Progressive EMU Inc v. Nutrition & Fitness Inc

Filing 82

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 )

FILED
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
SOUTHERN DIVISION
PROGRESSIVE EMU, INC., f/k/a
JOHNSON EMU, INC.,
Plaintiff and
Counterclaim Defendant,

}
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v.
NUTRITION & FITNESS, INC.,
Defendant and
Counterclaim Plaintiff.

CIVIL ACTION NO.
2:12-CV-01079-WMA

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
contract.

This is not what the court had in mind.

The court’s

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.

In other

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).

The parties

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
undertaking.

When both parties agree that their contract is

“unambiguous,” does it become unambiguous as a matter of law?

Any

ambiguity arguably is transmogrified into the unambiguous.

The

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

2

DENIED because it does the same thing that Pro Emu does, i.e.,
address issues beyond the interpretation of the contract.

NFI may

file such a brief if and when the court reaches issues beyond what
is now undertakes to resolve.
Background
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
farm.
and

NFI, a North Carolina corporation, manufactures, markets,

distributes

various

consumer

health

products,

including

products made with emu oil, the main emu-based product being Blue
Emu.
In

early

2003,

Pro

Emu

and

NFI

entered

into

a

Sales,

Marketing, and Operating Agreement (“2003 Sales Agreement” or
“Agreement”),

effective

January

1,

2003.

This

contract,

as

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’

3

relationship.1

The

parties

agree

that

their rights and

obligations at issue in this case depend entirely upon the terms of
the Agreement.

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.

First, the

1

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.”
2

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 . . . .”).
4

court must determine whether the contract language is unambiguous
and complete. If contract language is unambiguous and complete, as
the parties

here

claim, the

according to its terms.

court must enforce

the

contract

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

does

allow

for

a

written

contract

to

be

explained

or

supplemented by usage of trade evidence, it does not allow the use
of

such

parol

evidence

to

alter

or

vary

the

terms

of

the

contract.”).

Georgia law explains that “[w]here the language of

the contract

is

plain,

unambiguous,

and

capable

of

only one

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
the contract.

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).

The Georgia

Commercial Code provides that a final, written contract, such as
this Agreement,
may be explained or supplemented:
5

(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
agreement.
GA. CODE ANN. § 11-2-202 (emphasis added). Extrinsic evidence of the
parties’

course

of

dealing,

usage

of

trade,

or

course

performance may be used to explain or supplement a contract.

of
See

Allapattah Servs., Inc. v. Exxon Corp., 333 F.3d 1248, 1261 (11th
Cir. 2003) (examining this concept under the Uniform Commercial
Code).

Finally,

if,

after

applying

the

rules

of

contract

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.
1.

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
for

emu

oil.

Pro

Emu

does

not

argue

with

this

proposed

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
6

agree, “exclusive dealings” sales contracts always impose “an
obligation

by

the

seller

[contracted for] goods.”

to

use

best

efforts

to

supply

GA. CODE ANN. § 11-2-306(2).

the

This “best

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
expected delivery.
before,

instead

of

Even if NFI notifies Pro Emu of a need one day
thirty

days

before,

a

hoped-for

expected

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.
The

“best

efforts”

standard

requires

that

Pro

Emu

“use

reasonable diligence as well as good faith in [its] performance of
7

the contract.”

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
accomplish something.”

BLACK’S LAW DICTIONARY (9th ed. 2009).

Pro

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
hereunder.
(emphasis added).

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”
feature.

The parties disagree about (1) what circumstances can
8

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
to

be

for

NFI

to

purchase

oil

in

the

open

market.

This

interpretation of ¶ 2.2 is overly broad and self-contradicting.
The last sentence in ¶ 2.2 cannot be read in isolation to impose a
limitation

on

remedies

that

would

apply

to

every

possible

circumstance in which there is a failure by Pro Emu to supply emu
oil.

As discussed supra, ¶ 2.2 requires that Pro Emu use “its best

efforts to fulfill all orders as quickly and as reasonably as
possible.”

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
results.

As Pro Emu would have it, Pro Emu, as seller, would be

permitted to refuse to supply any order, even in bad faith, and
NFI’s

only

remedy

would

be

to

find

another

supplier.

This

construction would effectually eliminate Pro Emu’s duty “to use
best efforts to fulfill all orders as quickly and as reasonably as
possible.”

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

9

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.
Contracts

are

to

be

interpreted

“as

a

whole,

and

each

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
after

employing

its

best

efforts,

but

does

limitation on NFI’s remedy would not apply.

not

do

so,

the

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.
3.

The Parties’ Responsibility for Payment of Marketing and
Promotional Expenses

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
10

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
marketing

and

promotion

of

emu

oil-based

amounts spent by third-party retailers.

products,

including

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. . . .
(emphasis added).

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
itself “undertakes.”

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
undertaken

by

third-party

retailers.

Whether

marketing

and

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.
11

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
revenue.3

On this basis, Pro Emu contends that whether NFI pays an

advertising agency or a mass market retailer for marketing and
promotion

makes

no

difference,

responsible for all advertising.

and

that

NFI

is

ultimately

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
meaning.

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

3

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.
12

promotional

efforts

performed

by

third-parties

retailers,

and

instead has treated the charges as deductions from revenue.

NFI

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
each other.

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.

Id.

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
same industry).

Id. at §§ 11-2-208(2) and 11-1-205.

Over the course of eight years, these parties treated thirdparty

retailer

charges

as

“discounts,” discussed infra).

deductions

from

revenue

(or

as

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
Agreement.

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
13

express provisions.

GA. CODE ANN. § 11-2-202(a).

That is precisely

the situation here.
Under ¶ 1.5 of the Agreement, NFI is financially responsible
marketing

only for

or

promotional activity

that

NFI

itself

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
retailers.

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.
4.

The Definition of NFI’s “Total Revenues Received” and
“Discounts”

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
refunds.”

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
14

Emu Cream or any similar product, net of discounts and
refunds (“Net Revenues”);
(b)Other Products.
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.
(emphasis added).
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.

Under Pro

Emu’s proposed construction, these charges would be included in the
“net revenues” from which the royalty is calculated.

NFI contends

that the plain language of the Agreement, plus the parties’ course
of

performance,

require

(1)

that

third-party

promotional

and

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.”

15

As Pro Emu points out, however, “discounts” are not “received,” but
are included in “total revenue received” before they are later
deducted.
to

treat

While the court sees why the parties could have wanted
different

types

of

“discounts”

or

“deductions”

differently, there is no language or extrinsic evidence to support
treating these retailer charges differently.
From

the

beginning

of

the

parties’

over

eight

year

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
incorrectly.
Furthermore, since the Agreement was executed in 2003, NFI has
provided Pro Emu with monthly written statements that included the

16

“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
deductions.

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
marketing

and

promotion

differently

from

other

deductions

or

“discounts.”

“Discount” is defined as “a reduction made from the

gross

or

amount

value

DICTIONARY 361 (1983).

of

something.”

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
17

other than NFI not in the “Mass Retail Market.”4

Pro Emu’s

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
Mass

Retail

Market.

NFI

argues,

to

the

contrary,

that

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).

This

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,

4

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.
18

approval from NFI is also required if Pro Emu wants to enter into
any new contracts to sell emu oil to any third party.

Under the

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
sole customer.
A year after the original agreement was executed, the parties
amended it.

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
Market.

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.
19

“Mass Retail

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. . . .
(emphasis added).

Simply put, this paragraph addresses the nature

and scope of the parties’ rights regarding products containing emu
oil.

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
retaining

establishments

targeted
20

by

NFI.”

First

Amendment

(Recitals).
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.

The above

quoted language, then, provides that Pro Emu may not market, sell,
21

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
purchase.”

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.”

Id.

Of course, what constitutes

“reasonable discretion” is as loosy goosey as what constitutes
“best efforts.”

NFi is obligated to be “reasonable” in its

demands.
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
Amendment

without

any

restriction.

Any

other

interpretation

ignores the unambiguous language of the Agreement and ignores the
bargained-for exclusivity of the arrangement.
Amendment,

Pro

Emu

can

sell

Under the First

products containing

emu

oil

(as

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.
22

Pro Emu is not obligated to

scale down its operations so as to meet only the needs of NFI.
6.

The Nature of the Parties’ Relationship: Independent
Contractors or Joint Ventures

Under
contractors.

the

Agreement,

Pro

Emu

and

NFI

are

independent

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. .
. .
(emphasis added).

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
is irrelevant.

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)).

5

The

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.
23

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,
508

(Ga.

2006)

(quoting

Kissun,

479

S.E.2d

at

752).

The

relationship between Pro Emu and NFI lacks these elements.
Under the Agreement, Pro Emu and NFI retain control over their
respective operations.

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.

To the

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 profits.

The payment of a royalty is not the same as sharing

profits.
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.
7.

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.
24

The 2003 Sales

Agreement set the price of emu oil at a fixed per gallon price.

In

March 2008, the Fourth Amendment changed the pricing from per
gallon to per barrel, but did not define “barrel.”

According to

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
gallons.

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.

Admittedly, the

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

here.

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.
25

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.

Therefore, a

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.
Pro

Emu

does

not

offer

any

argument

in

support

of

its

assertion that the contract calls for a barrel of emu oil to be
52.65

gallons

or

to

demonstrated by NFI.

contradict

the

usage

in

the

trade

as

For the time periods in question, a “barrel”

of emu oil is 55 gallons.
8.

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
oil.”

The court grants this request from Pro Emu because its

interpretation only paraphrases ¶ 2.2 of the 2003 Sales Agreement,
which provides:
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
26

oil.

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.

NFI further

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 ¶
3.

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.
up.

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.
After all,

they

employed

the

words
27

“right

of

first

refusal”

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.
NFI’s proposed construction of this provision goes beyond
reason.

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,

From

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
28

selling to others is on NFI.
9.

Claimed Contract Rights to Joint Ownership of the BLUE
EMU Trademark

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
Agreement

is

silent

on

the

issue

and

because

NFI

properly

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

6

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
effect.
29

Agreement Letter of Intent between the parties dated May
10, 2002.
¶ 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
course of

performance.

Neither

the

Agreement

nor

any

other

agreement between the parties provides for joint ownership of the
BLUE EMU trademark.
Conclusion
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.

Pro Emu

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

30

that Pro Emu did not use its best efforts.

The dispute has, thus

far, been heated enough even to predict an eventual trip to
Atlanta.
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
NFI.

It does not apply to any breaches of the Agreement that do

not involve supplying emu oil.
3.

NFI is only responsible for the marketing and promotional

activity that it undertakes in the marketing and promoting of Blue
Emu products.
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.

31

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
greater than

it

could

reasonably

requirements for sixty days.

be expected

to

fulfill

its

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
others.
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.

It

was the dispute over the rights and obligations of the parties that
was

the

mediation.

biggest

stumbling

block

to

the

prior

unsuccessful

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
such breaches.

Unless the parties can agree to mediate and on

deadlines to complete discovery and filing dispositive motions, the

32

court will fix a new schedule.
DONE this 7th day of June 2013.

_____________________________
WILLIAM M. ACKER, JR.
UNITED STATES DISTRICT JUDGE

33