Progressive EMU Inc v. Nutrition & Fitness Inc
MEMORANDUM OPINION AND ORDER denying 81 MOTION for Leave to File a Limited Reply in Support of Motion for Summary Adjudication of Contract Issues filed by Nutrition & Fitness Inc. for reasons noted within; The court suggests that another stab at mediation might now be the order of the day. Signed by Judge William M Acker, Jr on 6/7/13. (SAC )
2013 Jun-07 PM 03:32
U.S. DISTRICT COURT
N.D. OF ALABAMA
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ALABAMA
PROGRESSIVE EMU, INC., f/k/a
JOHNSON EMU, INC.,
NUTRITION & FITNESS, INC.,
CIVIL ACTION NO.
MEMORANDUM OPINION AND ORDER
Before the court are cross-motions for summary adjudication of
disputed contract interpretation issues in the above-entitled case.
Although Progressive Emu, Inc., f/k/a Johnson Emu, Inc., (“Pro
Emu”) concedes that the court only asked for briefs on “the
interpretation of the terms of the [Agreement that] control[s] the
parties’ relationship,” it spends a substantial amount of its time
addressing the merits of the counterclaims of Nutrition & Fitness,
Inc. (“NFI”) and complaining that NFI wrongly withheld documents
during discovery thus far.
It gets ahead of the court by arguing
that NFI breached various terms of the as yet imprecisely defined
This is not what the court had in mind.
March 28, 2013 order is clear. The court instructed the parties to
file briefs and supporting documents on “the issues of contract
interpretation.” The parties agreed that no further discovery was
needed on these issues, so the purpose of the March 28, 2013 order
was to provide a procedure for determining, as a final matter, the
meaning of the contract, after which the parties can go at each
other to obtain whatever evidence they deem necessary for a jury
determination of which party breached which provisions of the now
understood contract, and what, if any, damages resulted.
The court is taking the parties at their word when they both
represent that the contract documents, together with undisputed
evidence on the course of dealings, are unambiguous.
words, the parties have willingly asked this court to establish, as
a binding matter, their intent even while they disagree as to what
that intent was.
NFI asserts that “the Court can adjudicate the
parties’ rights and duties under their written contracts as a
matter of law.”
(Doc. 73 at 1).
Pro Emu says: “The parties agree
that the Agreement is unambiguous.”
(Doc. 80 at 1).
are granting the court the authority to decide which of their
disputed interpretations of an “unambiguous” contract are correct.
They are calling upon the court to assume a unique judicial
When both parties agree that their contract is
“unambiguous,” does it become unambiguous as a matter of law?
ambiguity arguably is transmogrified into the unambiguous.
parties, in effect, have waived their right to a jury trial as to
the meaning of their contract.
The correct interpretation of the
contract is the only task now before the court.
NFI’s motion for leave to file a limited reply, (Doc. 81), is
DENIED because it does the same thing that Pro Emu does, i.e.,
address issues beyond the interpretation of the contract.
file such a brief if and when the court reaches issues beyond what
is now undertakes to resolve.
There is little that the parties don’t dispute in this case
except that the contract is unambiguous.
Some background is
necessary in order to understand the parties’ differing views. Pro
Emu, an Alabama corporation, is in the business of raising emus.
Pro Emu runs an emu farm and sells emu oil that it acquires from
various sources, including the slaughter of birds raised on its
NFI, a North Carolina corporation, manufactures, markets,
products made with emu oil, the main emu-based product being Blue
Marketing, and Operating Agreement (“2003 Sales Agreement” or
subsequently amended, is the subject of this litigation. Under the
Agreement, NFI agreed to purchase emu oil from Pro Emu on certain
terms and conditions.
NFI undertook, either itself or through
third parties, to manufacture, sell, market, and promote certain
products containing the emu oil it was to purchase from Pro Emu.
The Agreement was amended on several occasions during the parties’
their rights and
obligations at issue in this case depend entirely upon the terms of
The parties further agree that, although their
claims of breach may ultimately involve factual disputes that
cannot be resolved at this stage, the terms of the Agreement itself
are sufficiently clear for the court to adjudicate the rights and
obligations of the parties.
It is the court’s intent that its
findings on the construction and meaning of terms of the Agreement
will channel future discovery so as to expedite a final disposition
of the controversy.
Discussion of the Contract Terms
Under Article 2 of the Georgia Commercial Code,2 contract
interpretation can involve as many as three steps.
The 2003 Sales Agreement was first amended on January 1,
2004, by an agreement captioned “Amendment No. 1 to Sales,
Marketing, and Operating Agreement” (“First Amendment”) and again
on August 1, 2005, with an agreement captioned “Addendum to Sale,
Marketing, and Operating Agreement” (“Second Amendment”) and
again on April 18, 2006, with an agreement captioned “Addendum to
Sales, Marketing, and Operating Agreement” (“Third Amendment”)
and again on March 11, 2008, with an agreement captioned “Fourth
Amendment to Sales, Marketing, and Operating Agreement” (“Fourth
Amendment”). The 2003 Sales Agreements and the amendments
thereto are collectively referred to as the “Agreement.”
It is conceded that Georgia law governs the Agreement.
(Nov. 5, 2012 Order, Doc. 45); see Agreement ¶ 9.4.
Specifically, because the Agreement relates predominately to the
sale of goods, emu oil, emu fat, and products containing emu oil,
the agreement is governed by Article 2 of the Georgia Commercial
Code. Heart of Texas Dodge, Inc. v. Star Coach, LLC, 567 S.E.2d
61, 63 (Ga. Ct. App. 2002) (“When the predominant element of a
contact is the sale of goods, the contract is viewed as a sales
contract and the UCC applies . . . .”).
court must determine whether the contract language is unambiguous
and complete. If contract language is unambiguous and complete, as
according to its terms.
court must enforce
GA. CODE ANN. § 11-2-202; Sage Tech., Inc.
v. NationsBank N.A. South, 509 S.E.2d 694, 697 (Ga. Ct. App. 1998).
If there are no ambiguities and no missing necessary terms, the
contract alone is looked to for its meaning.
Golden Peanut Co. v.
Hunt, 416 S.E.2d 896, 898 (Ga. Ct. App. 1992) (“[W]hile . . . § 112-202
supplemented by usage of trade evidence, it does not allow the use
Georgia law explains that “[w]here the language of
reasonable interpretation, no other construction is permissible.”
Golden Peanut Co., 416 S.E.2d at 899.
Only when a contract is ambiguous or incomplete in some
material respect, will the court take the second step and apply
rules of contract construction, looking beyond the four corners of
GA. CODE ANN. § 11-2-202; see Golden Peanut Co., 416
S.E.2d at 899 (explaining that a party may not use parol evidence
to contradict clear, unambiguous contract language).
Commercial Code provides that a final, written contract, such as
may be explained or supplemented:
(a) By course of dealing or usage of trade (Code Section
11-1-205) or by course of performance (Code Section 22-1208); and
(b) By evidence of consistent additional terms unless the
court finds the writing to have been intended as a
complete and exclusive statement of the terms of the
GA. CODE ANN. § 11-2-202 (emphasis added). Extrinsic evidence of the
performance may be used to explain or supplement a contract.
Allapattah Servs., Inc. v. Exxon Corp., 333 F.3d 1248, 1261 (11th
Cir. 2003) (examining this concept under the Uniform Commercial
interpretation, some ambiguity remains, a jury must decide what the
parties intended, that is, assuming that the parties reached a
meeting of the minds, something both of these parties concede. Cf.
Shirley, 699 S.E.2d at 619.
The parties here take away the
possibility that there was no meeting of the minds.
Pro Emu’s Duty to Supply Emu Oil to NFI
NFI asks the court to find that the Agreement requires Pro Emu
to use all reasonable efforts in good faith to supply NFI’s orders
construction of the provision of the Agreement that describes Pro
Emu’s duty in this regard, but reminds the court that the Agreement
is an “exclusive dealings” contract as defined in Article 2 of the
Georgia Commercial Code.
NFI does not quarrel with the Pro Emu’s
concept of exclusivity.
Unless contracting parties otherwise
agree, “exclusive dealings” sales contracts always impose “an
[contracted for] goods.”
GA. CODE ANN. § 11-2-306(2).
efforts” standard is unambiguously memorialized in the parties’
following contract language:
NFI will provide [Pro Emu] with at least thirty (30) days
written notice prior to the required delivery date.
Notwithstanding the thirty (30) day notice, [Pro Emu]
will use its best efforts to fulfill all orders as
quickly and as reasonably as possible. . . .
Agreement ¶ 2.2 (emphasis added).
Under this provision, NFI must
provide Pro Emu with at least thirty days notice prior to a
proposed delivery date.
But, even if less notice is provided, Pro
Emu is nevertheless required to use its best efforts to fulfill
NFI’s orders as quickly and as reasonably as possible.
There is no
doubt over the parties’ intent to impose a “best efforts” standard
on Pro Emu to fulfill NFI’s orders.
The Agreement, however,
requires NFI to give Pro Emu thirty days notice prior to an
Even if NFI notifies Pro Emu of a need one day
delivery date, Pro Emu must do its “best” to fill the order,
whatever its “best” may be.
Disputes over what constitutes “best
efforts” under differing circumstances will inevitably present a
jury question if the litigation goes the distance.
reasonable diligence as well as good faith in [its] performance of
Flynn v. Gold Kist, Inc., 353 S.E.2d 537, 339 (Ga.
Ct. App. 1987) (quoting GA. CODE ANN. § 11-2-306 Official Comments)
(emphasis added). “Diligence” is defined as “a continual effort to
BLACK’S LAW DICTIONARY (9th ed. 2009).
Emu was therefore required to use all reasonable efforts in good
faith to fulfill NFI’s orders for emu oil.
2. NFI’s Remedy for Any Failure by Pro Emu to Supply Emu Oil
Section 2.2 of the Agreement contains a limitation upon NFI’s
remedy in the event of a failure by Pro Emu to fulfill an order.
This section provides, in part:
In the event that [Pro Emu] is unable to supply any order
within sixty days (60) days following the order date, NFI
shall have the right, notwithstanding the terms of
Section 1.4 of this Agreement, to order emu oil from a
third party; provided, however, that at such time as [Pro
Emu] provides reasonable evidence to NFI that it can
supply NFI with its requirements, NFI shall have no
further right to purchase emu oil from third parties
unless [Pro Emu] shall again become unable to supply
NFI’s requirements. NFI shall not place orders for emu
oil in quantities greater than are reasonably expected to
be needed to allow its contract manufacturer to maintain
on hand an inventory of emu oil reasonably expected to be
required to fulfill its requirements for sixty (60) days.
The remedies provided by this Section 2.2 shall be NFI’s
exclusive remedies for any failure by [Pro Emu] to
provide the quantities of emu oil required by NFI
This section recognizes that, under limited
circumstances, NFI will have the right to purchase emu oil from a
supplier other than Pro Emu, despite the Agreement’s “exclusivity”
The parties disagree about (1) what circumstances can
trigger this limitation on NFI’s remedies, and (2) what breaches by
Pro Emu are not subject to the limitation on NFI’s remedies.
Pro Emu argues that the contract language makes NFI’s only
remedy for any failure by Pro Emu to fulfill NFI’s purchase orders
interpretation of ¶ 2.2 is overly broad and self-contradicting.
The last sentence in ¶ 2.2 cannot be read in isolation to impose a
circumstance in which there is a failure by Pro Emu to supply emu
As discussed supra, ¶ 2.2 requires that Pro Emu use “its best
efforts to fulfill all orders as quickly and as reasonably as
Therefore, only failures to supply emu oil after Pro
Emu has given its best efforts and has been unsuccessful in meeting
NFI’s need are covered by the remedy restriction.
Pro Emu’s proposed construction would lead to incongruent
As Pro Emu would have it, Pro Emu, as seller, would be
permitted to refuse to supply any order, even in bad faith, and
construction would effectually eliminate Pro Emu’s duty “to use
best efforts to fulfill all orders as quickly and as reasonably as
Furthermore, the Agreement states that Pro Emu “will
supply NFI’s requirements for emu oil needed for the manufacturing
of Emu products,” and that “NFI shall use exclusively emu oil from
[Pro Emu] in all products that it manufactures or sells that
contain emu oil.”
Agreement ¶¶ 1.1, 1.4.
To interpret ¶ 2.2 as
Pro Emu proposes would negate the exclusive dealings relationship
that serves as a core reason for the Agreement in the first place.
provision is to be given effect and interpreted so a to harmonize
with the others.”
S. Point Retail Partners, LLC v. N. Amer.
Properties Atlanta, Ltd., 696 S.E.2d 136, 139 (Ga. Ct. App. 2010).
Pro Emu’s proposed construction would frustrate this first tenant
of contract construction.
Considering the Agreement as a whole,
its plain language requires that the limitation on NFI’s remedy in
¶ 2.2 applies only when Pro Emu, after using its “best efforts,” is
unable to supply an order within sixty days.
Therefore, if Pro Emu
has the ability to supply an order for emu oil within sixty days
limitation on NFI’s remedy would not apply.
The limitation does
apply to any failure by Pro Emu to provide the quantities of emu
oil required by NFI under ¶ 2.2.
The limitation on NFI’s remedy
does not apply to any breaches of the Agreement that do not involve
fulfilling orders for emu oil.
The Parties’ Responsibility for Payment of Marketing and
The parties dispute the extent of NFI’s obligations for the
payment of expenses related to the marketing and promoting of Blue
Emu products manufactured by NFI using Pro Emu’s oil. NFI contends
that it is responsible only for the payment of its own advertising
expenditures, and is not responsible for any of the promotional
expenditures of third-party retailers.
Pro Emu contends that NFI
is responsible for the payment of all expenditures related to the
amounts spent by third-party retailers.
This disagreement stems
from the following language in the Agreement:
Paragraph 1.5 of the Agreement states:
NFI agrees that all marketing or promotional activity
undertaken by it in order to market or promote the Emu
Products shall be at NFI’s expense. . . .
NFI points out that the word “it” can only refer
to NFI, and, therefore that the Agreement limits its financial
obligation for marketing and promotional activity to those that NFI
There is no provision in the Agreement that
expressly addresses whether either party is responsible for the
costs of advertising, marketing, or other promotional activities
promotional efforts that result from agreements between NFI and its
mass market retailers is covered by the language “all marketing or
promotional activity undertaken by [NFI]” would be unclear but for
the fact that both parties say that it is clear.
The court cannot
amend the parties’ contract to place an obligation on NFI that both
parties knew would call for expenditures of promotional money if
their contract was to generate a profit.
Pro Emu explains that mass market retailers control how
advertising is done, and that they routinely pass along advertising
expenses to their suppliers, such as NFI, as a deduction from gross
On this basis, Pro Emu contends that whether NFI pays an
advertising agency or a mass market retailer for marketing and
responsible for all advertising.
In isolation, Pro Emu’s position
makes sense and is not unreasonable.
This, however, is not how the
parties have treated the obligation.
If, arguendo, the Agreement is unclear on this item, the court
can and will consider undisputed parol evidence to explain its
GA. CODE ANN. ¶ 11-2-202.
The most persuasive type of
parol evidence is the parties’ “course of performance,” that is,
the parties’ conduct pertinent to the contract term in question.
On “course of performance,” the Georgia Commercial Code provides:
Where the contract for sale involves repeated occasions
for performance by either party with knowledge of the
nature of the performance and opportunity for objection
to it by the other, any course of performance accepted or
acquiesced without objection shall be relevant to
determine the meaning of the agreement.
GA. CODE ANN. § 11-2-208(1). NFI points out that over the course of
eight years Pro Emu did not call upon NFI to pay for marketing and
NFI contends that, most of the time (if not all of the
time), there were no actual marketing or promotional efforts by
retailers underlying these charges. Instead, NFI characterizes
these charges as non-negotiable, standard costs of doing business
with large mass market retailers.
instead has treated the charges as deductions from revenue.
further points out that over the course of the parties’ eight year
relationship Pro Emu has never complained about this practice.
The express terms of a contract and any parol evidence used in
its interpretation must be construed so as to be consistent with
Id. at § 11-2-208(2).
When the express terms of the
contract and parol evidence are not consistent, the express terms
of the contract control.
The course of performance here is
consistent with the language of the contract, and certainly is not
contradictory to it.
If the course of performance is used to
explain or supplement the contract, such course of performance will
control both over course of dealings (prior dealings between the
parties) and usage of trade (standard practices or methods in the
Id. at §§ 11-2-208(2) and 11-1-205.
Over the course of eight years, these parties treated thirdparty
“discounts,” discussed infra).
Pro Emu has never claimed that the
alleged “advertising” deductions on the monthly statements were
NFI’s responsibility under the Agreement.
Pro Emu contends that
the court cannot consider course of performance to modify the
The court is not in any way “modifying” the Agreement.
“Course of performance” may be used to explain the meaning of a
contract term, so long as it does not contradict the contract’s
GA. CODE ANN. § 11-2-202(a).
That is precisely
the situation here.
Under ¶ 1.5 of the Agreement, NFI is financially responsible
undertakes in order to market or promote the Blue Emu products.
Based on the literal language of the Agreement, even without using
the parties’ course of performance, this obligation does not
include marketing or promotional efforts undertaken by third-party
retailers or any standard cost of doing business with mass market
The marketplace will have to be the place where it is
decided what entity or entities bear the costs of any advertising
not directly contracted for by NFI.
The Definition of NFI’s “Total Revenues Received” and
The parties dispute the meaning of the terms “NFI’s total
revenue received” and “discounts,” which are used in ¶ 2.4 of the
Agreement to describe amounts necessary for the calculation of
NFI’s royalty payments to Pro Emu. Subparagraph 2.4(a) states that
NFI will make a royalty payment of a specified percentage of “NFI’s
total revenue received” from product sales, “net discounts and
In relevant part, § 2.4 provides:
In addition to the purchase price of the emu oil provided
for in Section 2.3, NFI shall pay [Pro Emu] an overriding
royalty payment as follows:
(a) Super Strength Blue Emu Cream. Eight percent (8%) of
NFI’s total revenue received from the sale of Super Blue
Emu Cream or any similar product, net of discounts and
refunds (“Net Revenues”);
Five percent (5%) of NFI’s Net
Revenues from sales of all products other than Super
Strength Blue Emu Cream sold by NFI containing emu oil.
Pro Emu argues that NFI’s “total revenue received” includes
third-party retailer promotional and advertising expenses and that
such expenses are not to be deducted from “total revenue received”
as “discounts” in order to calculate royalty payments.
Emu’s proposed construction, these charges would be included in the
“net revenues” from which the royalty is calculated.
that the plain language of the Agreement, plus the parties’ course
advertising expenses not be included in “total revenue received”
because they are not “received;” and/or (2) that such expenses
should be deducted as “discounts” because they fit the ordinary
definition of the word “discount.”
It is clear from the plain language of the Agreement that
third-party retailer marketing and promotional charges are not part
of “net revenue.” It is not facially clear, however, whether these
charges are to be excluded from “total revenue received” or are to
be deducted from “total revenue received” as a “discount.”
NFI argues that these charges are not “received,” so that they
cannot be included in the calculation of “total revenue received.”
As Pro Emu points out, however, “discounts” are not “received,” but
are included in “total revenue received” before they are later
While the court sees why the parties could have wanted
differently, there is no language or extrinsic evidence to support
treating these retailer charges differently.
relationship, it is undisputed that third-party retailer marketing
and promotional charges were treated as deductions or “discounts”
from the “total revenue received.”
These charges were treated the
same way as slotting expenses, product returns, and any number of
non-negotiable charges that third-party retailers imposed. This is
firmly evidenced by a July 2003 email that a NFI representative
sent to Pro Emu explaining how it was calculating royalty payments.
The email stated, in part:
Obviously, this is a billing report and not a net sales
report. There will be account advertising and promotional
expenses, slotting expenses, product returns, product
damage and any of a number of things that retailers can
find to make deductions reduced from these numbers prior
to reconciling your commissions. However, this will give
you an idea of what to expect for monthly commissions.
Pro Emu admits that it received this email and did not respond to
it or otherwise inform NFI that it was handling the account
Furthermore, since the Agreement was executed in 2003, NFI has
provided Pro Emu with monthly written statements that included the
“total revenue received” from all retailers for sales of emu oilbased products.
The monthly statements also listed the type and
amount of each deduction made by retailers and the total amount of
These monthly reports included retailer charges for
“coupons,” “advertising,” and “promotion,” among other things. Pro
Emu did not object to how NFI was calculating royalty payments
until August 19, 2011, eight and a half years after the effective
date of the Agreement.
Neither the language of the Agreement nor the parties’ course
of performance supports treating third-party retailer charges for
“Discount” is defined as “a reduction made from the
DICTIONARY 361 (1983).
WEBSTERS NINTH COLLEGIATE
The parties have treated the third-party
retailer marketing and promotion charges in precisely this way.
Under the Agreement, as explained by the parties’ over eight year
course of performance, third-party retailer charges for advertising
and promotions are “discounts” as used in ¶ 2.4. This construction
is also consistent with the construction of the obligation for
promotional expenses discussed supra, finding that NFI shall bear
only its advertising expenses.
5. Nature and Scope of NFI’s Rights of Exclusivity
The parties dispute whether the Agreement permits Pro Emu to
sell emu oil, emu fat, or products containing emu oil to parties
other than NFI not in the “Mass Retail Market.”4
position is that it can sell emu oil, emu fat, and products
containing emu oil to anyone so long as the buyer is not in the
Agreement, including its amendments, requires Pro Emu first and
foremost to meet NFI’s supply needs.
NFI contends that only after
NFI’s supply needs are met, can Pro Emu sell emu oil or emu fat to
third parties, that is, if NFI consents to such sale or declines to
buy the excess oil or fat itself.
NFI concedes that Pro Emu can
sell “products containing emu oil” (as contrasted to emu oil or emu
fat) to certain third parties without NFI’s consent.
Under the original Agreement, NFI agreed to purchase emu oil
exclusively from Pro Emu.
2003 Agreement at ¶ 1.4(a)(b).
exclusivity is reciprocal.
Pro Emu was not permitted to sell emu
oil to any third party, except for purposes of winding down certain
contracts under which Pro Emu was providing emu oil to thirdparties and to renew such contracts only with approval from NFI.
Id. at ¶¶ 3.1, 3.2.
With certain exceptions to be discussed infra,
The Agreement defines “Mass Retail Market” as “all national
drug store chains, national supermarket chains, mass market
discount retailers and club retailers (e.g., Sams Club, Price
Club, Costco). The Mass Retail Market shall not include (I)
direct sales . . . (ii) sales to specialty stores (even if they
are national chain specialty stores), health clubs, spas, local
grocery store and drug store chains, independent retailers or any
other outlet outside the Mass Retail Market. . . . First
Agreement at ¶ 3.1.
approval from NFI is also required if Pro Emu wants to enter into
any new contracts to sell emu oil to any third party.
original Agreement, Pro Emu could only sell emu oil (1) to NFI, and
(2) to Pro Emu’s then-existing customers with a winding-down to
take place so that NFI would shortly thereafter become Pro Emu’s
A year after the original agreement was executed, the parties
Pro Emu takes the position that ¶ 3.1 of the First
Amendment to the Sales Agreement now permits Pro Emu to sell emu
oil to third parties.
Paragraph 3.1 provides:
Notwithstanding anything to the contrary contained in
this section 3, [Pro Emu] shall have the right to
develop, manufacture, distribute, market, advertise and
sell products, or to contract with others to develop,
manufacture, distribute, market, advertise and sell
products containing emu oil supplied by [Pro Emu] in
markets other than the Mass Retail Market. . . .
First Amendment at ¶ 3.1 (emphasis added).
Pro Emu’s expansive
interpretation of this provision is contrary to common sense. This
section is only meant to address Pro Emu’s right to sell “products
containing emu oil.”
Pro Emu’s right to engage in a business that
only involves products that do not contain emu oil did not need and
does not need protecting. Pro Emu can manufacture and sell widgets
if it wants to, without NFI’s consent, and even in the Mass Retail
This provision precludes Pro Emu and its contractors from
selling emu oil-based products to the “Mass Retail Market,” an
action that would be in direct competition with NFI.
Market” is a term well understood by the parties.
Pro Emu concedes
that it must provide NFI with the right of first refusal if Pro Emu
develops an emu-based product that it believes to be appropriate
for the Mass Retail Market.
Paragraph 3.1 continues:
If [Pro Emu] or any party it contracts with develops a
product that the owner of the product believes is
appropriate for distribution in the Mass Retail Market,
NFI will be offered a right of first refusal to
distribute such product in the Mass Retail Market. . . .
Simply put, this paragraph addresses the nature
and scope of the parties’ rights regarding products containing emu
The First Amendment does not authorize Pro Emu to sell to
third parties emu oil or fat, as distinguished from a product made
from emu oil or fat.
How Pro Emu can control third parties who may
develop an emu oil-based product appropriate for the Mass Retail
Market and can guarantee NFI first refusal on the marketing of such
a third-party produced product is not a question before the court.
It is a provocative question that will have to await another
lawsuit, hopefully assigned to another judge.
Pro Emu is suggesting that the court ignore the plain language
of ¶ 3.1, and instead, should rely on the recitals to the First
Amendment, which provide, in part, that “[t]he parties desire that
the Agreement be amended to allow [Pro Emu] to sell emu oil to
parties other than NFI who will, market, distribute and sell
products containing emu oil in markets other than the mass market
The court cannot overlook or avoid the overriding language of
the operative provisions of the Agreement that specifically limit
Pro Emu’s rights to products containing emu oil based on the one
phrase in the contract’s recitals, which also includes multiple
references to “products containing emu oil.”
Parties’ recitals as
to why they are entering into a contract do not control or alter
the operative language of the contract.
See Mun. Gas Auth. of Ga.
V. Teton Fuels Mid-Ga., LLC., No. 1:06-cv-186, 2008 WL 6690030, at
*10 n.11 (N.D. Ga. Mar. 26, 2008) (citing Rosenberg v. Rosenberg,
208 S.E.2d 824, 825 (Ga. 1974)).
The Fourth Amendment to the Agreement supports the court’s
construction by specifically addressing the parties’ rights in
regards to emu oil and emu fat.
The relevant part states:
Except as provided by Section 1 of the First Amendment,
[Pro Emu] shall not market, sell or distribute emu oil
or emu fat to any third party without the express consent
of NFI. Notwithstanding the forgoing, in the event NFI
determines in its reasonable discretion that it cannot or
will not use emu oil or emu fat [Pro Emu] has available
for purchase, NFI shall notify [Pro Emu] and [Pro Emu]
shall then be free to sell such excess emu oil or emu fat
to a third party.
Fourth Amendment at ¶ 3 (emphasis added).
The opening phrase
“[e]xcept as provided by Section 1 of the First Amendment,” is
referring to the exception to exclusivity that allows Pro Emu to
sell products containing emu oil, discussed supra.
quoted language, then, provides that Pro Emu may not market, sell,
or distribute emu oil or emu fat to third-parties, with two
exceptions: (1) that Pro Emu can sell emu oil and emu fat to a
third-party either with the express consent of NFI, or (2) “in the
event NFI determines in its reasonable discretion that it cannot or
will not use emu oil or emu fat that [Pro Emu] has available for
Under the second exception, “NFI shall notify [Pro
Emu] and [Pro Emu] shall then be free to sell such excess emu oil
or fat to a third party.”
Of course, what constitutes
“reasonable discretion” is as loosy goosey as what constitutes
NFi is obligated to be “reasonable” in its
There would have been no need to carve out these exceptions if
Pro Emu were permitted to sell emu oil or emu fat to third parties
prior to the execution of the Fourth Amendment or after the Fourth
ignores the unambiguous language of the Agreement and ignores the
bargained-for exclusivity of the arrangement.
Under the First
contrasted to emu oil or emu fat) to third party retailers not in
the Mass Retail Market without NFI’s consent.
The Agreement, as
amended, requires Pro Emu to first meet NFI’s supply needs for emu
oil and emu fat.
Once NFI’s supply needs are met, Pro Emu can sell
emu oil or emu fats to third parties if (1) NFI consents or (2) NFI
declines to buy the oil or fat itself.
Pro Emu is not obligated to
scale down its operations so as to meet only the needs of NFI.
The Nature of the Parties’ Relationship: Independent
Contractors or Joint Ventures
Paragraph 9.1 provides:
The relationship of [Pro Emu] and NFI is that of
independent contractors. Nothing in this Agreement shall
be construed to create any other type of relationship. .
It does not take the parties’ mutual agreement
that no ambiguity exists for the court to find that there is no
ambiguity in this provision.
Pro Emu and NFI are independent
contractors, not partners in a joint venture. Any reference to the
parties’ relationship as a joint venture in their Letter of Intent
The Letter of Intent was expressly cancelled and
superseded by the Agreement.5
2003 Sales Agreement at ¶ 9.10.
Even if the parties had not included ¶ 9.1 in the Agreement,
the court’s conclusion would be the same.
Under Georgia law, “[a]
joint venture ‘arises where two or more parties combine their
property or labor, or both, in a joint undertaking for profit, with
rights of mutual control.”
Rossi v. Oxley, 495 S.E.2d 39, 40 (Ga.
1998) (quoting Kissun v. Humana, 479 S.E.2d 751 (Ga. 1997)).
Pro Emu repeatedly refers to the 2002 Operating Agreement
Letter of Intent as the “2002 Operating Agreement.” This is
misleading. By their nature letters of intent are temporary and,
as is the case here, are routinely cancelled and superseded by
the official contract, here the 2003 Sales Agreement.
essential elements of a joint venture are “(1) a pooling of action;
(2) a joint undertaking for profit; and (3) rights of mutual
control.” Hillis v. Equifax Consumer Servs., Inc., 237 F.R.D. 491,
relationship between Pro Emu and NFI lacks these elements.
Under the Agreement, Pro Emu and NFI retain control over their
Pro Emu lacks control over NFI or its
operations related to the sale of Blue Emu products, and NFI has no
control over Pro Emu’s raising, slaughtering, and processing of emu
birds for oil.
The parties conduct their businesses totally
separately and independently from one another.
Nothing in the
Agreement gives either party control over any part of the other
party’s internal operations.
Further, the Agreement does not
provide for the parties to share in each other’s profits.
contrary, the Agreement, as amended, specifically provides that NFI
is to pay Pro Emu a royalty based on sales as opposed to a share of
The payment of a royalty is not the same as sharing
The express terms of the Agreement and the relationship of the
parties in operation prove that Pro Emu and NFI were independent
contractors, not parties in a joint venture.
The Meaning of a Barrel of Emu Oil
NFI asks the court to give definition to the term “barrel” as
used in the Fourth Amendment to the Agreement.
The 2003 Sales
Agreement set the price of emu oil at a fixed per gallon price.
March 2008, the Fourth Amendment changed the pricing from per
gallon to per barrel, but did not define “barrel.”
NFI, this issue became a matter of disagreement after the Fourth
Amendment was executed.
NFI claimed at that time that a barrel was
55 gallons of emu oil while Pro Emu claimed that a barrel was 52.65
gallons of emu oil.
The parties thereupon agreed that going
forward NFI would accept barrels with only 52.65 gallons of emu oil
in exchange for Pro Emu’s agreeing to reduce the price of a barrel
of emu oil to reflect the difference between 55 gallons and 52.65
The parties did not agree as to how the term “barrel”
should be defined for the period of time after the Fourth Amendment
was executed, or for the time before the interim oral mutual
concession was reached.
The Agreement does not disclose what the parties meant by a
“barrel” of emu oil.
NFI proposes the usage of the trade as
defining evidence that “barrel” means 55 gallons.
term “barrel” is a standard term in the emu oil supply business.
The American Emu Association (AEA) has a Trade Rule which defines
a barrel of emu oil.
This rule, No. 105, provides that a barrel of
emu oil is 55 gallons unless the parties expressly agree otherwise.
There is no such express agreement
The standard rule
provides that emu oil is sold on a net weight basis in pounds and
that the unit weight is 7.6 lbs./gallon.
The unit of sale may be
a drum, a barrel, or a five gallon pail.
Unless the parties agree
otherwise, a steel drum is said to weigh 418 lbs.
drum weighing 418 lbs. contains 55 gallons of emu oil.
7.6 lbs per gallon = 55 gallons).
(418 lbs /
The terms “drum” and “barrel”
are used interchangeably.
assertion that the contract calls for a barrel of emu oil to be
demonstrated by NFI.
For the time periods in question, a “barrel”
of emu oil is 55 gallons.
The Quantity of Emu Oil that NFI is Permitted to Order
Pro Emu asks the court to find that “NFI is not permitted to
purchase emu oil from Pro Emu for resale, to store, or for any
purpose other than in the manufacture of products containing emu
The court grants this request from Pro Emu because its
interpretation only paraphrases ¶ 2.2 of the 2003 Sales Agreement,
NFI shall not place orders for emu oil in quantities
greater than are reasonably expected to be needed to
allow its contract manufacturer to maintain on hand an
inventory of emu oil reasonably expected to be required
to fulfill its requirements for sixty (60) days.
Whereas under ¶ 2.2 of the original Agreement NFI only had the
right to purchase emu oil in a quantity sufficient to provide a
sixty day inventory for its reasonably expected requirements, NFI
argues that the Fourth Amendment expanded its right to purchase emu
Section 3 of the Fourth Amendment provides in relevant part:
Notwithstanding the foregoing, in the event NFI
determines in its reasonable discretion that it cannot or
will not use emu oil or emu fat [Pro Emu] has available
for purchase, NFI shall notify [Pro Emu] and [Pro Emu]
shall then be free to sell such excess emu oil or emu fat
to a third party.
NFI argues that this language gives it the right of first refusal
to buy any and all emu oil from Pro Emu that Pro Emu has available
for sale before Pro Emu can sell it to third-parties.
contends that this right necessarily implies that it is permitted
to demand emu oil and emu fat from Pro Emu beyond the amounts
anticipated in the 2003 Agreement.
There is no history reflecting how the parties have treated ¶
For instance, there is no evidence, disputed or not, about
whether NFI has ever informed Pro Emu that it will not need emu oil
or emu fat that Pro Emu has available for sale, and what Pro Emu’s
response was to any such notice.
The issue apparently has not come
This does not mean, of course, that it will never come up.
There is no evidence as to which party drafted the contract
language under consideration, so that contra proferentem is not
available as a rule of construction.
But drafting a “right of
first refusal” does not call for Professor Williston’s fine hand.
If the parties had intended to give NFI a right to purchase any and
all of Pro Emu’s emu oil before Pro Emu can sell it to another, the
parties could easily have said so, and would surely have said so.
elsewhere in the Agreement.
Pro Emu is not chain-bound to NFI.
Only if NFI notifies Pro Emu that it wants to purchase a particular
amount of Pro Emu’s excess oil before Pro Emu sells it to another
is Pro Emu prohibited from selling it to others.
The burden of
taking action to stop Pro Emu from selling to another is on NFI.
Put another way, as long as Pro Emu has not received an order from
NFI to purchase more than its guaranteed regular order, Pro Emu can
sell to a third-party any oil that would not interfere with its
obligation to supply NFI’s regular orders. Pro Emu is not required
to maintain an inventory subject to all possible future demands of
NFI’s proposed construction of this provision goes beyond
Pro Emu’s contention that ¶ 3 leaves it free to sell its
emu oil and fat to third parties if it produces more than it takes
to fulfill NFI’s needs makes sense.
Accordingly, from January 1,
2003 until March 10, 2008, NFI was not permitted to place orders
for emu oil in quantities greater than could reasonably be expected
to be needed to fulfill its requirements for sixty days.
March 11, 2008 to the present,
Pro Emu was free and is now free to
sell its emu oil and emu fat to third parties unless NFI, in an
exercise of its reasonable discretion, first notifies Pro Emu in
writing that it will not use emu oil and emu fat beyond the amount
expressly contemplated in the 2003 Agreement. The burden of taking
this action to obligate itself in order to stop Pro Emu from
selling to others is on NFI.
Claimed Contract Rights to Joint Ownership of the BLUE
The parties dispute whether the Agreement gives Pro Emu and
NFI joint ownership in the BLUE EMU trademark.
Pro Emu points out
that the 2002 Letter of Intent6 which preceded the 2003 Agreement
provides that the parties would jointly own the BLUE EMU trademark
and contends that this joint ownership arrangement became an
integral part of the Agreement.
NFI contends, to the contrary,
that it is the sole owner of the BLUE EMU trademark because the
registered the BLUE EMU trademark without objection by Pro Emu.
Paragraph 2 of the parties’ 2002 Letter of Intent provides
that “NFI and [Pro Emu] will jointly own any current and future
trademarks of products that contain [Pro] Emu Oil.” This Letter of
Intent, however, was replaced and superceded by the 2003 Sales
Agreement, which states:
This Agreement . . . constitutes the entire agreement
between the parties and supersedes and cancels any and
all prior agreements, written or oral, between them
relating to the subject matter hereof, including, without
limitation, that certain [Pro Emu]-NFI Operating
As it has done throughout its briefing, Pro Emu refers to
the parties’ “2002 Operating Agreement Letter of Intent” as the
“2002 Operating Agreement.” It is undisputable that this
agreement is the Letter of Intent that preceded, and was
explicitly superseded by, the 2003 Sales Agreement. Pro Emu’s
attempt to restyle this agreement does not change its nature and
Agreement Letter of Intent between the parties dated May
¶ 9.10 (emphasis added).
Pro Emu’s claim to partial ownership of
the BLUE EMU trademark is ineffectual because the Letter of Intent
was superseded in 2003.
Pro Emu could have insisted otherwise. If
it had done so, no one knows whether its insistence upon joint
ownership would have created an insurmountable obstacle to the
Agreement or the Agreement would have contained the language Pro
Emu wants the court now to insert.
If there were any doubt about
the parties’ intent on this subject, Pro Emu has never objected to
NFI’s claim of ownership of the trademark or asserted that it had
any type of ownership interest during the parties’ eight year
agreement between the parties provides for joint ownership of the
BLUE EMU trademark.
The court will briefly recapitulate its foregoing findings and
determinations with respect to the intent of the parties in the
2003 Sales Agreement and its amendments, as follows:
1. Paragraph 2.2, imposes a “best efforts” standard.
is required to use all reasonable efforts in good faith to fulfill
NFI’s orders for emu oil.
This leaves a wide open door for
disagreement between the parties that will not end until after a
prolonged jury trial in which NFI will have the burden of proving
that Pro Emu did not use its best efforts.
The dispute has, thus
far, been heated enough even to predict an eventual trip to
2. The limitation on NFI’s remedy in ¶ 2.2 applies only when
Pro Emu, after using its “best efforts,” is unable to supply an NFI
order within sixty days. Also, this limitation applies only if Pro
Emu fails to provide the quantities of emu oil actually needed by
It does not apply to any breaches of the Agreement that do
not involve supplying emu oil.
NFI is only responsible for the marketing and promotional
activity that it undertakes in the marketing and promoting of Blue
of its pocket.
In other words, it can decide how much to spend out
Marketing and promotional activity undertaken by
third-party retailers is only implicated to the extent that it is
a factor in computing “net revenue” as “discounts.”
4. Third-party retailer marketing and promotional charges are
not part of “net revenue” but rather are “discounts” as the said
terms are used in ¶ 2.4
5. Pro Emu can sell products containing emu oil to retailers
outside of the Mass Retail Market.
Pro Emu must supply NFI’s
legitimate needs for emu oil and emu fat.
Once NFI’s needs are
met, Pro Emu can sell emu oil and emu fat to third parties (1) if
NFI consents, or (2) if NFI does not notify Pro Emu that it will
buy Pro Emu’s excess emu oil or emu fat itself.
6. Pro Emu and NFI are independent contractors.
7. A “barrel” of emu oil is 55 gallons.
8. From January 1, 2003 until March 10, 2008, NFI was not
permitted to place orders with Pro Emu for emu oil in quantities
requirements for sixty days.
From March 11, 2008 until the
present, NFI could order, and can now order, any amount of emu oil
and emu fat that Pro Emu has available for sale if it gives Pro Emu
notice of its desire before the excess is sold by Pro Emu to
9. The Agreement between the parties does not diminish NFI’s
sole ownership of the Blue Emu trademark.
* * *
The court does not expect the parties to lay down their arms
and embrace each other in view of these findings and conclusions
about their Agreement’s meaning, but the court does suggest that
another stab at mediation might now be the order of the day.
was the dispute over the rights and obligations of the parties that
Unless the parties agree to mediation within fourteen
(14) days, they will be free to engage in discovery of the evidence
they will need to prove alleged breaches and the remedies for any
Unless the parties can agree to mediate and on
deadlines to complete discovery and filing dispositive motions, the
court will fix a new schedule.
DONE this 7th day of June 2013.
WILLIAM M. ACKER, JR.
UNITED STATES DISTRICT JUDGE
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