October 24th Court of Appeals Decision: The Non-Compete Lawsuit Involving 5 Hour Energy.

Happy Thanksgiving!

This Case was too interesting to pass up writing about.

I have posted a series on covenants not-to-compete and a friend and fellow lawyer (Eric Guerin, Varnum Law – check him out, great business/real estate litigator) sent me this recent unpublished Michigan Court of Appeals decision involving the makers of 5 Hour Energy Drink  and their failed attempt to enforce a covenant not-to-compete against a competitor, “Eternal Energy“.

The Case: Innovation Ventures, L.L.C. v. Liquid Mfg., L.L.C., No. 315519, 2014 WL 5408963, (Mich. Ct. App. Oct. 23, 2014)

A. Synopsis:

As the Court of Appeals states, this case “primarily concerns plaintiff’s business dealings and contracts with two entities, defendant K & L Development and defendant Liquid Manufacturing.” Id.

Innovation Ventures engaged Defendant to bottle its 5 Hour Energy Drink. Innovation later ended its relationship with Defendant, in order to bottle its own product.

Innovation retained another Defendant to consult in the marketing of 5 Hour Energy Drink, and then terminated its business relationship after two weeks.

Both Defendants (bottler, and consultant) decided to come together and compete with 5 Hour Energy. After an extensive lawsuit involving multiple counts, amended pleadings, discovery, Plaintiff’s claims were dismissed!

B. Facts: (they are admittedly relatively complex)

Parties:

• Plaintiff, Innovation Ventures, LLC, – the maker of “5 Hour Energy”

• Defendants Liquid Manufacturing, LLC, K & L Development of Michigan, LLC, and Peter Paisley and Andrew Krause, the presidents and owners of Liquid Manufacturing and K & L Development.

i. Innovation Engages Liquid to bottle 5 Hour Energy

• On May 18, 2007, plaintiff entered into a manufacturing contract whereby plaintiff hired defendant Liquid Manufacturing to bottle 5 Hour Energy.

• In June 2010, plaintiff terminated its agreement with defendant Liquid Manufacturing, and the parties entered into an agreement to formalize the termination and to formalize plaintiff’s exercise of its option to purchase the equipment that defendant Liquid Manufacturing used to bottle plaintiff’s product. Id. pg 1.
• The Termination agreement contained nondisclosure and non-compete provisions, but permitted defendant Liquid Manufacturing to produce a list of 36 “Permitted Products” on the equipment that was formerly used to bottle plaintiff’s product; that permission could be revoked for violation of the Termination Agreement. Plaintiff agreed, though, to give defendant Liquid Manufacturing 30 days to cure any violation of the agreement. Id.

ii. Innovation Engages K&L to Help Market 5 Hour Energy

• In 2008, Plaintiff and Defendant K&L entered an oral agreement with defendants, defendants to act as consultants “to help design, manufacture, and install certain beverage production and packaging equipment for plaintiff.”

• On April 27, 2009, plaintiff and defendants Krause and K & L Development entered into a written agreements, including a confidentiality and non-compete agreement” Id.

• On or about May 10, 2009, less than two weeks after the signing of the Agreements, plaintiff terminated the parties’ business relationship. The Parties entered into a “Termination Agreement”

And The Plot Thickens…

iii. K&L and Liquid Join Forces to Make: Eternal Energy

• On September 10, 2010, defendant Eternal Energy LLC, which produces a liquid energy shot known as “Eternal Energy” was formed by the owners of Liquid Manufacturing and K&L Development to compete with 5 Hour Energy.

• On May 9, 2011, defendant LXR Biotech was formed;  Defendant LXR Biotech markets and distributes Eternal Energy in approximately 2–ounce bottles, which is approximately the size of 5 Hour Energy bottles. Id. pg 2.

• On September 20, 2010, ten days after the formation of defendant Eternal Energy, defendant’s CFO contacted plaintiff’s counsel, and requested that Eternal Energy be added to the list of Permitted Products that defendant Liquid Manufacturing could, pursuant to the Termination Agreement, produce.

• In an e-mail dated September 21, 2010, plaintiff agreed to include it. (this would later be fatal to Plaintiff’s case)

• On January 27, 2012, plaintiff sued Defendants, alleging breach of confidentiality agreement, non-compete agreements, as well as  tort claims for the disclosure of its confidential information.

Essentially, Plaintiff claimed that Defendant wrongfully obtained Plaintiff’s confidential information, and the Defendants used the information in marketing Eternal Energy, and by representing to Wal-Mart that defendant previously bottled 5 Hour Energy for plaintiff. Id.

After several amended complaints and extensive discovery of documents, (aka “loads of attorney fees”) Defendants filed a motion to dismiss. The Court granted the  motion and dismissed all claims. Plaintiff appealed. The Court of Appeals affirmed – found in favor of Defendants.

C. The Court of Appeals Ruling

Some of the rules of law cited by the Court are worth particular mention.