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Innovation Ventures, LLC v. Custom Nutrition Laboratories, LLC

United States District Court, E.D. Michigan, Southern Division

June 12, 2017

INNOVATION VENTURES, LLC, Plaintiff,
v.
CUSTOM NUTRITION LABORATORIES, LLC, NUTRITION SCIENCE LABORATORIES, LLC, and ALAN JONES, Defendants.

          OPINION AND ORDER GRANTING IN PART AND DENYING IN PART PLAINTIFF'S MOTION FOR PARTIAL SUMMARY JUDGMENT (DKT. 332) AND GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION FOR SUMMARY JUDGMENT (DKT. 328)

          TERRENCE G. BERG UNITED STATES DISTRICT JUDGE

         I. Introduction

         This is a breach of contract case that involves the liquid energy supplement 5-hour ENERGY®. Plaintiff Innovation Ventures, the manufacturer of 5-hour ENERGY®, alleges that, among other things, Defendants Custom Nutrition Laboratories ("CNL"), Nutrition Science Laboratories ("NSL"), and Alan Jones breached an agreement with Plaintiff not to produce energy shots containing ingredients from the Choline Family.

         After several motions to dismiss by Defendants (Dkts. 16, 30, 74, and 78), a previous motion for summary judgment by Defendants (Dkt. 199), the first phase of a bifurcated jury trial (Dkts. Ill. 301-308), and a motion to dismiss Defendants' counterclaims brought by Plaintiff (Dkt. 317), the case is now approaching the second phase of the bifurcated jury trial, and both Plaintiff and Defendants have filed motions for summary judgment. Dkts. 332 (Plaintiffs motion) and 328 (Defendants' motion). For the reasons below, both motions are GRANTED IN PART and DENIED IN PART.

         II. Background

         Plaintiff and Defendants have engaged in aggressive litigation for nearly five years in this Court, after having settled a previous, also ferociously litigated case in the state of Texas. The Court described this unfortunate story of business mistrust and mistreatment in its last summary judgment order, Dkt. 219, and none of the key facts have changed since then, so a summary of those facts will suffice.

         In short, Plaintiff hired CNL to develop a formula for what became 5-hour ENERGY® and to produce bottles of the energy shot that Plaintiff sold in the market. Plaintiff then switched to another supplier. CNL sued Plaintiff in Texas, the parties eventually settled the case, and, as part of the Settlement Agreement, CNL and Alan Jones (CNL's President) agreed not to make energy shots containing ingredients in "the Choline Family."

         CNL then sold its assets to NSL, and, as part of the purchase, NSL agreed to be bound to the Choline Family restriction in the Settlement Agreement between CNL, Jones, and Plaintiff. Alan Jones joined the NSL team, and together NSL and Jones allegedly went ahead and produced energy shots that violated the Choline Family restriction, and sold those energy shots to major retailers around the country.

         Plaintiff sued CNL, as well as NSL and Jones, for breach of contract and a number of other things, and after five years of motion practice and the completion of the first phase of a bifurcated trial, we have arrived at the current stage of this case: cross-motions for summary judgment on issues relating to the second phase of trial.[1]Plaintiffs and Defendants' cross-motions for summary judgment are now before the Court, motions in limine are due tomorrow, and the second phase of the bifurcated trial is a month away.

         III. Standard of Review

         "Summary judgment is appropriate if the pleadings, depositions, answers to interrogatories, and admissions on file, together with any affidavits, show that there is no genuine issue as to any material fact such that the movant is entitled to a judgment as a matter of law." Villegas v. Metro. Gov't of Nashville, 709 F.3d 563, 568 (6th Cir. 2013); see also Fed.R.Civ.P. 56(a). A fact is material only if it might affect the outcome of the case under the governing law. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986). On a motion for summary judgment, the Court must view the evidence, and any reasonable inferences drawn from the evidence, in the light most favorable to the non-moving party. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (citations omitted); Redding v. St. Edward, 241 F.3d 530, 531 (6th Cir. 2001).

         "As the moving parties, the defendants have the initial burden to show that there is an absence of evidence to support [plaintiffs] case." Selhv v. Caruso, 734 F.3d 554 (6th Cir. 2013); see also Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986). Once the moving party has met its burden, the non-moving party "may not rest upon its mere allegations or denials of the adverse party's pleadings, but rather must set forth specific facts showing that there is a genuine issue for trial." Ellington v. City of E. Cleveland, 689 F.3d 549, 552 (6th Cir. 2012).

         IV. Analysis

         Many of the arguments raised in these cross-motions for summary judgment are interrelated, so the Court will address both motions, starting with Plaintiffs motion, and will discuss related issues together.

         a. Plaintiffs Motion for Partial Summary Judgment

         Plaintiff raises four arguments in its motion: (1) Defendants' patent counterclaims fail as a matter of law; (2) Plaintiff is entitled to summary judgment on Count I (breach of the Choline Family restriction); (3) Defendants' breaches of the Choline Family restriction tolled the restriction's duration; and (4) Defendants' duress counterclaims fail as a matter of law.

         i. Plaintiffs argument concerning Defendants' patent-disclosure counterclaims is moot

         As a preliminary matter, Plaintiffs argument that it is entitled to summary judgment on Defendants' patent-disclosure counterclaims, Dkt. 332 Pg. ID 17, 886, is moot; the Court granted Plaintiffs motion to dismiss the counterclaims on April 7, 2017. Dkt. 337. The patent-disclosure counterclaims are no longer pending, so summary judgment on those claims is inappropriate and Plaintiffs motion with respect to this argument is DENIED.

         ii. Plaintiff is not entitled to summary judgment on Count I (breach of Settlement Agreement § 5(c)(i))

         Plaintiff argues that it is entitled to summary judgment on Count I because both NSL and Jones breached § 5(c)(i) of the Settlement Agreement in multiple ways. Dkt. 332, Pg. ID 17, 878. Plaintiff has established that NSL made energy shots containing betaine and Alpha-GPC. Dkt. 332, Pg. ID 17, 878. Jones sold those energy shots on NSL's behalf. Dkt. 332, Pg. ID 17, 878. And NSL and Jones repeated the process at least nine times, with Jones securing agreements by other companies to pay NSL to make the following energy shots, all of which used Choline Family ingredients in violation of § 5(c) (i):

Rock On (Walgreens);
NXT (Walgreens);
Slam (AdvoCare);
Triple f/x (RBC Life Sciences);
Champion Energy (Kiosk Kings);
Winchester Pump Up (Max Professional);
The Energy Shot (GNC);
Up&Up (Weider Global Nutrition);
Members' Mark/Simply Right (Weider Global Nutrition);
Weider High Energy (Weider Global Nutrition);
Kirkland Signature (Costco); and
Shotz (Velocity).

Dkt. 332, Pg. ID 17, 879.

         Plaintiff also argues that Jones breached § 5(c) (i) by helping NSL make the shots. Specifically, Plaintiff submits that Jones: signed contracts as President of NSL; called himself President of NSL; discussed formulations for NSL's energy shots with David Henzler (NSL's chief formula creator); and dealt with other production-related issues such as production readiness, taste-testing, product testing methods, facility inspections, and health department citations. Dkt. 332, Pg. IDs 17, 879-17, 880. And Plaintiff argues that Jones continued to offer to sell energy shots that contained betaine after he left NSL and started working for Universal Nutrition. Dkt. 332, Pg. ID 17, 880.

         Defendants don't deny these allegations. Dkt. 333, Pg. ID 18, 325. Instead, they argue that-although they might have breached § 5(c)(i)-Plaintiff may not secure summary judgment on Count I because Defendants' laches defense could shield them from being held liable for their breaches.[2] Dkt. 333, Pg. ID 18, 324. The laches defense applies, Defendants argue, because Plaintiff delayed filing this lawsuit for three years during which Defendants openly used ingredients that Plaintiff believed were prohibited under the Choline Family restriction's ambiguous "catch-all" language, and Plaintiff now seeks to recover damages it claims accrued in that three-year period. Dkt. 333, Pg. IDs 18, 330-18, 331.

         To support their argument, Defendants submit that:

■ NSL made Rock On using choline bitartrate (which is prohibited by name) from October 2009 until November 2011, and afterwards continued to make Rock On using betaine (which is not prohibited by name, but which Plaintiff believed was covered under the "catch-all" language of the prohibition);
■ NSL made Slam using betaine from October 2009 until NSL stopped all energy shot production in March 2014.
■ Plaintiff knew that both Rock On and Slam were CNL products (Exhibit D to the Settlement Agreement lists both products), and knew or should have known that they contained choline bitartrate or betaine;
■ Plaintiff nevertheless waited three years to file this lawsuit; and
■ The three-year delay prejudiced Defendants because Plaintiff now seeks tens of millions of dollars in damages for products that Defendants developed and sold during the period of delay-products that Defendants could have developed using other chemicals if Plaintiff had filed its lawsuit earlier.

Dkt. 333, Pg. IDs 18, 327-18, 331.

         Plaintiff replies that because it filed its claims within the statute of limitations, laches is inapplicable. Dkt. 338, Pg. ID 20, 517. Plaintiff also argues that there was no delay of the sort laches requires because Defendants have not submitted a specific date on which they claim Plaintiff knew or should have known of their breaches. Dkt. 338, Pg. ID 20, 518. And Plaintiff argues that Defendants have not submitted proof that they were prejudiced by any delay, and that in fact there was no prejudice because, after Plaintiff sued, Defendants denied liability and continued selling products rather than stopping their use of the prohibited ingredients. Dkt. 338, Pg. IDs 20, 518-20, 519.

         Laches is the "negligent and unintentional failure to protect one's rights." Nartron Corp. v. STMicroelectronics, Inc., 305 F.3d 397, 408 (6th Cir. 2002). Under Michigan law, to successfully assert a laches defense, a party must show that there was a passage of time combined with some prejudice to the party asserting the defense. Head v. Benjamin Rich Realty Co., 55 Mich.App. 348, 356 (Mich. Ct. App. 1974). Laches is concerned mainly with the question of the inequity of permitting a claim to be enforced, and depends on whether the plaintiff has exercised due diligence. Sloan v. Silberstein, 2 Mich.App. 660, 676, 141 N.W.2d 332 (1966).

         Defendants have set out their theory of why laches should bar Plaintiff from recovering for breach of Count I. Defendants made and sold some products containing ingredients that the Settlement Agreement explicitly prohibited and others that Plaintiff believed were prohibited, but Plaintiff waited three years after the execution of the Settlement Agreement to file this lawsuit. In the meantime, Defendants-without notice by way of a lawsuit that Plaintiff viewed the products as violating the restrictive covenant-expanded the products they made (which inflated the damages Plaintiff could recover). Had Defendants been on notice of the alleged breach, they argue, they could have initially designed those products not to use prohibited ingredients.

         And Plaintiffs arguments in reply are all without merit. First, Plaintiffs contention that laches are inapplicable because Plaintiff filed its claims within the applicable statute of limitations is incorrect. MEEMIC v. Morris, 460 Mich. 180, 200-201 (1999), the case Plaintiff cites to support its position, does not contain a well-developed discussion of the laches doctrine. More importantly, the case expressly limits its laches holding to "the circumstances of [that] case, " which are not present here or generally in laches case law.[3] Instead, Michigan courts have noted time and again-both before and after Morris-that "laches may bar a legal claim even if the statutory period of limitations has not yet expired." Tenneco Inc. v. Amerisure Mut. Ins. Co., 281 Mich.App. 429, 456-57 (2008) (citing Eberhard v. Harper-Grace Hosp., 179 Mich.App. 24, 35-36 (1989) and Citizens Ins. Co. of America v. Bryant, 216 Mich.App. 217, 228(1996)).

         Second, although Defendants have not explicitly stated the exact day they claim Plaintiff should have discovered the breach, Plaintiff fails to cite a case that requires a party seeking to raise a laches defense to allege an exact date that the other party learned or should have learned there was reason to sue.

         Third, by arguing that Defendants have not shown proof of prejudice, Plaintiff misunderstands the point of Defendants' argument. Defendants' theory is that Plaintiff permitted Defendants to make products that Plaintiff-not Defendants-considered to be breaching products, then sat back, watched the potential damages accrue, and only later sued after Defendants had created the offending product-formulas, set up manufacturing lines, and developed customers. Plaintiff assumes that because Defendants did not immediately stop making and selling products containing betaine and alpha GPC when they were sued after they had been making them for three years, Defendants also would not have stopped if they had been sued at an earlier time. But the entire point of Defendants' argument is that they would have reacted differently because they could have designed the products differently from the outset.

         Defendants have presented enough evidence of their laches defense to create genuine issues of material fact such that Count I must go to a jury. For example, there are issues of fact concerning (1) when Plaintiff learned of the breach, (2) when Plaintiff should have learned of the breach, (3) how long Plaintiff actually delayed in bringing its claim (if at all), and (4) what (if any) prejudice Defendants suffered from any delay. Thus, the Court will rely on a jury "to consider [the] factual disputes in [Defendants'] laches defense, " GMC v. Lanard Toys, Inc., 468 F.3d 405, 421 (6th Cir. 2006), and will then "look at the prejudice to [Defendants] occasioned by the delay" (if any) and will determine whether there was "an intermediate change of conditions that renders it inequitable to allow [Plaintiff] to enforce its rights." Luke v. Home-Owners Ins. Co., 2017 Mich.App. LEXIS 96, at *10 (Ct. App. Jan. 19, 2017). Consequently, Plaintiff is not entitled to summary judgment on Count I, and its motion with respect to this argument is DENIED.

         iii. Plaintiff may not secure tolling of § 5(c)(i)'s duration

         Plaintiff argues that under the doctrine of equitable tolling, Defendants' breaches of § 5(c)(i) tolled the duration of the restrictive covenant because Defendants flouted their obligations under the Settlement Agreement. Dkt. 332, Pg. IDs 17, 880-17, 885. Specifically, Plaintiff argues that Defendants flouted their obligations by:

■ Using choline bitartrate and choline citrate-two ingredients that § 5(c)(i) expressly prohibits;
■ Interchanging Choline Family ingredients with each other, without regard for § 5(c)(i)'s Choline Family prohibition;
■ Denying the true nature of Jones's relationship with NSL;
■ Falsely maintaining that Jones did not work for NSL;
■ Neglecting to tell NSL's chief Energy Liquid formula-tor about the § 5(c) (i) restrictions despite having incorporated the restrictions into the Asset Purchase Agreement by which NSL bought CNL's assets;
■ Jones claiming that he was not individually liable under the Settlement Agreement; and
■ Jones testifying that NSL "could make anything that NSL wanted to" and that he was not concerned about NSL complying with the Settlement Agreement.

Dkt. 332, Pg. IDs 17, 883.

         Plaintiff also argues that § 5(a)(xii) of the Settlement Agreement specifically provides that the duration of the restrictions is extended (or tolled) by the time period of any breach. Dkt. 332, Pg. IDs 17, 884. And Plaintiff contends that any tolling remedy should be in addition to its recovery of monetary damages. Dkt. 332, Pg. ID 17, 884. Indeed, Plaintiff submits that it needs to ...


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