Court concludes that seller of business did not breach implied obligation to not solicit former customers

Seller develops, markets, and sells a variety of over-the-counter and prescription medications. Seller’s Owner owns Seller and is Seller’s CEO, president and secretary.

Buyer entered into the asset purchase agreement with Seller. Pursuant to the asset purchase agreement, Buyer paid approximately $170 million for the intellectual property, formulae, and goodwill relating to eighteen Seller products in the “Biotene” line. These products are over-the-counter medicines, including mouthwashes and toothpastes, used in the treatment of dry mouth.

Seller was prohibited from competing against Buyer for 3 years and Seller’s Owner was also prohibited from competing with Buyer, but Seller’s Owner’s non-compete provision did not state a term of the non-compete.

Over three years after the closing — Seller introduced the Salivea line of products, a suite of over-the-counter medicines, including mouthwash and toothpaste, used to treat dry mouth. A month later Seller and Seller’s Owner mailed fliers advertising Salivea. Seller and Seller’s Owner estimated that they sent approximately 100,000 mailers to healthcare professionals and others based on contacts generated at conventions and rebate recipients.

Seller prominently described Seller as the creator of Biotene and stated that Salivea utilized the same ingredients as the “ORIGINAL Biotene. The Proven and Loved Formula!” Finally, at the far left of the advertisement, running vertically in by far the smallest typeface on the flyer, the following words appear: “Biotene is trademark owned by Buyer.”

Other flyers had a header that said: “DID YOU KNOW Biotene HAS CHANGED?” Slightly below the header, the flyer stated that over 35 years ago, Seller developed “Biotene enzyme toothpaste and mouthwash that became the #1 brand for dry mouth. Biotene was acquired by the GSK Company and was reformulated. After years of perfecting formulas, we now introduce Salivea mouthwash and toothpaste that utilizes the Proven Enzyme Technology as in the ORIGINAL Biotene.” Meanwhile, in the top right, highlighted in red, the flyer lists “CURRENT Biotene Changes,” including “ENYZMES (Removed),” and “PARABENS (Added),” alongside a picture of a Biotene oral rinse bottle. A footer at the bottom of the flyer states: “Back Again! Salivary Enzymes and Components — Essential for Dry Mouth Care.” Just above the footer, there is a comparison of the “Salivea Mouthwash Utilizing ORIGINAL Biotene Formula” with the “ORIGINAL Biotene Formula/The #1 Recommended Brand for Dry Mouth.” Finally, like the Toothpaste Mailer, the Mouthwash Mailer contains a small disclaimer that “Biotene is trademark owned by Buyer,” running vertically on the far left of the flyer.

Buyer sued Seller and Seller’s Owner in a New York federal district court accusing them of trademark infringement and violation of their non-compete obligations under the asset purchase agreement and an implied nonsolicitation obligation under New York law. Buyer claimed that Seller and Seller’s Owner breached their non-compete and nonsolicitation obligations when, in 2018, Seller and Seller’s Owner launched Salivea, a competing line of medicines and prominently used the Biotene trademark in its advertising campaign.

Buyer immediately asked a New York federal district court to enjoin Seller and Seller’s Owner from selling Salivea altogether or, at a minimum, from using the Biotene mark in advertising Salivea while Buyer and Seller litigate the lawsuit. The court issued a preliminary injunction that ordered Seller to stop using the Biotene trademark in its advertising but said that Seller could continue selling Salivea.

The court said that it could only issue a preliminary injunction if the court decided that Buyer was likely to prevail at trial on its claims and Buyer would suffer irreparable harm if the court did not issue the preliminary junction now before the dispute was resolved in the litigation.

The court first looked at Buyer’s request that Seller stop selling the Salivea product line. Buyer argued that New York applied and under New York law, Seller and Seller’s Owner had a perpetual implied obligation owed to Buyer to not solicit Seller’s former Biotene customers because Buyer purchased the goodwill associated with the Biotene product line. This obligation is independent of any non-compete obligations in the asset purchase agreement.

Buyer claimed Seller and Seller’s Owner were soliciting their former Biotene customers and thus the court should issue a preliminary injunction stopping them from marketing and selling the Salivea product line.  The court said that even if New York law applied, Buyer probably would not prevail on this issue because Seller and Seller’s Owner’s Salivea advertisement campaign was general in nature — and not specifically aimed at the Seller’s former customers. Therefore, the court would not issue a preliminary injunction on that basis.

The court also noted that Seller’s non-compete obligation expired in 3 years; before the Salivea line was launched and so Seller did not breach its non-compete. However, that left Seller’s Owner’s non-compete which did not have a time limit and Buyer argued that therefore it was perpetual, and Seller’s Owner breached Seller’s Owner’s non-compete and therefore Seller’s Owner should be stopped from causing Seller to sell and market the Salivea product line.

The court said that Buyer would probably not prevail on this claim because Seller’s Owner’s non-compete was vaguely worded and if the non-compete was perpetual, then the non-compete was probably unenforceable as unreasonable. Therefore, the court would not order Seller and Seller’s owner to stop marketing and selling the Salivea line of products.

However, the court did think that Seller and Seller’s Owner’s probably infringed upon Buyer’s Biotene trademark in its advertising campaign and ordered them to stop using the Biotene trademark in their advertising campaign while the dispute is being resolved in litigation.

This case is referred to Glaxosmithkline LLC v. Laclede, Inc., No. 18-CV-4945 (JMF), United States District Court, S.D. New York, (January 23, 2019).

Comment. It’s interesting that the court said that under New York law a seller of the goodwill a business has a perpetual obligation to the buyer not to solicit seller’s former customers; and this obligation is independent of the existence of any written seller non-compete obligation.

By John McCauley: I help people start, grow, buy and sell their businesses.

Email: jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

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