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HealthBanc International, LLC v. Synergy Worldwide, LLC

United States District Court, D. Utah

August 1, 2019

HEALTHBANC INTERNATIONAL, LLC and BERNARD FELDMAN, Plaintiffs and Counterclaim Defendants,
v.
SYNERGY WORLDWIDE, INC. and NATURE'S SUNSHINE PRODUCTS, INCORPORATED, Defendants and Counterclaim Plaintiffs.

          MEMORANDUM DECISION AND ORDER GRANTING IN PART AND DENYING IN PART MOTIONS FOR SUMMARY JUDGMENT AND MOTIONS TO EXCLUDE EXPERT TESTIMONY

          Jill N. Parrish United States District Court Judge

         Plaintiff HealthBanc International, LLC sued Synergy Worldwide, Inc. for breach of a royalty agreement. Bernard Feldman, the sole member of HealthBanc, also sued Nature's Sunshine, Inc. and Synergy for breach of a separate confidentiality agreement. Synergy countersued, alleging that HealthBanc had breached the royalty agreement and that HealthBanc and Feldman were liable for fraudulent inducement. Before the court is a motion for summary judgment brought by Synergy and Nature's Sunshine [Docket 125], motions for summary judgment brought by HealthBanc and Feldman [Docket 129, 150], and motions brought by both sides to exclude expert witness testimony [Docket 121, 122].

         The court GRANTS IN PART and DENIES IN PART Synergy and Nature's Sunshine's motion for summary judgment. [Docket 125]. The court also GRANTS IN PART and DENIES IN P A R T HealthBanc and Feldman's motions for summary judgment. [Docket 129, 150]. The court GRANTS HealthBanc's motion to exclude expert testimony [Docket 121] and DENIES AS MOOT Synergy's motion to exclude expert testimony [Docket 122].

         BACKGROUND

         HealthBanc created a recipe for a powder comprised of various grasses and other natural ingredients called the Greens Formula. The Greens Formula can be combined with water to create a nutritional supplement.

         The owner of HealthBanc, Feldman, alleges that he entered into a confidentiality agreement with Nature's Sunshine, which also bound its subsidiary, a multi-level marketing company called Synergy.[1] The confidentiality agreement required Nature's Sunshine and Synergy to maintain the confidentiality of the Greens Formula.

         HealthBanc also entered into a royalty agreement with Synergy. Under the terms of the agreement, HealthBanc assigned to Synergy its “entire rights, title, and interest in and to the Greens Formula, including, without limitation, all patent rights and other intellectual property rights of any kind.” In exchange, Synergy agreed to “pay HealthBanc a royalty on net unit sales by Synergy for Greens Formula equal to One Dollar and Seventy Five Cents ($1.75) per 150 gram bottle of the Greens Formula which is sold by Synergy.” The recipe for the Greens Formula is described in Exhibit A and Exhibit B attached to the royalty agreement. Exhibit A lists the original formula, while Exhibit B describes a variation of the Greens Formula that purports to comply with California's Proposition 65. The Exhibit A and Exhibit B versions of the of Greens Formula have the same 22 ingredients. But in the Exhibit B formula, five of the ingredients are in different proportions than the ingredients for the Exhibit A formula. The other 17 ingredients are in the same proportions in both the Exhibit A and Exhibit B versions of the formula.

         Using the Exhibit B iteration of the Greens Formula, Synergy began to sell a product called Core Greens in 2006. Core Greens was initially sold in 150-gram bottles. Synergy later used the Core Greens formula to create capsules that were sold in 150-gram increments alongside the bottled product.

         Over the years, Synergy made several changes to the recipe of the Core Greens product. In 2008, Synergy eliminated an ingredient that accounted for 23.77% of the original formula because Synergy could “no longer source the material.” Synergy compensated for this loss by increasing the amounts of four other existing ingredients. In 2009, Synergy excluded another ingredient that comprised .22% of the Core Greens formula because it had “become difficult to source.” Synergy increased the proportion of three other ingredients. In 2013, Synergy removed an ingredient that accounted for .06% of the Core Greens formula because it had become “extremely difficult to source” and increased the amount of one of the other existing ingredients. Finally, in 2014, Synergy eliminated an ingredient that comprised 5.3% of the Core Greens formula because it had been discontinued by the supplier and it was difficult to find a new supplier. This ingredient was replaced by a new ingredient not found in the original Greens Formula. During the course of these changes to the Core Greens formula, Synergy continued to pay a $1.75 royalty for net unit sales for the Core Greens bottles and capsules.

         In 2013, a dispute arose between Synergy and HealthBanc. In September of that year, Synergy inadvertently sent a document to HealthBanc detailing sales numbers for a Core Greens product in South Korea. HealthBanc had previously been unaware of these sales and argued to Synergy that it was entitled to royalties for sales in South Korea and other foreign countries. Synergy, however, asserted that it did not have to pay royalties for the foreign sales. Over the next two years, the parties attempted to resolve this business dispute. The principals of Synergy and HealthBanc met in November 2015 to discuss the disagreement but did not come to any resolution. Synergy stopped making royalty payments after it made a payment for sales for the month of November 2015.

         In February 2016, HealthBanc sued Synergy for breach of contract and for breach of the covenant of good faith and fair dealing. HealthBanc alleged that Synergy broke its promise to pay royalties that were owed from sales in a number of foreign countries and by underpaying for sales made in the United States. HealthBanc requested monetary damages for unpaid royalties and an injunction prohibiting “Synergy from replacing the Greens Formula with a separate formula.” Feldman also sued Nature's Sunshine and Synergy, asserting that they had breached the confidentiality agreement by publishing information about the Greens Formula on the packaging of products sold in South Korea.

         Synergy countersued HealthBanc, alleging that HealthBanc had breached the royalty agreement and engaged in fraudulent inducement by falsely implying that it held intellectual property rights for the Greens Formula. Synergy also claimed that HealthBanc breached the royalty agreement by failing to provide contractually required consultation services.

         In 2016, Synergy began selling the Core Greens formula in single-serve foil packages referred to as a “stick packs.” The stick packs are sold in 150-gram increments. Synergy added an anti-caking agent that is useful for this new form of packaging and rebranded the product as Essential Greens. Synergy asserts in this litigation that it has no obligation to pay royalties for the Essential Greens stick packs or the Core Greens capsules.

         I. SYNERGY'S AND NATURE'S SUNSHINE'S MOTION FOR SUMMARY JUDGMENT

         Synergy and Nature's Sunshine move for summary judgment, asserting three main arguments. First, Synergy contends that it is entitled to partial summary judgment on HealthBanc's claim for damages for breach of the royalty agreement and breach of the covenant of good faith and fair dealing. Second, Synergy argues for summary judgment on HealthBanc's injunctive relief claim. And third, Nature's Sunshine and Synergy assert that they are entitled to summary judgment on Feldman's claim for breach of the confidentiality agreement.

         A. Damages Claim Against Synergy

         Synergy argues that, as a matter of law, HealthBanc is not entitled to royalties for two categories of sales. First, it asserts that it has no obligation to pay royalties for sales of the Essential Greens product because the formula for this product is different from the Greens Formula referenced in the royalty agreement. Second, Synergy contends that it has no obligation to pay royalties on products sold in stick packs or in capsules because the royalty agreement only requires it to pay a fee for products sold in bottles.

         1) Changes to the Core Greens/Essential Greens Formula

         The royalty agreement requires Synergy to pay fees for the sale of products made using the Greens Formula. Two versions of the Greens Formula were attached to the agreement as Exhibit A and Exhibit B. In 2006, Synergy began selling a product called Core Greens using the Exhibit B version of the Greens Formula.

         Over the years, though, Synergy made changes to the formula for its Core Greens product. It eliminated three of the 22 ingredients found in the original Greens Formula because of difficulties in purchasing these ingredients. Synergy increased the proportions of other existing ingredients to make up the difference. Synergy also eliminated a fourth ingredient due to sourcing problems and replaced it with a new ingredient. Finally, Synergy changed the name of its product from Core Greens to Essential Greens and changed the way that it was packaged. Synergy added a small amount of an anti-caking agent to facilitate the new packaging configuration.

         Synergy argues that it has no contractual obligation to pay royalties on sales of the Essential Greens product because it is not made from the Greens Formula. It contends that the changes that it made to the Greens Formula over the years have transformed Essential Greens into a new product that is not subject to the royalty agreement.

         HealthBanc makes two arguments in response. First it argues that the exact definition of the term “Greens Formula” in the royalty agreement is ambiguous, requiring consideration of extrinsic evidence to determine its meaning. HealthBanc contends that because extrinsic evidence must be evaluated by a jury, summary judgment is not appropriate. Second, HealthBanc argues that Synergy's decision to modify the Greens Formula and stop paying a royalty on the resulting product violates both an explicit good faith provision found in the royalty agreement and the implied covenant of good faith and fair dealing. The court addresses each of HealthBanc's arguments in turn.

         i. Extrinsic Evidence

         Generally, parties may not introduce extrinsic evidence of the meaning of a contract unless the language of the contract is facially ambiguous. Mind & Motion Utah Invs., LLC v. Celtic Bank Corp., 367 P.3d 994, 1001 (Utah 2016); Giusti v. Sterling Wentworth Corp., 201 P.3d 966, 975 (Utah 2009). “A contract is facially ambiguous if its terms are ‘capable of more than one reasonable interpretation because of uncertain meanings of terms, missing terms, or other facial deficiencies.'” Mind & Motion, 367 P.3d at 1001 (citation omitted). In other words, “a contract provision is ambiguous only where the parties submit tenable contrary readings of the provision.” Layton City v. Stevenson, 337 P.3d 242, 248 (Utah 2014); see also Brady v. Park, No. 20160425, 2019 WL 2051350, at *11 (Utah May 8, 2019) (“Under our caselaw a reasonable interpretation is an interpretation that cannot be ruled out, after considering the natural meaning of the words in the contract provision in context of the contract as a whole, as one the parties could have reasonably intended.”).

         The parties in this litigation disagree as to whether the meaning of the term “Greens Formula” is ambiguous as it is used in the key payment provision of the royalty agreement. The agreement provides: “Synergy will pay HealthBanc a royalty on net unit sales by Synergy for Greens Formula . . . .” Synergy argues that “Greens Formula, ” as it is used in this clause, is not ambiguous and can only be read to mean one of the exact formulas attached as Exhibits A and B to the royalty agreement. HealthBanc, on the other hand, asserts that this term is ambiguous because provisions of the contract suggest that “Greens Formula” includes modified versions of the formula.

         The royalty agreement does not contain an explicit definition of “Greens Formula.” The introductory recitals section of the contract, however, sheds some light on the term. This section states:

B. HealthBanc has expertise in the development of nutritional products and has developed an exclusive formula known as Greens Formula (the “Greens Formula”).
C. Synergy desires to purchase from HealthBanc the Greens Formula as defined in Exhibit A and Exhibit B and HealthBanc desires to supply the Greens Formula exclusively to Synergy, pursuant to the terms and conditions set forth below in this Agreement.
D. If it becomes necessary to make a change to the formula to enter various countries, wherein Synergy may sell this product, both Synergy and HealthBanc will work together to facilitate changes to the product.

         In the representations and warranties section of the royalty agreement, HealthBanc also warrants that it is the sole and exclusive owner of “the Greens Formula, as identified in Exhibit A and Exhibit B attached hereto.” Synergy argues that Recital C and the warranties section of the royalty agreement explicitly define the term “Greens Formula” as the two formulas attached to the contract. It contends, therefore, that it is required to pay royalties only on products made from one of these two precise formulas; any derivative formulas are excluded from the definition of “Greens Formula” and no payment of royalties is required for the sale of products made from derivative formulas.

         The court concludes, however, that the term “Greens Formula” is ambiguous because there is another plausible reading of this term that is “reasonably supported by the language of the contract.” See Daines v. Vincent, 190 P.3d 1269, 1277 (Utah 2008) (citation omitted). In order to determine whether a term is ambiguous, courts must look to the contract as a whole. Id. “Greens Formula” is first defined in Recital B as “an exclusive formula” developed by HealthBanc “known as Greens Formula (the “Greens Formula”).” Recital C then states that Synergy desires to purchase the versions of the Greens Formula “defined in Exhibit A and Exhibit B.” But this statement is immediately followed by language in Recital D that contemplates future modifications to the Greens Formula: “If it becomes necessary to make a change to the formula to enter various countries, wherein Synergy may sell this product, both Synergy and HealthBanc will work together to facilitate changes to the product.” Paragraph 4 of the royalty agreement also suggests that future changes may be made to the Greens Formula. This provision requires HealthBanc to provide to Synergy “consultation services as may be reasonably required in order to research, develop and market the Greens Formula.” (Emphasis added). The royalty agreement, therefore, contemplates that the parties would work together to “facilitate changes to” and “develop” the Greens Formula. Thus, the term “Greens Formula, ” as used in the royalty provision, can be read to incorporate modifications made to the original formulas purchased by Synergy.

         Another provision of the royalty agreement adds to the ambiguity surrounding the term “Greens Formula.” The agreement contains a good faith clause, which provides: “The parties agree to maintain good faith, loyalty and mutual respect towards each other during the course of this agreement.” Synergy's contractual duty of good faith could reasonably be interpreted to support HealthBanc's construction of “Greens Formula” to include derivative versions of the Exhibit A and Exhibit B iterations of the formula. Making non-material changes to the formula in order to escape the obligation to pay royalties could be a violation of the good faith provision. Thus, the good faith provision plausibly supports HealthBanc's interpretation of the term “Greens Formula” to include derivative versions of the formula.

         In short, “Greens Formula, ” as it is used in the royalty provision, is ambiguous. The parties may introduce extrinsic evidence, including their course of performance in relation to derivative formulas, to resolve this ambiguity. See WebBank v. Am. Gen. Annuity Serv. Corp., 54 P.3d 1139, 1145 (Utah 2002) (“If a contract is ambiguous, the court may consider the parties' actions and performance as evidence of the parties' true intention.”). This is a question for the jury that may not be resolved by the court on summary judgment. See Brady, 2019 WL 2051350, at *12. Therefore, the court denies partial summary judgment on the issue of whether royalties are owed on the Essential Greens product.

         ii. Covenant of Good Faith and Fair Dealing

         As noted above, the royalty contract contains a good faith provision, which provides: “The parties agree to maintain good faith, loyalty and mutual respect towards each other during the course of this agreement.”[2] In addition, the parties are bound by the implied covenant of good faith and fair dealing inherent in every contract. See Oman v. Davis Sch. Dist., 194 P.3d 956, 968 (Utah 2008). “Under the covenant of good faith and fair dealing, both parties to a contract impliedly promise not to intentionally do anything to injure the other party's right to receive the benefits of the contract.” Id. (citation omitted). “To determine the legal duty a contractual party has under this covenant, a court will assess whether a ‘party's actions [are] consistent with the agreed common purpose and the justified expectations of the other party.'” Oakwood Vill. LLC v. Albertsons, Inc., 104 P.3d 1226, 1239-40 (Utah 2004) (alteration in original) (citation omitted). The parties' common purpose and justified expectations are determined “by considering ‘the contract language and ...


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