Innovation Ventures v. Liquid Manufacturing
499 Mich. 491
| Mich. | 2016Background
- Innovation Ventures contracted with K&L Development (Krause) to design and install bottling equipment and with Liquid Manufacturing to house and operate the equipment used to produce 5-hour ENERGY; oral arrangements were later memorialized in a written EMI (2009) and a separate Nondisclosure Agreement.
- The EMI included confidentiality terms and a five‑year noncompete limited to designing/manufacturing bottling equipment; the Nondisclosure Agreement added broader confidentiality obligations.
- Innovation Ventures terminated the EMI in 2010 (as the EMI expressly allowed). Liquid Manufacturing and its CEO Paisley, and Krause, later formed Eternal Energy and LXR Biotech; Liquid Manufacturing bottled Eternal Energy and other drinks using the equipment.
- Innovation Ventures and Liquid Manufacturing executed a 2011 Termination Agreement memorializing the equipment sale, listing 36 permitted products, requiring nondisclosure agreements from makers of permitted products, and containing a noncompete restricting production of non‑permitted products.
- Innovation Ventures sued in 2012 for breaches of confidentiality and noncompete provisions and related torts; the trial court and Court of Appeals granted summary disposition to defendants on all claims. Supreme Court granted leave to consider (1) failure‑of‑consideration for the EMI and Nondisclosure Agreement and (2) reasonableness/enforceability of the commercial noncompete provisions.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the EMI and Nondisclosure Agreement were void for failure of consideration | The agreements were effectively unenforceable because the business relationship ended shortly after they were signed, leaving K&L without the promised exchange | Consideration existed: parties performed and the EMI expressly contemplated termination; much work was done before writing, and the agreements were supported by bargained‑for exchange | Court: Agreements were supported by consideration and not void for failure of consideration; reversal of Court of Appeals on this point |
| Proper standard for evaluating noncompete provisions between businesses | MARA factors for employee noncompetes should apply (as Court of Appeals used) | Commercial noncompetes between businesses should be reviewed under the antitrust rule of reason, with deference to federal interpretations | Court: Use the rule of reason (not the employee‑statute factors) to assess commercial noncompetes; federal precedent instructive |
| Whether K&L Development or Krause breached the EMI or Nondisclosure Agreement by producing Eternal Energy | Innovation claims K&L/Krause disclosed confidential info and violated noncompete by facilitating/producing a competing drink | Defendants contend EMI/Nondisclosure did not bar using equipment to produce a drink and EMI’s noncompete is limited to design/manufacture of equipment; Krause signed only in representative capacity for the Nondisclosure Agreement | Court: No genuine issue that Krause or K&L breached the EMI (EMI’s confidentiality only covered post‑execution info and noncompete was limited to equipment design/production). Krause not individually liable under Nondisclosure. Remand limited claim whether K&L violated the separate Nondisclosure Agreement because factual issues remain |
| Whether Liquid Manufacturing breached the Termination Agreement by producing Eternal Energy or other unapproved drinks | Innovation contends Liquid Manufacturing breached both nondisclosure and noncompete terms by producing Eternal Energy and other unapproved drinks | Liquid Manufacturing points to plaintiff’s prior approval to add Eternal Energy to the approved list and timely cure (produced executed NDA from Eternal Energy); also argues noncompete is unreasonable | Court: Innovation abandoned the Eternal Energy noncompete claim before this Court (so summary disposition affirmed as to Eternal Energy). But there is a genuine factual issue whether Liquid Manufacturing produced other non‑permitted drinks in breach; remanded to apply rule of reason to noncompete provisions and decide those claims |
Key Cases Cited
- Maiden v. Rozwood, 461 Mich 109 (review standard for summary disposition) (summary disposition under MCR 2.116(C)(10) tests factual sufficiency)
- Miller‑Davis Co. v. Ahrens Const., 495 Mich 161 (contract interpretation de novo; give effect to parties’ intent)
- State Oil Co. v. Khan, 522 US 3 (rule of reason requires case‑specific inquiry into restraint’s nature, history, purpose, and effect)
- Bd. of Trade of City of Chicago v. United States, 246 US 231 (rule of reason articulated—courts consider business‑specific facts, history, intent, and probable effect)
- Perceptron, Inc. v. Sensor Adaptive Machines, Inc., 221 F.3d 913 (6th Cir.) (commercial noncompete ancillary to legitimate transaction must be analyzed under the rule of reason)