Innovation Ventures, LLC v. Custom Nutrition Laboratories, LLC et al
Filing
421
ORDER DENYING 406 Plaintiff's Motion for Summary Judgment; DENYING 400 Defendants' Motion for Summary Judgment; GRANTING IN PART 403 Plaintiff's Motion to Consolidate Cases; and DISMISSING Alan Jones as a Defendant with Prejudice. Signed by District Judge Terrence G. Berg. (AChu)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
4:12-CV-13850-TGB
INNOVATION VENTURES,
L.L.C. f/d/b/a LIVING
ESSENTIALS,
ORDER
Plaintiff,
DENYING PLAINTIFF’S
MOTION FOR SUMMARY
JUDGMENT
(ECF NO. 406);
vs.
CUSTOM NUTRITION
LABORATORIES, L.L.C.,
NUTRITION SCIENCE
LABORATORIES, L.L.C., ALAN
JONES,
DENYING DEFENDANTS’
MOTION FOR SUMMARY
JUDGMENT (ECF NO. 400);
GRANTING IN PART
PLAINTIFF’S MOTION TO
CONSOLIDATE CASES (ECF
NO. 403);
Defendants.
AND DISMISSING ALAN
JONES AS A DEFENDANT
WITH PREJUDICE
This matter is before the Court on the parties’ third round of crossmotions for summary judgment. ECF Nos. 400, 406. Also before the Court
is Plaintiff’s motion to consolidate cases and for clarification of Alan
Jones’ status as a defendant. ECF No. 403. For the reasons stated herein,
the Court will DENY Plaintiff’s motion for summary judgment, DENY
Defendants’ motion for summary judgment, GRANT IN PART
1
Plaintiff’s motion to consolidate, and find that Alan Jones is not
personally liable under the Settlement Agreement, as held by the Sixth
Circuit.
I. Facts and Procedural History
The facts of this case are set out in detail in this court’s prior
opinions (ECF Nos. 219, 343) and in the Sixth Circuit’s opinion (ECF No.
392), but a brief overview follows.
Some sixteen years
ago, Plaintiff Innovation Ventures, L.L.C.,
f/d/b/a Living Essentials (“Living Essentials”), the manufacturer of the
two-ounce energy shot 5-Hour Energy, contracted with now-defunct
Custom Nutrition Laboratories (“Custom Nutrition”) to manufacture and
package 5-Hour Energy. Innovation Ventures, LLC v. Custom Nutrition
Labs., 912 F.3d 316, 324 (6th Cir. 2018). The relationship soured and
litigation ensued. In August 2009, the parties reached a settlement
agreement (“Settlement Agreement” or “noncompete agreement”) when,
according to Alan Jones, a Custom Nutrition’s officer, Custom Nutrition
was on the verge of bankruptcy. Under the Settlement Agreement, in
exchange for a $1.85 million payment to Custom Nutrition, the “CNL
Parties”—defined to include Custom Nutrition and its CEO Alan Jones—
agreed to a number of restrictive covenants. As relevant here, the
noncompete agreement prohibited the CNL Parties from using any
ingredients in the “Choline Family.” Living Essentials had recently
introduced a new choline-based ingredient, citicoline, into 5-Hour
2
Energy, which according to Living Essentials was a “critical innovation”
that it wanted to keep the CNL Parties from using. Id.
In October 2009, Custom Nutrition was failing financially, and
Jones spoke with Don Lovelace, owner of a company called Lily of the
Desert, about acquiring Custom Nutrition. Instead of acquiring Custom
Nutrition, Lovelace agreed to purchase its assets and formed a new
corporation, Defendant Nutrition Science Laboratories (“NSL”) to do so.
NSL and Custom Nutrition entered into an Asset Purchase Agreement
to complete the sale. After the Asset Purchase Agreement was executed,
NSL began selling energy shots. Jones became an employee of Lily of the
Desert and represented himself as President of NSL. Over the next few
years, NSL sold energy shots containing Choline Family ingredients and
substances that Living Essentials contended were chemical equivalents
to choline prohibited under the restrictive covenant’s catch-all clause.
Living Essentials sued, naming Custom Nutrition, NSL, and Alan Jones
as Defendants. Id. at 324-25.
On an initial round of summary judgment motions in 2015, this
Court granted partial summary judgment in favor of Living Essentials,
concluding that NSL violated the Choline Family restrictions because the
Defendants admitted to producing energy shots containing two
ingredients listed in the Choline Family definition in the Settlement
Agreement. A jury later concluded in the first phase of a bifurcated jury
trial that two other ingredients admittedly used by Defendants were also
3
included in the catch-all clause in the Choline Family definition of the
Settlement Agreement (Betaine and Alpha-glycerolphosphorylcholine or
“Alpha-GPC”). Regarding liability, this Court concluded first that NSL
was bound by the Choline Family restrictions in the Settlement
Agreement by virtue of its incorporation into the Asset Purchase
Agreement. Second, it concluded that Jones was bound by the Settlement
Agreement because he signed it. And third, the Court concluded that the
twenty-year duration of the Settlement Agreement was unreasonable
under Michigan Law (M.C.L. § 445.774(a)(1)). The Court reformed the
duration of the noncompete agreement to three years, as authorized by §
445.774(a)(1). See Innovation Ventures, LLC v. Custom Nutrition Labs.,
LLC, 2015 WL 5679879, at *16-25 (E.D. Mich. Sept. 28, 2015); see also
ECF No. 219.
On a second round of summary judgment motions in 2017, this
Court concluded that Plaintiff was not entitled to summary judgment as
to liability on its primary breach of contract claim because NSL’s
affirmative defense of latches raised factual disputes. Second, it
concluded that Plaintiff’s three proposed methodologies for calculating
damages were impermissible but Living Essentials could “still recover
lost profits under a non-patent infringement specific method of
calculation.” Innovation Ventures, LLC v. Custom Nutrition Labs., LLC,
256 F. Supp. 3d 696, 704, 710-12 & n.8 (E.D. Mich. 2017).
4
Living Essentials disagreed with the Court’s ruling on damages and
wanted to find a way to appeal. Living Essentials believed the order left
it “without any theory of actual damages to present to the jury, leaving
only the theory of nominal damages” to recover on its primary breach of
contract claim. 912 F.3d at 326. To expedite appeal of the prior orders
and judgment, the parties submitted a proposed judgment awarding
nominal damages to Living Essentials, which this court entered.
While the case against Custom Nutrition, Jones, and NSL (“Lead
Case”) was proceeding, Living Essentials had sought to add Lily of the
Desert as another defendant, but the Court did not permit the complaint
to be amended. In order to get around the Court’s ruling, Living
Essentials brought a new lawsuit against NSL (“Secondary Case”),
adding Lily of the Desert and including many of the same claims that the
Court had dismissed in the Lead Case. The new complaint alleged that
discovery in the Lead Case revealed that Lily of the Desert was also liable
under the Settlement Agreement because of its relationship to NSL.
Because the parties agreed that judgment in the Lead Case rendered the
claims in the Secondary Case “effectively moot,” this Court also entered
Judgment in favor of Defendants. Innovation Ventures, LLC v. Nutrition
Science Labs., LLC, No. 16-11179, 2017 WL 4553429, at *1-2 (E.D. Mich.
July 17, 2017); see also ECF No. 343. The cases were consolidated on
appeal.
5
A. Sixth Circuit Opinion
On appeal, the Sixth Circuit Court of Appeals affirmed in part and
reversed in part. First, the court concluded it had appellate jurisdiction
over the claims because the parties sought formal dismissal only to
expedite appeal of an order which in effect dismissed Living Essentials’
claims. 912 F.3d at 327-32. NSL also sought conditional review of this
Court’s personal jurisdiction; the Sixth Circuit determined that this
objection was waived in both the Lead and Secondary Cases. Id. at 33233. Second, the court concluded that this Court appropriately dismissed
Defendants’ antitrust counterclaim because it did not relate back to the
original complaint. Id. at 333-34. Third, it concluded that Jones was not
bound by the Settlement Agreement in his individual capacity because
he did not sign the document twice as a corporate officer and as an
individual, but agreed with this Court that NSL was bound by the
Choline Family restrictions of the Settlement Agreement (§5.c.1) by
virtue of its incorporation into the Asset Purchase Agreement. Id. at 33539. The Sixth Circuit also agreed with this Court that that whether
Betaine and Alpha-GPC are covered by the catch-all clause in the Choline
Family definition was ambiguous as a matter of law. Id. at 339.
Citing a Michigan Supreme Court decision that had not yet been
decided at the time of this Court’s prior order, Innovation Ventures v.
Liquid Manufacturing, 499 Mich. 491, 885 N.W.2d 861 (Mich. 2016)), the
Sixth Circuit determined that when this Court found the 20-year
6
duration of the Settlement Agreement to be unreasonable and reformed
the contract, it applied the incorrect standard. It should have evaluated
the noncompete agreement under the “rule-of-reason test,” 912 F.3d at
340,
rather
than
analogizing
the
parties’
business-to-business
noncompete agreement to employer-employee noncompete agreements
under M.C.L. § 445.771a(1). The court of appeals also held that the
burden of showing the existence of an unreasonable restraint on trade
lies with the Defendants (i.e., the party alleging the restraint on trade).”
912 F.3d at 341-42. Because the Sixth Circuit determined that neither
party had fully briefed the application of the rule-of-reason test, and that
this “fact intensive determination” fell within this Court’s area of
expertise, it remanded the Lead Case “so that the parties may provide
the detailed record information necessary for the court to apply the ruleof-reason framework.” Id. at 342. With respect to the Secondary Case, the
Sixth Circuit determined that because it was reversing and remanding
the Lead Case, it would likewise remand the Secondary Case. Id.
Additionally, the Sixth Circuit affirmed this Court’s conclusion that
disputes of material fact existed relating to the issue of latches. Id. at
343. And finally, with respect to Living Essentials’ proposed damages
calculation methodologies, the Sixth Circuit concluded (1) that the
“market-share based calculation of lost profits” is a theory of relief
available for Living Essentials to pursue, id. at 345, (2) “[a]n estimated
reasonable royalty is not an appropriate theory of proof for damages” in
7
a breach of contract case such as this, id. at 347, and (3) disgorgement of
Defendants’ proceeds from selling energy shots that violated the Choline
Family restrictions is not appropriate here, id. at 348.
On remand, the Court permitted the parties to file motions for
summary judgment on the application of the rule of reason test. Before
the Court are the parties’ cross motions for summary judgment (ECF
Nos. 400, 406), as well as Plaintiff’s motion to consolidate the Lead and
Secondary cases and to seek clarification of Alan Jones’ status as a
defendant (ECF No. 403). The motions are fully briefed, and the Court
heard oral argument on December 16, 2019.
II. Standards of Review
A. Motions for Summary Judgment
“Summary judgment is appropriate if the pleadings, depositions,
answers to interrogatories, and admissions on file, together with any
affidavits, show that there is no genuine issue as to any material fact
such that the movant is entitled to a judgment as a matter of law.”
Villegas v. Metro. Gov’t of Nashville, 709 F.3d 563, 568 (6th Cir. 2013);
see also Fed. R. Civ. P. 56(a). A fact is material only if it might affect the
outcome of the case under the governing law. See Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 249 (1986).
On a motion for summary judgment, the Court must view the
evidence, and any reasonable inferences drawn from the evidence, in the
light most favorable to the non-moving party. See Matsushita Elec. Indus.
8
Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (citations omitted);
Redding v. St. Edward, 241 F.3d 530, 531 (6th Cir. 2001).
The moving party has the initial burden of demonstrating an
absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477
U.S. 317, 325 (1986). If the moving party carries this burden, the party
opposing the motion “must come forward with specific facts showing that
there is a genuine issue for trial.” Matsushita, 475 U.S. at 587. The trial
court is not required to “search the entire record to establish that it is
bereft of a genuine issue of material fact.” Street v. J.C. Bradford & Co.,
886 F.2d 1472, 1479-80 (6th Cir. 1989). Rather, the “nonmoving party has
an affirmative duty to direct the court’s attention to those specific
portions of the record upon which it seeks to rely to create a genuine issue
of material fact.” In re Morris, 260 F.3d 654, 655 (6th Cir. 2001). The
Court must then determine whether the evidence presents a sufficient
factual disagreement to require submission of the challenged claims to
the trier of fact or whether the moving party must prevail as a matter of
law. See Anderson, 477 U.S. at 252.
B. Covenants Not to Compete
“Reasonableness of a noncompete agreement is inherently factspecific, see, e.g., Woodward v. Cadillac Overall Supply Co., 396 Mich.
379, 391, 240 N.W.2d 710 (1976), but ‘[t]he reasonableness of a
noncompetition provision is a question of law when the relevant facts are
undisputed.’” Innovation Ventures v. Liquid Mfg., 885 N.W.2d 861, 8709
71 (Mich. 2016) (quoting Coates v. Bastian Bros., Inc., 741 N.W.2d 539,
544 (Mich. Ct. App. 2007)); see also Follmer, Rudzwicz & Co., PC v. Kosco,
362 N.W.2d 676, 683 (Mich. Ct. App. 1984) (“The courts thus must
scrutinize such agreements and enforce them only to the extent they are
reasonable.”). Where the parties dispute material facts regarding what
the covenants convey, the district court is permitted to allow the jury to
decide the reasonableness of the contract’s competition-limiting effect.
Bar’s Prods. Inc. v. Bars Prods. Int’l Inc., 662 Fed.Appx. 400, 410 (6th
Cir. 2016) (citing Certified Restoration Dry Cleaning Network, LLC v.
Tenke Corp., 511 F.3d 535, 547 (6th Cir. 2007)).
C. Motions to Consolidate
Consolidation is governed by Federal Rule of Civil Procedure 42(a):
If actions before the court involve a common question of law
or fact, the court may:
(1) join for hearing or trial any or all matters at issue in
the actions;
(2) consolidate the actions; or
(3) issue any other orders to avoid unnecessary cost or
delay.
“Whether cases involving the same factual and legal questions should be
consolidated for trial is a matter within the discretion of the trial court.”
Cantrell v. GAF Corp., 999 F.2d 1007, 1011 (6th Cir. 1993) (citing Stemler
v. Burke, 344 F.2d 393, 396 (6th Cir. 1965)). “A court may issue an order
of consolidation on its own motion, and despite the protestations of the
10
parties.” Id. (citing In re Air Crash Disaster at Detroit Metro. Airport, 737
F. Supp. 391, 394 (E.D. Mich. 1989)).
III. Analysis
A. Texas Law Does Not Apply to the Noncompete Clause (5.c.i)
Defendants argue for the first time in response to Plaintiff’s motion
for summary judgment that Texas law, rather than Michigan law, now
applies to interpretation of the Choline Family restrictions (§ 5.c.i of the
Settlement Agreement) because this Court’s prior application of
Michigan law to the restrictions was based the Settlement Agreement’s
choice of law provision (§ 22). Because this Court determined—and the
Sixth Circuit affirmed—that NSL is only bound to § 5.c.i, NSL argues
that it stands to reason that it is not bound by § 22. As NSL is only bound
to § 5.c.i because it was incorporated by reference into the Asset Purchase
Agreement, the Court should apply the Asset Purchase Agreement’s
choice of law provision, rather than the Settlement Agreement’s choice of
law provision. And because this Court has already determined that Texas
law governs the Asset Purchase Agreement, NSL avers that Texas law
ought to govern § 5.c.i and this Court’s application of it. ECF No. 415,
PageID.26015-18. NSL argues this distinction is important, asserting
that Texas applies the same three-part analysis as MCL § 445.774(a)(1)
rather than a more general rule of reason analysis, or the more stringent
Sherman Act formulation proposed by Plaintiff. ECF No. 415,
PageID.26017 n.3 (citing Tex. Bus. & Com. Code Ann. § 15.50(a)).
11
Living Essentials argues that application of Texas law here would
violate the Sixth Circuit’s express mandate to apply Michigan law, which
requires courts to apply the federal common law rule of reason to
business to business noncompete agreements. Because the Sixth Circuit
rejected the application of MCL § 445.774(a)(1) to the Settlement
Agreement, and clearly directed this Court to apply the federal common
law rule of reason, its decision necessarily excluded the application of
some other state law regime which is
arguably “the same” as
§445.774(a)(1), such as § 15.50(a) of the Texas Code. ECF No. 417,
PageID.26045.
Having considered both sides of the argument, the Court concludes
that it should apply Michigan law to §5.c.i. First, to do otherwise would
violate the mandate rule. Under the mandate rule, “the trial court must
proceed in accordance with the mandate of the law of the case as
established on appeal” and “implement both the letter and the spirit of
the mandate.” Mason v. Mitchell, 729 F.3d 545, 550 (6th Cir. 2013). The
Sixth Circuit was already implicitly faced with the question of whether
to apply Texas law to § 5.c.i and expressly stated this Court should apply
the rule of reason test as mandated by the Michigan Supreme Court. In
its opinion, the Sixth Circuit affirmed this Court’s decision that only §
5.c.i of the Settlement Agreement applied to NSL through the doctrine of
incorporation by reference; that § 4.2(r) of the Asset Purchase Agreement
incorporated the Choline Family restrictions in § 5.c.i “specifically.” 912
12
F.3d at 338. Indeed, when analyzing § 4.2(r) of the Asset Purchase
Agreement to determine whether it “plainly referred to” or “merely
mentioned” the Settlement Agreement, the Sixth Circuit stated that §
4.2(r) was an “acknowledgement in the Asset Purchase Agreement that
“NSL’s rights to the formula were limited by the settlement agreement.”
Id.
In so holding, the Sixth Circuit applied Michigan law when
interpreting § 5.c.i. It did not divorce § 5.c.i from the Settlement
Agreement’s choice of law provision in § 22 and apply Texas law to
determine what standard should govern the noncompete agreement in §
5.c.i. See 912 F.3d at 340. In other words, the Sixth Circuit considered
which law to apply to interpret § 5.c.i, and it expressly mandated this
Court to apply Michigan law, it did not adopt the analysis suggested by
Defendant here—to apply Texas law.
Second, Defendants have not provided the Court with any authority
that it should—or could—divorce the noncompete clause of the
Settlement Agreement from that agreement’s choice of law clause
requiring that the Settlement Agreement be interpreted by Michigan
law. Defendants cite to no comparable cases where a court has ruled in
the manner they ask this court to rule, that is, where a court has held
that a provision from Contract A has been incorporated by reference into
Contract B, but that when interpreting the meaning of that provision
from Contract A, the court must apply the choice of law provision from
13
Contract B. Ultimately, Defendants are challenging a provision of the
Settlement Agreement, not a provision of the Asset Purchase Agreement.
In sum, the Court will apply Michigan law to § 5.c.i of the
Settlement Agreement because not doing so would violate the letter and
the spirit of the Sixth Circuit’s mandate and because Defendants have
offered no persuasive authority in support of their position that Texas
law should apply.
B. Breach of Covenant Not to Compete under the Rule of Reason
The Sixth Circuit instructed this Court to apply the “rule of reason”
test to evaluate the reasonableness of the Settlement Agreement’s
business-to-business
noncompete
clause.
912
F.3d
at
341-42.
Unfortunately, however, the court of appeals did not define the specific
contours of what is meant by the rule of reason test, and the parties are
at odds over the question. Plaintiff asserts that an effective challenge
under the rule of reason test would require Defendants to show that the
noncompete clause would violate § 1 of the Sherman Act—which has its
own five-factor burden-shifting rule of reason test. Defendants
meanwhile contend that the common law rule of reason test requires no
more than showing a violation of M.C.L. § 445.774a(1), so that the Court
may simply reaffirm its prior holding. Given the lack of clarity in this
area, the Court will do its best to discern the meaning of the “rule of
reason” test by analyzing its historical roots and development in the
relevant Michigan cases.
14
i. Historical Framework
In 1873, the Michigan Supreme Court considered when a businessto-business noncompete clause would be held valid:
[I]f, considered with reference to the situation, business and
objects of the parties, and in the light of all the surrounding
circumstances with reference to which the contract was made,
the restraint contracted for appears to have been for a just
and honest purpose, for the protection of the legitimate
interests of the party in whose favor it is imposed, reasonable
as between them and not specially injurious to the public.
Hubbard v. Miller, 27 Mich. 15, 19, 15 Am.Rep. 153 (1873). The court
went on to state:
whether [a contract with a noncompete clause] can be
supported or not, depends upon matters outside of and beyond
the abstract fact of the contract or the pecuniary
consideration; it will depend upon the situation of the parties,
the nature of their business, the interests to be protected by
the restriction, its effect upon the public; in short upon all the
surrounding circumstances; and the weight or effect to be
given to these circumstances is not to be affected by any
presumption for or against the validity of the restriction; if
reasonable and just, the restriction will be sustained, if not, it
will be held void.
Id. at 19-20. Over time, the Hubbard standard evolved into a four-factor
test in Michigan courts and was recognized as the “common law rule of
reason.” See Cardiology Assocs. of Southwestern Michigan, P.C. v.
Zencka, 400 N.W.2d 606, 607-08 (Mich. Ct. App. 1985). “First, the
covenant must be for a just and honest purpose. Second, it must be
established for the protection of the legitimate interest of the party in
whose favor it is imposed. Third, it must be reasonable as between the
15
parties to the contract. Finally, it must not be specially injurious to the
public.” Id.; see also Woodward v. Cadillac Overall Supply Co., 240
N.W.2d 710, 714 (Mich. 1976) (“It has long been established in English
and Michigan common law that a balancing test is used to test the
reasonableness or unreasonableness of a contractual restraint of trade,”
citing Hubbard).
Just as Michigan courts adopted the rule of reason in the context of
covenants not to compete, the United States Supreme Court followed a
similar course in interpreting the federal Sherman Act. In Standard Oil
Co. of New Jersey v. United States, the Court interpreted the Sherman
Act’s prohibition against restraints of trade to outlaw only unreasonable
restraints. 221 U.S. 1, 66-67 (1911). One of the best-known explanations
of the rule of reason in the Sherman Act context is found in Board of
Trade of Chicago v. United States, 246 U.S. 231, 238 (1918):
Every agreement concerning trade, every regulation of trade,
restrains. To bind, to restrain, is of their very essence. The
true test of legality is whether the restraint imposed is such
as merely regulates and perhaps thereby promotes
competition or whether it is such as may suppress or even
destroy competition. To determine that question the court
must ordinarily consider the facts peculiar to the business to
which the restraint is applied; its condition before and after
the restraint was imposed; the nature of the restraint and its
effect, actual or probable. The history of the restraint, the evil
believed to exist, the reason for adopting the particular
remedy, the purpose or end sought to be attained, are all
relevant facts. This is not because a good intention will save
an otherwise objectionable regulation or the reverse; but
16
because knowledge of intent may help the court to interpret
facts and to predict consequences.1
The Michigan Supreme Court’s application of a common-law rule of
reason in Hubbard thus predated the federal courts’ adoption of it in
Sherman Act jurisprudence. See Bristol Window & Door, Inc. v.
Hoogenstyn, 650 N.W.2d 670, 676 (Mich. Ct. App. 2002). Michigan’s
judicially developed approach to restraints on trade was soon
accompanied by state statutory law. In 1905, the Michigan Legislature
enacted MCL § 445.761, which provided that:
All agreements and contracts by which any person,
copartnership or corporation promises or agrees not to engage
in any avocation, employment, pursuit, trade, profession or
business, whether reasonable or unreasonable, partial or
general, limited or unlimited are hereby declared to be
against public policy and illegal and void.
This broad proscription against any kind of noncompete agreements was
limited by exceptions found in M.C.L. § 445.766.2 Interestingly, even
As discussed in greater detail below, this test continued to evolve in the Sherman
Act context to the point where in the Sixth Circuit, plaintiffs bringing § 1 Sherman
Act claims must prove that a defendant’s conduct unreasonably restrains trade under
a rigid “rule of reason” burden-shifting framework that includes a five-part test. See
Care Heating & Cooling, Inc. v. American Standard, Inc., 427 F.3d 1008, 1012 (6th
Cir. 2005).
2 MCL § 445.766 provided:
This act shall not apply to any contract mentioned in this act, nor in
restraint of trade where the only object of restraint imposed by the
contract is to protect the vendee, or transferee, of a trade pursuit,
avocation, profession or business, or the good will thereof, sold and
transferred for a valuable consideration in good faith, and without any
intent to create, build up, establish or maintain a monopoly; nor to any
contract of employment under which the employer furnishes or discloses
to the employe[e] a list of customers or patrons, commonly called a route
list, within certain territory in which such employe[e] is to work, in
1
17
though these statutes did not expressly refer to a reasonableness
standard, the Michigan Supreme Court continued to apply the rule of
reason in addressing the validity of noncompete agreements. Bristol
Window, 650 N.W.2d at 677 (citing Staebler-Kempf Oil Co. v. Mac’s Auto
Mart, Inc., 45 N.W.2d 316 (Mich. 1951)). As Bristol Window points out,
in the Michigan Supreme Court’s 1951 Staebler-Kempf decision, the court
quoted and applied the Hubbard rule of reason test to an agreement
between a gasoline retailer and an oil company where the retailer agreed
to exclusively sell the oil company’s gasoline and at the same price as that
charged by other gasoline retailers that the oil company supplied. 650
N.W.2d at 677; 45 N.W.2d at 318-19; see also ARA Chuckwagon of Detroit,
Inc. v. Lobert, 244 N.W.2d 393, 398 (Mich. Ct. App. 1976) (“Covenants not
to compete have always been governed by the rule of reason.”).
However, Michigan law took another turn in 1984, when the state
legislature enacted the Michigan Antitrust Reform Act (“MARA”),
repealing former § 445.761. Under MARA, “[a] contract, combination, or
conspiracy between two or more persons in restraint of, or to monopolize,
trade or commerce in a relevant market is unlawful.” M.C.L. § 445.772
(also known as § 2 of MARA). This provision tracks its sister provision in
the Uniform State Antitrust Act (“USAA”) and was patterned after the
which contract the employe[e] agrees not to perform similar services in
such territory for himself or another engaged in a like or competing line
of business for a period of 90 days after the termination of such contract
or services.
18
Sherman Antitrust Act. See USAA Comment to § 2 (“This section gathers
together
and
proscribes
all
concerted
or
collusive
conduct
in
unreasonable restraint of trade, as under the common law and section 1
of the Sherman Act, and to monopolize trade, as under section 2 of the
Sherman Act. . . . The adoption of Sherman Act language establishes its
general standards of legality, provides needed flexibility, and makes
available to state courts the relevant body of federal precedent.”)
(emphasis added).
When initially enacted, MARA “contained no sections specifically
addressing competition agreements,” so the Michigan Supreme Court, as
explained in Compton v. Joseph Lepak DDS, PC, 397 N.W.2d 311 (Mich.
Ct. App. 1986), stated that MARA’s general provision—§ 2—and the
common law rule of reason would govern the enforceability of all
covenants restraining trade. See Bristol Window, 650 N.W.2d at 678. As
the Court explained in Bristol Window:
Although the noncompetition agreement at issue in Compton
contained no limitation of its duration, [the Michigan Court of
Appeals], citing the weight of authority from other
jurisdictions, federal precedent, and Michigan law, concluded
that the agreement should be enforced to the extent reasonable
according to ‘the developed common law.’ [The court]
reiterate[d] that [it] reached its conclusion despite that § 2 of
the MARA makes no explicit reference to a standard of
reasonableness.
Id. (internal citations omitted) (emphasis added). Compton also
explained that MARA was broader than its predecessor, because unlike
19
§ 445.761 “which declared void any agreement not to compete, whether
reasonable or unreasonable, § 2 of MARA only makes unlawful any
contract which is an unreasonable restraint of trade, as under the
common law or § 1 of the Sherman Act or monopolized trade under § 2 of
the Sherman Act.” Compton, 397 N.W.2d at 314. As Michigan courts have
stated, the legislature’s repeal of § 445.761, and codification of § 2 of
MARA “clearly demonstrates the Legislature’s intent to revive the
common-law rule set forth in Hubbard, that the enforceability of
noncompetition agreements depends on their reasonableness.” Bristol
Window, 650 N.W.2d at 679 (internal citations omitted).
In 1987, the Michigan Legislature enacted § 4a of MARA, which
codified a test to determine the enforceability of a noncompetition
agreement in the employer-employee context. M.C.L. § 445.774a(1)
states:
An employer may obtain from an employee an agreement or
covenant which protects an employer’s reasonable
competitive business interests and expressly prohibits an
employee from engaging in employment or a line of business
after termination of employment if the agreement or covenant
is reasonable as to its duration, geographical area, and the
type of employment or line of business. To the extent any such
agreement or covenant is found to be unreasonable in any
respect, a court may limit the agreement to render it
reasonable in light of the circumstances in which it was made
and specifically enforce the agreement as limited.
Therefore, in the employer-employee context, § 445.774a(1), rather than
the common law rule of reason, governs. Under § 445.774a(1), an
20
employer-employee covenant not to compete must protect a party’s
reasonable competitive business interests, and its protection must be
reasonable with respect to: (1) duration; (2) geographical scope; and (3)
the line of business restricted. St. Clair Med., P.C. v. Borgiel, 715 N.W.2d
914, 919 (Mich. Ct. App. 2006). In support of the consideration of these
factors, the court in St. Clair looked to Hubbard and Bristol Window and
stated that “§4a(1) represents a codification of the common-law rule ‘that
the enforceability of noncompetition agreements depends on their
reasonableness.’” St. Clair, 715 N.W.2d at 918.
In considering the challenge to the 20-year noncompete agreement
between Living Essentials and CNL in the absence of any conflicting
authority from the Michigan Supreme Court, this Court applied §
445.774a(1) to the parties’ covenant not to compete, noting that it did not
need to apply a different common law the rule of reason test because “a
non-compete agreement’s enforceability rests on its reasonableness,
regardless of whether it involves an employment contract or not.” ECF
No. 219, PageID.9230 & n.41. This Court then concluded that Settlement
Agreement’s 20-year noncompete agreement was reasonable in scope and
geographic area but was unreasonable as to duration. Consequently, the
Court reformed the duration of the covenant to three years. Id. at
PageID.9232-37. In applying that remedy, the Court relied upon §
445.774a(1), which empowers a Court to “limit the agreement to render
it reasonable in light of the circumstances.”
21
ii. The Liquid Manufacturing Decision
After this Court’s decision, however, the Michigan Supreme Court
decided Innovation Ventures, LLC v. Liquid Manufacturing, LLC, in
which it expressly held that the common law rule of reason, rather than
the statutory authority of § 445.774a(1), should be applied to businessto-business noncompete agreements, recognizing that § 2 of MARA was
actually a codification of the rule of reason. 885 N.W.2d at 874 & n.18
(citing Bristol Window, 650 N.W.2d 670). In light of Liquid
Manufacturing, the Sixth Circuit reversed this Court’s decision to apply
§ 445.774a(1) to § 5.c.1 of the Settlement Agreement, explaining that
Liquid
Manufacturing
“makes
clear
that
business-to-business
noncompete agreements like the one at issue here must be ‘evaluated by
the rule of reason,’ not by analogy to employment noncompete
agreements that do not ‘address the proper framework.’” 912 F.3d 316,
340 (6th Cir. 2018).
Nonetheless, Defendants assert that § 445.774a(1), which this
Court previously applied, is merely a codification of the rule of reason
and consequently the Court should again conclude that § 5.c.(1) of the
Settlement Agreement is an unreasonable restraint on trade because its
duration is unreasonably long.3 Conversely, Plaintiff suggests that
Defendants cite Bristol Window for the proposition that § 445.774a(1) is a
codification of the rule of reason, ECF No. 400, PageID.24279, but that is not what
Bristol Window nor Liquid Manufacturing stated. Rather, as the Michigan Court of
Appeals made clear in St. Clair: Ҥ4a(1) represents a codification of the common-law
3
22
because MARA was patterned after §§ 1-2 of the Sherman Antitrust Act,
and Sherman Act jurisprudence has developed to include a rigid “rule of
reason” burden-shifting framework, Defendants should be required to
establish all the elements of a § 1 Sherman Act claim to demonstrate that
the covenant not to compete is an unreasonable restraint on trade.
Unfortunately, neither the Michigan Supreme Court in Liquid
Manufacturing nor the Sixth Circuit in its opinion in this case delineated
clear standards under the rule of reason test for this Court to apply. And
the parties here have capitalized on that ambiguity to advocate for a
formulation of the rule of reason that most favors their interests. But in
holding that the common law rule of reason—and not § 445.774a(1)—was
the proper standard by which to judge business to business noncompete
agreements, Liquid Manufacturing strongly suggested that the
requirements of the two standards are not identical.
So what did the Michigan Supreme Court mean when it said that
the rule of reason applies? In Liquid Manufacturing, it stated that when
analyzing
business-to-business
noncompete
agreements,
MCL
445.784(2) requires that courts look to federal interpretation of
comparable statutes. The Liquid Manufacturing court then cited to a
decision from the Sixth Circuit, Perceptron, Inc. v. Sensor Adaptive
Machines, Inc., 221 F.3d 913 (6th Cir. 2000), and a decision from the
rule ‘that the enforceability of noncompetition agreements depends on their
reasonableness.’” St. Clair, 715 N.W.2d at 918.
23
Seventh Circuit, County Materials Corp. v. Allan Block Corp., 502 F.3d
730, 735 (7th Cir. 2007), for the proposition that “federal courts have
assessed noncompete agreements between two commercial entities under
the rule of reason.” Liquid Mfg., 885 N.W.2d at 874.
Perceptron involved a plaintiff bringing a breach of contract action
alleging the defendant violated a covenant not to compete and a
defendant asserting a counterclaim that the noncompete agreement
violated antitrust law. 221 F.3d at 917. The jury found for the plaintiff,
concluding that the covenant “was reasonable, enforceable (including
permitted under the antitrust laws[]),” that the defendant had breached
the covenant, and that the defendant had failed to prove that the
noncompete agreement constituted an unreasonable restraint of trade in
violation of federal antitrust laws. Id. at 917-18. Post-trial, the defendant
moved for judgment as a matter of law, or in the alternative, for a new
trial on both the plaintiff’s breach of contract claim and its counterclaims.
Id. at 918. The trial court denied the defendant’s motion. Id. On appeal,
the defendant contested the jury’s finding that the noncompete
agreement was a valid and reasonable restraint on competition under
federal and state antitrust laws. Id. The Sixth Circuit analyzed the
legality of the noncompete agreement “under the rule of reason test,”
citing a Seventh Circuit case, Lektro-Vend Corp. v. Vendo Co., 660 F.2d
255, 265 (7th Cir. 1981). Perceptron’s formulation of the rule reason
states:
24
[C]ovenants not to compete are valid if (1) ancillary to the
main business purpose of a lawful contract, and (2) necessary
to protect the covenantee’s legitimate property interests,
which require that the covenants be as limited as is
reasonable to protect the covenantee’s interests. United States
v. Addyston Pipe & Steel Co., 85 F. 271, 281-82 (6th Cir. 1898);
aff’d as modified, 175 U.S. 211, 20 S. Ct. 96, 44 L.Ed. 136[ ]
(1899).
221 F.3d at 919 (quoting Lektro-Vend, 660 F.2d at 265).
Interestingly, the Sixth Circuit’s formulation is not the traditional
five-factor burden shifting framework commonly applied in pure § 1
Sherman Act claims and proposed by Plaintiff to be applied here. See
Care Heating, 427 F.3d at 1014 (citing Int’l Logistics Grp. Ltd. v. Chrysler
Corp., 884 F.2d 904, 907 (6th Cir. 1989)). Rather, when analyzing
whether there was any basis for the jury to conclude that the noncompete
agreement was a valid and reasonable restraint on competition, the Sixth
Circuit considered the evidence the jury heard regarding several factors:
(1) whether the aggrieved party continued to develop products that did
not compete, (2) the need for the noncompete agreement, (3) the value of
the goodwill acquired to determine whether the noncompete agreement
was ancillary to the purpose of contract, (4) the reasonableness of the
duration, geographic reach, and product scope of the noncompete
agreement, and (5) that motivation to escape competition, alone, does not
make
a
noncompete
agreement
an
unreasonable
restraint
on
competition. Id. at 919-20. In weighing all of these factors, the Sixth
Circuit concluded that “reasonable minds could differ about whether the
25
non-compete agreement was ancillary to the transaction and a
reasonable restraint on competition” affirming the district court’s denial
of the defendant’s motion for judgment as a matter of law. Id. at 919
(emphasis added). Of note, the Sixth Circuit concluded that the jury
heard evidence that the plaintiff purchased goodwill and a customer
base—not just an escape from competition, and that reasonable minds
could differ about whether five years was a reasonable duration for the
plaintiff to protect its ability to realize the benefit of the transaction. Id.
at 919-20.
The other federal appellate decision cited by the Michigan Supreme
Court as an example of a “rule of reason” case, County Materials, did not
concern an antitrust claim. 502 F.3d 730, 735 (7th Cir. 2007). Rather, a
manufacturer brought an action seeking a declaration that a covenant
not to compete in a patent licensing agreement was unenforceable. Id. In
the patent misuse context, “[u]nder the rule of reason, the finder of fact
must decide whether the questioned practices imposes an unreasonable
restraint on competition, taking into account a variety of factors,
including specific information about the relevant business, its condition
before and after the restraint was imposed, and the restraint’s history,
nature, and effect.” County Materials, 502 F.3d at 735 (quoting Virginia
Panel Corp. v. MAC Panel Co., 133F.3d 860, 869 (Fed. Cir. 1997)). County
Materials also clarified that “[a]nticompetitive effects . . . are a critical
element of any patent misuse case that is evaluated under a rule of
26
reason approach.” Id. at 736. And, of particular relevance to this case, the
court stated that it would assume that it was “not necessary for a plaintiff
to plead a case that would suffice to show that the antitrust laws have
been violated. But, at the summary judgment stage, some evidence
tending to show an adverse effect in an economically sound relevant
market is essential for any claim governed by the rule of reason.” Id.
(emphasis added).
Specifically,
the
Seventh
Circuit
considered
whether
the
noncompete agreement: (1) showed signs of one-sidedness or abuse of
power, (2) permitted the aggrieved party to continue selling or producing
similar competing products in the market, had temporal and geographic
limits, and (3) whether the aggrieved party had shown that the
noncompete had a broader effect on the market, as opposed to an effect
only on the aggrieved party. Id. at 736-37. The court concluded that the
covenant not to compete was not “particularly onerous” because it
allowed County Materials to continue to manufacture and sell two
competing products, was temporally limited because it lasted for only 18
months, and was geographically limited because it applied only to County
Materials’ exclusive production territory (a section of Wisconsin).
Further, because there was no evidence in the record that the restrictive
covenant had any effect on the broader market (as opposed to an effect
only on County Materials) the defense that the covenant was
unreasonable under the rule of reason could not succeed. Id. at 737
27
Liquid Manufacturing also cited the Supreme Court’s decisions in
State Oil Co. v. Khan, 522 U.S. 3 (1997) and Bd. of Trade of City of
Chicago v. United States, 246 U.S. 231 (1918), two seminal cases applying
the rule of reason test in the context of Sherman Act claims.4 More recent
jurisprudence under the Sherman Act has evolved to a specific five-part
rule of reason test that plaintiffs must meet in order to pass muster.
Consequently, to make out a valid claim under § 1 of Sherman Act, the
[r]ule of reason analysis requires the plaintiff to prove (1) that
the defendant(s) contracted, combined, or conspired; (2) that
such contract produced adverse anticompetitive effects; (3)
within relevant product and geographic markets; (4) that the
objects of and conduct resulting from the contract were illegal;
and (5) that the contract was a proximate cause of the
plaintiff’s injury.
Care Heating & Cooling, Inc. v. American Standard, Inc., 427 F.3d 1008,
1014 (6th Cir. 2005). This five-factor test aids the Court in discerning
whether a plaintiff as overcome the first of a three-part burden-shifting
framework:
First, the plaintiff must establish that the restraint produces
significant anticompetitive effects within the relevant product
and geographic markets. [Then,] [i]f the plaintiff meets this
burden, the defendant must come forward with evidence of
the restraint’s procompetitive effects to establish that the
alleged conduct justifies the otherwise anticompetitve
injuries. [Finally,] [i]f the defendant is able to demonstrate
procompetitive effects, the plaintiff then must show that the
legitimate objectives can be achieved in a substantially less
restrictive manner.
The Board of Trade of Chicago excerpt quoted by Liquid Manufacturing is quoted
above at page 16.
4
28
Id. at 1012 (quoting Nat’l Hockey League Players’ Ass’n v. Plymouth
Whalers Hockey Club, 325 F.3d 712, 718 (6th Cir. 2003)) (alterations in
original).
Plaintiff argues that because the Michigan Supreme Court cited
these early Sherman Act cases, it intended to require that any successful
challenges to business noncompete clauses must likewise make out a
prima facie case of a § 1 Sherman Act claim. Put differently, because the
Sherman Act rule of reason test developed from the formulation in Board
of Trade of Chicago to this five-factor test, and because Liquid
Manufacturing and Innovation Ventures make reference to the Sherman
Act, Plaintiff argues NSL should be required to meet all five elements of
the test set out in Care Heating to prove that the covenant not to compete
in the Settlement Agreement is an unreasonable restraint on trade.
There is some appeal to Plaintiff’s argument. Indeed, why else
would the courts in Liquid Manufacturing and Innovation Ventures cite
to Sherman Act cases—where the modern case law has developed its own
carefully articulated “rule of reason” test—if they intended to apply some
less exacting standard? And both Sixth Circuit and Michigan courts
agree that § 2 of MARA “adopted language from and is interpreted
consistent with the Sherman Act.” Perceptron, 221 F.3d at 919 n.6 (citing
Compton v. Joseph Lepak, DDS, PC, 397 N.W.2d 311 (Mich. Ct. App.
1986)).
29
But it is also the case that the Michigan Supreme Court did not
quote Care Heating or any number of other governing Sherman Act cases
applying this five-factor test. Rather, it quoted a rule of reason test
developed in a 1918 Supreme Court Sherman Act case which requires
courts to weigh a number of factors, under the framework that “[t]he true
test of legality is whether the restraint imposed is such as merely
regulates and perhaps thereby promotes competition or whether it is
such as may suppress or even destroy competition.” Bd. of Trade of City
of Chicago, 246 U.S. at 238. Those factors are: “the facts peculiar to the
business to which the restraint is applied; its condition before and after
the restraint was imposed; the nature of the restraint and its effect,
actual or probable.” Id. Additionally, “[t]he history of the restraint, the
evil believed to exist, the reason for adopting the particular remedy, [and]
the purpose or end sought to be attained.” Id. Also telling, when the
Michigan Supreme Court declared that the rule of reason should be
applied, it cited Perceptron (which involved antitrust claims, but did not
apply the five-factor test), and County Materials and Bristol Window
(both of which did not involve antitrust claims).
In reviewing the various factors articulated in Board of Trade,
Perceptron,
and
County
Materials,
the
cases
cited
in
Liquid
Manufacturing, the Court finds they are more in line with the venerable
old Hubbard factors from 1873 than they are with the 21st Century five-
30
factor test set out in Care Heating.5 And while “MARA was enacted in
order to create uniform state laws and to draw upon federal antitrust
decisions,” Compton v. Joseph Lepak, D.D.S., P.C., 397 N.W.2d 311, 316
(Mich. Ct. App. 1986), this Court can discern no reason why a defendant
seeking to defend against the breach of a covenant not to compete should
have to prove all the strict elements of a § 1 Sherman Act claim to meet
its burden. The Court may “draw upon federal antitrust decisions” and
take guidance from decisions such as Board of Trade without necessarily
imposing all the requirements of a § 1 Sherman Act claim.6
This Court also finds that a common theme among each of these
formulations of the rule of reason is that the party challenging the
restrictive covenant must demonstrate that it causes some harm to
competition in the greater product market. This effect on the greater
market appears to be the most substantial difference between the
showing that must be made under § 445.774a(1) and that which would
Plaintiffs rely on Little Caesar Enters., Inc. v. Creative Rest. Inc., No. 16-14263, 2017
WL 4778721 (E.D. Mich. Oct. 23, 2017), to argue that a full Sherman Act analysis
should be applied when analyzing the breach of a business-to-business restrictive
covenant. But that case involved trademark infringement, unfair competition, and
trade dress infringement claims, not just a breach of contract action. And it neither
applied all five Sherman Act factors nor did it clearly hold that all the Sherman Act
factors must be met in a breach of contract action.
6 The Court appreciates that both the Sixth Circuit and the Michigan Supreme Court
in Liquid Manufacturing considered the Sherman Act concepts of per se violations
and horizontal restraints on trade. See 912 F.3d at 340-41; 885 N.W.2d at 874. But
while the Sixth Circuit and Michigan Supreme Court discussed these Sherman Act
concepts, they did not expressly require that defendants challenging a noncompete
agreement would necessarily need to prove all the elements of a § 1 Sherman Act
claim.
5
31
be required under the rule of reason framework. Indeed, as outlined
above, Perceptron, County Materials, and Board of Trade consider
duration, geographical scope, and reasonableness between the parties
under the rule of reason, but they also consider the restrictive covenant’s
impact on competition in the wider market. Even Hubbard required
consideration of the covenant’s “effect upon the public.” 27 Mich. at 1920. In other words, it is not enough—as Defendants contend—for the
Court to examine the covenant’s duration, geographic scope, type of
conduct prohibited, and business interests justifying the restriction—as
it did in its prior order. Based on this Court’s understanding of the
Michigan Supreme Court’s reasoning in Liquid Manufacturing, the
Court concludes that the following factors should be considered when
applying the rule of reason test to evaluate challenges to noncompete
agreements in the business-to-business context under Michigan law: (1)
whether the restraint is ancillary to the main business purpose of an
otherwise lawful contract; (2) whether the restraint protects legitimate
property interests, for example, goodwill; (3) whether the restraint’s
duration, geographic reach, and scope are reasonable considering the
nature of the property interest being protected; and (4) whether the
restraint suppresses or destroys competition in the relevant market. The
Court must take into account each of these factors to determine whether
the restraint is reasonable or void. Hubbard, 27 Mich. at 20 (“[I]f
32
reasonable and just, the restriction will be sustained, if not, it will be held
void.”).
iii. Application of the “rule of reason” test
In attempting to apply the rule of reason, the Court first
acknowledges the relevance of many of the Court’s prior findings. This
Court has already found that Plaintiff has a legitimate business interest
in the Choline Family restrictions and that the scope and geographic
locations of the restrictions are reasonable. ECF No. 219, PageID.9232.
Further, as in Perceptron, here the Court has already concluded that the
noncompete agreement was ancillary to the main purpose of the
Settlement Agreement. 221 F.3d at 919. Defendants previously conceded
that Living Essentials’ desire to protect its goodwill was a legitimate
business purpose. ECF No. 219, PageID.9232. And this Court held that
the restrictive covenant “had perhaps a greater than normal concern to
protect its goodwill from these parties because they had previously
admitted to wrongfully manufacturing [5-Hour Energy] in the past.” ECF
No. 219, PageID.9232.
But this Court also originally held that § 5.c.i’s 20-year duration
was unreasonable. ECF No. 219, PageID.9234 (stating that “courts have
upheld time periods of six months to three years”) (quoting Lowry
Computer Prods. Inc. v. Head, 984 F. Supp. 1111, 1116 (E.D. Mich. 1997)).
However, Lowry involved an employer-employee noncompete agreement,
as did Radio One, Inc. v. Wooten, 452 F. Supp. 2d 754, 759 (E.D. Mich.
33
2006), and Rooyakker & Sitz, P.L.L.C. v. Plante & Moran, P.L.L.C., 742
N.W.2d 409, 418 (Mich. Ct. App. 2007). The only cases cited by the Court
outside of the employer-employee context were Bristol Window, 650
N.W.2d at 679, and In re Spradlin, 284 B.R. 830, 836 (E.D. Mich. 2002).
In re Spradlin held that five years was reasonable, 284 B.R. at 836, while
Bristol Window considered a three-year limitation and remanded for the
trial court to determine whether the length was reasonable, 650 N.W.2d
at 498.
The Court’s additional review of Michigan cases involving businessto-business noncompete agreements has discovered several other cases,
one finding a 5-year noncompete clause reasonable, another allowing a
duration of 20 years, and a third holding that a never-ending noncompete
agreement would be categorically unreasonable. For example, in
Brillhart v. Danneffel, the Michigan Court of Appeals analyzed a
covenant not to compete between the buyer and seller of a restaurant
under a reasonableness standard. 194 N.W.2d 63, 65 (Mich. Ct. App.
1971). It held that the business-to-business noncompete agreement was
reasonable because the defendant understood they were signing a 5-year,
10-mile restriction, the defendant’s agent wrote the agreement, and they
voluntarily signed the contract. 194 N.W.2d 63, 65 (Mich. Ct. App. 1971).
Brillhart distinguished a case in which the court found a covenant to be
unreasonable because it required the seller to “never” re-engage in the
relevant business. Id. at 65-66 (citing Wolverine Sign Works v. Powers,
34
227 N.W. 669, 670, 674 (Mich. 1929) (“Never is a long time. It is a longer
time than necessary to enable the purchaser of a business to convert the
good will into a good will personal to himself.”)).
And more recently, in the unreported decision of Lieghio v.
Loveland Invs., the Michigan Court of Appeals held that a 12-mile, 20year covenant not to compete in a hotel business was not unreasonable
because “the parties’ agreement is similar to those upheld in a long line
of cases, like Brillhart, that have sanctioned covenants not to compete
where they are merely a reasonable restraint on a seller’s competitive
efforts in order to promote the buyer’s realization of goodwill in the
purchased business.” Nos. 285393-94, 2009 WL 3491620, at *1, 5 (Mich.
Ct. App. Oct. 29, 2009) (citing Hubbard, 27 Mich. at 19, 21). These
decisions do not provide the Court with much comfort that a business-tobusiness noncompete agreement lasting 20 years would necessarily be
found reasonable under the rule of reason test, but nor do they clearly
indicate that a 20-year noncompete agreement with otherwise reasonable
terms would automatically be voided under the rule of reason.
Particularly where, as here, the record indicates that Jones testified he
knew the covenant’s duration was 20 years when he signed the document,
and that NSL was free during this time to manufacture energy shots—
though not using Choline Family ingredients. That said, the Court has
also already found that Living Essentials “has failed to provide a
reasonable justification for a [20-year] restriction” and that its interest
35
in protecting its goodwill does not justify this decades-long restriction.
ECF No. 219, PageID.9235. And it has articulated its skepticism that
Living Essential’s “attempt to achieve the protections of a patent vis-àvis Custom Nutrition [and NSL] without having demonstrated that it
was legally entitled to a patent is not a reasonable use of a non-compete
agreement.” Id. at PageID.9263.
But as explained above, the key feature that makes the rule of
reason different from the test the Court already applied in its prior Order
is the requirement that a defendant show—in addition to these other
factors—a reasonable likelihood that enforcing the restrictive covenant
will cause anticompetitive effects. In order to make this showing, the
Court concludes a defendant may present the kind of evidence that would
tend to support a § 1 Sherman Act claim under the five-factor burdenshifting rule of reason framework because such evidence is probative of
the anticompetitive nature of the alleged restraint.7 But at the same
time, it is not necessary that the defendant present evidence sufficient to
prove all of the elements required to make out a Sherman Act antitrust
violation.
As detailed above, the Seventh Circuit took a similar approach in County Materials
for patent misuse cases. 502 F.3d at 736 (stating that it is “not necessary for a plaintiff
to plead a case that would suffice to show that the antitrust laws have been violated.
But, at the summary judgment stage, some evidence tending to show an adverse effect
in an economically sound relevant market is essential for any claim governed by the
rule of reason”) (emphasis added).
7
36
Defendants rely on the report provided by Living Essentials’
damages expert to show that Plaintiff’s product holds a significant
percentage of the energy shot market and therefore has market power.8
Given this market power, Defendants assert there is a potential for
anticompetitive effects under the rule of reason. ECF No. 415,
PageID.26022-24. But NSL has not argued how the restrictive covenant
causes anticompetitive effects. The case Defendants rely on, Realcomp II,
Ltd. v. F.T.C., 635 F.3d 815 (6th Cir. 2011), requires such a showing.9
Realcomp II holds that: “[m]arket power and the anticompetitive nature
of the restraint are sufficient to show the potential for anticompetitive
effects under a rule-of-reason analysis, and once this showing has been
made, [the proponent of the restraint] must offer procompetitive
justifications. Id. at 827. Here, NSL emphasizes the market power
element but entirely ignores the “anticompetitive nature of the restraint”
element.
The details of this report are under seal. Further, this expert testified he was
defining the relevant product markets strictly for purposes of damages calculations,
which was a different consideration than defining product markets for purposes of an
antitrust analysis.
9 Notably, Realcomp II is a Sherman Act case, and it applies that rigid five-factor
burden-shifting test developed in the Sixth Circuit under the Sherman Act. As
explained above, in Liquid Manufacturing, the Michigan Supreme Court did not hold
that the application of the rule of reason test would necessarily require proof of all
the elements of a §1 Sherman Act claim, but it did cite to antitrust cases that have
applied the rule of reason, indicating that the kinds of proof offered in such cases
would be useful to parties attempting to show anticompetitive effects.
8
37
In other words, at this stage, Defendants have not created a
genuine issue of material fact that the restrictive covenant has
anticompetitive effects on the energy shot market. Regardless of whether
Plaintiff has market dominance, Defendants must be able to show a jury
that the 20-year restrictive covenant between Plaintiff and Defendants
had anticompetitive effects on the market. NSL’s reliance on Plaintiff’s
alleged market dominance alone does not show, or raise a genuine issue
of fact, that the restrictions between NSL and Living Essentials “narrows
consumer choice” or “hinder[s] the competitive process.” Id. at 829. See
also Nat’l Soc’y of Prof’l Eng’rs, 435 U.S. 679, 692 (1978) (requiring an
analysis of “the competitive significance of the restraint”). Put
differently, NSL must create a genuine issue of material fact that the
restrictive covenant not only harmed NSL, but that it also harmed
competition in the greater energy shot market (whether because an NSL
free of the restrictive covenant would have been such a significant market
competitor that their elimination for 20 years harmed the market as a
whole, or for some other reason). That Plaintiff may have captured a large
percentage of NSL’s sales because NSL was unable to produce a
competing product containing Choline Family ingredients would
be
relevant if NSL could show that its lost sales would have been large
enough to impact the energy shot market. A subsidiary issue may also
be, for example, whether the Choline Family ingredients are influential
in determining a product’s success in the energy shot market. At this
38
point, Defendants have not made anything like this kind of showing, and
the report of Plaintiff’s damage expert does not do it for them.10
Moreover, this Court has already found that the covenant does not
prevent Defendants from competing in the energy shot market. Rather,
it prevents Defendants from using one family of ingredients. ECF No.
219, PageID.9233. NSL “can continue to develop, market, and distribute
energy liquids using all other types of ingredients.” Id. Defendants’
assertion that Plaintiff’s alleged market power is a sufficient showing
under Realcomp ignores this Court’s finding that the noncompete
agreement does not prevent Defendants from competing in the energy
shot market. It also fails to explain how this market share is caused by
the restrictive covenant—or indeed how the covenant impacts energy
shot manufacturers other than Defendants.
Further, at trial, Jones testified that of the 17 energy shots Custom
Nutrition produced at the time it entered into the Settlement Agreement,
only 2 were affected by the restrictive covenant, or so he could recall. ECF
No. 305, PageID.13854. While NSL denies that it produced any of the
other 17 energy shots, ECF No. 415, PageID.26014, the question is not
For the same reasons, the Court will not conduct a “quick look rule of reason”
analysis under the Sherman Act as NSL suggests. See ECF No. 415, PageID.26024.
Not only is that a Sherman Act concept not applicable here, it is reserved for the
situation where “an observer with even a rudimentary understanding of economics
could conclude that the arrangements in question would have an anticompetitive
effect on customers and markets.” Cal. Dental Ass’n. v. FTC, 526 U.S. 756, 770 (1999).
NSL has not shown this degree of anticompetitive effect to warrant any “abbreviated”
rule of reason analysis.
10
39
whether NSL is harmed by the restriction, but whether the greater
energy shot market is. That these other energy shots compete
successfully in the marketplace without Choline Family ingredients may
be telling. See Lektro-Vend Corp. v. Vendo Co., 660 F.2d 255, 265 (7th Cir.
1981) (“Legitimate reasons exist to uphold noncompetition covenants
even though by nature they necessarily restrain trade to some degree.
The recognized benefits of reasonably enforced noncompetition covenants
are by now beyond question.”). In sum, while market power may be
inferred from evidence of significant market share, Defendants still must
show “the anticompetitive nature of the restraint,” which Defendants
have not shown, or raised a genuine issue of material fact from which a
jury could conclude as such. Realcomp II, 635 F.3d at 827.
iv. NSL is entitled to discovery on anticompetitive effects
The Sixth Circuit’s remand order on the rule of reason issue
acknowledged that this “fact-intensive determination” falls appropriately
with the district court and it tasked the parties with providing “the
detailed record information necessary” to enable this Court to apply the
rule of reason test. 912 F.3d at 342. On its own, the Sixth Circuit did not
apply the rule of reason or find as a matter of law that NSL had or had
not met the test.
In light of the new test articulated by the Michigan Supreme Court
and identified by the Sixth Circuit—and as it must now be applied by this
Court—NSL could not have known that it would be required to develop
40
evidence regarding the potential anticompetitive effects of the restrictive
covenant to defeat Plaintiff’s breach of contract claim when it was
initially engaged in discovery with Plaintiff. Neither the parties nor the
Court were operating with the understanding that the rule of reason test
as outlined by Liquid Manufacturing, required by the Sixth Circuit’s
decision in this case, and now fleshed out by this Court would govern the
interpretation of the restrictive covenant and consequently determine the
boundaries
of
relevant
evidence
affecting
the
question
of
its
reasonableness. The Court believes this weighs in favor of permitting
NSL additional limited discovery on the question of whether § 5.c.i of the
Settlement Agreement has anticompetitive effects. C.f. Grant v. Metro.
Gov’t. of Nashville & Davidson Cty., 646 Fed.Appx. 465, 467-68 (6th Cir.
2016) (where additional discovery on remand of disparate impact claim
was not allowed because Sixth Circuit found as a matter of law that
plaintiffs failed to establish a prima facie case of disparate-impact
discrimination).
This course of action also makes sense because, as explained in
greater detail below, the Lead Case is no longer operating on a static
record. Living Essentials has moved to consolidate the Lead and
Secondary Cases and has requested the Court to allow additional,
narrowly tailored discovery on a number of subjects related to the claims
of the Secondary Case against Lily of the Desert. Because the Court will
grant Plaintiff’s motion later in this Order, it will be necessary for
41
discovery to be re-opened in any event. In the interests of justice, both
NSL and Lily of the Desert should also be given the opportunity to
develop evidence on the issue of anticompetitive effects under the rule of
reason.11
Accordingly, the Court DENIES Plaintiff’s motion for summary
judgment (ECF No. 420) and DENIES Defendants motion for summary
judgment (ECF No. 200), as Defendants should have the opportunity to
conduct additional, targeted and limited discovery on whether there is a
reasonable likelihood that enforcing the restrictive covenant will cause
anticompetitive effects. The Court makes no finding at this time as to
whether the restrictive covenant violates the rule of reason. As such, the
Court also need not resolve the question at this time as to whether
reformation is an appropriate remedy if a business-to-business
noncompete agreement is found to violate the rule of reason. Liquid Mfg.,
885 N.W.2d at 870-71 & n.21.
Plaintiff contends that additional discovery is not appropriate because NSL
initially brought an antitrust counterclaim and therefore had the opportunity to
conduct such discovery. See Second Amended Counterclaim, ECF No. 188. First, that
claim was dismissed because it was time barred. ECF No. 337. And more importantly,
in light of this Court’s decision to consolidate the Lead and Secondary Cases on
Plaintiff’s motion, and to reopen discovery once consolidation is complete, NSL and
Lily should have the opportunity to conduct discovery on anticompetitive effects
under the rule of reason.
11
42
C. Consolidation of the Lead and Secondary Cases
i. Consolidation is warranted
In addition to the parties’ cross motions for summary judgment on
the application of the rule of reason, Plaintiff also moves to consolidate
the Lead Case with the Secondary Case involving Lily of the Desert. See
ECF No. 403. Plaintiff alleges that while litigating the Lead Case, it
learned that NSL was actually the nutrition division of L.D.O.C. Group,
Ltd. (“LD Operating”), which in turn was owned by L.D.O.C., Inc. (“LD
Inc.”). Secondary Case, 16-11179, ECF No. 1, PageID.7. Plaintiff brought
suit against LD Operating and LD Inc. (together “Lily”), asserting that
they are alter egos of NSL. In the complaint, Plaintiff alleges Lily should
be liable for NSL’s breaches of § 5.c.i of the Settlement Agreement as
uncovered in the Lead Case (if it is found that NSL is insolvent and
unable to pay any judgment against it), as well as for additional breaches
occurring after discovery concluded in the Lead Case. Id. at PageID.3637.12 Further, the complaint alleges that Lily, as an alter ego of NSL,
produced energy liquids containing Alpha-GPC and Betaine, which a jury
has already concluded are prohibited ingredients under the Choline
Family restrictions. Jury Verdict Form, ECF No. 296. However, the
Paragraphs 141 and 142 of the Complaint allege that “[i]n April 2014, the NSL
division ceased operations and all assets, including at least four of the accounts or
agreements to produce the Secret Products, were transferred to LD Operating or LD
Inc. and LD Operating began to produce and sell at least four of the Secret Products.
. . . Such transfer occurred without any agreement or consideration.” No. 16-11179,
ECF No. 1, PageID.31.
12
43
complaint also alleges that Lily and NSL may have produced energy
liquids containing other, unspecified Choline Family ingredients (that
presumably could be discovered during the discovery process). No. 1611179, ECF No. 1, PageID.19, 34.
Alternatively, if LD Operating and LD Inc. are not alter egos of
NSL, Plaintiff alleges in the complaint that LD Operating and LD Inc.
(as separate and distinct entities) induced Jones, CNL and/or NSL to
breach § 5.c.i13 by assisting them in producing energy liquids containing
Choline Family ingredients, resulting in tortious interference with
contract and business expectancy. Id. at PageID.44-48. Additionally,
Plaintiff contends they are liable under the Texas or Michigan Uniform
Fraudulent Transfer Act for receiving substantially all of NSL’s assets
without adequate consideration and Plaintiff seeks an order avoiding
those transfers and awarding Plaintiff monetary recovery “in whatever
amount Plaintiff is found to be entitled.”14 Id. at PageID.48-50. Plaintiff
also alleges a civil conspiracy claim against NSL and Lily. Id. at 50-51.
The Complaint also alleges violations of other provisions of the Settlement
Agreement. However, because this Court has already held—and the Sixth Circuit
affirmed—that NSL is only bound by § 5.c of the Settlement Agreement by virtue of
its incorporation into the Asset Purchase Agreement, the Court will only discuss
those counts in the 16-11179 Complaint that assert violations relating to § 5.c. See
912 F.3d at 338-39; ECF No. 343 (Order on Motions for Summary Judgment disposing
of counts II, IV, V, VII and VII in Lead Case).
14 It is unclear from Plaintiff’s Complaint in Case No. 16-11179 whether Plaintiff is
arguing that under the Michigan/Texas Fraudulent Transfer Act, it is able to recover
for “new” breaches by Lily of the Desert (i.e., breaches that were not specifically made
by NSL during the time frame that the parties’ damages experts analyzed).
13
44
With this summary of the Secondary Case in mind, Plaintiff argues
that the Lead and Secondary Cases involve multiple common issues of
law and fact which should persuade this Court to exercise its discretion
and consolidate the cases for trial. ECF No. 403. Living Essentials
contends that because a jury trial has already concluded that Alpha-GPC
and Betaine are Choline Family ingredients, consolidation will ensure
swifter recovery against NSL and Lily for their alleged violations. NSL
argues that consolidation is not appropriate because (1) transfer of the
Secondary Case to the Eastern District of Texas pursuant to 28 U.S.C. §
1404(a) is appropriate, (2) Plaintiff did not appeal the Court’s order
denying Plaintiff’s motion to amend its complaint to add the Lily
defendants and associated claims and therefore this holding is the law of
the case,15 and (3) the cases do not involve multiple issues of law and fact
justifying consolidation. ECF No. 409.
Pursuant to Federal Rule of Civil Procedure 42(a)(2), “[i]f actions
before the court involve a common question of law or fact, the court may
. . . consolidate the actions.” The party seeking consolidation, here
Plaintiff, bears the burden of proving that consolidation should be
However, just because the Court at one time denied a plaintiff’s motion to amend
its complaint does not preclude a party from later moving to consolidate by invoking
the Court’s discretionary power to do so under Federal Rule of Civil Procedure
42(a)(2). This is not barred by the mandate rule because the district court is free on
remand to consider issues remanded, issues arising for the first time after remand,
and “issues that were timely raised before the district and/or appellate courts but
which remain undecided.” Wright & Miller Fed. Prac. & Proc. § 4478.3 (quoting
United Sates v. Morris, 259 F.3d 894, 898-99 (7th Cir. 2001)).
15
45
granted. Invest-Import v. Seaboard Surety Co., 18 F.R.D. 499, 500
(S.D.N.Y 1955). And the essential test “is whether there are common
questions of law or fact.” Hasman v. G.D. Searle & Co., 106 F.R.D. 459,
460 (E.D. Mich. 1985) (citing Brewer v. Republic Steel Corp., 513 F.2d
1222 (6th Cir. 1975)). “Consolidation is in the sound discretion of the
court.” Id. (citing Stemler v. Burke, 344 F.2d 393 (6th Cir. 1965)).
A trial court making a decision to consolidate must consider:
[W]hether the specific risks of prejudice and possible
confusion [are] overborne by the risk of inconsistent
adjudications of common factual and legal issues, the burden
on parties, witnesses and available judicial resources posed by
multiple lawsuits, the length of time required to conclude
multiple suits as against a single one, and the relative
expense to all concerned of the single-trial, multiple-trial
alternatives.
Cantrell v. GAF Corp., 999 F.2d 1007, 1011 (6th Cir. 1993) (quoting
Hendrix v. Raybestos-Manhattan, Inc., 776 F.2d 1492, 1495 (11th Cir.
1985)). “Thus, the decision to consolidate is one that must be made
thoughtfully, with specific reference to the factors identified above.” Id.
“Care must be taken that consolidation does not result in unavoidable
prejudice or unfair advantage. Conservation of judicial resources is a
laudable goal. However, if the savings to the judicial system are slight,
the risk of prejudice to a party must be viewed with even greater
scrutiny.” Id. “When cases involve some common issues but individual
issues predominate, consolidation should be denied. Consolidation is not
46
justified or required simply because actions include a common question
of fact or law.” Hasman, 106 F.R.D. at 461 (internal citations omitted)
(emphasis in original). “Consolidation is improper when the introduction
of ‘voluminous’ evidence, relevant to one of the consolidated actions but
irrelevant to another, impairs the conduct of trial.” Id. (citing Flintkote
Co. v. Allis-Chalmers Corp., 73 F.R.D. 463, 465 (S.D.N.Y. 1977).
Applying the Cantrell factors here, the Court finds that
consolidation is appropriate. First, any risks of prejudice and confusion
are overborne by the risk of inconsistent adjudications of common factual
and legal issues. In order for Plaintiff to win a judgment from Lily for any
of its alleged violations of the Settlement Agreement (pre and post April
2014) in the Secondary Case, Plaintiff would have to prove both that Lily
was an alter ego and that Alpha-GPC and Betaine are Choline Family
ingredients. Although a jury has already established this in the Lead
Case, ECF No. 296, if the Secondary Case is not consolidated, it is at least
possible that a second jury might disagree and conclude that Lily’s
production of energy liquids containing these ingredients does not violate
the Choline Family restrictions. In such circumstances, Plaintiff would
be unable to recover a judgment from Lily even if it proved that Lily and
NSL were alter egos.
Further, special jury verdict forms could be created to avoid juror
confusion. In a consolidated trial, the jury could be instructed to first
consider whether Lily is NSL’s alter ego. If yes, the jury could determine
47
what damages Plaintiff is entitled to for Lily and NSL’s usage of the
Choline Family ingredients, as litigated in the first trial. If the jury does
not conclude that Lily is NSL’s alter ego, the jury would be instructed to
consider whether, as a discrete and separate entity, Lily violated the
Michigan Uniform Fraudulent Transfer Act and engaged in tortious
interference with business expectancy and contract. To be sure,
Plaintiff’s claims against Lily as an alter ego rely, in part, on the
speculation that NSL is insolvent and would be unable to pay any
judgment against it in the Lead Case. But even if Lily is not found to be
NSL’s alter ego, Plaintiff’s tortious interference and fraudulent transfer
claims would still be closely related to the Lead Case. This is because
Plaintiff argues they arise from Lily’s interference with Plaintiff’s rights
under § 5.c.1 “and its improper efforts—during the course of the [Lead
Case]—to assist NSL in avoiding ultimate judgment collection.”
Secondary Case, No. 16-11179, ECF No. 16, PageID.643. Indeed, as the
Sixth Circuit acknowledged when it consolidated the Lead and Secondary
Cases on appeal, “[a]ll claims in the Secondary Case relate to the same
nucleus of fact as in the Lead Case, and [Living Essentials] concedes that
the claims in the Secondary Case ‘rise or fall with the rulings in the lead
case.’” 912 F.3d at 326.
Second, any risk of prejudice or confusion is overcome by the burden
on the parties, witnesses and available judicial resources posed by
multiple lawsuits, including the time and expense of trying multiple suits
48
rather than a single one. While limited discovery would be required to
determine whether an alter ego relationship exists, whether Lily
tortiously interfered with NSL’s obligations under the Settlement
Agreement, and to investigate and calculate additional damages for any
alleged violations by Lily after April 2014, such limited discovery would
be a comparatively minor inconvenience compared to the amount of
judicial resources saved by not duplicating discovery in the Lead Case for
the Secondary Case. Indeed, Plaintiff has cited to discovery from the Lead
Case that it intends to use to prove an alter ego relationship and
underlying facts for the remaining Lily claims. This weighs in favor of
consolidation. See White v. Baxter Healthcare Corp., No. 05-71201, 2008
WL 5273661, at *3 (E.D. Mich. Dec. 17, 2008) (concluding that the burden
to the parties, witnesses, and the Court would be significant if separate
trials were conducted where the trials would be conducted in close
proximity and one case required only limited discovery, which could be
conducted in an expedited manner). Plaintiff has stated it needs only an
additional 120 days of discovery on the limited issues of alter ego
relationship, Lily’s tortious interference, existence of a fraudulent
transfer and additional production and sales of energy liquids by Lily
that violate § 5.c.i. Unlike when Plaintiff filed its motion to amend the
complaint, the case is not on the eve of trial, so there is less concern for
prejudice to NSL.
49
ii.
Transfer to the Eastern District of Texas is not
appropriate
In arguing that consolidation is not appropriate, NSL incorporates
by reference the arguments it made in its motion to transfer venue, filed
in the Secondary Case. Likewise, Plaintiff incorporates the arguments it
made in its response to NSL’s motion. The parties dispute whether, under
28 U.S.C. § 1404(a), it would be in the interests of justice to transfer the
Secondary Case to the United States District Court for the Eastern
District of Texas.
Section 1404(a) of Title 28 of the United States Code provides that
“[f]or the convenience of the parties and witnesses, in the interests of
justice, a district court may transfer any civil action to any other district
or division where it might have been brought or to any district or division
to which all parties have consented.” District courts have wide discretion
to transfer an action pursuant to § 1404(a). Audi AG v. D’Amato, 341 F.
Supp. 2d 734, 749 (E.D. Mich. 2004). The Court must weigh several
factors: “(1) the convenience of the parties; (2) the convenience of the
witnesses; (3) the relative ease of access to sources of proof; (4) the
availability of processes to compel attendance of unwilling witnesses; (5)
the cost of obtaining willing witnesses; (6) the practical problems
associated with trying the case most expeditiously and inexpensively;
and (7) the interest of justice.” Id. (quoting MCNIC Oil & Gas Co. v. IBEX
Resources Co., 23 F. Supp. 2d 729, 738-39 (E.D. Mich. 1998)). “The party
50
who brings a motion to transfer venue bears the burden of proving by a
preponderance of the evidence that ‘fairness and practicality strongly
favor the forum to which transfer is sought.’” Weather Underground, Inc.
v. Navigation Catalyst Syst., Inc., 688 F. Supp. 2d 693, 696 (E.D. Mich.
2009) (emphasis added) (quoting Amphion, Inc. v. Buckeye Elec. Co., 285
F. Supp. 2d 943, 946 (E.D. Mich. 2003). The defendant must show that
the plaintiff’s chosen forum is “unnecessarily burdensome.” Boling v.
Prospect Funding Holdings, LLC. 771 Fed.Appx. 562, 568 (6th Cir. 2019).
“Merely shifting the inconvenience from one party to another does not
meet [the] [d]efendant’s burden. If the court determines that the balance
between the plaintiff’s choice of forum and the defendant’s desired forum
is even, the plaintiff’s choice . . . should prevail.” Choon’s Design, LLC v.
Larose Industries, LLC, No. 13-13569, 2013 WL 5913691, at *2 (E.D.
Mich. Nov. 1, 2013) (internal citations and quotations omitted).
In considering all of these factors, the Court finds that “fairness and
practicality” do not “strongly favor” Texas as the forum. Weather
Underground, 688 F. Supp. 2d at 696. As discussed above, any purported
inconvenience to NSL is overcome by the significant common issues of
law and fact between the Lead and Secondary Cases. Judicial economy is
served by having the same district court try cases involving the same
contracts. In re Volkswagen of Am., Inc., 566 F.3d 1349, 1351 (Fed. Cir.
2009) (transfer on inconvenience grounds where district court could try
two cases involving the same patents).
51
While the Secondary Case will involve the additional issues of alter
ego and fraudulent transfer, the court adjudicating the Secondary Case
will be tasked with determining several issues that are already before
this Court—just for a new timeline with respect to damages. Namely,
whether post-April 2014 conduct by Lily (as an alter ego for NSL) was a
violation of the Settlement Agreement. While the Court appreciates that
the fraudulent transfer claim would involve an alleged transfer of assets
between two Texas corporations, an ultimate question for the Court to
consider in the Secondary Case is whether Lily, as a potential alter ego
of NSL, violated §5.c.i of the Settlement Agreement through conduct that
was not at issue in the Lead Case (post-April 2014 sales). Whether Lily
manufactured products that contained Choline Family ingredients and
therefore violated the Settlement Agreement, and how damages should
be calculated for any determined violation are precisely the same issues
the Court has been considering and will further determine in the Lead
case for violations by Custom Nutrition and NSL up through April 2014.
Additionally, in the Secondary Case Plaintiff alleges that NSL concealed
documents that would have shown an alter ego relationship during the
litigation of the Lead Case, further linking the two cases. This Court is
already all-too-familiar with the parties, witnesses, and legal issues at
play, the relevant provisions of the Settlement Agreement, and the
Choline Family ingredients. And many of the witnesses and parties have
already testified before this Court.
52
Therefore, while “these cases may not involve precisely the same
issues, there will be significant overlap and a familiarity with the
[Settlement Agreement that] could preserve time and resources. . . .
[J]udicial economy is served by having the same district court try the
cases involving the same [Settlement Agreement].” In re Volkswagen of
America, Inc., 566 F.3d 1349, 1351 (Fed. Cir. 2009). Accordingly, in
determining that consolidation is appropriate here, the Court also
concludes that transfer of the Secondary Case to the United States
District Court for the Eastern District of Michigan under 28 U.S.C. §
1404(a) is not appropriate.
D. Clarification of Jones as a Defendant
Finally, Plaintiff has moved for clarification of whether Alan Jones
may still be considered a defendant in this matter. See ECF No. 403. This
issue was explicitly addressed by the Sixth Circuit in ruling on whether
Jones was bound by the Settlement Agreement in his personal capacity
and therefore whether he would remain a defendant in the case. The
Sixth Circuit explicitly held: “the Settlement Agreement does not bind
Jones in his personal capacity.” 912 F.3d at 337. While this holding would
seem to resolve the issue by indicating that Jones is no longer a
defendant, the Sixth Circuit also affirmed this Court’s holding that NSL
is bound by § 5.c.i because it was incorporated by reference into the Asset
Purchase Agreement, which NSL signed—and so did Jones. Id. at 33839.
53
Living Essentials asserts that as a result of these holdings, Jones
should still be a defendant in the case because he signed the Custom
Nutrition-NSL Asset Purchase Agreement in his personal capacity as a
“member of CNL,” binding himself to that agreement and (like NSL)
incorporating by reference the obligations of § 5.c.i of the Settlement
Agreement. This argument is exactly the one made by the Court in dicta
in its 2015 Order on the parties’ motions for summary judgment. ECF
No. 219. In a footnote, this Court stated:
The Court notes that the same incorporation by reference
rationale that binds Nutrition Science to the Choline Family
restriction applies regarding Alan Jones. Jones signed the
Asset Purchase Agreement twice, once in his representative
capacity for Custom Nutrition and a second time in his
individual capacity. Thus, there is no question that Jones’s
signature complies with the Statute of Frauds. As explained
above, § 4.2(r) incorporates the Settlement Agreement’s
Choline Family restrictions by reference. According to the
Asset Purchase Agreement, Section 4.2(r) was a
representation made not only by CNL (the Seller) but also by
its “Members.” Jones signed the agreement as a Member of
CNL and consequently also made the representation in §
4.2(r). As a result, Jones also incorporated the Choline Family
restrictions by reference. However, because the Court finds
below that Jones is personally bound under Settlement
Agreement, the Court need not hold Jones liable under
incorporation by reference.
ECF No. 219, PageID.9222.
The question is whether the Sixth Circuit’s holding that “the
Settlement Agreement does not bind Jones in his personal capacity,”
54
precludes Plaintiff from arguing on remand that under the logic of the
Court’s dicta, Jones is still bound to the Settlement Agreement because
he also signed the Asset Purchase Agreement as a member of CNL, and
that agreement incorporated by reference part of the Settlement
Agreement. This presents an interesting question under the “law of the
case” doctrine because it concerns an appellee seeking to revisit an issue
on remand that was previously decided by the district court and explicitly
reversed (but on other grounds) by the court of appeals. Living Essentials
was both appellee and cross-appellant before the court of appeals. Jones
and NSL appealed this Court’s ruling that Jones was bound personally
to the Settlement Agreement. On appeal, Living Essentials had every
incentive to defend the district court’s ruling—and was fully aware that
the district court had expressed in dicta an alternative legal basis for
finding that Jones was bound to the Settlement Agreement. Living
Essentials chose not to raise this alternative ground in defending the
district court’s ruling on appeal, but has swiftly resurrected it on remand
knowing that the court of appeals was not given the chance to consider
it.
Generally, the “law of the case” doctrine is applied differently to
appellees because “[f]orcing an appellee to raise all possible defenses on
a first appeal ‘might increase the complexity and scope of appeals more
than it would streamline the progress of the litigation.’ ‘[F]ull application
of the waiver rule to an appellee puts it in a dilemma between procedural
55
disadvantage and improper use of the cross-appeal,’ justifying ‘a degree
of leniency in applying the waiver rule to issues that could have been
raised by appellees on previous appeals.’ Wright & Miller Fed. Prac. &
Proc., § 4478.6 Law of the Case—Related Doctrines (quoting Crocker v.
Piedmont Aviation, Inc., 49 F.3d 735, 738–741 (D.C. Cir. 1995)). Applying
such a degree of leniency may not be appropriate here, however, because
raising the district court’s alternative basis for binding Jones would not
have unduly complicated the appeal and would have added clarity to the
Sixth Circuit’s decision. While that general rule may not preclude Living
Essentials from arguing on remand that Jones is personally liable under
the Settlement Agreement through incorporation by reference, even
though it failed to raise the issue with the Sixth Circuit when it had the
chance, there is an element of “lying in wait” about Plaintiff’s tactics that
gives the Court pause in considering whether justice would be served by
allowing Jones to be brought back into the case after the Sixth Circuit
has ruled he is out.
Regardless, however, in looking closely at the Sixth Circuit’s
holding, it is clear that the issue of Jones’ status as a defendant has been
conclusively decided by the Sixth Circuit and was not remanded to permit
further consideration by this Court. The Sixth Circuit determined that
Jones was not individually liable because under Michigan law “he signed
the Agreement in his capacity as a corporate officer.” 912 F.3d at 337
(quoting Liquid Mfg., LLC, 885 N.W.2d 861, 867 n.6 (Mich. 2016)). To
56
permit Plaintiff to now resurrect the logic in this Court’s prior footnote
would go against “both the letter and the spirit of the mandate.” Mason
v. Mitchell, 729 F.3d 545, 550 (6th Cir. 2013).
Accordingly, the Court holds that because the Sixth Circuit
concluded “the Settlement Agreement does not bind Jones in his personal
capacity,” he is no longer a party to the Lead Case. Jones is DISMISSED
WITH PREJUDICE in his personal capacity.
IV. Conclusion
For the reasons stated above the Court DENIES Plaintiff’s Motion
for Summary Judgment (ECF No. 420), DENIES Defendants’ Motion for
Summary Judgment (ECF No. 400), GRANTS IN PART Plaintiff’s
Motion to Consolidate the Lead Case and the Secondary Case (ECF No.
403), and DISMISSES WITH PREJUDICE Alan Jones as a defendant
from the Lead Case.
IT IS FURTHER ORDERED that the parties shall meet and
confer to develop and propose a stipulated scheduling order within 21
days of the date of this Order, and shall file the same with Court.
57
IT IS SO ORDERED.
DATED: March 31, 2020.
BY THE COURT:
/s/Terrence G. Berg
TERRENCE G. BERG
United States District Judge
58
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