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Yeti Enterprises Inc. v. Tang

United States District Court, D. Oregon, Medford Division

August 14, 2017

YETI ENTERPRISES INCORPORATED, an Oregon corporation; ALEXANDER J. HEAGLE, and individual; and FREQ WATER, INC., an Oregon corporation, Plaintiff,
ORION TANG, an individual; OREGON GLOBAL DISTRIBUTION, INC., an Oregon corporation; RENY TOWNSEND, an individual; RICHARD ROWE, an individual; WETA, INC., an Oregon corporation; IN AND OUT GARDENS LLC, an Oregon limited liability company; HEADQUARTERS, LLC, an Oregon limited liability company; and NPK, LLC, an Oregon limited liability company, Defendants, NICHOLAS JACKSON, an individual; and JESSICA LILGA, an individual, Counter-Defendants.


          CLARKE, Magistrate Judge.

         On July 25 and 26, 2017, the Court held a bench trial and took this case under advisement. The following are my findings of fact and conclusions of law. Fed.R.Civ.P. 52(a)(1).[1]


         NPK, LLC ("NPK"), has sued Nicholas Jackson ("Jackson") and Jessica Lilga ("Lilga") for events taking place largely between October 2012 and December 2013, when NPK alleges Jackson and Lilga conspired with Jim Heagle ("Heagle") to eliminate NPK from the distribution market for frequency-water products.

         NPK manufactures, distributes, and markets gardening supplies and materials. In 2009, NPK entered into a contract with Yeti Enterprises, Inc. ("Yeti), which was memorialized into a written distribution agreement on September 28, 2010, and again on November 11, 2010. The agreement provided that NPK would market, bottle, and distribute Yeti's product known as frequency water.[2] See Pl.'s Ex. 2. Heagle is the president and majority owner of Yeti. Subsequent to this agreement, NPK created three plant washes: Mighty Wash, Power Wash, and PM Wash, all of which contained and were marketed as containing frequency water. The products were sold to wholesale distributors. This partnership rapidly increased revenue for both NPK and Yeti.

         Jackson owns 22.5 percent of NPK. In October 2012, Jackson was incarcerated for fourteen months. Prior to his incarceration, Jackson was also employed by NPK as vice president of sales; Jackson believed he was chronically underpaid for this position—he was paid $12, 250.72 in 2011 and $28, 733.98 in 2012. Pl.'s Exs. 76, 77. As soon as his incarceration began, NPK ceased paying Jackson wages, though he did retain his ownership interest in the company. As part of a deal apparently worked out between Jackson, Lilga, and NPK's President, Richard Rowe ("Rowe"), Lilga, at the time Jackson's girlfriend, would take over many if not all of Jackson's responsibilities at the company and be paid in his stead. At the outset, the setup proved difficult; Lilga complained of "being treated like an incompetent child, " being overwhelmed, and being asked to do more than Jackson was ever asked to do. Pl.'s Ex. 115, at 11:26-12:l.[3] Although agreeing with Lilga that she was being treated improperly, Jackson told her to "[j]ust listen to them" and not to take anything personally. Pl.'s Ex. 115, at 12:26.

         Nevertheless, Lilga's relationship with NPK continued to rapidly deteriorate; she described her treatment to Jackson as "[a]bsolutely awful, " and stated Rowe told her that because she is not Jackson she would not like working at NPK, the job would be tough, and she would have to do what he says. PL Ex. 117, at 20:5. She felt her treatment was improper and described being "sick to [her] stomach" at work every day. PL Ex. 117, at 20:26. She further stated Rowe threatened to fire her three times in the first two weeks. By November 2012, Lilga no longer worked for NPK; she was employed by the company for three weeks.

         Jackson's relationship with NPK appears to have been fraught prior to his incarceration. Part of his disillusionment with NPK arose because he felt NPK was attempting to improperly cut his pay. In addition to this, Jackson felt Rowe and the rest of NPK's management were excluding him from critical management-level decision-making; as he described it, "[N]obody talks to [me] that should be talking to [me] about business and what's going on out there besides my lady, you know, which you guys are keeping her in the dark." Pl.'s Ex. 118, at 3:2-5.

         Jackson also felt NPK "stabbed" him in the back; indeed, he felt that if any of the other members had been in the legal predicament he was in, "they would have put a lot more energy towards" ensuring adequate legal representation. Pl.'s Ex. 117, at 18:21-24. He also testified that Rowe promised to take care of his family while he was incarcerated but that Rowe failed to follow through on this promise, at least to the extent Jackson expected. Finally, Jackson strongly believed Rowe was taking the company in the wrong direction by introducing products that were not "safe for the environment" and were outside of the markets he felt NPK stood to succeed in. Pl.'s Ex. 116, at 10:9. Consequently, at the outset of his incarceration, Jackson began talking with Lilga about the possibility of leaving NPK and working for Yeti, stating, "If all of a sudden, you know, me and you work for Yeti Enterprises . . ., so be it." Pl.'s Ex. 116, at 11:13-15. Jackson further said that he was "going to make sure that we have a game plan set up and that's with Jim [Heagle]." Pl.'s Ex. 117, at 6:10-11.

         In addition to discussing these plans with Lilga, Jackson also routinely conversed with Heagle while incarcerated; the two discussed their common disdain for NPK and its other members, Jackson's intent to leave and work for Yeti or in a business partnership with Heagle, as well as Heagle's intent to end Yeti's distribution agreement with NPK. Heagle believed he had been "soaked [] for all of [his] resources, " Pl.'s Ex. 119, at 3:4, and that NPK had breached their distribution agreement on multiple occasions by double billing and failing to pay Yeti in a timely matter, among other things. Jackson was well aware of Heagle's intent to end his distribution agreement with NPK; as Jackson stated to Lilga in October 2012, "Jim's gonna pull the line from them almost regardless, and it's pretty much regardless." Ex. 117, at 7:22-23. Jackson also knew that NPK was unaware of his conversations with Heagle and concurrent knowledge of Heagle's intentions, saying, "[T]hey don't know that I'm conversing with you like this." Pl.'s Ex. 122, at 14:8-9.

         During this time, Jackson decided he wanted to sell his "part of the company, " opining that he would "rather just be positive with [his] life instead of promote more of their negativity or even their selfishness. . . ." Pl.'s Ex. 119, at 2:14-17. Heagle stated that he would wait to end his distribution agreement and to notify NPK of his intent to do so until Jackson was "taken care of, " at which point, he stated, "I'm gonna jump ship" by "throw[ing] enough shit at them that they're not gonna want to go forward." Pl.'s Ex. 119, at 3:7-8; Ex. 119, at 4: 21-22. In addition to waiting for Jackson's exit, Heagle also wanted to ensure NPK signed a new five-year nondisclosure agreement with Yeti prior to ending their business relationship so that, as he told Jackson, he could guard against any attempt on NPK's part to "copy [his] product. . . ." Pl.'s Ex. 128, at 10:19. In January 2013, NPK did in fact renew the parties' non-disclosure agreement.

         In 2012, NPK was in the process of spinning off into three separate corporations, Griffin Holdings, Inc., Intelligent Technologies, Inc., and Oregon Global Distribution, Inc. Jackson was offered a 22.5 percent interest in each of the three companies; however, for the above-mentioned reasons, because he disagreed with the decision to split, and because NPK wanted Jackson to sign a two-year non-compete agreement, Jackson refused to sign the shareholder agreement for any of the new entities. Then, in December 2012, Jackson notified Rowe, via a letter from his attorney, that Jackson wanted a "full accounting" of the new entities and NPK's tax returns from 2010 onward. Pl.'s Ex. 28. After receipt of Jackson's attorney's letter, Rowe reached out to Jackson to inquire about Jackson's request. On December 21, 2012, Jackson described his conversation with Rowe to Lilga. According to Jackson, Rowe did not understand why Jackson wanted out of the company, to which Jackson said he replied, "[B]ecause I don't believe [you] have my best interests at heart." Pl.'s Ex. 126, at 3:19-20. He further stated he felt Rowe and others had minimally communicated with him since his incarceration and had gone forward without his consent on various decisions regarding the direction of NPK. Rowe implored Jackson to reconsider and then offered to buy Jackson out for ten or twenty thousand dollars. Jackson felt the offer was far too low and said he believed it was necessary to have an internal audit of NPK performed to determine the value of his shares. Jackson said Rowe replied, "You don't have to do that... we can figure this out just me and you, Nick." Pl.'s Ex. 126, at 7:21-23. According to Jackson, Rowe did not want an audit because "he's been doing a lot of wrong stuff." Pl.'s Ex. 126, at 8:15-16.

         During much of the next year, Jackson continued to negotiate his exit from NPK and continued to plan a future business relationship with Heagle. Meanwhile, in January 2013, with Jackson and Heagle continuing their communications about arranging a future business relationship, Jackson sent Heagle a draft copy of a proposed advertisement from NPK that depicted a series of products beyond those that Yeti was apparently aware of; as Jackson told Heagle, "They've been lying to you. I mean, sitting there telling you they weren't going to do other products. They already did. . . . They've got their whole nutrient line. . . ." Pl.'s Ex. 130, at 10:2-7. Jackson apparently received the advertisement from Rowe, and he never notified NPK that he forwarded it on to Heagle.

         During the same month, Jackson and Heagle agreed that Heagle should move forward and terminate Yeti's distribution agreement with NPK, even though Jackson had not yet divested himself of his interest in NPK. Consequently, on January 28, 2013, Yeti, through its attorney, sent NPK a letter notifying NPK that it was in breach of the parties' distribution agreement, citing as "[t]he last straw" the above-referenced advertisement Jackson had passed along to Heagle. Pl.'s Ex. 5, at l.[4] Yeti claimed this advertisement showed NPK was "blatantly" using Yeti's creation in an "attempt to market other products. . . ." Pl.'s Ex. 5, at 1. Yeti's attorney attached a copy of the advertisement to the letter. NPK was given ten days to, in effect, end its relationship with Yeti and to turn over all of Yeti's property, including any money owed to Yeti.

         Instead of abruptly ending their business relationship, however, Yeti and NPK worked out an agreement whereby Yeti would continue to supply its frequency water to NPK through January 2014. In exchange, NPK would turn over to Yeti certain frequency-water-related trademarks that NPK registered in its name. Heagle, however, still made clear to Jackson that, once the new contract expired in the beginning of 2014 and all trademarks were "handed over, " he did not intend to continue distributing his product to NPK; Heagle stated to Jackson that he intended to walk off at that point "and just leave them alone and do our own business. . . ." Pl.'s Ex. 137, at 18:16; Pl.'s Ex. 137, at 13:17-18.

         The new Yeti-NPK distribution agreement did not pan out. In April 2013, Yeti notified NPK that it was raising the prices it would charge NPK for its products, to which NPK objected and sent a letter asking for reassurance of performance; Yeti never responded. Shortly thereafter, NPK filed suit in Jackson County Circuit Court claiming Yeti tortuously interfered with NPK's relationship by wrongfully communicating and seeking business with NPK's customers. Subsequently, on June 17, 2013, Yeti filed a complaint in Multnomah County Circuit Court arguing NPK misappropriated Yeti's trademarks and had engaged in unlawful competition and false advertising.[5] The next day, Yeti notified NPK that it was terminating the parties' distribution agreement.

         As stated, while the Yeti-NPK relationship deteriorated, Jackson and Heagle continued to develop their own business plans, and Jackson continued his attempt to divest from NPK. In January 2013, NPK presented Jackson with a membership-redemption agreement, offering to purchase his 22.5 percent ownership for $50, 000. Jackson, however, believed this was an insufficient sum of money and that his shares were worth much more; thus, he did not sign the offer and continued to press for an internal audit.

         On February 8, 2013, having failed to receive an overt acceptance or rejection of its offer, NPK notified Jackson that it was revoking the redemption offer because it believed Jackson had breached his fiduciary duties to the company and improperly disseminated proprietary information. Indeed, NPK evidently tied Jackson to Heagle when NPK received the January 28, 2013, letter from Yeti's attorney containing a draft copy of NPK's proposed advertisement. Rowe testified that Jackson was the only person the proposed advertisement was sent to. In addition, NPK believed Jackson disseminated false, misleading, and damaging statements regarding NPK's products. On April 9, 2013, NPK notified Jackson, through his attorney, that it had "decided to pursue a judicial expulsion action against [him]." Def's Ex. 220. On April 12, 2013, NPK filed the expulsion action in Jackson County Circuit Court. The case is currently abated pending resolution of this case.

         By this time, NPK's distribution agreement with Yeti had been terminated and NPK had relaunched its product line without Yeti's frequency water. Around the same time, Jackson began working in earnest with Dennis Hunter, owner of Left Coast Garden Wholesale ("Left Coast"), a former distributor of NPK's products, to launch a competitive product line using Yeti's frequency water. To aid in this endeavor, Jackson promised to supply Hunter with a list of 1, 300 Sunlight Distributors, Inc. ("Sunlight"), stores. At the time, Sunlight was a major purchaser of NPK's products. Jackson later instructed Lilga to provide Hunter with a copy of "that list of all those stores." Pl.'s Ex. 144, at 9:25-26. It is not perfectly clear where this list originated. On October 14, 2012, early in Jackson's incarceration, he appeared to direct Lilga to download NPK's customer database, stating:

And if you can-if you can find a way to download that database information, and I don't know, you know, you might have to be squirrelly about it or whatever, download it on a hard drive, but find a way to download all that so that we have it as well, and do it periodically.

Pl.'s Ex. 116, at 13:5-10. Jackson goes on to say that it is important to have all that information "because we've worked for that." Pl.'s Ex. 116, at 13:13-14. Lilga replies, "That's a good idea." Pl.'s Ex. 116, at 13:11. Lilga never confirms she took this database; however, Rowe testified at trial that NPK discovered Lilga had taken NPK's database of customers and every interaction with those customers, as well as trade secrets and sales processes. Rowe also testified, and the physical evidence confirms, that Left Coast had NPK's customer lists and sent out damaging e- mails to NPK's customers stating that it had "decided to discontinue distributing products from NPK industries" because NPK's new plant-wash line, which no longer contained frequency water, was susceptible to molding and that Left Coast[6] would now "provide the original frequency altered formulations and will be marketing under the trade names Mega Wash, White Wash, and Freq Wash. . . ." Pl.'s Ex. 24, at 4. Accordingly, it would seem that the list of 1, 300 stores Jackson referred to was taken from NPK's database of customers.

         Rowe testified at trial that Left Coast's damaging e-mails, as well as the introduction of Left Coast's new product line, halved NPK's sales, which had already been halved earlier in the year due to the loss of Yeti's frequency-water products. As Rowe put it, the goodwill that NPK had generated over the years marketing its plant washes transferred to Left Coast's new products.

         Upon Jackson's release from prison in December 2013, he continued to work for Left Coast. See, e.g., Pl.'s Ex. 17, 18. He remains a member of NPK, and on July 29, 2013, he filed suit against NPK, Rowe, and NPK's additional members in Jackson County Circuit Court seeking an assessment and payment of the value of his membership interest in the company. That case is also abated pending resolution of this matter.


         I. Nicholas Jackson

         NPK brings two claims against Jackson for fraudulent misrepresentation, as well as claims for violations of the Lanham Act, common law trade libel, conversion, and breach of the parties' nondisclosure agreement. NPK contends Jackson is liable for these claims on an individual basis and in concert with others and therefore is also liable for these tortious acts on the basis of civil conspiracy and aiding and abetting. The Court addresses each of these claims.

         A. Fraudulent misrepresentation - failure to disclose

         To establish a claim for fraud in Oregon, a party must prove (1) a material misrepresentation that was (2) false, (3) made with knowledge of its falsity or with ignorance of its truth, (4) with the intention that it be acted upon by the party claiming fraud, and (4) that the acting party in fact justifiably relied on the material misrepresentation, (5) suffering an injury as a result. Handy v. Beck, 282 Or. 653, 659 (1978). The party bringing a claim for fraud must prove its case by clear and convincing evidence, not merely a preponderance of the evidence, since "[t]he stigma of fraud is not lightly laid upon a defendant." Fahrenwald v. Hemphill, 239 Or. 421, 425-26 (1965).

         "Actionable fraud may be committed by a concealment of material facts as well as by affirmative and positive misrepresentations." Musgrave v. Lucas, 193 Or. 401, 410 (1951) (internal citation omitted). Indeed, typically, "mere silence is not fraud, " but "[w]here the law imposes a duty on one party to disclose all material facts known to him and not known to the other, silence or concealment in violation of this duty with intent to deceive will amount to fraud. ..." Id.

         NPK contends Jackson "had a special relationship with [NPK] which included the duty to disclose to [NPK] all information which could damage its business, " including his assistance in bringing competitive products to the market and assistance in cutting NPK out of the plant-wash distribution market. Pretrial Order, at 8. Because these detrimental activities were not disclosed, NPK contends Jackson breached this "special relationship.

         " Jackson had no duty to disclose information that could damage NPK's business. A manager of a limited liability company ("LLC") carries with him specific duties that are owed to the LLC. See ORS § 63.l55(9)(a). Specifically, those duties include the obligation "to refrain from dealing with the limited liability company in a manner adverse to the limited liability company and to refrain from representing a person with an interest adverse to the limited liability company, in the conduct . . . of the limited liability company's business." ORS § 63.l55(2)(b). Mere members of an LLC, however, who are not also managers of the company, "owe no duty to the LLC or the other members." Synectic Ventures I LLC v. EVI Corp., 353 Or. 62, 78 (2012) (citing ORS § 63.l55(9)(a)). Hence, unlike managers, these passive members are not agents of the LLC and owe no duty of loyalty to put the company's interests first. Id.

         Here, NPK readily acknowledges that, once Jackson's incarceration began, he was no longer paid for his role as vice president of sales. Indeed, the facts demonstrably show that, at this point, Jackson's only affiliation with NPK was his 22.5 percent membership interest; Lilga took on his former responsibilities and received his pay. Accordingly, without any management-level position at NPK, Jackson was simply a passive member of the company. Thus, as Oregon law makes clear, he owed "no duties to the limited liability company or the other members solely by reason of being a member" of NPK and therefore no duty to put the company's interests first and to disclose his own business interests, which were adverse to NPK's. ORS § 63.l55(9)(a). Beyond Jackson's relationship with NPK as a member, NPK fails to point to any other relationship that imposed upon Jackson a duty to disclose his private business dealings, and the Court finds none. Accordingly, NPK has failed to prove that Jackson's failure to disclose his negotiations with Heagle, Hunter, Lilga, or any others renders him liable for fraud.

         B. Fraudulent misrepresentation - active concealment of facts

         Next, NPK contends Jackson "conspired to deprive NPK, LLC of the market for Frequency Water products" by setting up "an exclusive business relationship with Sunlight and Green Planet[7] and others in the marketplace to distribute" Yeti's frequency-water products and "to cause said entities to stop distributing" NPK's products. Pl.'s Trial Mem., at 6-7. NPK opines that "[t]hese activities were actively concealed from" NPK. Pl.'s Trial Mem., at 7. Finally, at trial, Rowe testified that Jackson concealed his intent to withdraw from NPK and concealed his communications with Heagle, Lilga, and Hunter. NPK charges Jackson had a duty to disclose these activities "as he is a member of that LLC." Pretrial Order, at 6.

         As articulated in the prior section, when there is not duty to disclose, fraud requires an active misrepresentation of a material fact. "[E]ven in the absence of a duty to speak, " however, "actions by a defendant to actively conceal the truth can constitute fraud." Wieber v. FedEx Ground Package Sys., Inc., 231 Or.App. 469, 485 (2009) (internal citation omitted).

         Here, there is nothing in the evidence showing Jackson actively concealed facts from NPK or from any manager at the company. First, the prison phone records NPK has submitted show that Jackson repeatedly attempted to leave NPK and made his intentions to do so quite clear. Second, while he did not disclose to NPK his ongoing negotiations with Heagle, Lilga, and Hunter, and his intent to create a competitive product line to the detriment of NPK, he had no duty to disclose these activities to NPK. A failure to disclose private business negotiations is distinct from active concealment; as the Oregon Court of Appeals explained, "[A]n active concealment such as the filling in of [a] ditch ... is to be distinguished from a simple nondisclosure." Paul v. Kelley,42 Or.App. 61, 65 (1979) (internal citation omitted). Citing Prosser, the court further explained that active concealment is defined as "[a]ny words or acts which create a false impression covering up the truth, ... ...

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