443 P.3d 780
Utah Ct. App.2019Background
- In May 2009 LifeVantage and Backbone (owned by Burke Hedges) entered an Independent Distributor Agreement plus a First Amendment; LifeVantage agreed to monthly "Support Payments."
- The Agreement required prior written approval for supplemental marketing materials and restricted unapproved websites; Backbone launched a public website in June 2009 making prohibited health/income claims and selling non-LifeVantage products without approval.
- LifeVantage stopped Support Payments in October 2009 due to cash flow and proposed a Second Amendment offering stock in lieu of cash; Backbone never agreed to that amendment.
- LifeVantage later investigated complaints about Hedges, found some misconduct credible, placed Backbone on probation, suspended the distributorship, and terminated the Agreement in mid-2010 for breaches including the unapproved Website.
- A transfer agent issued a stock certificate for 240,000 shares (initially prepared by LifeVantage but retained when Backbone declined the stock amendment); a substitute certificate was later issued to Hedges, who transferred and sold the shares.
- Backbone sued for breach of contract and implied covenant; LifeVantage counterclaimed for conversion. The district court granted summary judgment for LifeVantage on breach and conversion; Backbone and Hedges appealed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether LifeVantage breached the implied covenant of good faith and fair dealing by terminating the Agreement (pretext motive) | Backbone: LifeVantage’s stated grounds were pretext; motive (not wanting to pay / animus toward Hedges) shows bad faith | LifeVantage: Termination followed objectively defined breaches (unapproved Website); motive irrelevant where express contractual right to terminate exists | Court: Affirmed for LifeVantage—agreement gave objective right to terminate for any breach; motive is irrelevant where termination right is objectively defined |
| Whether LifeVantage was precluded from terminating by the first-breach rule | Backbone: LifeVantage breached first by withholding Support Payments, so it cannot terminate | LifeVantage: Backbone committed the first breach (Website) in June 2009; LifeVantage’s later nonpayment occurred after that breach | Court: Backbone breached first (Website rollout); first-breach rule does not bar LifeVantage’s termination |
| Whether Hedges can prevail on conversion of the 240,000 shares | Hedges: Inference that LifeVantage intentionally issued/allowed issuance of stock to Hedges in lieu of payments despite lack of agreement; genuine issue of intent | LifeVantage: No evidence supports an inference of intentional conversion; transfer agent actions lack proof of LifeVantage intent | Court: Summary judgment in favor of LifeVantage affirmed—Hedges failed to present evidentiary foundation or legal analysis to defeat summary judgment |
Key Cases Cited
- Markham v. Bradley, 173 P.3d 865 (Utah Ct. App. 2007) (implied covenant supplies objective reasonableness when contract leaves discretion undefined)
- Oakwood Village LLC v. Albertsons, Inc., 104 P.3d 1226 (Utah 2004) (implied covenant cannot create duties inconsistent with express contract terms)
- Load Zone Mktg. & Mgmt., LLC v. Clark, 333 P.3d 1255 (Utah Ct. App. 2014) (if contract grants a clear legal right to terminate, motive for exercising it is irrelevant)
- Tuf Racing Prods., Inc. v. American Suzuki Motor Corp., 223 F.3d 585 (7th Cir. 2000) (duty of good faith does not justify judicial inquiry into motive where good cause for termination exists)