Seychelles Organics Incorporated v. Rose

Filing 73

ORDER denying 61 Motion for Order to Show Cause; denying 67 Renewed Application for Order to Show Cause. See order for details. Signed by Senior Judge Frederick J Martone on 3/27/2015.(LMR)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE DISTRICT OF ARIZONA

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Seychelles Organics Inc.,
Plaintiff,

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vs.

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John R. Rose,
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Defendant.
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No. CV-11-1746-PHX-FJM
ORDER

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Before the court is plaintiff’s motion for an order to show cause (doc. 61), defendant
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Rose’s response (doc. 63), Julie Alcantar and AnuMed International’s response (doc. 64),
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plaintiff’s replies (docs. 65, 66); plaintiff’s renewed motion (doc. 67), defendant Rose’s
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response (doc. 69), Maria Esparza and Signature Formulations’ objection and response (docs.
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70, 71), and plaintiff’s reply (doc. 72).
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I.
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The parties in this case have a long and tortured history. In November 2006, plaintiff
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Seychelles Organics purchased the assets of several entities owned, managed, or serviced by
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John Rose (“Rose Entities”) for $7 million. The Rose Entities formulated, manufactured,
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marketed and sold creams, lotions, cosmetics, and nutritional supplements, including
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progesterone-based products. As part of the asset purchase agreement, Rose executed a non28

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compete agreement (“NCA”), promising not to participate, directly or indirectly, in any

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business similar to the Rose Entities for a period of three years. The parties agreed that the

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three-year period would begin to run following the termination of Rose’s employment with

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Seychelles. Rose was terminated by Seychelles in August 2007, therefore the NCA was set

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to expire no later than August 2010.

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Seychelles claims that before the expiration of the NCA, Rose violated its terms by

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providing services to AnuMed International in direct competition with the Rose Entities. In

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August 2008, Seychelles filed a complaint in Utah state court seeking enforcement of the

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NCA. In May 2009, the Utah court issued a preliminary injunction ordering Rose to comply

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with the terms of the NCA. Nevertheless, Rose continued to violate the agreement. One day

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before Rose was scheduled to appear to show cause as to why he should not be held in

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contempt, Rose filed a bankruptcy petition in the District of Arizona. Seychelles responded

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by filing an adversary proceeding in Rose’s bankruptcy case and a trade dress infringement

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action in the United States District Court for the District of Utah.

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In April 2011, following mediation, the parties executed a Settlement Agreement,

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resolving all claims in each of the three actions. Seychelles agreed to dismiss the litigation

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and withdraw its proof of claim. In exchange, Rose agreed to the immediate entry of

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judgment against him in the amount of $1 million, as well as the entry of a permanent

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injunction, prohibiting him from participating in any business in competition with the Rose

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Entities for a period of 25 years from the settlement date. Specifically, the injunction broadly

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prohibits Rose, and any of his agents, employees, or affiliates, or anyone with whom he

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consults, “from producing, marketing, selling or distributing any product in any form

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containing any one or more of the following hormones: (i) Progesterone; (ii) Testosterone;

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(iii) Estrodial; (iv) Estriol; (v) Pregnenolone.” (Doc. 1, ex. A, ¶ 4(a)).

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As part of the Settlement Agreement, Seychelles agreed to forbear taking action to

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collect on the $1 million judgment so long as Rose timely complied with his obligation to pay

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$180,000 over a 5-year period and “remain[ed] in compliance with the terms of the

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injunction.” Id. ¶ 6.
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The bankruptcy court approved the Settlement Agreement and issued proposed

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findings of fact and conclusions of law. We adopted the bankruptcy court’s findings and

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conclusions and granted the parties’ stipulated motion for entry of final judgment and

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permanent injunction (“Stipulated Judgment”) (doc. 6), which incorporated the terms of the

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Settlement Agreement.

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In 2013, Seychelles filed a motion to reopen this case, contending that Rose defaulted

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on his payment obligations under the Settlement Agreement and continued to violate the

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terms of the NCA. Seychelles notified Rose of the termination of its forbearance obligation

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and began efforts to collect on the $1 million Stipulated Judgment.

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On January 15, 2013, AnuMed filed a separate action against Seychelles seeking a

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declaration that AnuMed was not a party to the Settlement Agreement and not bound by its

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terms. AnuMed Int’l, LLC v. Seychelles Organics, Inc., No. CV-13-0098-PHX-MHB (D.

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Ariz. Jan. 15, 2013) (Burns Case). Rose subsequently joined as a party plaintiff. AnuMed’s

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complaint has been dismissed and all that remains of the Burns Case is Rose’s claim seeking

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a declaration that the $1 million Judgment “is so grossly excessive” that it constitutes an

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“unenforceable penalty.” Burns Case, Amended Compl. (doc. 13, ¶ 41).

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In July 2014, Rose filed a motion in our case seeking to set aside the $1 million

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judgment pursuant to Rule 60(b), Fed. R. Civ. P., arguing that the Stipulated Judgment is

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void, unconscionable, or that applying it prospectively is no longer equitable—in each

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instance challenging the enforceability of the $1 million Judgment. We denied the motion,

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concluding that Rose failed to establish the “extraordinary circumstances” required to support

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setting aside a judgment under Rule 60(b). (Doc. 60).

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In the most recent chapter in this saga, Seychelles has moved for an order requiring

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Rose to show cause as to why he should not be held in contempt for his violation of the 25-

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year non-compete clause contained in the Settlement Agreement and Stipulated Judgment.

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He contends that Rose continues to violate the terms of the NCA because of his relationship

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with Maria Esparza and her company, Signature Formulations. Now called upon to enforce

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the 25-year NCA, we must first consider its legal validity.
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II.

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Under Arizona law, covenants not to compete that are ancillary to contracts for

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employment or sale of a business will be enforced only where they are reasonably limited as

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to time and geography. “When a business is sold, the value of that business’s goodwill

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usually figures significantly into the purchase price. The buyer therefore deserves some

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protection from competition from the former owner.” Valley Med. Specialists v. Farber, 194

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Ariz. 363, 368, 982 P.2d 1277, 1282 (1999). However, the scope of a covenant must be no

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greater than necessary to protect the legitimate business interests of the party seeking

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enforcement. Id. at 370, 982 P.2d at 1284. “To be enforced, the restriction must do more

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than simply prohibit fair competition by the employee.” Id. at 367, 982 P.2d at 1281. “The

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test of validity of restrictive covenants is one of reasonableness.” Olliver/Pilcher Ins. v.

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Daniels, 148 Ariz. 530, 532, 715 P.2d 1218, 1220 (1986).

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By any standard, the NCA in the Settlement Agreement, as adopted by the Stipulated

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Judgment, is unreasonable in both its duration and geographic scope. Arizona law permits

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only those restrictive covenants that are reasonably limited as to time and territory. A 25-

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year, worldwide restriction1 provides no limitation as to either duration or geography, and

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accordingly constitutes an unreasonable restraint of trade. Recall that the original NCA in

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connection with the asset purchase agreement limited the restrictive covenant to three years,

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an arguably reasonable term. However, the duration was expanded to 25 years as part of the

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parties’ Settlement Agreement. Neither punishment for prior NCA violations, nor a lifelong

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prohibition of competition serves as a legitimate business purpose to support this

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unreasonable NCA.
III.

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Generally, courts do not rewrite contracts for parties. Id. at 533, 715 P.2d at 1221.

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However, “[i]f it is clear from its terms that a contract was intended to be severable, the court

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In addition to markets in the United States, Seychelles seeks to enjoin any action by
Rose to sell in a Vietnamese market (doc. 61-1, ex. K at 104), a Mexican market, (doc. 61-1,
ex. L at 106), and a Norwegian market (doc. 61-1, ex. C at 120).
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can enforce the lawful part and ignore the unlawful part.” Id. “Arizona courts will ‘blue

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pencil’ restrictive covenants, eliminating grammatically severable, unreasonable provisions.”

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Farber, 194 Ariz. at 372, 982 P.2d at 1286. Here, the Settlement Agreement contains an

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enforceability clause whereby the parties agreed that in the event any clause is ruled legally

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unenforceable, the remaining portions of the Agreement will remain in full force and effect.

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(Doc. 1, ex. A, ¶ 15). We conclude that paragraphs (a), (b), (e) and (f) of the Settlement

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Agreement (doc. 1 at 15) and the Stipulated Judgment (doc. 6 at 2) are invalid and legally

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unenforceable.2
IV.

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IT IS ORDERED DENYING Seychelles’ motion for an order to show cause (doc.
61) and DENYING Seychelles’ renewed motion (doc. 67).
DATED this 27th day of March, 2015.

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This holding does not affect that portion of the permanent injunction prohibiting Rose
from infringing on Seychelles’ trade dress, trademarks or logos contained in paragraphs (c)
and (d).
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