Opinion
Case No. 2:03-CV-272 TS
August 4, 2003
ORDER GRANTING PLAINTIFF'S MOTION FOR A PRELIMINARY INJUNCTION AND PRELIMINARY INJUNCTION
This matter came before the court on April 10, 2003, for hearing on Plaintiff Whole Living's Motion for a Preliminary Injunction. On April 2, 2003, the court held a hearing on Plaintiff Whole Living's Motion for a temporary restraining order (TRO). Pursuant to the parties' stipulation, the court entered a TRO. The parties stipulated to the continuance of that injunction, pending briefing and decision on the preliminary injunction.
I. FINDINGS FOR PRELIMINARY INJUNCTION
The following facts are established for the purpose of the preliminary injunction: In the late 1990s, defendant Don Tolman and Glen Tanner developed and sold a line of whole foods, health foods, supplements, personal care products, and similar products. The centerpiece or focus product of the business is a product called Pulse, based on the principles of "signatures" and "proportions." According to Mr. Tolman, he developed Pulse from a manuscript in a private collection of artifacts, the manuscript being the translation of information contained on scrolls.
The business was operated under the name Brain Garden, LLC or The Brain Garden LLC. It operated as a network marketing organization. In late 1998, Mr. Tolman and Mr. Tanner sold the business to the principals of Plaintiff Whole Living. The company eventually became Whole Living dba Brain Garden, the plaintiff herein (Whole Living). Included in the sale were the products' formulas, trade dress and the distributor lists. Much of the purchase price went to pay the liabilities of The Brain Garden LLC and/or Mr. Tolman.
On November 30, 1998, Plaintiff Whole Living and Mr. Tolman entered into a Consulting Agreement providing that Plaintiff Whole Living retained Mr. Tolman as a product and sales aid developer and marketing consultant. The Consulting Agreement contained a non-compete clause effective for two years from the date of termination. Part of the consideration was that Mr. Tolman would receive a Master Distributorship and the income therefrom.
On May 4, 1999, the parties entered into an Indemnification Agreement under which Plaintiff Whole Living set aside a substantial sum to pay claims against The Brain Garden LLC arising from Mr. Tolman's earlier Power Blitz program. The Power Blitz program was formerly operated in conjunction with the operation of The Brain Garden LLC. Under the Indemnification Agreement, Whole Living was to be indemnified by Mr. Tolman and his then-wife for claims arising from the Power Blitz program. The Indemnification Agreement contained a broad two-year non-compete clause. As part of the settlement with Power Blitz claimants, Mr. Tolman's Master Distributorship was sold to a claimant.
In March 18, 2002, Plaintiff Whole Living and Mr. Tolman entered into a new Consulting Agreement (Second Consulting Agreement), that provided for payments to Mr. Tolman. The Second Consulting Agreement was effective as of December 2001 and was for a term of three years. The Second Consulting Agreement provided that, if Mr. Tolman terminates it without cause, the "non-compete provisions contained herein shall be in full force and effect" for two years. If Plaintiff terminated it with cause, the non-compete provisions would be in effect for only one year.
Mr. Tolman had the advice of counsel in negotiating the Second Consulting Agreement. Several drafts were considered and some changes were made per Mr. Tolman's request. The Second Consulting Agreement contains an integration clause. It also provided for stock options. There was no price listed for the stock options. However, there has never been any attempt to exercise the stock options.
In late March 2002, Mr. Tolman received a Notice of Garnishment that involved amounts owed to his former wife for child support. The garnishment was served on Plaintiff Whole Living on March 28, 2002, and included the payments made by Whole Living to Mr. Tolman under the Second Consulting Agreement. Mr. Tolman attempted to avoid the garnishment by setting up a new company called Go Creative. Go Creative was to receive the payment in the amount formerly paid directly to Mr. Tolman under the Second Consulting Agreement. Go Creative would then make Mr. Tolman's services available to Whole Living.
As part of his plan to avoid the garnishment, on or about April 11, 2002, Mr. Tolman provided Whole Living with a letter that terminated the Second Consulting Agreement, without cause, thus triggering the two-year non-compete provision. The letter was faxed from his attorney in Tennessee on April 11, 2002. Mr. Tolman, who was in Utah at the time, provided it to Whole Living. Whole Living was willing to pay a fee to Go Creative to obtain Mr. Tolman's services because it believed that Mr. Tolman provided key leadership for their distributors. Based on Mr. Tolman's April 11, 2002, voluntary termination of the Second Consulting Agreement, Whole Living began paying a fee to Go Creative to obtain Mr. Tolman's services. As a result of his voluntary termination of the Second Consulting Agreement and setting up Go Creative, Mr. Tolman was able to avoid the garnishment.
On June 12, 2002, Mr. Tolman's attorney faxed a copy of the signed April 11, 2002, resignation letter to Whole Living. The cover letter for the June 12, 2002, fax references an agreement between Whole Living and Go Creative that Mr. Tolman's attorney was to provide later that same day. No such agreement was later provided.
In April, May, and June 2002, Whole Living paid Go Creative for services provided by Mr. Tolman.
On July 10, 2002, Mr. Tolman sent Plaintiff Whole Living a second letter notifying it that he was purporting to terminate the Second Consulting Agreement, this time with cause. The July 10, 2002 letter stated that he was severing all ties with Plaintiff Whole Living, that he would not accept any more consulting payments, and that he would be venturing to find employment with a similar company or would be venturing out on his own accord. As a result of this letter, Plaintiff Whole Living failed to make funds available to cover its July payment check to Go Creative.
Mr. Tolman started a company, defendant Great American, with defendant Mark Bowen. Beginning on or about March 1, 2003, Mr. Tolman and Great American began advertising products on a website. The materials on the website duplicated Plaintiff Whole Living's sales materials, and its products were very similar, or identical to, Plaintiff Whole Living's products. Mr. Tolman and Great American also solicited Whole Living's distributors.
Pulse is Whole Living's major product. Prior to Great American's introduction of its competing PhiPhi product, Pulse was a unique product in the marketplace. Great American's introduction of a competing product, purportedly from the same origin, threatens that unique market niche and constitutes irreparable harm.
Mr. Tolman's and Great American's solicitation of distributors constitutes irreparable harm because it undermines the confidence and credibility of Plaintiff Whole Living's distributorships — irreplaceable components of its successful network marketing sales force.
Mr. Tolman's competition through his personal promotion of Great American's products is especially injurious to Plaintiff because Mr. Tolman is so closely identified with their unique Pulse product.
In the two months during which Mr. Tolman and Great American competed with their similar product and nearly identical promotional and website materials, Plaintiff Whole Living recorded an immediate and serious drop in revenues, in excess of $75,000 a month.
II. PARTIES' POSITIONS
Plaintiff seeks an injunction against Mr. Tolman's breaching the Consulting Agreement's covenant not to compete and not to solicit its customers. Plaintiff also seeks injunction against all Defendants from (1) using materials that are allegedly trade secrets, such as marketing materials and distributor contracts; or (2) misappropriating its alleged trade secrets by marketing products through and operating the website visions.wholefoodfarmacy.com; and (3) doing business as Think Again, Inc., d/b/a Great American The Whole Food Farmacy and ceasing the operation of the website visionswholefoodfarmacy.com.
Defendants now concede that their website, products and solicitation of Plaintiff's distributors were properly enjoined and that a permanent injunction may be entered on those matters.
Defendants contend that the contracts at issue should not be enforced because Plaintiff breached its agreements with Mr. Tolman and, therefore, Plaintiff should be prevented from enforcing the contracts under the doctrine of unclean hands.
III. INJUNCTION STANDARD
In order to merit a preliminary injunction . . ., Plaintiff must establish that: (1) it has a substantial likelihood of prevailing on the merits; (2) it will suffer irreparable injury if it is denied the injunction; (3) its threatened injury outweighs the injury that the opposing party will suffer under the injunction; and (4) an injunction would not be adverse to the public interest. . . . As a preliminary injunction is an extraordinary remedy, the right to relief must be clear and unequivocal The following types of preliminary injunctions are disfavored and they require that the movant satisfy an even heavier burden of showing that the four factors listed above weigh heavily and compellingly in movant's favor before such an injunction may be issued: (1) a preliminary injunction that disturbs the status quo; (2) a preliminary injunction that is mandatory as opposed to prohibitory; and (3) a preliminary injunction that affords the movant substantially all the relief he may recover at the conclusion of a full trial on the merits.
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A preliminary injunction that alters the status quo goes beyond the traditional purpose for preliminary injunctions, which is only to preserve the status quo until a trial on the merits may be had. Mandatory injunctions are more burdensome than prohibitory injunctions because they affirmatively require the nonmovant to act in a particular way, and as a result they place the issuing court in a position where it may have to provide ongoing supervision to assure that the nonmovant is abiding by the injunction. Finally, a preliminary injunction that awards the movant substantially all the relief he may be entitled to if he succeeds on the merits is similar to the "Sentence first — Verdict Afterwards" type of procedure parodied in Alice in Wonderland, which is an anathema to our system of jurisprudence. Thus, in order to prevail on a motion for preliminary injunction where the requested injunction falls into one or more of these three categories, the movant must show that on balance, the four factors weigh heavily and compellingly in his favor.SCEC ILC, Inc. v. Visa USA, Inc., 936 F.2d 1096, 1098-1000 (10th Cir. 1991).
Thus, where, as in this case, the requested preliminary injunction would disturb the status quo, it is mandatory as opposed to prohibitory, and would afford Plaintiff substantially all the relief it may recover at the conclusion of a full trial on the merits, Plaintiff must show all of the four factors weigh heavily and compellingly in its favor.
IV. ANALYSIS
The court finds that Plaintiff has shown that the products, promotional and advertising materials, and the distributor lists are trade secrets and that it will likely prevail on its claim of misappropriation of trade secrets. See Water Energy Systems v. Keil, 974 P.2d 821, 822 (Utah 1999) (elements of claim of misappropriation of trade secrets) and Microbiological Research Corp. v. Muna, 625 P.2d 690, 697-98 (Utah 1981) (burden of proof in claims of misappropriation of trade secret).
Defendants now concede that the injunction is appropriate for the trade secrets — the product formulas, the website and promotional materials, and the distributor lists. Defendants also concede that the following has been established for this case:
Defendants Tolman and Great American, during the period that Great American operated from March 1, 2003, wherein it provided its website to the general public and continuing through Defendants' compliance to this court's initial TRO of April 2, 2003, which compliance was immediately implemented on or about April 3, 2003, utilized duplicates of portions of the Whole Living website, offered its PhiPhi product to the public, which product was based on the same proportions of contents as per the original formula sold to Whole Living November 30, 1998, and with almost identical ingredients thereto, and also actively solicited current Whole Living distributors to distributorship with Great American.
Def's Br. at 6.
Plaintiff has shown a contract not to compete that appears to be valid and enforceable under Utah law. The contract not to compete covers competition with Plaintiff "throughout the world." However, the lack of a spacial or geographic limitation does not render the contract invalid. In Systems Concepts, Inc. v. Dixon, 669 P.2d 421, 427 (Utah 1983), the Utah Supreme Court acknowledged that a lack of a spacial (meaning geographic) limitation was not fatal where the market in that case was nation-wide. In our case, there is a world-wide market. The covenant is limited by the recital at ¶ A of page 1 that recites that the company is engaged in the business of "marketing, selling, manufacturing and distributing health, nutritional, personal care, personal use and educational products" — which appears to limit the subject of competition.
Although Mr. Tolman attempted to show that the contracts, the sale of the products' formulas, trade dress and the distributor lists, and the Second Consulting Agreement, should not be enforced under the doctrine of unclean hands, Plaintiff Whole Living has established for purposes of this hearing that it performed its obligations under its contracts with Mr. Tolman, that Mr. Tolman had the advice of counsel regarding the contracts, and, as noted above, that Mr. Tolman voluntarily terminated the Second Consulting Agreement on April 11, 2002. Therefore, Plaintiff has shown that it is likely to prevail on the merits of its claim that the two-year non-compete provision is enforceable.
Plaintiff has shown it will suffer irreparable injury if it is denied the injunction. The irreparable injury includes the confusion in the marketplace as to its products and loss of market share and the loss of confidence by its distributors.
The threatened injury to Plaintiff Whole Living clearly outweighs the threatened injury to Defendants. As noted above, all Defendants concede that the record supports the injunction against their use of Plaintiff's materials and trade secrets in Great American's website and from selling products based on formulas sold by Mr. Tolman in 1998. On the other hand, the injunction requires Mr. Tolman and those in concert with him, to cease doing what they now concede they were properly enjoined from doing. With respect to Mr. Tolman, personally, the record shows a valid and enforceable contract with a non-compete clause, his voluntary invocation of that clause and no evidence that it would be inequitable to require him to abide by his contract entered into knowingly, and with the advice of counsel. There is no evidence in this case that an injunction would be in any way adverse to the public interest.
The court finds that Plaintiff has met the burden of showing that the four injunction factors weigh heavily and compelling in its favor and therefore the court will grant the injunction.
V. INJUNCTION ORDER
The court having found that Plaintiff has met its burden of showing that the four injunction facts weigh heavily and compellingly in its favor, it is therefore
ORDERED that Plaintiffs Motion for a Preliminary Injunction is GRANTED. It is further
ORDERED that, pending entry of Judgment in this case, the following are enjoined:
A. Don Tolman shall not solicit anyone on behalf of Think Again, Inc., d/b/a Great American Whole Food Farmacy, or any of its other d/b/as or related entities) (hereafter Great American), and shall not talk to any of Whole Living Inc.'s distributors (past or present) about any aspect of either business;
B. Don Tolman shall not defame Whole Living Inc.'s business or products;
C. Don Tolman shall not, directly or indirectly, engage in (whether as an employee, distributor, consultant, proprietor, partner, director, or otherwise) or have any ownership interest in, or participate in the financing, operation, management or control of, Think Again, Inc., d/b/a The Great American, the Wholefood Farmacy and shall not rewrite its website;
D. Don Tolman shall take no action in competition with Whole Living, Inc.
E. Defendants Don Tolman, Mark Bowen, Think Again, Inc., d/b/a Great American, the WholeFood Farmacy and their officers, agents, servants, employees and attorneys and those persons in active concert or participation with them who receive actual notice of this Preliminary Injunction shall not utilize, in whole or in part, any portion of the past, current or future Whole Living promotional and sales materials, including websites;
F. Defendants Don Tolman, Mark Bowen, Think Again, Inc., d/b/a Great American, the WholeFood Farmacy and their officers, agents, servants, employees and attorneys and those persons in active concert or participation with them who receive actual notice of this Preliminary Injunction shall not utilize the original content proportions set forth in the formulas sold to Whole Living on or about November 30, 1998, or any other product from such proportions, including, but not limited to, PhiPhi.
DATED this 4th day of August, 2003.