This case involves a putative class action filed by a coffee company against its former sales distributor over whether the latter’s non-compete clauses are legally enforceable.

The Court suggests this issue remains open, while also noting Defendant’s non-compete clauses as being possibly too broad and unreasonable.

Non-Compete Clauses

Non-compete clauses are frequently included in employment contracts to protect employers against their former workers using confidential information to compete against them after leaving. Such restrictions typically cover current and former employees alike and may prohibit solicitation, disclosure, training repayment or similar activities after departing the firm. Sometimes geographic restrictions also limit where such activity can take place.

Organo Gold International Inc. and its distributors are charged with marketing ganoderma-based supplements that compete with Melaleuca’s range of health and wellness products, thus prompting Melaleuca to file state court actions against Buggs and L&A Ventura Management, alleging violations of non-competition and non-solicitation clauses in their Distributor Agreements.

These clauses are governed by Washington law and seem to limit their scope to a one-year contract subject to renewal; however, policies and procedures for those agreements include an affirmative clause stating they become effective upon acceptance by Organico.

The district court determined Defendants violated these provisions, ordering a permanent injunction and awarding damages totalling $16,963. On appeal, this decision was upheld.

Appellants contend in support of their appeal that the court incorrectly excluded evidence regarding Organo’s profits from AmeriSciences breach. This evidence relied upon expert witness Scott Weingust, who used statistical techniques to estimate AmeriSciences distributor network and WMS software value; appellants maintain Weingust was unreliable and should have been excluded under Daubert rules.

However, the district court’s jury instructions included specific statements that Cocheu’s transfer of their distributor list and WMS software constitute fraudulent enrichment. Furthermore, district courts typically have considerable latitude when it comes to framing jury instructions; as a result of which, its interpretation of this language by this particular district court does not appear clearly erroneous.

Solicitation

Organo’s claims against Buggs’ breach of contract and tortious interference are legitimate; however, the Court is unable to grant their injunctive relief request as there are too many competing interests involved here for them to consider properly.

First and foremost is the scope of any requested restriction. While Organo’s non-compete clauses in question are fairly narrow – restricting them from soliciting its distributors or customers and forbidding participation in opportunities involving Ganoderma-based products – without geographic limitation these restrictions could significantly curtail Defendants’ professional careers due to network marketing business being spread over multiple regions.

Furthermore, the Court finds the allegations of Organo’s goodwill being undermined and customer base destroyed through an organized plan by Defendants to be meritorious. According to testimony provided by former distributors who left, they allege Defendants have engaged in an elaborate scheme designed to persuade other former Melaleuca Marketing Executives to defect by offering financial inducements and recruiting them by phone or in person – leading them to violate contracts through such solicitation tactics and suffering economic harm as a result.

Organo has presented evidence showing that Defendants attempted to steal its confidential information and trade secrets by recruiting former Melaleuca employees into their new company. For example, former distributors including Jose Ardon, Arturo Nazario, Donaciano Martinez, Sonia Alfaro John Sachtouras and Marcel Hinojosa who left were offered bonuses by Defendants as inducements to break non-solicitation and confidentiality obligations that violated laws in violation of which caused considerable harm to Organo. This conduct violated laws as it caused serious harm to Organo and caused significant harm to Organo.

Finally, Organo contends that TLC business is not a direct competitor. Even though TLC only sells a few Ganoderma-based products, TLC remains an indirect rival because they compete for similar groups of potential distributors as Organo. Therefore, the Court concludes that equitable considerations weigh in favor of issuing the injunction order.

Independent Contractor Agreements

An independent contractor agreement is an essential document that establishes the relationship between a company and its independent contractors. It must clearly outline each party’s expectations, how they will collaborate together, compensation terms and any waiver clauses to protect business owners such as a waiver clause for breaches; an outline of work to be performed; ownership rights regarding any products created during performance of services rendered and applicable laws to govern the contract.

An important element of an independent contractor agreement is a confidentiality and nondisclosure clause, which may include provisions to define what confidential information is covered by the contract, to actively protect any such data from disclosure, as well as returning all records or materials belonging to the hiring party upon termination of the agreement.

Non-solicitation clauses are an integral component of an independent contractor agreement and prohibit an independent contractor from recruiting or otherwise trying to get business from any current or former distributors of their hiring party, whether online or offline methods like emails, social media posts, text messaging and phone calls are used to communicate or gain business. They might even extend to direct marketing methods like cold calling and door-to-door sales as part of an agreement’s provisions.

An effective independent contractor agreement should also include a minimum monthly requirement that they perform for the hiring party, such as 40 hours. This can help ensure they provide enough services and any unused hours cannot carry over from month to month.

Independent contractors must abide by all federal, state and local laws when conducting their work. Furthermore, their contract should stipulate that they are solely responsible for paying taxes that pertain to their activity, including but not limited to self-employment tax, income tax, workers’ compensation insurance premiums, disability premiums or any other statutory employee benefits that may apply.

Additionally, both parties should sign the contract in duplicate – each signature shall be considered an original while both copies should make up one and the same document. Furthermore, an agreement may be executed in any number of counterparts with each counterpart being considered an original but all of which together being considered part of one single instrument.

Damages

This case presents an intriguing test of judicial discretion and damages in trade secret misappropriation cases. A jury found Holton Buggs, Organo Gold International and Organo Gold Enterprises (collectively known as the “Appellants”)1 liable to AmeriSciences trustee Rodney Tow for damages totaling $3,461,166; Tow was compensated for trade secret misappropriation, tortious interference with contracts, unjust enrichment, fraudulent transfer and breach of fiduciary duty by this award.

Appellants contend that the district court abused its discretion in awarding an injunction and compensatory damages, particularly by permitting expert testimony from Scott Weingust concerning AmeriSciences’ distributor network value. According to appellants, Weingust’s methodology was unreliable and should have been excluded under Daubert; however, contrary to what appellants believed, Weingust was reliable and admissible testimony before the district court.

The district court determined that an actionable fraudulent transfer claim existed against the Appellants, as per an invocation from Cocheu of fraudulent transfer if she transferred distributor lists and WMS software with intent to hinder, delay or defraud creditors.

Additionally, the district court held that Appellants were unjustly enriched because they held onto AmeriSciences’ valuable distributor network and WMS software prior to the merger – this valuation being well over $3.451 million based on market values of these assets. Furthermore, they found that jury had properly considered evidence and allocated damages appropriately between Appellants.

District court held that an injunction would cause irreparable harm to Defendants because it would interfere with their ability to participate in another opportunity which directly competes with Organo Gold’s offer of ganoderma-based products. This was true despite Organo Gold’s Distributor Application language likely prohibiting soliciting distributors for competing MLM opportunities that sell similar products or services; furthermore, reasonable people might interpret “other opportunity” to exclude this type of MLM opportunity at issue here.