912 F.3d 316
6th Cir.2018Background
- Innovation Ventures (maker of 5-Hour Energy) settled prior litigation with Custom Nutrition in a written Settlement Agreement that (among other things) prohibited use of ingredients in the "Choline Family" and allocated $1.85M as consideration.
- Custom Nutrition’s assets were later sold to Nutrition Science Laboratories (NSL) under an Asset Purchase Agreement that referenced limits on Custom Nutrition’s formulas "by the settlement agreement."
- NSL (with former Custom Nutrition officer Alan Jones involved) manufactured energy shots containing choline citrate, choline bitartrate, betaine, and alpha-GPC; Innovation sued for breach of the Settlement Agreement and related claims.
- The district court held that NSL was bound by §5.c (Choline Family restrictions) via incorporation; it found the catch‑all phrase ambiguous (jury found betaine and alpha‑GPC covered), reformed the covenant duration from 20 years to 3 years, and left factual issues (e.g., laches, damages) for trial.
- Parties stipulated to entry of nominal damages ($1) to expedite appeal; Innovation appealed, and the Sixth Circuit considered appellate jurisdiction under the Raceway/Procter & Gamble line of authority.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Appellate jurisdiction over stipulated final judgment | Stipulations were to "expedite appeal" of adverse orders; appeal should be allowed under Raceway/Procter & Gamble precedent | Judgment was a consensual dismissal not final under §1291; appeal should be dismissed | Appeal permitted: Sixth Circuit applied Raceway exception (distinguishing Microsoft) and found §1291 satisfied |
| Personal jurisdiction (waiver) | Innovation did not directly contest | Defendants challenged district court’s exercise of personal jurisdiction on appeal | Defendants waived personal jurisdiction objections by litigation conduct and Rule 12 practice; court proceeded to merits |
| Whether Alan Jones is personally bound by the Settlement Agreement | Innovation: Jones signed and is bound individually | Jones: signed only once as "President and CEO," indicating corporate capacity | Reversed: Jones is not bound in his individual capacity as a matter of law (single signature labeled in representative capacity) |
| Whether NSL is bound by the Settlement Agreement via incorporation into the Asset Purchase Agreement | Innovation: APA §4.2(r) plainly incorporates settlement restrictions on formula | NSL: APA limits liabilities; language does not plainly incorporate restrictive covenants | Affirmed: under Texas law APA plainly referred to and incorporated §5.c (Choline Family restrictions); NSL is bound |
| Ambiguity of Settlement Agreement's catch‑all clause ("equivalents, derivatives, substitutes") | Innovation: clause can encompass betaine and alpha‑GPC | Defendants: clause should be narrowly construed; not ambiguous | Affirmed: clause ambiguous as a matter of law; issue properly for the jury (jury found betaine/alpha‑GPC covered) |
| Enforceability / duration of noncompete-like covenant; applicable standard | Innovation: apply Michigan Supreme Court’s business‑to‑business rule (rule of reason under antitrust framework) | Defendants: district court properly used employment noncompete standard and reformed to 3 years | Court reversed reformation and held Liquid Mfg. II requires rule of reason; burden to show restraint is unreasonable lies with defendants; remanded for rule‑of‑reason factual analysis |
| Laches defense | Innovation: laches inapplicable because suit filed within statutory limitations; also invoked unclean hands | Defendants: alleged delay and prejudice; laches may bar claim even within statutory period | Affirmed (as to existence of factual disputes): material factual issues on delay and prejudice exist—jury must resolve laches; unclean hands not established |
| Damages methodologies (market‑share lost profits, reasonable royalty, disgorgement) | Innovation: may present market‑share lost profits, reasonable royalty, and disgorgement under contract/remedy clauses | Defendants: market‑share model too speculative; royalty not appropriate in contract context; disgorgement not incorporated against NSL | Mixed: Market‑share lost‑profits approach may be presented to jury; reasonable‑royalty methodology rejected for this contract context; disgorgement denied (§5.d not incorporated to permit disgorgement against NSL) |
| Defendants' antitrust counterclaim (relation back) | Defendants: amended antitrust counterclaim relates back to original pleading | Innovation: original pleadings lacked antitrust injury facts; statute of limitations bars claim | Affirmed dismissal: amended antitrust counterclaim did not relate back; defendants were not on notice of antitrust claim in original pleading |
Key Cases Cited
- Catlin v. United States, 324 U.S. 229 (finality under §1291 principle)
- United States v. Procter & Gamble Co., 356 U.S. 677 (consenting to form of dismissal to obtain review)
- Microsoft Corp. v. Baker, 137 S. Ct. 1702 (limits on creating finality via voluntary dismissals; class‑action context)
- Raceway Properties, Inc. v. Emprise Corp., 613 F.2d 656 (6th Cir.) (permitted appeal where stipulated dismissal was to expedite review of effectively final order)
- Perceptron, Inc. v. Sensor Adaptive Machines, Inc., 221 F.3d 913 (6th Cir.) (rule‑of‑reason framework; defendant bears burden to show restraint invalid)
- Liquid Mfg., LLC v. Innovation Ventures, LLC, 885 N.W.2d 861 (Mich. 2016) (Michigan Supreme Court: business‑to‑business noncompetes evaluated under antitrust rule of reason rather than employment noncompete statute)