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Herdguard, LLC v. NXT Generation Pet, Inc.

United States District Court, E.D. Kentucky, Central Division, Lexington

February 5, 2019

HERDGUARD, LLC, Plaintiff,
v.
NXT GENERATION PET, INC., et al., Defendants.

          MEMORANDUM OPINION AND ORDER

          Joseph M. Hood Senior U.S. District Judge

         Plaintiff Herdguard, LLC, was the creator of “Bodyguard 360, ”[1] a dry powder scent suppression product developed to mask the scent of deer hunters. Representatives of Defendant NXT Generation Pet approached Herdguard representatives about acquiring Herdguard and Bodyguard 360. During negotiations, the parties, including manufacturer Vermont Soap, executed non-disclosure (“NDA”) and confidentiality agreements. Herdguard and NXT failed to reach an agreement pertaining to the acquisition of Bodyguard 360. Still, Herdguard alleges that Defendants NXT and Vermont soap violated the agreements in two primary ways. First, Herdguard alleges that NXT and Vermont Soap reverse engineered the confidential formula for Bodyguard 360 and sold the reverse engineered product as a product called “Ultimate Outdoor Protection.” Second, Herdguard claims that NXT engaged in a business relationship with Vermont Soap, in violation of the non-circumvention clause in the Mutual NDA.

         NXT and Vermont Soap moved for summary judgment. [DE 64, Motion for Summary Judgment by NXT and Jason Riccardi and DE 67, Motion for Summary Judgment by Vermont Soap]. Additionally, Herdguard moved for partial summary judgment. [DE 68, Herdguard Motion for Summary Judgment]. The parties have responded in opposition to the applicable motions for summary judgment. [DE 65. Response by Herdguard to DE 64; DE 74 Response by Herdguard to DE 67; DE 71 Response by Vermont Soap to DE 68; and DE 73 Response by NXT to DE 68]. Additionally, the parties have either replied in support of their motions or the time to reply has expired. [DE 69 Reply of NXT and Riccardi and DE 75 Reply of Vermont Soap]. As a result, this matter is ripe for review and consideration of all pending motions for summary judgment will be consolidated in this memorandum opinion and order.

         For the reasons that follow, NXT and Riccardi's motion for summary judgment [DE 64] is GRANTED IN PART and DENIED IN PART, Vermont Soap's motion for summary judgment [DE 67] is GRANTED, and Herdguard's motion for partial summary judgment [DE 68] is DENIED.

         I. Procedural and Factual Background

         Herdguard was the creator of Bodyguard 360, a dry powder scent suppression product originally marketed to mask the scent of deer hunters. [DE 67 at 1, 4, Pg ID 566, 569]. To produce Bodyguard 360, Herdguard used a base soap product sold by Vermont Soap that was filtered through a substance known as diatomaceous earth. [Id. at 1-2, 4-5, Pg ID 566-67, 569-70]. The base soap product from Vermont Soap was then infused with other proprietary ingredients to produce Bodyguard 360. [Id. at 4-5, Pg ID 569].

         Sometime around May 2015, NXT's president, Jason Riccardi, approached Herdguard owner Kenneth Stewart about NXT acquiring Herdguard. [DE 64 at 4, Pg ID 316; DE 68 at 2, Pg ID 748; DE 67 at 5, Pg ID 570]. During the negotiations, NXT and Herdguard entered into two non-disclosure agreements (“NDAs”). The “Herdguard NDA” was signed by the parties on May 20, 2015, and is governed by Kentucky law. [DE 64-4, Herdguard NDA]. The “Mutual NDA, ” also dated May 20, 2015, is governed by New Jersey law. [DE 64-5, Mutual NDA]. The parties do not remember which agreement was signed first.

         Then, on June 15, 2015, Herdguard and Vermont Soap entered into a confidentiality agreement at Herdguard's request. [DE 67-5, Confidentiality Agreement; DE 67 at 6, Pg ID 571]. The confidentiality agreement between Herdguard and Vermont Soap is governed by Vermont law. [DE 67-5 at 2, Pg ID 681].

         Subsequently, NXT and Herdguard engaged in discussions about NXT purchasing Herdguard. [See DE 68-3, Various Emails]. On June 17, 2015, Crystal Geis, [2] a Herdguard employee, sent NXT the formula for Bodyguard 360. [DE 67-4 at 1, Pg ID 675]. Then, on June 26, 2015, Herdguard sent the formula for Bodyguard 360 to Vermont Soap through email. [DE 67-7 at 1, Pg ID 687].

         At some point during the negotiations, NXT expressed interest in visiting Vermont Soap's facilities. Herdguard employees coordinated with officials at NXT and Vermont Soap to arrange for NXT representatives to visit Vermont Soap's manufacturing facility. [DE 68-1 at 9, Pg ID 770]. Riccardi and Beth Sommers, an NXT employee/representative, visited Vermont Soap on July 8, 2015. [DE 67-8 at 3, PG ID 691].

         Ultimately, though the parties exchanged drafts of an asset purchase agreement, they never executed an asset purchase agreement and the negotiations fell apart. [DE 64-2, Sommers Deposition at 6, Pg ID 376; DE 64-3, Riccardi Deposition at 3-5, 7-8, Pg ID 380-82, 384-85].

         Still, Vermont Soap did perform experiments and develop some products for NXT after NXT officials visited the Vermont Soap facility. In fact, Riccardi testified that the purpose of his initial visit to Vermont Soap's facility in July 2015 was both to conduct due diligence as part of the Herdguard acquisition negotiations and to seek a manufacturer for NXT products. [DE 68-6, Riccardi Deposition at 4-5, Pg ID 809-10]. Vermont Soap asserts that it conducted an experiment in an attempt to develop a foaming hand soap for NXT. [DE 67-8, Plesent Deposition at 8-9, Pg ID 696-97]. But this product was rejected because it did not work. [Id.].

         Additionally, in October 2015, Vermont Soap was testing a deodorizing spray product for NXT that used diatomaceous earth. [Id. at 10-11, Pg ID 698-99]. But Larry Plesent, corporate designee of Vermont Soap, testified that experimentation on this product was ultimately discontinued because the product was too similar to the Herdguard formula for Bodyguard 360. [Id. at 10-13, Pg ID 698-701; see also DE 67-10, Emails].

         Furthermore, Vermont Soap sold NXT an insect repellant product containing citronella marketed by NXT as “Ultimate Outdoor Protection.” [DE 67-8 at 5, Pg ID 693]. According to Vermont Soap, this product was initially developed as “insect armor” or “camping spray” before Vermont Soap began doing business with Herdguard and was purchased off-shelf by NXT. [Id.]. Additionally, Plesent testified that before doing business with Herdguard, Vermont Soap did not have any product on the market that used diatomaceous earth as an ingredient. [Id. at 5-6, Pg ID 693-94].

         Subsequently, in April 2016 Herdguard executed a dissolution agreement and the company dissolved, distributing all assets and assigns to Stewart. [DE 67-12]. In November 2016, Stewart filed this lawsuit in Garrard Circuit Court, which was removed to this Court in December 2016. [DE 1; DE 1-1].

         Furthermore, in December 2016, Stewart executed an asset purchase agreement and sold Herdguard's assets to DCS Enterprises, LLC. [DE 67-13]. The purchase agreement excepted Stewart's rights to pursue this lawsuit. [Id. at 3-4, Pg ID 724-45]. But the principal of DCS Enterprises died soon after the asset purchase agreement was signed and Stewart elected not to enforce the asset purchase agreement, opting to release DCS from the purchase agreement and having DCS convey the rights and assets back to Stewart. [DE 67-2 at 17-22, 347-49, Pg ID 614-19, 658-60]. In deposition testimony, Stewart indicated that he planned on selling Bodyguard 360 again. [Id. at 64, Pg ID 661].

         Finally, NXT and Vermont Soap stopped doing business with one another in 2017, after this lawsuit was filed. [DE 67-11 at 3, Pg ID 717; DE 67-8 at 13-14, Pg ID 701-02]. This lawsuit generally alleges that the agreements were violated the NDAs in two ways: (1) by reverse engineering the formula for Bodyguard 360 to make a similar product called “Ultimate Outdoor Protection, ” and (2) by doing business with each other to circumvent Herdguard's business relationships in violation of the agreements.

         II. Legal Standard

         Summary judgment is appropriate only when no genuine dispute exists as to any material fact and the movant is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(a). A material fact is one “that might affect the outcome of the suit under governing law.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The moving party has the burden to show that “there is an absence of evidence to support the nonmoving party's case.” Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986). “A dispute about a material fact is genuine if the evidence is such that a reasonable jury could return a verdict for the nonmoving party.” Smith v. Perkins Bd. of Educ., 708 F.3d 821, 825 (6th Cir. 2013) (internal quotations omitted). The Court construes the facts in the light most favorable to the nonmoving party and draws all reasonable inferences in the non-moving party's favor. See Anderson, 477 U.S. at 248; Hamilton Cty. Educ. Ass'n v. Hamilton Cty. Bd. of Educ., 822 F.3d 831, 835 (6th Cir. 2016).

         In a diversity action like this one, the Court must apply the substantive law of the forum state and federal procedural law. Gasperini v. Ctr. for Humanities, Inc., 518 U.S. 415, 427-28 (1996); Hanna v. Plumer, 380 U.S. 460, 465-66 (1965); Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78-80 (1938); Hoven v. Walgreen Co., 751 F.3d 778, 783 (6th Cir. 2014). Thus, “where a federal court is exercising jurisdiction solely because of the diversity of citizenship of the parties, the outcome of the litigation in the federal court should be substantially the same . . . as it would be if tried in a State court.” Guaranty Trust Co. v. York, 326 U.S. 99, 109 (1945). Ultimately, to determine whether summary judgment should be granted here, the Court must look to state law and court decisions, as well as other relevant materials. Meridian Mut. Ins. Co. v. Kellman, 197 F.3d 1178, 1181 (6th Cir. 1999).

         III. Analysis

         A. Voluntary Dismissal of Certain Counts

         As an initial matter, Herdguard states that it wishes to dismiss certain counts against the defendants in this action. Specifically, “Herdguard voluntarily dismisses Counts IV, V, and VII against NXT and Riccardi. By dismissing Counts V and VII against Riccardi individually, Herdguard dismisses Riccardi as a defendant in this litigation.” [DE 65, Herdguard Response at 2, Pg ID 437]. Additionally, as to Vermont Soap, “Herdguard does not object to the dismissal of Counts V and VII, in that they are subsumed in the claims for breach of contract.” [DE 74, Herdguard Response at 1, Pg ID 1027].

         Federal Rule of Civil Procedure 21 provides the proper procedural mechanism through which individual counts or claim may be dismissed against certain parties without disposing of the entire action. See United States ex rel. Doe v. Preferred Care, Inc., 326 F.R.D. 462, 464 (E.D. Ky. 2018) (citing Philip Carey Manufacturing Company v. Taylor, 286 F.2d 782, 785 (6th Cir. 1961)).

         “On motion or on its own, the court may at any time, on just terms, add or drop a party. The court may also sever any claim against a party.” Fed.R.Civ.P. 21. The rule applies where “no relief is demanded from one or more of the parties joined as defendants.” Letherer v. Alger Grp., LLC, 328 F.3d 262, 267 (6th Cir. 2003). Normally, under the rule, Courts must consider prejudice to the nonmoving party. See Wilkerson v. Brakebill, No. 3:15-CV-435-TAV-CCS, 2017 WL 401212, at *2 (E.D. Tenn. Jan. 30, 2017); Arnold v. Heyns, No. 13-14137, 2015 WL 1131767, at *4 (E.D. Mich. Mar. 11, 2015). The inquiry overlaps with Rule 41 standards “as guidance in evaluating potential prejudice to the non-movant.” Wilkerson, 2017 WL 401212, at *2. Courts determine whether the nonmoving party would suffer “plain legal prejudice” and consider: (1) defendant's effort and expense of preparation for trial; (2) excessive delay and lack of diligence on plaintiff's part in prosecuting the case; (3) insufficient explanation for the need for dismissal; and (4) whether a motion for summary judgment is pending.” Grover v. Eli Lily & Co., 33 F.3d 716, 718 (6th Cir. 1994).

         But here, the nonmoving parties support the dismissal of these claims. [DE 69, NXT's and Riccardi's Reply at 1, Pg ID 863; DE 75, Vermont Soap's Reply at 10, Pg ID 1055]. As a result, dismissal of these counts is appropriate since all parties agree to the dismissal. Thus, Counts IV, V, and VII of Herdguard's complaint against NXT and Riccardi are dismissed without prejudice. Additionally, Counts V and VII of Herdguard's complaint against Vermont Soap are dismissed without prejudice.

         B. Breach of ...


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