Explore the legal battles surrounding energy drink acquisitions and formula restrictions. Learn from the case of Innovation Ventures, LLC v. Custom Nutrition Laboratories, LLC.
M&A Stories
January 2, 2019
In 2004, a well-known energy drink manufacturer partnered with a company to produce their energy drink. When the manufacturer abruptly terminated this business relationship, leaving the company with surplus ingredients and packaging, legal disputes arose.
The company argued its right to continue using the surplus under the Uniform Commercial Code to recover some losses from the manufacturer’s termination. After protracted litigation, they reached a settlement agreement. This agreement barred the company from producing new energy drinks with specific ingredients and granted them $1.85 million in compensation.
Struggling financially, the company discussed acquisition with the buyer’s parent company. The buyer’s parent company acquired the company’s assets, forming a new corporation. The asset purchase agreement stated that the buyer didn’t assume the company’s liabilities except for listed ones, and it referenced the settlement agreement, specifying which substances were restricted.
After the acquisition, the buyer, under the former CEO/president of the company, continued to produce energy shots containing the restricted substances. The manufacturer sued the buyer, claiming breach of the settlement agreement.
The buyer argued they weren’t bound by the settlement agreement as they hadn’t signed it. However, the trial and appellate courts found the buyer bound by the formula restrictions due to the language in the asset purchase agreement, indicating their intent to be bound by the settlement agreement provision.
This case serves as a reminder for buyers to closely monitor the acquired company, especially if former management remains in place. Adequate control and oversight can prevent issues like formula misuse post-acquisition.
Case Reference
Innovation Ventures, LLC v. Custom Nutrition Laboratories, LLC, Nos. 17-1734, 17-1771, 17-1911, United States Court of Appeals, Sixth Circuit., (Decided and Filed: December 20, 2018).
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