Opinion
Civil No. 02-3708 (RHK/AJB)
October 11, 2002
Mary R. Vasaly, William Z. Pentelovitch, Maslon, Edelman, Borman Brand, LLP, Minneapolis, MN, for Plaintiff.
Joseph S. Lawder, Kimberly T. Ross, Rider, Bennett, Egan Arundel, LLP, Minneapolis, MN, for Defendants.
MEMORANDUM OPINION AND ORDER
Introduction
Plaintiff Watkins Incorporated is a direct selling organization based in Winona, Minnesota, that sells health care products, food items, and various household products. Defendants Lloyd M. ("Mike") and Sandra G. ("Sandy") Lewis are residents of Tennessee who have distributed Watkins products in the southeastern United States for over twenty years. On September 11, 2002, Watkins sent the Lewises a letter notifying them that it was terminating their contract and membership with Watkins effective immediately. Watkins advised stores to which the Lewises had sold Watkins products that FitzGibbon and Company, based in Georgia, was now their "Manufacturer's Representative" and informed other Watkins distributors whom the Lewises had sponsored that the Lewises were no longer a distributor for Watkins.
Contemporaneous with its termination of the Lewises' distributorship, Watkins sued the Lewises in Winona County District Court, alleging that they had breached two agreements which they had signed. The Lewises timely removed Watkins' lawsuit to federal district court on September 25, 2002.
Before the Court is the Lewises' application for a temporary restraining order prohibiting Watkins from (1) terminating their distributorship, (2) representing to others that they have been terminated as distributors of Watkins products, (3) directing businesses that had purchased Watkins products from the Lewises to place orders through FiztGibbon and Company, (4) making false representations to those businesses about their ability to purchase through the Lewises, (5) misappropriating "trade secret" information that the Lewises had disclosed during a Watkins' employee's visit in February 2002, and (6) making disparaging statements about the Lewises personally, their business, or their services. For the reasons set forth below, the Court will deny the Lewises' motion.
In their motion, the Lewises also sought expedited discovery. At the hearing, however, the Lewises acknowledged that, as both parties had received an opportunity to submit memoranda and affidavits in connection with the motion, the application was before the Court in the posture of a preliminary injunction motion, and no expedited discovery was necessary.
Background I. The Lewises become Watkins Distributors
On March 29, 1982, Mike and Sandy Lewis signed a Purchase Agreement with Watkins whereby the Lewises became "self-employed dealer[s] in merchandise sold by Watkins Incorporated." (Compl. Ex. 1 (Watkins Purchase Agreement).) The Purchase Agreement identified Watkins as the "SELLER" and the Lewises as the "PURCHASER," and indicated that it was "a vendor/vendee agreement and that performance under this agreement does not constitute any employment relationship." (Id. ¶ 7.) Watkins agreed to supply merchandise, advertising or sales promotional materials, and supplies to the Lewises (id. first ¶ 1) and to extend credit to them in accordance with Watkins' Credit Policy (id. first ¶ 2). For their part, the Lewises agreed to "promote the sale of Watkins products in the locality selected," and to "pay SELLER for merchandise ordered according to the terms of the credit policy." (Id. second ¶¶ 1, 2.) The Lewises were to bear all costs associated with the conduct of their business. (Id. ¶ 3.) The Purchase Agreement gave the Lewises no power or authority to incur debts, obligations or liabilities on behalf of Watkins, to make any representation or contract on behalf of Watkins, or to hold themselves out as being Watkins' agent or representative. (Id. ¶ 5.)
The Purchase Agreement covered "all the terms governing the business transactions between the PURCHASER and SELLER. These terms shall not be changed except in writing signed by both PURCHASER and an officer of SELLER." (Id.) The agreement did not specify the "locality selected" for the Lewises' sale of Watkins products, nor did it provide that it was effective for a fixed term. Rather, it stated that it "may be terminated at any time by the PURCHASER OR SELLER by the giving of notice in writing." (Id.)
II. The Relationship between Watkins and the Lewises Evolves
Watkins compensated the Lewises pursuant to its Compensation Plans. (Jacobs Aff. ¶ 4.) Those plans permitted the Lewises to earn income not only from their own sales of Watkins products, but also from the sales of Watkins products by other Watkins distributors who were either sponsored by the Lewises or were sponsored by Lewis-sponsored distributors. (Id.) The Lewises developed a "downline Watkins sales organization" of sponsored distributors.
In the nomenclature of Watkins' Compensation Plans, an "Associate" is an individual who has applied and been accepted as a distributor. An Associate may "sponsor" (i.e., bring in) other new distributors into the business. The sponsoring Associate is responsible to see that the new Associate receives adequate start-up training and on-going support as needed. The term "downline" describes the organization that a given distributor builds and consists of all of the newer Associates sponsored into his or her organization. The term "upline" refers to the "genealogy," or line of sponsorship, above a given distributor in the business organization. (Watkins Associate Reference Guide at 15-17.)
After signing the Purchase Agreement, the Lewises began selling Watkins products in the southeastern United States over an area that ultimately included all or part of ten states. (Verified Countercl. ¶ 44.) Whereas most distributors sold Watkins products directly to individuals (id. ¶ 46), the Lewises targeted their sales efforts at small "mom and pop" retail establishments, such as gift stores and pharmacies. (Id. ¶ 45.)
On December 15, 1992, Watkins issued a "Location Selling Policy" that provided as follows:
Do not sell Watkins products at self-service retail locations. Watkins products may be sold from locations such as trade shows, fairs, and mall kiosks provided the location is operated by and the sale is transacted by a registered Watkins Marketing Representative/Director.
Watkins products may not be displayed or sold in self-service retail locations. (Note: Display and sales may continue at all retail locations which were in operation and have been registered with the company prior to 12/15/92. The accounts and locations are not transferable.)
(See Jacobs Aff. Ex. C (emphasis in original).) Thus, sales to retail locations that were in operation before December 15, 1992 and had been registered with Watkins were "grandfathered" under the Location Selling Policy.
On August 24, 1997, the Lewises signed an "Agreement to Comply with All Watkins Policies and Procedures." (Jacobs Aff. ¶ 7.) By signing that document, the Lewises verified that they would "comply with and follow all of Watkins' policies and guidelines as set forth in the terms and conditions of the International Marketing Representative Agreement and Watkins Training/Reference Manual." (Jacobs Aff. Ex. C (Aug. 24, 1997 Agreement).) The Lewises further represented that they had "a complete understanding of Watkins' retail location selling policy." (Id.) The Lewises acknowledged that if the completed agreement was not mailed to Watkins Incorporated by August 30, 1997, they would give up all rights to their "Directorship." (Id.)
III. The Parties' December 12, 1998 Agreement
In December 1998, Watkins and the Lewises entered into an agreement, the purpose of which was to "clarify their independent contractor relationship with one another" (hereinafter "the Settlement Agreement"). (Compl. Ex. 2 (Dec. 12, 1998 Watkins Agreement with the Lewises) ¶ 1, at 1.) The Lewises "furnished Watkins with a list of businesses and the locations thereof . . . in their downline Watkins sales organization that existed under the December 15, 1992 Location Selling Policy when the policy was promulgated." (Id.) The Lewises warranted to Watkins that each of those business locations "was selling Watkins products as a member of their downline Watkins sales organization on or prior to December 15, 1992." (Id.)
For its part, Watkins agreed as follows:
The Lewises and their daughter Brittany and any spouse of Brittany are entitled to continue to distribute [specified Watkins products] through such Business Locations under said Location Selling Policy until the businesses located on [the list provided by the Lewises] no longer operate at the Business Location specified [on the list] or until they die or until further agreement of the parties.
Brittany Lewis is now twenty-six years old. Thus, at the time the Settlement Agreement was signed, she was approximately twenty-two years old. There is no evidence before the Court establishing that Brittany is now or ever has been married. The Court notes that Brittany is not a defendant in the action commenced by Watkins and has not intervened as a counterclaimant.
(Id. ¶ 1, at 2.) Watkins and the Lewises further agreed "to communicate with each other on a professional basis and . . . to work with each other in a manner consistent with the Watkins' Rules of Conduct in order to increase their respective businesses." (Id. ¶ 3.) The Settlement Agreement "applies to, inures to the benefit of, and is binding upon the entire Lewis downline sales organization as it exists on the date of this Agreement." (Id. ¶ 5.) It is governed by Minnesota law. (Id. ¶ 7.) After signing the Settlement Agreement, the Lewises continued to distribute Watkins products into 2002.
Ann Messenger, Watkins' Manager of Field Policies and Procedures, avers that after the Settlement Agreement was signed, she became responsible for monitoring the Lewises' compliance with it. (Messenger Aff. ¶ 4.)
IV. The Lewises' Interactions with Watkins During 2002
In early 2002, Mark Jacobs, the president of Watkins, contacted the Lewises to evaluate whether they could become part of a "retail specialty store" marketing strategy that Watkins was developing. (Jacobs Aff. ¶ 10.) Jacobs believed that it might be considerably less expensive and more efficient to use the Lewises in the southeastern United States as they were already familiar with the product line and had experience selling it in that area. (Id. ¶¶ 10-11.)In February of 2002, Jacobs sent Joan Wadkins, Consumer Products Marketing Director for Watkins, to Tennessee to meet with and evaluate the Lewises. (Jacobs Aff. ¶ 11; see also Verified Countercl. ¶ 54 ("The Lewises felt as though [Wadkins] was assessing their sophistication and that she was patronizing them with compliments about being `on the cutting edge'").) As part of her visit, Wadkins accompanied the Lewises on calls to two businesses, "the Apple Barn" and "Gift and Gourmet." (See Verified Countercl. Ex. A. (Feb. 25, 2002 letter from the Lewises to Wadkins).) After her visit, Wadkins advised Jacobs that the Lewises did not have any particular skill or expertise in selling the Watkins product line and were fairly unsophisticated in their selling. (Jacobs Aff. ¶ 12.)
Following Wadkins' visit, the Lewises wrote a letter thanking her for meeting with them and discussing possibilities for the future. (Verified Countercl. Ex. A.) The second half of their letter to Wadkins addressed the following concern:
As you know, one of our major concerns is the fact that other people are going into our stores and selling products and we really need this to be handled by you. This is a blatant violation of their contract and it is detrimental to our growth in the company. We really appreciate your help and as you know, each associate's signature on the contract indicates they realize they cannot sell to retail stores and we need you to enforce these contracts that are being violated. We feel that we have the right to service the very stores that we have initiated all contacts and sales. We are the ones who have actually gone out and "sold" each of these accounts and now other Watkins associates are going to our stores and selling them products. We need a letter from Watkins that we can show to each merchant stating that they are buying Watkins' products "illegally" and they need to be buying the products from us. Plus, we need each offending associate to be contacted by you ordering them to cease and desist selling to retail stores.
(Id.) There is no record of a response from Watkins to this issue raised by the Lewises.
In early April 2002, Jacobs wrote the Lewises, advising them that it would "probably be another six months or so before we have a better handle on our retail strategy." (Verified Countercl. Ex. B (Apr. 5, 2002 letter from Jacobs to the Lewises).) He stated that the company believed "it would be best for you to simply continue serving the accounts that Watkins approved for you several years ago under the current compensation plan." (Id.) Jacobs added that when the company better knew its game plan, it would look with the Lewises at "some other options that are mutually beneficial to all of us." (Id.)
V. Watkins Receives Complaints About the Lewises in 2002
During the first half of 2002, Watkins discovered that the Lewises were selling Watkins products to unauthorized retail store locations. Watkins' Manager of Field Policies and Procedures, Ann Messenger, compared the business locations listed on Exhibit B of the Settlement Agreement with the businesses to which the Lewises were requesting direct shipments of orders. She determined that many orders during 2002 were being shipped to locations that were not on the list. (Messenger Aff. ¶ 10.)
Beginning in February 2002, Watkins' customer service representatives began receiving an increasing number of complaints about the Lewises. (Mish Aff. ¶ 2.) Some of the complaints involved overcharges by the Lewises for Watkins products; others involved the Lewises' failure to deliver product that had been ordered and paid for. (See generally Mish Aff.; Messenger Aff. ¶ 11.) Some of the individuals making complaints to Watkins also indicated that, when they tried to contact the Lewises, the Lewises could not be reached and would not return their messages. (Mish Aff. ¶ 3 and Exs. C D.)
On April 19, 2002, Messenger wrote to the Lewises, raising concerns over "numerous unsolicited phone calls from customers (retail store managers) and Associates who have told us that they are not happy with the service they have been receiving from you and would prefer to order directly from Watkins." (Verified Countercl. Ex. C (Apr. 19, 2002 letter from Messenger to the Lewises) at 1.) Messenger also stated that it had come to her attention that the Lewises had asked Watkins to force Associates to order only through them and had asked Watkins to not process their orders directly: "Please know that this is a form of disruption and interference in another Associate's business, and all your Associates have the same right as you to order directly from Watkins." (Id.) Messenger told the Lewises that both Watkins employees and several persons who had called with complaints also said that the Lewises had made disparaging remarks about the company. (Id.) Messenger further indicated that the company had learned that the Lewises had inappropriately brought their personal problems into conversations while discussing Watkins business with Watkins employees and Associates. (Id.)
Finally, Messenger questioned the Lewises' understanding of their ability to sell Watkins products to retail stores:
Based on other feedback we have received, it appears that you are unclear regarding the exception Watkins granted you to continue selling our products to certain stores that you were already selling to in 1992. Although Watkins granted you this exception, as specified in the Agreement dated December 12, 1998, it applies only to stores that you were already selling to in 1992, and it only applies as long as you are a Watkins Associate in good standing. As outlined in our policies, any Associate including retail stores currently signed up under you has a right to switch sponsors after waiting six months, and no Associate has an exclusive right to a customer. The agreement signed by each Associate is a contractual agreement between the person and Watkins Incorporated, and Watkins retains the right to make exceptions and business decisions to protect the good of the overall business.
(Id. at 1-2.) Messenger cautioned that "any future unprofessional behavior and violation of our policies and procedures will not be tolerated and may result in the cancellation of your Watkins contract." (Id. at 2.) On April 24, 2002, Messenger sent a memo by facsimile to Sandy Lewis describing several complaints that Watkins' TeleServices Department had received from drug stores that the Lewises serviced. (Messenger Aff. Ex. E (Fax Transmittal from Messenger to Lewis).)
Approximately five weeks later, the Lewises responded to Messenger by letter. The Lewises expressed "surprise and hurt" at the allegations in Messenger's letter, noting that Watkins "had just completed a lengthy review of our operation, including an on-site visit," which the Lewises had felt was positive and constructive. (Verified Countercl. Ex. D (May 28, 2002, letter from the Lewises to Messenger) at 1.) The Lewises also told Messenger that, on April 5, 2002, they had received a letter from Jacobs "indicating that we should continue to servicing [sic] our accounts and that we would be involved in other conversations at a later date, perhaps as early as six months." (Id.) In response to the customer complaint information that Messenger had sent to them, the Lewises wrote:
Upon very diplomatic and tactful follow-up with those individuals, some said they had been misunderstood, and others flatly denied any contact and wrote you accordingly. We are walking examples of goodwill as we represent Watkins day in and day out. We believe our conduct is exemplary and beyond reproach. We intend to live by both the word and spirit of our agreement. There is an agreed upon list of retail establishments that make up our clientele. We give them every service and consideration. If you receive a complaint, ask them to call up. Assure them we aren't monsters and are kindly Southern folk. We would like the opportunity to discuss and resolve the problem directly with the store manager or other individual.
(Id.) The Lewises denied disparaging Watkins and asked for dates, names, and exact quotes so they could "get to the bottom of the situation." (Id. at 1-2.) Finally, the Lewises responded that, given their long-standing relationships with many of their customers, it is not unusual for those customers to be concerned about and ask after Sandy Lewis's health and offer suggestions that would help her feel better. They contended that no unprofessional communications were either intended or took place.
VI. The Lewises' Relationship with Watkins Sours
Through the summer, Jean Mish, Watkins' Teleservices Manager, continued to receive e-mails from others within the Watkins organization forwarding complaints about the Lewises. (Mish Aff. ¶¶ 8-10.) In July 2002, Mish received a telephone call from Nestor Stewart of Stewart Pharmacy in Tennessee who stated that he was owed over $300,000.00 by the Lewises and threatened to file suit against both Sandy Lewis and Watkins for Lewis's conduct. (Id. ¶ 10 and Ex. J.) Mish later received correspondence from Stewart's attorney and his accountant documenting the amount of the loss at over $357,000.00. (Mish Aff. Exs. J-L.) Mish estimates that he personally has spoken to about twenty customers since February 2002 with complaints regarding the Lewises. (Mish Aff. ¶¶ 2,-8-10, 11.) Mish avers that the majority of these complaints fall into two categories: the Lewises failure to deliver product that customers had paid for, and their delivery and billing for product customers did not order. (Mish Aff. ¶ 11.)
The Lewises have presented a document regarding their dispute with Stewart Pharmacy which, they contend, was "completely resolved by an audit by accountants hired by both the customer and the Lewises and that was paid for by the Lewises." (Oct. 9, 2002, Mike Lewis Aff. ¶ 12 and Ex. A.) That document is authored by Edwin Osborne, the Lewises' accountant. (Id. ¶ 21.) It describes Osborne's attempt to "arbitrate" a dispute between the Lewises and Stewart Pharmacy. Osborne was "unable to finally determine amounts, if any, due the respective parties." (Lewis Aff. Ex. A at 1.) In part, that inability was attributable to the parties' "failure to maintain (or promptly reconcile) contemporaneous accounting records" and "failure to maintain or reconcile inventory records." (Id.) Osborne observed that "because records did not establish the movement and ownership of inventory as it was happening . . . one can only conjecture about whose inventory, who got what checks (and cash, unfortunately), and how much of the total that changed hands was recorded and made it to the bank." (Id. at 3.)
On August 20, 2002, Edwin Osborne prepared a memorandum to Mike Winchester regarding "Sandy Mike Lewis v. Watkins" that memorialized a conversation that Osborne, the Lewises' accountant, had with Jacobs. (Oct. 9, 2002 Mike Lewis Aff. ¶ 21 and Ex. D.) Osborne reports that, beginning on August 9, 2002, he began to receive "daily or twice-daily calls from Sandy reporting disruptive actions that she attributed to Watkins." (Id. Ex. D (Aug. 20, 2002 memo from Osborne).) On August 14, Osborne sent a facsimile to Jacobs to call his attention to these matters. Osborne spoke to Jacobs on August 16 by telephone; in that conversation, Jacobs said, inter alia, "I knew I should have terminated them five years ago," "Sandy has violated the contracts over and over," "I have received over seventy-five complaints," and "I am turning this matter over to my lawyers." (Id.)
The Lewises do not identify who Mike Winchester is. At the hearing, however, Watkins identified him as the Lewises' attorney in Tennessee, a description that the Lewises did not dispute.
A copy of the facsimile memo is attached as Exhibit E to Mike Lewis' October 9, 2002 Affidavit.
Osborne's observations were as follows:
It is clear from my discussions with Mark and with Sandy that this situation is critical and will continue to get worse over time. It is clear that Watkins will not allow the Lewises to continue their business without legal intervention of some sort. It is clear that Sandy and Mike need to take whatever action you deem necessary to preserve any rights and privileges. I believe that Watkins intends to discontinue the Associate status of the Lewises at the earliest opportunity.
(Id.)
VII. Watkins Terminates the Lewises' Distributorship
On September 11, 2002, Messenger notified the Lewises that, effective immediately, their contract and membership with Watkins was terminated.
The basis for this termination is multiple and continuing breaches of the Purchase Agreement you signed, as well as multiple and continuing breaches of the Agreement you signed on December 12, 1998, and for continuing violation of our Rules of Conduct as stated in our Policies and Procedures Manual.
(Verified Countercl. Ex. E (Sept. 11, 2002, letter from Messenger to the Lewises) at 1.) Messenger stated that Watkins had evidence that the Lewises had repeatedly not honored the "Watkins Customer Satisfaction Guarantee" and had held orders longer than seventy-two hours from the time they had been placed by the customer. (Id.) Messenger reminded the Lewises that this matter had been brought to their attention and observed that they had apparently made no good faith effort to correct the situation and provide appropriate customer service: "In many cases you have made yourself unreachable to Watkins as well as to the customer." (Id.) Messenger also stated that the Lewises had violated the company's policy requiring the Associate to provide their retail customers with a copy of an official Watkins sales receipt at the time of sale. (Id.) Messenger further indicated that the Lewises had violated the company's non-disparagement and co-mingling policies. (Id.)
With respect to the December 12, 1998 Settlement Agreement, Messenger asserted that the Lewises had breached the agreement by selling Watkins products to stores and locations that were not on the list of business locations attached as Exhibit B to the agreement and by selling to stores that are part of national chains. (Id.) Messenger further indicated that the Lewises' credit account with Watkins was often delinquent and noted that Watkins had received checks from them that had bounced. (Id.) Finally, Messenger complained that the Lewises had made it impossible for the company to communicate with them in a professional manner "since often there is no answer at any of your phone numbers, no voicemail to leave message and you refuse to respond to e-mail quickly." (Id.) Messenger conveyed Watkins' frustration that it often took over a week to make contact with the Lewises in order to discuss customer service issues and issues regarding their delinquent credit account. (Id.)
On September 17, 2002, Joan Wadkins sent a letter to store managers and owners, advising them as follows: "[I]n an effort to better serve your needs, we are now working with FitzGibbon and Company as our Manufacturer's Representative for our retail store program. Please know that no other Watkins Representative or Associate is authorized to sell and service stores in your area." (Verified Countercl. Ex. F (Sept. 17, 2002 letter to store managers/owners).)
Two days later, Messenger sent a letter to associates and managers notifying them that "there will be a change regarding your Watkins sponsor. Sandy and Mike Lewis are no longer Watkins Independent Associates." (Verified Countercl. Ex. G (Sept. 19, 2002 letter from Messenger to associates/managers).) Messenger told the recipients that, should they "need support for the development of [their] Watkins business," they should contact Cecilia and Myron Smith in Clarksville, Georgia. (Id.)
Analysis I. Standard of Decision
Whether a district court should award temporary injunctive relief pending a trial on the merits depends upon an evaluation of the following factors: (1) the threat of irreparable harm to the movant; (2) the state of the balance between this harm and the injury that granting the injunctive relief will inflict on other parties litigant; (3) the probability that the movant will succeed on the merits; and (4) the public interest. See Dataphase Sys., Inc. v. C.L. Sys., Inc., 640 F.2d 109, 113 (8th Cir. 1981). "When applying the Dataphase factors, as they have come to be called, a court should flexibly weigh the case's particular circumstances to determine whether the balance of equities so favors the movant that justice requires the court to intervene." Hubbard Feeds, Inc. v. Animal Feed Supplement, Inc., 182 F.3d 598, 601 (8th Cir. 1999) (internal quotation marks and citations omitted). The party requesting the injunctive relief bears the "complete burden" of proving all the factors listed above. Gelco Corp. v. Coniston Partners, 811 F.2d 414, 418 (8th Cir. 1987).
The Lewises contend that the following claims provide the basis for a temporary restraining order: breach of contract, tortious interference with current and prospective economic relations, violation of Minnesota's Trade Secrets Act, and defamation/product disparagement under the Minnesota Deceptive Trade Practices Act. At the hearing, counsel for the Lewises acknowledged that not every claim entitles the Lewises to all of the injunctive relief sought by the motion. For example, under the Trade Secrets Act, the Lewises would not be entitled to a preliminary injunction compelling Watkins to reinstate them as a distributor. Accordingly, the Court evaluates whether the Dataphase factors have been met with respect to each claim separately.
II. Breach of Contract A. Likelihood of Success on the Merits
The Lewises have constructed their breach of contract claim from the foundational assumption that Watkins has no right or ability to terminate their distributorship under any circumstances. They allege that they have a "lifetime contract" — a contract for a "definite duration" — to sell Watkins products and cannot be terminated at will. In order to end the distributorship relationship, the Lewises argue, Watkins was required to bring an action to rescind the contract and to prove that the Lewises had so substantially breached their contract with Watkins that rescission was warranted. The Lewises assert that Watkins here has violated this procedure and "preemptively" terminated the Lewises' distributorship without legal justification. Thus, Watkins has breached the parties' distributorship agreement.
At pages 10 and 11 of its opposition brief, Watkins analyzes the 1982 Purchase Agreement as an agreement for "at will" employment and argues that the language from the 1998 Settlement Agreement cannot create a "lifetime employment." It is clear from the face of the Purchase Agreement, however, and from other documents submitted by Watkins such as the Watkins Associate Reference Manual, that the distributor is an independent contractor vis-a-vis Watkins, not an employee or agent. Watkins' arguments are not helpful.
The duration of the 1998 Settlement Agreement presents an interesting problem. The "entitlement" to sell Watkins products to a given merchant lasts until either (1) that merchant ceases to do business at the listed location or (2) all of the following people die — Mike Lewis, Sandy Lewis, Brittany Lewis, and the then- and presently-unknown, unascertained, and (potentially) unborn "spouse of Brittany," whichever comes sooner. At a minimum, the "entitlement" to sell Watkins products embodied in the Settlement Agreement is not for a "definite duration" as the Lewises contend.
In evaluating the Lewises' likelihood of success on this claim, the Court begins with what constitutes the contract. The Lewises' view is that the Settlement Agreement modified the 1982 Purchase Agreement by changing the terms on which the parties could terminate the relationship. The Lewises do not dispute that the Purchase Agreement was terminable at will by either party. They contend, however, that when they settled their dispute with Watkins over sales to retail stores in 1998, they gave up the right to transfer or sell their distributorship in exchange for the right to sell Watkins products to their retail store customers for the remainder of their lives. There are two problems with the Lewises' premise.
First, the Lewises were not limited to distributing Watkins products only to the retail stores listed on Exhibit B of the Settlement Agreement. They acknowledge that Watkins distributors traditionally sell products directly to end consumers. (Verified Countercl. ¶ 46; see also Jacobs Aff. Ex. B (Watkins Associate Reference Guide) at 28.) Nothing in the Settlement Agreement precludes the Lewises from selling Watkins products directly to individual consumers. Furthermore, a distributor may sell Watkins products through a temporary sales location, such as a booth at a fair. (Jacobs Aff. Ex. B (Watkins Associate Reference Guide) at 26.) Nothing in the Settlement Agreement precludes the Lewises from selling Watkins products in this way. Therefore, the Settlement Agreement did not address the full scope of the Lewises' ability, as distributors, to sell Watkins products. Any sales of products through these other avenues would have been pursuant to the 1982 Purchase Agreement, not the Settlement Agreement.
Second, the Lewises did not, as they allege, give up their right to transfer their distributorship. Paragraph 2 of the 1998 Settlement Agreement provides that the Lewises gave up only their right to assign or transfer their entitlement to distribute Watkins products to the business locations listed on Exhibit B. (Compl. Ex. 2 ¶ 2.) This provision in the Settlement Agreement is consistent with the restriction on transfers of accounts and locations found in the Location Selling Policy. (Jacobs Aff. Ex. C.) Thus, the Lewises' characterization of the consideration given in exchange for the Settlement Agreement is not persuasive.
Having reviewed the 1982 Purchase Agreement, the 1997 Agreement to Comply With All Watkins Policies and Procedures, and the 1998 Settlement Agreement, the Court finds that the Settlement Agreement clarifies the Lewises' ability to sell Watkins products to retail store locations. The Lewises have failed to establish that there was either an express or implied agreement between the parties about the duration of the distributorship (as opposed to the duration of the right to sell product to certain retail stores). Elvgren Paint Supply Co. v. Benjamin Moore Co., 948 F.2d 1082, 1084 (8th Cir. 1991); Plainview Milk Prods. Co-op. v. Marron Foods, Inc., 3 F. Supp.2d 1074, 1077 (D.Minn. 1998) (Doty, J.). Nothing in the Settlement Agreement expressly modifies the termination provision of the 1982 Purchase Agreement. The relationship between Watkins and the Lewises is terminable at any time upon written notice.
The 1982 Purchase Agreement states that its terms may be modified only by a writing signed by both the Lewises and an officer of Watkins. Neither copy of the 1998 Settlement Agreement before the Court is signed by an officer of Watkins. (Compl. Ex. 2; Jacobs Aff. Ex. D.)
"Unlike other types of agreements, employment contracts and sales agency and distribution agreements are ordinarily terminable at will if they do not contain express provisions for duration or termination" Dorso Trailer Sales, Inc. v. American Body Trailer, Inc., 372 N.W.2d 412, 414 (Minn.Ct.App. 1985) (citing Benson Co-op. Creamery Ass'n v. First Dist. Ass'n, 151 N.W.2d 422, 426 (Minn. 1967) ("The general rule is that a contract having no definite duration, expressed or which may be implied, is terminable by either party at will upon reasonable notice to the other.")). A party to an "at-will" contract may terminate it for any reason or no reason at all. Abraham v. County of Hennepin, 639 N.W.2d 342, 351 (Minn. 2002); Michaelson v. Minnesota Min. Mfg. Co., 474 N.W.2d 174, 179 (Minn.Ct.App. 1991). The Court finds that the Lewises have failed to establish a likelihood of success on their claim that Watkins could not terminate their distributorship without cause and breached the contract by terminating them without first commencing an action to rescind the contract.
The Court need not and does not decide whether Watkins had "cause" for terminating the Lewises' distributorship. The parties hotly contest that issue.
B. Threat of Irreparable Harm
"`The basis of injunctive relief in the federal courts has always been irreparable harm and inadequacy of legal remedies.' Thus, to warrant . . . preliminary [injunctive relief], the moving party must demonstrate a sufficient threat of irreparable harm." Bandag, Inc. v. Jack's Tire Oil, Inc., 190 F.3d 924, 926 (8th Cir. 1999) (quoting Beacon Theatres, Inc. v. Westover, 359 U.S. 500, 506-07 (1959)); Glenwood Bridge, Inc. v. City of Minneapolis, 940 F.2d 367, 371 (8th Cir. 1991); see also In re Travel Agency Commission Antitrust Litig., 898 F. Supp. 685, 689 (D.Minn. 1995) ("[A]n injunction cannot issue based on imagined consequences of an alleged wrong. Instead, there must be a showing of imminent irreparable injury.").The Lewises assert that termination of their distributorship has caused and will cause them financial harm in the nature of lost income, including lost bonuses and lost commissions. According to the Lewises, compensation from Watkins accounts for approximately 95% of their annual income. (Oct. 9, 2002, Lewis Aff. ¶ 22.) For each of the past five years, the Lewises have earned commissions and bonus payments in excess of $250,000. (Verified Countercl. ¶ 52.) This financial harm is readily measurable in monetary terms, and an adequate remedy at law therefore exists. See Pacific Equip. Irrigation, Inc. v. Toro Co., 519 N.W.2d 911, 915 (Minn.Ct.App. 1994) (affirming denial of temporary injunction for distributor seeking to forestall termination of distributorship where distributor was not entitled to statutory injunction under Minnesota Franchise Act and had adequate remedy at law for wrongful termination).
The Lewises also assert that Watkins' termination of their distributorship is causing a present and ongoing injury to their goodwill and relationships with their customers. Sandy Lewis has identified one customer, Dale Debow, who has purchased Watkins' products through the Lewises in the past. (Oct. 9, 2002, Sandra Lewis Aff. ¶ 3.) Debow has "expressed doubt and concern about whether he could ever purchase product from us in the future because of the unanswered questions as to what we would have done to merit the alleged "termination" by Watkins." (Id. ¶ 4.) The Lewises also complain that "they have been receiving many telephone calls from customers asking what is going on and seeking to order product" and "are not able to address the customer's concerns because they do not know the factual reasons supporting Watkins' alleged `termination' of them." (Verified Countercl. ¶ 83.) They assert that "customers have expressed shock and raised questions about why [the Lewises] were terminated which is prejudicing the Lewises whether they sell Watkins product or any other product." (Id. ¶ 84.) "Certain customers who previously called the Lewises everyday have not called since soon after the Watkins' letters were sent." (Id.)
The Lewises' proof of irreparable harm in this regard is insufficient to warrant injunctive relief. They have failed to quantify or otherwise substantiate their conclusory allegations about customer calls expressing shock and concern over their termination. Nor have they offered any quantification or other substantiation for their conclusory allegation that customers who usually called them on a daily basis have stopped calling. The Lewises have identified only one former purchaser of Watkins' products who has expressed doubt and concern arising from the termination, and those doubts and concerns apparently relate only to future purchases of Watkins products. The Lewises have a customer base, however, of over 2,100 retail stores. (Verified Countercl. ¶ 48.) There is insufficient evidence to support a finding that the termination of their Watkins distributorship has had or will have any meaningful impact on the Lewises ability to sell other product lines to these businesses.
C. Balance of Harms and Public Interest
An order directing Watkins to reinstate the Lewises as a distributor and to issue letters telling store managers and associates that the Lewises have returned to their role in the hierarchy of Watkins' distributorship organization presents a threat of disruption and harm to Watkins' relationship with purchasers and other distributors. (See Jacobs Aff. ¶¶ 17-19.) The injunction the Lewises propose does not simply maintain the status quo pending a trial on the merits. It attempts to "unscramble the egg" and return the Lewises to their pre-litigation status as distributors.
With respect to the public interest, where "the franchise act does not apply, public policy would not favor granting an injunction because this case would involve only a private business dispute. Public policy would not support requiring parties to remain in a business relationship that is unsatisfactory" Pacific Equip., 519 N.W.2d at 915-16. Furthermore, the Lewises themselves offer a forceful argument as to why the public interest is not served by the issuance of an injunction. The prices that FitzGibbons and Company charges its customers for Watkins products are between fifty cents and $1.50 lower per unit than the prices the Lewises had charged. (Oct. 9, 2002 Mike Lewis Aff., ¶¶ 19-20.) Thus, as Mike Lewis avers, "[b]oth the customer and Watkins are better off if they can maintain the customers and sales volume if we are out of the chain." (Id. ¶ 20.) The temporary injunctive relief the Lewises seek would result in higher prices to customers; this cannot be in the public interest. None of the Dataphase factors tips in favor of issuing an injunction on the breach of contract claim.
III. Tortious Interference with Current and Prospective Business Relations A. Likelihood of Success on the Merits 1. Tortious interference with contractTo establish a claim of tortious interference with contract, the Lewises must show (1) the existence of a contract, (2) that Watkins knew of the contract, (3) that Watkins intentionally procured a breach of the contract without justification, and (4) that the Lewises suffered injuries as a direct result of the breach. Bouten v. Richard Miller Homes, Inc., 321 N.W.2d 895, 900 (Minn. 1982). The Lewises contend that, once customers have ordered product from them and they have placed that order with Watkins, a contract is formed about which Watkins knows. Interference with these "contracts" occurs when Watkins refuses to fill the orders. The Lewises argue that Watkins' refusal to fill orders is unjustified because it has improperly "rescinded" the contract with the Lewises. This argument thus returns the Court to the Lewises' claim about "wrongful rescission," for which the Court, above, found no likelihood of success on the merits.
Even if the Lewises could show that it is more likely than not that Watkins unjustifiably interfered with their sales orders, however, the inquiry does not end there. There is no wrongful interference with a contract where one asserts in good faith a legally protected interest of his own, believing that his interest may otherwise be impaired or destroyed by the performance of the contract or transaction. Kjesbo v. Ricks, 517 N.W.2d 585, 588 (Minn. 1994). There is significant evidence from which one could reasonably find that Watkins had a good faith belief that its own goodwill and business reputation — legally protected interests of Watkins — would be impaired by continuing to fill orders placed by the Lewises. Watkins had received numerous complaints that the Lewises had been overcharging customers, failing to deliver merchandise that customers had paid for, or delivering and billing customers for merchandise they did not order. Thus, even if the Lewises have a reasonable likelihood of establishing the essential elements of their claim, Watkins nevertheless has a viable defense, making it less likely that the Lewises would ultimately succeed on the merits of their claim.
2. Tortious interference with prospective business relations
Under Minnesota law, a cause of action for tortious interference with a prospective business relationship lies when one intentionally and improperly (1) induces a third person not to enter into or to continue the prospective relation, or (2) prevents the plaintiff from acquiring or continuing the prospective relationship. See United Wild Rice, Inc. v. Nelson, 313 N.W.2d 628, 632-33 (Minn. 1982); Hough Transit, Ltd. v. National Farmers Org., 472 N.W.2d 358, 361 (Minn.Ct.App. 1991).
To determine whether the defendant's conduct is improper, the Court examines several factors:
(a) the nature of the actor's conduct,
(b) the actor's motive,
(c) the interests of the other with which the actor's conduct interferes,
(d) the interests sought to be advanced by the actor,
(e) the social interests in protecting the freedom of action of the actor and the contractual interests of the other,
(f) the proximity or remoteness of the actor's conduct to the interference, and
(g) the relations between the parties.
R.A., Inc. v. Anheuser-Busch, Inc., 556 N.W.2d 567, 571 (Minn.Ct.App. 1996) (quoting Restatement (Second) of Torts § 766B cmt. a).
The Lewises' argument is premised on the notion that they have the sole and exclusive right to sell to the over 2,100 retail customers listed in Exhibit B of the 1998 Settlement Agreement. Given the analysis above regarding the breach of contract claim — in particular, the conclusion that the Settlement Agreement did not modify the fact that the distributorship was terminable at will — there is no basis for the Lewises' asserted absolute right to sell Watkins products to those customers.
This argument raises troubling antitrust questions given that the Federal Trade Commission long ago determined that a manufacturer cannot prevent or discourage one distributor from selling or offering for sale products at retail to a person or entity on the grounds that such person or entity is the customer of another distributor. See In re Amway Corp., 93 F.T.C. 618 (1979).
While the Lewises also contend that Watkins has interfered with their ability to sell other non-Watkins products to those listed business locations, that argument is based on the claim that the "termination" is damaging the Lewises' reputation and goodwill among these customers. It appears unlikely that the Lewises can establish that their termination was wrongful and, as discussed above, there is little evidence of actual or threatened harm to the Lewises' reputation and goodwill among customers who buy other product lines. Accordingly, there appears to be little likelihood of success on a claim of wrongful interference with prospective business relations.
B. Threat of Irreparable Harm/Balance of Harms/Public Interest
The Court's analysis of these factors for the breach of contract claim is germane to the tortious interference claims as well. None of these factors favors issuing an injunction to the Lewises restoring them as Watkins distributors.
IV. Minnesota's Trade Secrets Act A. Likelihood of Success on the Merits
Minnesota's Trade Secrets Act requires the party seeking protection to show both the existence and the misappropriation of a trade secret. Electro-Craft Corp. v. Controlled Motion, Inc., 332 N.W.2d 890, 897 (Minn. 1983). To establish that a particular item is a "trade secret" under the Act, the Lewises bear the burden of proving that (1) the information is not generally known or readily ascertainable, (2) the information derives independent economic value from secrecy, and (3) they make reasonable efforts to maintain the information's secrecy. See NewLeaf Designs, L.L.C. v. BestBins Corp., 168 F. Supp.2d 1039, 1043 (D.Minn. 2001) (Tunheim, J.); Lexis-Nexis v. Beer, 41 F. Supp.2d 950, 958 (D.Minn. 1999) (Doty, J.). The Act defines "misappropriation" to mean the "disclosure or use of a trade secret of another without express or implied consent of a person who . . . at the time of disclosure or use, knew or had reason to know that his knowledge of the trade secret was . . . acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use. . . ." Minn. Stat. § 325C.01, subd. 3(ii)(B)(II).
The Act defines a "trade secret" as
information, including a formula, pattern, compilation, program, device, method, technique, or process, that:
(i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and
(ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
Minn. Stat. § 325C.01, subd. 5.
In their Verified Counterclaim, the Lewises allege that Watkins has misappropriated "sales formulas, product ideas, marketing programs, sales techniques and processes and customer information." (Verified Countercl. ¶ 118.) The Lewises allege that, during Joan Wadkins' visit in February 2002, they shared with her the following:
• maketing techniques;
• product ideas;
• sales ideas;
• methods for successfully building up, maintaining and increasing sales to a large retail customer base; and
• large and important customers and information about those customers.
(Verified Countercl. ¶ 64.) Sandy Lewis disclosed some of the same information to Jacobs the following week during a telephone call. (Id. ¶ 65.)
"An injunction is inappropriate if plaintiff fails to identify specific trade secrets and instead produces long lists of general areas of information which contain unidentified trade secrets." International Bus. Machs. Corp. v. Seagate Tech. Inc., 941 F. Supp. 98, 100 (D.Minn. 1992) (Magnuson, C.J.). The Lewises have provided additional detail, beyond the general lists of areas of information found in the Verified Counterclaim, with respect to only three things. The first is a "planagram" that the Lewises describe as enhancing the arrangement and display of product in retail stores. (Oct. 10, 2002, Lloyd M. Lewis Decl. ¶ 7.) Mike Lewis acknowledges that the "planagrams" and product displays and arrangements are found in the stores in which the displays are set up and are seen by store owners and employees and end consumers who come into the stores. Thus, these displays and arrangements are accessible to the general public, including representatives and distributors of products that compete with Watkins products. Nothing appears to prevent competitors from seeing, studying, and copying the Lewises' product displays and arrangements. There appears to be no evidence from which one could find that the Lewises have made any efforts to maintain the information's secrecy. Therefore, the Lewises have not demonstrated a likelihood that the "planagrams" and related information are trade secrets.
The second "trade secret" the Lewises describe is the "concept of product baskets." (Id. ¶ 8.) Based on that scant description, one cannot determine what the concept of "product baskets" includes and whether that "concept" has already been generally known or readily ascertainable. Thus, the Lewises have failed to establish that this concept qualifies as a trade secret.
The final category the Lewises discuss in any detail is information about their largest customers' purchasing preferences and what motivates them to sell. (Id. ¶ 9.) With respect to purchasing preferences, both the identity of the Lewises' largest customers and what they prefer to purchase would presumably be available from the orders placed with Watkins. Thus, Watkins already had access to that information in the ordinary course of business. As for what motivates retail stores to sell, the Lewises contend that they have developed "motivational sales techniques that reward store salespeople for sales of Watkins product." (Id.) They do not, however, specifically identify what was disclosed to either Joan Wadkins or Jacobs on that topic, if anything, and do not describe what the "motivational sales techniques" entail beyond simply "contests." (Id.) Accordingly, the Lewises have not established that this category of information rises to the level of trade secrets.
B. Threat of Irreparable Harm
"When an injunction is explicitly authorized by statute, proper discretion usually requires its issuance if the prerequisites for the remedy have been demonstrated and the injunction would fulfill the legislative purpose." United States v. White, 769 F.2d 511, 515 (8th Cir. 1985). The threat of misappropriation of trade secrets constitutes irreparable harm and warrants injunctive relief. See Minn. Stat. § 325C.02. To obtain an injunction under the Act, however, the Lewises must demonstrate "a high degree of probability of inevitable disclosure." Lexis-Nexis, 41 F. Supp.2d at 958 (quoting International Bus. Machines Corp., 941 F. Supp. at 101. The Lewises have failed to demonstrate that disclosure of either the "planagrams" and related information or the "motivational sales techniques" is quite likely to be inevitable. The Lewises do allege that Watkins has used the "concept of product baskets" to market "similar items" through FitzGibbon Company. (Oct. 10, 2002, Mike Lewis Decl. ¶ 8.) Having failed to explain the "concept of product baskets" in any detail, however, it is difficult to assess whether there is any likelihood that the Lewises can establish that Watkins misappropriated that concept. The Lewises have therefore not shown a threat of irreparable harm under the Trade Secrets Act.
In October 2001, prior to Joan Wadkins' visit to the Lewises, the Watkins Associate Reference Guide stated that "Watkins Associates may promote and assemble baskets (or product assortments) that include Watkins Products and complimentary (non-Watkins) products," provided those baskets stayed within certain guidelines. (Jacobs Aff. Ex. B at 27.) Thus, it is unclear whether the "concept of product baskets" was unique to the Lewises.
C. Balance of Harms and Public Interest
Having concluded that the Lewises have shown neither a likelihood of success on the merits of their Trade Secrets Act claim nor a threat of irreparable harm, the Court finds no need to address the remaining Dataphase factors. See Gelco Corp., 811 F.2d at 418 ("The failure to show irreparable harm is, by itself, a sufficient ground upon which to deny a preliminary injunction"). Certainly, the public interest is not served by the issuance of a court order restricting competitive conduct in the marketplace where (1) there is little likelihood of success on the merits and (2) the balance of harms tips heavily in favor of not issuing the injunction.
V. Defamation/Disparagement in Violation of the Minnesota Deceptive Trade Practices Act A. Likelihood of Success on the Merits
The Lewises allege that Watkins has made representations to third parties that Watkins knew or should have known would harm the reputation of the Lewises and deter customers from doing business with them. (Verified Countercl. ¶¶ 105, 113.) Specifically, the Lewises allege that the following statements are actionable:
The Lewises also allege that "they are sometimes referred to at Watkins as "softies" in that they can easily be taken advantage of." (Verified Countercl. ¶ 93.) Such a statement cannot form the basis of a claim for disparaging the Lewises to third persons, as the Lewises have not alleged that the statement circulated beyond Watkins itself.
On September 17, 2002, Watkins sent a letter to the Lewises' customers indicating
that FitzGibbon and Company is Watkins' "Manufacturer's Representative for our retail store program. Please know that no other Watkins Representative or Associate is authorized to sell and service stores in your area." (Verified Countercl. ¶ 77.)
On September 19, 2002, Watkins sent another letter to the Lewises' customers and associates informing them that the Lewises were "no longer Watkins Independent Associates." (Verified Countercl. ¶ 78.)
It has been reported to the Lewises that Jacobs has represented to third parties/customers that the Lewises are "going bankrupt." (Verified Countercl. ¶ 92.)
Under Minnesota's Deceptive Trade Practices Act, unfair trade practices include disparagement of "the goods, services, or business of another by false or misleading representation of fact." Minn. Stat. § 325D.44, subd. 1(8) (1992). With respect to the common-law claim of defamation, the essential elements are that (1) the alleged statements were made, (2) they were communicated to someone other than the plaintiff, (3) they were false, and (4) as a result, the plaintiff's reputation was harmed. Ferrell v. Cross, 557 N.W.2d 560, 565 (Minn. 1997).
To the extent the Lewises argue that Watkins has "falsely represented" to others that they have been terminated and can no longer act as distributors for Watkins products, this argument is intertwined with the issue of whether the termination was wrongful. If Watkins was free to terminate the Lewises' distributorship at will and did do so, the statements made to store managers and associates cannot be false. As there appears to be little likelihood of success on the merits of the Lewises' breach of contract claim, the defamation/disparagement claim also has little likelihood of success on the merits.
The Lewises also argue that Watkins has made "other false statements of fact about the Lewises' financial status and character." The only specific allegation the Lewises make in that regard, however, is the assertion that it has been reported to them that the president of Watkins "has represented to third parties/customers that the Lewises are `going bankrupt.'" (Verified Countercl. ¶ 92.) This slender and conclusory allegation rests on the hearsay of one or more unidentified persons. From it alone, the Court cannot find that the Lewises have established a likelihood of success on the merits of their defamation and business disparagement claims.
B. Threat of Irreparable Harm
Temporary injunctive relief based on claims of defamation or business disparagement serve to prevent future harm to the complainant's goodwill and reputation during the pendency of the lawsuit. See Medical Graphics Corp. v. SensorMedics Corp., 872 F. Supp. 643, 649 (D.Minn. 1994) (Kyle, J.). There is no evidence, however, as to when Jacobs made the alleged comment that the Lewises were "going bankrupt." Thus, assuming for the sake of argument that the unidentified person reporting Jacobs' comments to the Lewises has done so accurately, the Court cannot determine whether the comment is stale or current. Nothing before the Court suggests that there is any real risk of future statements by Jacobs regarding the Lewises' solvency. The Lewises have not shown a threat of irreparable harm that can be averted by preliminary injunctive relief.
C. Balance of Harms and Public Interest
Having concluded that the Lewises have failed to establish a threat of irreparable harm and have failed to demonstrate a likelihood of success on the merits, there is no reason to address the remaining Dataphase factors beyond the Court's previous discussions. See Gelco Corp., 811 F.2d at 418.
Conclusion
The function of a temporary restraining order is to preserve the status quo. Here, the status quo is that the Lewises have not been acting as a distributor for Watkins for almost one full month; Watkins has appointed another distributor for the Lewises' customers and another sponsor for the former members of the Lewises' "downline sales organization." The Lewises seek an order forcing Watkins to return to business as it was operating a little over a month ago. They have not, however, satisfied the Dataphase factors and established that the balance of equities warrants such extraordinary relief.
Based on the foregoing, and all of the files, records and proceedings herein, IT IS ORDERED that Defendants Lloyd M. Lewis and Sandra G. Lewis's Application for Temporary Restraining Order, Affirmative Relief and Expedited Discovery (Doc. No. 4) is DENIED.