Innovation Ventures v. Liquid Manufacturing
885 N.W.2d 861, 499 Mich. 491 (2016)
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Rule of Law:
Commercial noncompete agreements between businesses are to be evaluated under the rule of reason, with deference to federal interpretations of comparable antitrust statutes, rather than the standard for employer-employee noncompete agreements. Furthermore, a contract is not void for failure of consideration when a party exercises a termination right explicitly contemplated by the agreement.
Facts:
- In 2007, Innovation Ventures, LLC, contracted with Andrew Krause and K & L Development, LLC, to design, manufacture, and install equipment to produce and package 5-hour ENERGY at Liquid Manufacturing, LLC’s bottling plant.
- Innovation Ventures also contracted with Liquid Manufacturing, LLC, to house and operate the equipment designed and installed by K & L Development.
- In April 2009, Innovation Ventures and K & L Development formalized their oral agreement into a written Equipment Manufacturing and Installation Agreement (EMI) and also entered into a separate Nondisclosure and Confidentiality Agreement; much of the work contemplated by the EMI had already been completed by this time.
- In 2010, Innovation Ventures terminated the EMI with K & L Development and the manufacturing agreement with Liquid Manufacturing, LLC, which was permitted by the EMI's terms, and K & L Development subsequently ceased business operations.
- In September 2010, Andrew Krause (K & L Development’s managing member) and Peter Paisley (Liquid Manufacturing’s president and CEO) formed Eternal Energy, LLC, to produce an energy shot.
- On September 20, 2010, Liquid Manufacturing, LLC, sought and received Innovation Ventures' permission to add Eternal Energy to the list of products it could produce using the equipment.
- From September 2010 until March 2011, Liquid Manufacturing, LLC, used Innovation Ventures’ equipment to bottle Eternal Energy.
- In March 2011, Innovation Ventures and Liquid Manufacturing, LLC, entered into a Termination Agreement, which included nondisclosure and noncompete provisions, explicitly permitted Liquid Manufacturing to produce 36 specified products (with Eternal Energy added), and required Liquid Manufacturing to obtain nondisclosure agreements from companies associated with those products.
Procedural Posture:
- On January 27, 2012, Innovation Ventures, LLC, filed a complaint in the Oakland Circuit Court (trial court) against Liquid Manufacturing, LLC; K & L Development, LLC; LXR Biotech, LLC; Eternal Energy, LLC; Andrew Krause; and Peter Paisley, alleging various tort and breach of contract claims.
- The defendants moved for summary disposition under MCR 2.116(C)(8) and MCR 2.116(C)(10).
- The trial court initially denied the defendants’ motions on most claims but later granted summary disposition to the defendants on all remaining claims, concluding that the Nondisclosure Agreement failed for lack of consideration, noncompete provisions were unreasonable, and Liquid Manufacturing did not breach the Termination Agreement regarding Eternal Energy.
- Innovation Ventures appealed the trial court’s grant of summary disposition to defendants in the Michigan Court of Appeals.
- The Michigan Court of Appeals affirmed the trial court’s grant of summary disposition to defendants on all claims, holding that the EMI and Nondisclosure Agreement were unenforceable for a failure of consideration and that the noncompete provision in the Termination Agreement was unreasonable under an employer-employee standard.
- Innovation Ventures filed an application for leave to appeal to the Michigan Supreme Court, which was granted to consider whether the Nondisclosure Agreement and EMI were void due to failure of consideration and whether the noncompete provisions were reasonable and enforceable.
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Issue:
1. Were the Equipment Manufacturing and Installation Agreement (EMI) and the Nondisclosure Agreement between Innovation Ventures and K & L Development void due to failure of consideration? 2. Are the commercial noncompete provisions in the Termination Agreement and the Nondisclosure Agreement reasonable and enforceable under the correct legal standard?
Opinions:
Majority - Justice McCormack
No, the EMI and the Nondisclosure Agreement were not void for failure of consideration. Both agreements were supported by sufficient consideration, as much of the work contemplated by the EMI had been completed when it was formalized, and K & L Development gained acknowledgment for continued business through the Nondisclosure Agreement. Failure of consideration is an affirmative defense applicable when a party's performance is so deficient that the contract’s basis becomes worthless, but it does not apply when a party acts within explicitly provided contractual rights, such as terminating the EMI with 14 days' notice as the contract allowed. Yes, commercial noncompete agreements between businesses must be evaluated for reasonableness under the rule of reason, and the Court of Appeals erred by applying the standard for employer-employee noncompete agreements. The Michigan Antitrust Reform Act (MARA), particularly MCL 445.772, prohibits unreasonable restraints of trade. While MCL 445.774a provides guidance for employer-employee agreements, MCL 445.784(2) directs Michigan courts to defer to federal interpretations of comparable antitrust statutes, which consistently apply the rule of reason to commercial noncompete agreements. The rule of reason considers various factors, including the specific business, its condition before and after the restraint, the restraint's history, nature, and effect, to determine if it promotes or suppresses competition. The Court affirmed the trial court’s summary disposition for Andrew Krause and K & L Development regarding alleged breaches of the EMI, finding no genuine issue of material fact because the EMI's confidentiality provisions only applied to information obtained after its execution (no such allegations were made) and its noncompete clause only prohibited designing/producing bottling equipment, not manufacturing competing drinks. However, the Court remanded the claim that K & L Development breached the Nondisclosure Agreement, as factual issues remained regarding K & L Development’s operations timeline. The Court left undisturbed the Court of Appeals' holding that Liquid Manufacturing did not breach the Termination Agreement by producing Eternal Energy because Innovation Ventures abandoned this specific argument on appeal. The Court remanded the claim regarding Liquid Manufacturing's production of other energy drinks to the trial court for evaluation under the rule of reason.
Analysis:
This decision significantly clarifies the legal landscape for noncompete agreements in Michigan by establishing a distinct, more flexible standard (the rule of reason) for agreements between businesses, separate from the stricter employer-employee standard. By mandating deference to federal antitrust law, the Michigan Supreme Court promotes uniformity and a sophisticated economic analysis in commercial contract disputes. The case also reinforces critical principles of contract law, particularly regarding the specific elements required for a valid claim of 'failure of consideration' and the importance of precise contract drafting to define confidential information and the scope of restrictive covenants.
