The Wellness Group, LLC v. King Bio, Inc.

Filing 149

MEMORANDUM OF DECISION AND ORDER granting 70 Motion for Partial Summary Judgment, and it is hereby DECLARED that the Non-Competition Provision of the parties' Non-Competition and Non-Disclosure Agreement signed February 23, 2012 is invalid and unenforceable. Signed by District Judge Martin Reidinger on 04/30/2014. (thh)

THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF NORTH CAROLINA
ASHEVILLE DIVISION
CIVIL CASE NO. 1:12-cv-00281-MR-DLH

THE WELLNESS GROUP, LLC,

)
)
Plaintiff,
)
)
vs.
)
)
KING BIO, INC., DR. FRANK J.
)
KING, JR., SUZIE R. KING, DAVID
)
GERHARDT, and MICHAEL D.
)
WHITTAKER,
)
)
Defendants.
)
________________________________ )

MEMORANDUM OF
DECISION AND ORDER

THIS MATTER is before the Court on the Plaintiff’s Motion for Partial
Summary Judgment as to Count VII of the Amended Complaint [Doc. 70].
I.

PROCEDURAL BACKGROUND
The Plaintiff The Wellness Group, LLC (“TWG”) initiated this action

on September 10, 2012 against the Defendant King Bio, Inc. (“King Bio”)
and its corporate officers for claims arising out of the alleged breach of the
parties’ Sales Management Agreement (SMA). In addition to its claims
relating to the breach of the SMA, TWG seeks a declaratory judgment that
the non-compete provision of the Non-Competition and Non-Disclosure

Agreement entered into between TWG’s principal Michael Lupacchini
(“Lupacchini”) and King Bio on February 23, 2012 is invalid and
unenforceable because it lacks consideration and also because it is overly
broad. [Doc. 45].
TWG now seeks summary judgment on this declaratory judgment
claim. [Doc. 70]. King Bio opposes the motion, arguing inter alia that no
actual controversy exists to support a claim under the Declaratory
Judgment Act. King Bio further argues that the Agreement is supported by
consideration and that it includes reasonable restrictions necessary to
protect King Bio’s legitimate business interests. [Doc. 94].
Having been fully briefed and argued, this matter is now ripe for
review.
II.

STANDARD OF REVIEW
Summary judgment is proper “if the movant shows that there is no

genuine dispute as to any material fact and the movant is entitled to
judgment as a matter of law.” Fed. R. Civ. P. 56(a). A fact is “material” if it
“might affect the outcome of the case.” News and Observer Pub. Co. v.
Raleigh-Durham Airport Auth., 597 F.3d 570, 576 (4th Cir. 2010).

A

“genuine dispute” exists “if the evidence is such that a reasonable jury

2

could return a verdict for the nonmoving party.” Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 248 (1986).
A party asserting that a fact cannot be genuinely disputed must
support its assertion with citations to the record. Fed. R. Civ. P. 56(c)(1).
“Regardless of whether he may ultimately be responsible for proof and
persuasion, the party seeking summary judgment bears an initial burden of
demonstrating the absence of a genuine issue of material fact.” Bouchat v.
Baltimore Ravens Football Club, Inc., 346 F.3d 514, 522 (4th Cir. 2003). If
this showing is made, the burden then shifts to the non-moving party who
must convince the Court that a triable issue does exist. Id.
In considering the facts for the purposes of a summary judgment
motion, the Court must view the pleadings and materials presented in the
light most favorable to the nonmoving party and must draw all reasonable
inferences in the nonmoving party’s favor. Adams v. Trustees of the Univ.
of N.C.-Wilmington, 640 F.3d 550, 556 (4th Cir. 2011).
III.

FACTUAL BACKGROUND
TWG is a limited liability corporation organized and existing under the

laws of the State of Pennsylvania with its principal place of business in
Virginia. TWG is a sales management company that helps launch and
manage product lines for consumer product companies through a network
3

of broker representatives in the United States and Canada. Lupacchini is
the founder and member of TWG and assumed primary responsibility for
the business relationship with King Bio. [Amended Complaint, Doc. 45 at ¶
6].
King Bio is a corporation organized and existing under the laws of the
State of North Carolina with its principal place of business in Asheville,
North

Carolina.

King

Bio

is

an

FDA-registered

pharmaceutical

manufacturing company engaged in the research, development, and sale
of homeopathic medicines. [Id. at ¶ 7; Answer, Doc. 56 at ¶ 7].
On November 22, 2011, King Bio and TWG entered into a Sales
Management Agreement (“SMA”) regarding the launch and management of
King Bio’s Food Drug and Mass market (“FDM”) business. Specifically,
TWG agreed to act as a “national sales manager” for King Bio and develop
its FDM business in exchange for a percentage of King Bio’s earnings as
commission.1
Upon entering the SMA, King Bio and TWG decided to market King
Bio’s asthma product to FDM retailers under King Bio’s SafeCare brand
1

The SMA includes a non-competition clause, which provides that TWG will not
compete, directly or indirectly, with King Bio by selling or brokering competing category
products for a period of 18 months following termination of the SMA. [Doc. 45-1 at 5 ¶
8]. The scope and enforceability of this provision has not been challenged in this
litigation.
4

name, using the product name AsthmaCare®. [Declaration of Frank King
(“F. King Decl.”), Doc. 95 at ¶ 3]. By late December 2011 or early January
2012, King Bio and TWG began developing the packaging and written
materials needed to launch the AsthmaCare® product at the February 2012
FDM trade show known as ECRM. [Id. at ¶ 4].
In February 2012, King Bio initiated the process of filing a trademark
application for the product name AsthmaCare®. [Id. at ¶ 6]. At that time,
King Bio discovered that a competitor was also attempting to register
ownership of the AsthmaCare® trademark. [Id.]. Lupacchini had a history
of business dealings with this competitor, thus making its attempt to
register the AsthmaCare® name of particular concern to King Bio. [Id. at ¶
7].

Specifically, Lupacchini had worked with the competitor during the

spring and summer of 2011, immediately prior to the formation of TWG.
[Id.].

Acting on behalf of this competitor, Lupacchini had consulted

extensively with King Bio on the development of a group of homeopathic
products, including an asthma product.

[Id.; Deposition of Michael

Lupacchini (“Lupacchini Dep.”), Doc. 94-3 at 94-101]. Lupacchini pitched
an arrangement under which King Bio would manufacture the products to
be resold by this competitor; this deal, however, was never consummated.
[F. King Decl., Doc. 95 at ¶ 7].
5

When King Bio learned that this competitor claimed trademark
ownership of a product name that King Bio had recently developed with
Lupacchini’s knowledge, King Bio became concerned about whether its
proprietary information was properly protected in the relationship with
TWG. [Id. at ¶ 8].
Accordingly, on February 23, 2012, King Bio presented Lupacchini
with a Non-Competition and Non-Disclosure Agreement (“Agreement”).
Lupacchini signed the Agreement while attending a planning meeting at
King Bio’s Asheville offices. [F. King Decl., Doc. 94-1 at ¶ 5; Lupacchini
Dep., Doc. 94-3 at 275].
The Agreement recites the following:
1.

KING BIO PHARMACEUTICALS, INC. is
engaged in the business of Homeopathic
consultation, sales, and services.

2.

Michael J. Lupacchini, The Wellness Group,
LLC desires to enter into a contract with KING
BIO.

3.

Because KING BIO will have to disclose to
Michael J. Lupacchini certain of KING BIO’s
confidential information, as a condition to
KING BIO’s agreement to enter into a contract
with Michael J. Lupacchini and to expose
Michael J. Lupacchini to its confidential
information, KING BIO requires that Michael J.
Lupacchini enter into an agreement not to
compete with KING BIO under certain
6

circumstances and not to disclose or use
KING BIO’s confidential information except in
furtherance of KING BIO’s business.
NOW THEREFORE, in consideration of the
premises and other valuable consideration the
sufficiency of which is hereby acknowledged, the
parties agree as follows . . . .
[Doc. 45-2 at 2].

The Agreement goes on to provide two primary

restrictions on the activities of Lupacchini and/or TWG2: (1) a noncompetition agreement restricting Lupacchini’s business activities for a
period of three years following termination of the SMA (“the NonCompetition Provision”); and (2) a non-disclosure agreement prohibiting
Lupacchini from using or disclosing King Bio’s confidential information or
trade secrets following termination of the SMA (“the Non-Disclosure
Provision”).
TWG does not challenge the enforceability of the Non-Disclosure
Provision. The Agreement contains a severability clause, which provides
that in the event that any provision of the Agreement should be declared

2

TWG characterizes this Agreement as one entered into between King Bio and TWG,
and it makes no argument regarding the enforceability of the Agreement as to
Lupacchini individually. The Agreement recites that it is being entered between King
Bio Pharamceuticals, Inc. and “independent contractor, Michael J. Lupacchini, The
Wellness Group, LLC (‘Michael J. Lupacchini’).” [Doc. 45-2 at 2]. Notably, however, the
Agreement is signed by Lupacchini only in his individual capacity, with no reference to
his capacity to sign on behalf of TWG.
7

invalid or unenforceable, such provision shall be deemed removed and the
remaining provisions shall continue in full force and effect. [Doc. 45-2 at 4
¶10]. Accordingly, the Non-Disclosure Provision of the Agreement remains
unaffected by the

Court’s

decision

regarding the

validity and/or

enforceability of the Non-Competition Provision.
The Non-Competition Provision restricts Lupacchini from the following
activities:
(1) render[ing] any services to or solicit any
business
from any person, firm, client, customer, or
corporation with whom or for whom KING BIO has
done business or provided services during Michael
J.
Lupacchini’s period of contract with KING BIO; and
(2) engag[ing] in any business, either alone, with
another, or on behalf of another, or provide
consulting services or other advice to any person
that
competes with KING BIO in any line of business
engaged in by KING BIO.
[Doc. 45-2 at 2].
In August 2012, King Bio sent a notice to TWG, terminating the SMA.
This termination letter states: “Enclosed is a copy of the signed NonCompetition and Non-Disclosure Agreement signed February 23, 2012,

8

which we will you bound for the duration of the term.” [Doc. 70-5 at 3].
This action followed.
IV.

DISCUSSION
A.

Actual Controversy

At the outset, King Bio argues that no actual controversy exists to
support a claim under the Declaratory Judgment Act. Specifically, King Bio
argues that TWG has taken no action that would result in any damages to
King Bio under the Agreement that might be assessed against TWG, nor
has King Bio itself taken any action to enforce the Agreement. As such,
King Bio contends that any purported controversy is speculative and
hypothetical, and this declaratory judgment action must be dismissed.

Under the Declaratory Judgment Act, a federal court “may declare the
rights and other legal relations of any interested party3 seeking such
declaration” when there is an “actual controversy.” 28 U.S.C. § 2201(a). In
order to satisfy the requirement of an actual controversy, the dispute must
3

The parties have not addressed TWG’s standing to seek a declaratory judgment
regarding the enforceability of the Agreement, apparently because both sides view
TWG as a party to the contract. As previously noted, however, it does not appear that
TWG is actually a signatory to this Agreement: Lupacchini signed only in his individual
capacity and not on behalf of TWG as its principal and/or member. In light of
Lupacchini’s close connections with TWG, however, it appears to the Court that the
parties concede that TWG is a proper “interested party” within the meaning of the
Declaratory Judgment Act.
9

“be definite and concrete, touching the legal relations of parties having
adverse legal interests.” Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, 24041 (1937). The dispute must also be “a real and substantial controversy
admitting of specific relief through a decree of a conclusive character, as
distinguished from an opinion advising what the law would be upon a
hypothetical state of facts.” Id. at 241. In other words, “the question in
each case is whether the facts alleged, under all the circumstances, show
that there is a substantial controversy, between parties having adverse
legal interests, of sufficient immediacy and reality to warrant the issuance
of a declaratory judgment.” MedImmune, Inc. v. Genentech, Inc., 549 U.S.
118, 127 (2007) (citation and footnote omitted).
In its August 2012 letter terminating the SMA, King Bio made clear to
TWG that it intended to hold Lupacchini “bound” to the Non-Competition
Provision of the Agreement. King Bio contends that this communication is
insufficient, without more, to create an actual controversy. [Doc. 94 at 6].
In support of this argument, King Bio cites InVue Security Products, Inc. v.
Merchandising Technologies, Inc., No. 3:12-cv-88-RJC-DSC, 2012 WL
2577452, at *3 (W.D.N.C. July 3, 2012). InVue, however, is distinguishable
from the present case.

In InVue, a patentee sent a letter to a party

identifying the patentee’s patent and requesting information about the other
10

party’s product line.

The Court held that this letter did not evidence a

stated position regarding potential infringement and therefore did not
indicate a substantial controversy between the parties.

Id. (“The plain

language of the letter does not identify any activity or product as infringing
any patent.

Instead, the letter appears to function as a proffer of and

request for information. Consequently, it does not establish an adverse
legal position. This type of non-litigious communication alone is insufficient
to establish a case of actual controversy.”). By contrast, in the present
case, the August 2012 termination letter clearly indicated King Bio’s intent
to enforce the Agreement. Under the circumstances, King Bio’s stated
intent to enforce its rights under the Agreement could reasonably be
construed as an intent to bring litigation against Lupacchini, TWG, or both.
The Fourth Circuit has recognized that threats of future litigation are
sufficient to give rise to an actual controversy for the purpose of a
declaratory judgment claim. See Volvo Constr. Equip. N.A., Inc. v. CLM
Equip. Co., 386 F.3d 581, 593 n.12 (4th Cir. 2004) (citing GTE Directories
Pub. Corp. v. Trimen Am., Inc., 67 F.3d 1563 (11th Cir. 1995)).
In the event of a breach of the Agreement, Lupacchini/TWG could be
liable to King Bio for $100,000 in liquidated damages. [See Doc. 45-2 at 3
¶ 7]. The fact that Lupacchini/TWG has refrained from engaging in any
11

conduct which could violate the terms of the Agreement and subject
Lupacchini/TWG to such a penalty does not minimize the nature of the
controversy between the parties. As the Supreme Court has noted, the
“actual controversy” requirement does not require a plaintiff to “destroy a
large building, bet the farm, or . . . risk treble damages and the loss of . . .
its business before seeking a declaration of its actively contested legal
rights.” MedImmune, 549 U.S. at 134.
For these reasons, the Court concludes that the parties have
presented a justiciable controversy to the Court.
B.

Lack of Consideration

Under North Carolina law, a covenant not to compete is enforceable if
it is “(1) in writing; (2) entered into at the time and as part of the contract of
employment; (3) based on valuable consideration; (4) reasonable both as
to time and territory embraced in the restrictions; (5) fair to the parties; and
(6) not against public policy.” Starkings Court Reporting Servs., Inc. v.
Collins, 67 N.C. App. 540, 541, 313 S.E.2d 614, 615 (1984) (analyzing
covenant not to compete imposed upon independent contractor).
An offer of employment may serve as adequate consideration for a
non-competition covenant where the agreement is entered into at the
commencement of the employment relationship. Reynolds and Reynolds
12

Co. v. Tart, 955 F.Supp. 547, 553 (W.D.N.C. 1997); Amerigas Propane, LP
v. Coffey, No. 13 CVS 11778, 2014 WL 580174, at *3 (N.C. Super. Ct. Feb.
11, 2014). If the employment relationship has already commenced when
the non-competition covenant is entered into, some kind of new material
consideration is required.

Reynolds and Reynolds Co., 955 F.Supp. at

553; Forrest Paschal Machinery Co. v. Milholen, 27 N.C. App. 678, 68687, 220 S.E.2d 190, 196 (1975).
Here, it is undisputed that TWG and Lupacchini received no financial
consideration for executing the Agreement. [Suzie King Deposition (“S.
King Dep.”), Doc. 70-8 at 342].

The Agreement itself cites King Bio’s

“agreement to enter into a contract with Michael J. Lupacchini and to
expose Michael J. Lupacchini

to

its confidential information” as

consideration for the non-competition provision. [Doc. 45-2 at ¶ 3]. Both of
these events, however, had already occurred.

King Bio had already

“exposed” Lupacchini to its confidential information; indeed, it was King
Bio’s concern that this shared confidential information had been disclosed
to a competitor which led to King Bio demanding Lupacchini sign the
Agreement in the first place. [See F. King Decl., Doc. 95 at ¶ 8]. As for
King Bio’s agreement to enter “a contract” with Lupacchini, such reference
can only be to the Sales Management Agreement, as it is the only
13

contractual agreement ever executed by the parties. The SMA, however,
had been executed months earlier. “Past consideration . . . is not adequate
consideration to support a contract.” Estate of Graham v. Morrison, 168
N.C. App. 63, 70, 607 S.E.2d 295, 300 (2005). Thus, the execution of the
SMA cannot serve as consideration for this new agreement.
King Bio urges the Court to construe this provision as King Bio
agreeing to the continuation of the SMA in exchange for the non-compete
agreement. [See King Bio’s Response, Doc. 94 at 7 (“The Agreement
states that it is required as a condition of King Bio entering into – and by
extension, continuing under – a contract with TWG….”) (emphasis added)].
This construction, however, is not supported by the plain language of the
Agreement.

In any event, the mere continuation of the parties’

arrangement was simply not sufficient to support consideration for this new
restrictive covenant. See Forrest Paschal Machinery Co., 27 N.C. App. at
686-87, 220 S.E.2d at 196 (“[W]hen the relationship of employer and
employee is already established without a restrictive covenant, any
agreement thereafter not to compete must be in the nature of a new
contract based upon a new consideration.”).4

4

While acknowledging that North Carolina courts require new or additional
consideration to support a non-compete covenant entered after an employment
14

For the foregoing reasons, the Court concludes upon the undisputed
forecast of evidence that there was no consideration to support the noncompetition

provision

of

the

Non-Competition

and

Non-Disclosure

Agreement signed February 23, 2012. Accordingly, the Court will grant
summary judgment in favor of the Plaintiff on Count VII of the Amended
Complaint.

ORDER
Accordingly, IT IS, THEREFORE, ORDERED that Plaintiff’s Motion
for Partial Summary Judgment [Doc. 70] is GRANTED, and it is hereby
DECLARED that the Non-Competition Provision of the parties’ NonCompetition and Non-Disclosure Agreement signed February 23, 2012 is
invalid and unenforceable.

Signed: April 30, 2014

IT IS SO ORDERED.

relationship is already established, King Bio argues that this rule is inapplicable here
because TWG was an independent contractor of King Bio, not an employee. King Bio’s
reasoning, however, is not persuasive. See Superior Performers, Inc. v. Meaike, No.
1:13CV1149, 2014 WL 1412434 (M.D.N.C. Apr. 11, 2014) (requiring new consideration
for non-compete agreements executed after defendants, who were independent
contractors, began their contractual relationship with the plaintiff).
15