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

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

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and fellow lawyer (Eric Guerin, Varnum Law – check him out, great business/real estate litigator) sent me this recent unpublished Michigan Court of Appeals decision involving the makers of 5 Hour Energy Drink  and their failed attempt to enforce a covenant not-to-compete against a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

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: