Backbone Worldwide Inc. v. Lifevantage Corp.

443 P.3d 780

BACKBONE WORLDWIDE INC. and Burke Hedges, Appellants,

v.LIFEVANTAGE CORPORATION, Appellee.

No. 20180038-CA

Court of Appeals of Utah.

Filed May 16, 2019

Scott O. Mercer and Ryan B. Hancey, Salt Lake City, Attorneys for Appellants

Thomas R. Karrenberg, Richard A. Kaplan, Jared D. Scott, and Nathan P. Hatch, Salt Lake City, Attorneys for Appellee

Judge Ryan M. Harris authored this Opinion, in which Judges Gregory K. Orme and Kate Appleby concurred.

Opinion

HARRIS, Judge:

¶1 LifeVantage Corporation (LifeVantage) terminated a contract it had entered into with Backbone Worldwide Inc. (Backbone).

There is no dispute that LifeVantage had the technical right to terminate the contract due to certain actions Backbone had taken. But because LifeVantage did not seem bothered by Backbone’s actions when they were first taken, Backbone contends that LifeVantage did not terminate the contract for those permissible reasons, but instead claims that LifeVantage terminated the contract simply because it did not want to pay, and because of animosity toward Backbone’s owner, Burke Hedges. Backbone contends that LifeVantage’s termination of the contract under these circumstances was improper and a violation of the implied covenant of good faith and fair dealing. The district court was not persuaded by Backbone’s arguments, and entered summary judgment in favor of LifeVantage, not only on Backbone’s contract claim, but also on LifeVantage’s separate counterclaim for conversion. We affirm the district court’s entry of summary judgment in LifeVantage’s favor.

BACKGROUND

¶2 In 2009, LifeVantage—already an existing, publicly-traded company—relaunched itself as a multi-level marketing company to promote sales of a nutritional supplement. As part of these efforts, LifeVantage sought the help of Hedges and his company, Backbone. Hedges was well-known within the multi-level marketing industry as an author and speaker. In May 2009, LifeVantage and Backbone entered into an agreement whereby Backbone would become a LifeVantage distributor and undertake additional duties to promote LifeVantage. To this end, Hedges, for and on behalf of Backbone, signed LifeVantage’s standard Independent Distributor Agreement, which incorporated LifeVantage’s Policies and Procedures; the parties also agreed to and executed a written amendment of that agreement (First Amendment) outlining Backbone’s additional duties and compensation. The standard Independent Distributor Agreement, along with the First Amendment and the incorporated Policies and Procedures, constitute the full agreement between the parties, and are collectively referred to herein as "the Agreement."

¶3 Under the terms of the Agreement, LifeVantage agreed to make "Support Payments" to Backbone in the amount of $ 20,000 per month for the first three months of the Agreement, then $ 10,000 per month for the next nine months or until the "cancellation of the Agreement for any reason in accordance with the Agreement." LifeVantage also agreed to compensate Backbone as a distributor, through commissions and various bonuses, at the highest level allowed by LifeVantage’s compensation plan, regardless of whether Backbone actually qualified for that level through the usual measurements.

¶4 The Agreement defined "Cancellation" as "the expiration or termination of an Independent Distributor’s Business. Cancellation may be either voluntary or involuntary by either LifeVantage or an Independent Distributor, through non-renewal, inactivity or breach of the Agreement." "Breach" was defined as "an actual or alleged transgression or violation of any part of this Agreement." The Agreement addressed remedies for breach and stated that "[a]ny breach of the Agreement ... may result, at LifeVantage’s discretion, in ... [c]ancellation of the [Agreement]."

¶5 While the Agreement required Backbone to "develop sales aides" for LifeVantage, it also required that "supplemental marketing material of any kind, ... be submitted to [LifeVantage’s] Compliance Department for approval before it can be used or made public." Moreover, the Agreement contained several restrictions on distributors’ ability to develop websites to promote LifeVantage products, and required distributors to register any such websites with LifeVantage and receive written approval from LifeVantage before making any such site publicly available.

¶6 In June 2009—only weeks after entering into the Agreement—Backbone developed and made public a website (the Website) that it used for various purposes, including the promotion of LifeVantage products. Backbone, through Hedges, also pitched the Website to others in the LifeVantage network as a way for them to likewise market their LifeVantage business. On the Website, Backbone also made health-related claims about LifeVantage products and income-related claims about working for LifeVantage, two actions that were expressly prohibited by the Agreement. Backbone further used the Website to sell not only LifeVantage products but also non-LifeVantage products, another activity prohibited by the Agreement. LifeVantage never provided Backbone with written approval for any marketing material, including the Website.

¶7 By October 2009, LifeVantage had developed cash flow problems, and it stopped paying Backbone the Support Payments required by the Agreement. LifeVantage proposed another amendment to the Agreement (Second Amendment) under which Backbone would agree to accept LifeVantage stock in lieu of the cash Support Payments. In anticipation that Backbone would agree to the Second Amendment, LifeVantage instructed its stock transfer agent (Transfer Agent) to issue a certificate for 240,000 shares of stock in Hedges’s name, to be sent to LifeVantage. However, Backbone never agreed to the Second Amendment, and therefore LifeVantage maintained possession of the certificate and did not present it to Hedges.

¶8 In February 2010, LifeVantage emailed Backbone regarding the Website, and for the first time took the position that the Website should not have gone live without LifeVantage’s prior approval, was not in compliance with the Agreement, and needed to be brought into compliance immediately. Shortly thereafter, LifeVantage began looking into other alleged misconduct by Backbone and Hedges. LifeVantage had received complaints about Hedges’s personal behavior; these complaints ranged from Hedges "not [being] a team player," to Hedges stealing the business of other LifeVantage distributors, all the way to sexual harassment. In May 2010, LifeVantage sent Backbone a letter restating its concerns with the Website, and stating that it had received complaints from other members of its organization about Hedges’s conduct. Hedges denied the allegations of personal misconduct.

¶9 After conducting an investigation, LifeVantage determined that at least some of the complaints of personal misconduct against Hedges were credible, and that Backbone had committed various breaches of the Agreement. At this point, in June 2010, LifeVantage terminated the First Amendment to the Agreement and placed Backbone on "probation." After that, however, LifeVantage continued to receive complaints about Hedges’s personal behavior, and it "suspended" Backbone’s distributorship in July 2010. Less than a month later, LifeVantage terminated the Agreement entirely.

¶10 In July 2010, while LifeVantage was investigating and taking action against Backbone, Transfer Agent—apparently as a routine matter, without being specifically asked to do so by LifeVantage—sent Hedges a statement showing that he had been issued a certificate for 240,000 shares of LifeVantage stock. In early 2011, Hedges called Transfer Agent, and explained that he had never received a stock certificate for the shares. Transfer Agent asked Hedges to fill out some additional paperwork, including an affidavit attesting that he had never received a stock certificate, and Hedges complied. Transfer Agent acknowledged Hedges’s non-receipt of the stock certificate in a letter dated March 9, 2011, and then issued Hedges a substitute stock certificate for the 240,000 shares. Transfer Agent did not inform LifeVantage about the new stock certificate issued to Hedges. Soon after receiving the certificate, Hedges proceeded to transfer all of his shares to his wife, who later sold the shares to a third party for approximately $ 380,000.

¶11 Backbone filed suit against LifeVantage in October 2011 asserting, among other claims, breach of contract and breach of the covenant of good faith and fair dealing.¹ Its chief complaint was that LifeVantage had failed to pay all of the Support Payments due under the Agreement. Backbone would later file two amended complaints, each of which contained a general breach of contract claim but omitted any separate claim for breach of the covenant of good faith and fair dealing. For its part, LifeVantage denied any wrongdoing. In March 2014, LifeVantage learned, through Backbone’s counsel, that Hedges had acquired a substitute stock certificate and thereby had obtained the 240,000 shares of LifeVantage stock, and LifeVantage responded by filing counterclaims for conversion, fraud, and securities fraud against Hedges personally.²

¶12 Backbone’s second amended complaint, filed in May 2015, stated that Backbone never agreed to amend the Agreement to allow LifeVantage to compensate it in stock instead of cash. Though it acknowledged that Hedges received the substitute stock certificate, and that the stock would have been given as compensation for the amount due Backbone under the original Agreement, it still claimed Backbone was damaged in the full amount of unpaid Support Payments.

¶13 LifeVantage and Backbone each filed cross-motions for summary judgment on all relevant issues. The district court initially granted summary judgment in favor of LifeVantage on its conversion counterclaim against Hedges, but denied summary judgment on LifeVantage’s counterclaims for fraud and securities...