationship with Defendant, in order to bottle its own product.

Innovation retained another Defendant to consult in the marketing of 5 Hour Energy Drink, and then terminated its business relationship after two weeks.

Both Defendants (bottler, and consultant) decided to come together and compete with 5 Hour Energy. After an extensive lawsuit involving multiple counts, amended pleadings, discovery, Plaintiff’s claims were dismissed!

B. Facts: (they are admittedly relatively complex)

Parties:

  • Plaintiff, Innovation Ventures, LLC, – the maker of “5 Hour Energy”
  • Defendants Liquid Manufacturing, LLC, K & L Development of Michigan, LLC, and Peter Paisley and Andrew Krause, the presidents and owners of Liquid Manufacturing and K & L Development.

i. Innovation Engages Liquid to bottle 5 Hour Energy

  • On May 18, 2007, plaintiff entered into a manufacturing contract whereby plaintiff hired defendant Liquid Manufacturing to bottle 5 Hour Energy.
  • In June 2010, plaintiff terminated its agreement with defendant Liquid Manufacturing, and the parties entered into an agreement to formalize the termination and to formalize plaintiff’s exercise of its option to purchase the equipment that defendant Liquid Manufacturing used to bottle plaintiff’s product. Id. pg 1.

  • The Termination agreement contained nondisclosure and non-compete provisions, but permitted defendant Liquid Manufacturing to produce a list of 36 “Permitted Products” on the equipment that was formerly used to bottle plaintiff’s product; that permission could be revoked for violation of the Termination Agreement. Plaintiff agreed, though, to give defendant Liquid Manufacturing 30 days to cure any violation of the agreement. Id.

ii. Innovation Engages K&L to Help Market 5 Hour Energy

  • In 2008, Plaintiff and Defendant K&L entered an oral agreement with defendants, defendants to act as consultants “to help design, manufacture, and install certain beverage production and packaging equipment for plaintiff.”
  • On April 27, 2009, plaintiff and defendants Krause and K & L Development entered into a written agreements, including a confidentiality and non-compete agreement” Id.
  • On or about May 10, 2009, less than two weeks after the signing of the Agreements, plaintiff terminated the parties’ business relationship. The Parties entered into a “Termination Agreement”

And The Plot Thickens…

iii. K&L and Liquid Join Forces to Make: Eternal Energy

  • On September 10, 2010, defendant Eternal Energy LLC, which produces a liquid energy shot known as “Eternal Energy” was formed by the owners of Liquid Manufacturing and K&L Development to compete with 5 Hour Energy.
  • On May 9, 2011, defendant LXR Biotech was formed;  Defendant LXR Biotech markets and distributes Eternal Energy in approximately 2–ounce bottles, which is approximately the size of 5 Hour Energy bottles. Id. pg 2.
  • On September 20, 2010, ten days after the formation of defendant Eternal Energy, defendant’s CFO contacted plaintiff’s counsel, and requested that Eternal Energy be added to the list of Permitted Products that defendant Liquid Manufacturing could, pursuant to the Termination Agreement, produce.
  • In an e-mail dated September 21, 2010, plaintiff agreed to include it. (this would later be fatal to Plaintiff’s case)
  • On January 27, 2012, plaintiff sued Defendants, alleging breach of confidentiality agreement, non-compete agreements, as well as  tort claims for the disclosure of its confidential information.

Essentially, Plaintiff claimed that Defendant wrongfully obtained Plaintiff’s confidential information, and the Defendants used the information in marketing Eternal Energy, and by representing to Wal-Mart that defendant previously bottled 5 Hour Energy for plaintiff. Id.

After several amended complaints and extensive discovery of documents, (aka “loads of attorney fees”) Defendants filed a motion to dismiss. The Court granted the  motion and dismissed all claims. Plaintiff appealed. The Court of Appeals affirmed – found in favor of Defendants.

C. The Court of Appeals Ruling

Some of the rules of law cited by the Court are worth particular mention.

i.Parties are free to contract!
“As a general matter, courts presume the legality, validity, and enforceability of contracts.” Coates, 276 Mich.App at 507.
ii. Non-Compete Agreements will be narrowly enforced.
However, “noncompetition agreements are disfavored as restraints on commerce and are only enforceable to the extent they are reasonable.” Id. See also Thermatool Corp v. Borzym, 227 Mich.App 366, 372; 575 NW2d 334 (1998).
“Thus, a restrictive covenant must protect an employer’s reasonable competitive business interests…” Innovation Ventures, L.L.C. v. Liquid Mfg., L.L.C., supra page 5.

iii. What is reasonable business interest?

In order to be reasonable, “a restrictive covenant must protect against the employee’s gaining some unfair advantage in competition with the employer, but not prohibit the employee from using general knowledge or skill.” Id. citing  Coates v. Bastian Bros, Inc, 276 Mich.App 498, 506; 741 NW2d 539 (2007).
  • “preventing unfair competition is…prevention of fair competition is not. St Clair Med, PC, 270 Mich.App at 266. Id at 7.
  • Protecting the goodwill that a party has built up with clients is a legitimate purpose. Id.
  • Just because Defendant acknowledges in the Agreement “I acknowledge that these restrictions are reasonable” (I admit, I have used this language before) – doesn’t mean a court will enforce it. It is up to the Court to decide what is reasonable, not the parties. Id. citing Rory v Continental Ins Co, 473 Mich 457 (2005).

D. The Court’s Ruling on Innovation’s Non-Compete.
The Court held that the language of the non-compete was too broad, unreasonable, and therefore unenforceable.

Even if the Language is Too Broad, Won’t the Court reform the language to make it reasonable?

Plaintiff made the argument, shouldn’t you simply strike the unreasonable language, and make it reasonable?

The Court of appeals said – No!

Courts may reform a noncompetition agreement if it is found to be unreasonable. See, e.g., Hopkins v.. Crantz, 334 Mich. 300, 304; 54 NW2d 671 (1952).
Here, the Court said – Plaintiff, you have given us no argument as to which provisions are reasonable, and how we could enforce them, or how we could reform it, so you have abandoned this argument.
oh, and by the way, “We have found no authority stating that a court must reform an unreasonable non-compete provision.” Id.
E. Other issues that resulted in the case being dismissed.
Innovation granted a 30 day window to cure any default – Defendants cured default within 30 days.
Defendant requested Eternal Energy be on the list of Permitted Products – Plaintiff agreed.
F. Take Away:
  • Courts acknowledge the right to enter into non-competes (freedom of contract)
  • Courts will narrowly enforce the terms, since restraint on trade is disfavored
  • If your non-compete language is too broad, the courts will not always take the initiative to reform the language to protect a legitimate business interest – it is up to the business (and their counsel) to demonstrate what is a “reasonable business interest” to protect.
  • Take notice in any contract whether you provided an opportunity to cure.
Questions? Comments?
email: Jeshua@dwlawpc.com

Business Law: Non-Competes Part III

November 20, 2014 Leave a comment

Ok, here is my third Blog Post in so many weeks on covenants not-to-compete.

If you read my last blog post on non-compete agreements, you will recall that I mentioned that non-competes are unenforceable against lawyers.

You might ask the question: What happens when law firms attempt to bind their attorneys to non-competes? 

I’m glad you asked.

See the ABAJournal article that came out today:  “Lawyer is reprimanded for including noncompete provision in associate’s contract”  here
What’s most interesting is the lawyer’s comment – that he wasn’t going to really enforce the non-compete.

Well, of course he wasn’t. Can you imagine a Judge hearing that case? The Judge knows the law, and would sanction the lawyer for bringing the lawsuit to enforce a covenant not-to-compete.

The lawyer’s answer really underscores a broader point: in general, many businesses will have employees sign non-competes that they never intend to enforce – simply in hopes that it deters the employee from attempting to compete.

Questions? Comments?

email: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Business Law Update: First Jimmy Johns now ServiceMasters: Non-Competes Against Cleaning Crew?

November 13, 2014 Leave a comment

Yes, indeed. In my previous article it was Jimmy Johns holding the sandwich delivery workers to a covenant not to compete, now its Servicemaster holding its cleaning crew.

The ABAJournal reported today on the article, “Cleaning worker who got new job with $3-an-hour pay raise faces possible suit over noncompete pact” you can see it here

As the article reports: Benny Almeida admits he saw a noncompetition provision in paperwork he signed when he got a $15-an-hour cleaning job with ServiceMaster of Seattle earlier this year.” The article was first published in the Seattle Times

The Seattle Times also hits on the Jimmy Johns non-compete fiasco that I previously posted about.

The columnist writes: It’s hard to conjure what intellectual property or trade secrets are at stake in making the Turkey Tom. Or in wet-vaccing carpets. It’s one thing to make engineers or lawyers sign noncompetes. But cleaners?

(as a side note, you won’t see any enforceable non-competes in the legal industry in Michigan, but that is besides the point)

When Will You see a Court uphold a non-compete?

When the Court sees that the Employer is attempting to protect its legitimate business interest.

Questions? Comments?

email: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Categories: Uncategorized

Latest Headlines: Fraud and Abuse in Real Estate Investment & Banking

November 12, 2014 Leave a comment

Headline News today – Fraud and abuse in real estate and banking.

 

Today a press release was issued from The Office of the Comptroller of the Currency (OCC)  assessing $950 million in fines against three national banks for “unsafe or unsound practices related to their foreign exchange trading businesses.”

You can see the press release and the supporting consent orders here

According to the Press Release, “The fines against Bank of America…; Citibank…; and JPMorgan Chase…, follow multiagency examinations and investigations of the banks’ activities in the global [foreign exchange] market.

 

The OCC indicates in its allegations that:

The foreign exchange (“FX”) market is one of the largest and most liquid markets
in the world. The FX market enables participants to buy, sell, exchange, hedge,and speculate on currencies”

Further,

the Bank’s “spot FX traders” participated in multibank chatrooms on instant messaging platforms until it prohibited such communications in January 2013. While participating in multibank chatrooms, some of the Bank’s G10 spot FX traders discussed engaging in potential misconduct with traders from other banks or market participants.

 

 

Skeptical of big banks? I don’t see why…

 

In other news…

 

The DOJ sentenced a  commercial real estate developer and mortgage broker  to serve 121 months in prison today for his role in a $50 million securities fraud scheme. You can check out the press release here

Apparently, the developer “solicited investors to provide funds for the development …falsely told investors who purchased notes through the program that they would receive a lien on a specific piece of property, and that the lien would be in first position.”

In reality,  “he never provided investors with a lien, and instead conveyed a lesser interest that did not allow investors to directly foreclose on the property to protect their investment.”

The developer will be ordered to pay restitution along with serving his sentence – I feel bad for the unwary investor caught up in that deal, I wouldn’t hold my breath about getting paid back…

 

Yikes, bad stuff!

 

Takeaway here: Real estate backed financing can be complicated, and can easily lend itself to fraud and abuse.

 

Investors: It’s important to vet  opportunities out through your counsel!

 

Questions? Comments?

email: Jeshua@dwlawpc.com

www.dwlawpc.com

 

Real Estate Law News: Example for Wary Landlords and Property Owners

November 6, 2014 Leave a comment

Here’s a profound truth those in the real estate industry will readily acknowledge:

Owning and Managing Real Estate is challenging.

 

I hear it from my Property Owner clients. I experience it when I am involved in negotiating in landlord/tenant disputes.

 

Some of the pitfalls property owners have to watch out for are illustrated in a recent Federal government press release.

The Department of Justice issued a press release concerning a lawsuit settlement reached with Landlords over Discrimination Charges brought by the Federal Government. You can review that press release here

 

According to the press release, the Federal government alleged in its complaint that the Landlords “discriminated on the basis of disability by refusing to grant a reasonable accommodation to waive a $1,000 pet deposit for a tenant with mental disabilities who needed a dog as an emotional support animal.”

Other allegations:

  • “the defendants refused to grant a waiver of the pet deposit despite numerous attempts by the tenant to provide documentation of her disability and her need for the emotional support animal.”
  • “The complaint also alleged that the defendants retaliated against the tenant after she filed a complaint with the U.S. Department of Housing and Urban Development (HUD).”
  • “Defendants’ policies constituted a pattern or practice of discrimination in violation of the Fair Housing Act because they allowed reasonable accommodations for specially-trained service animals but precluded reasonable accommodations for emotional support animals.
  • ” Defendants also refused to consider accommodation requests unless tenants had their physician complete forms that threatened penalty of perjury and threatened to require the physician to defend the information provided in court.”

 

Obviously these are serious allegations (which according to the Settlement Agreement, I presume are not admitted by the Landlords)

When reviewing the terms of the Lease as alleged by the government, they seem pretty terse. However, I wonder;  how many standard leases contain those or similar provisions?

The language could have been drafted by the landlords themselves, or it could very well have been drafted by a lawyer trying to protect his client from as much liability as possible

 

 

Strictly talking about the allegations of the unreasonably burdensome lease language, there are some lessons to be learned for landlords, property owners, managers, real estate investors.

 

Two takeaways from this news headline:

 

1. It is worth having your lawyer review your standard leases to make sure they are legally compliant and don’t have the potential to steer you into liability in the event a tenant has a grievance.

Although, your lawyer’s review of your lease won’t protect you if you take retaliatory action against a tenant with a grievance (but this goes without saying, I hope)

 

2. If you lease out “residential” property as opposed to commercial, you are under much more stringent regulations. You should make sure that everything, including what you charge the tenant for, and how those charges are incurred, are lawful.

 

Questions? Comments?

email: Jeshua@dwlawpc.com

http://www.dwlawpc.com