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Mionix, LLC v. ACS Technology

United States District Court, D. Colorado

August 24, 2018

MIONIX, LLC, a Nevada limited liability company; and MIONIX CORPORATION, a Delaware corporation, Plaintiffs,
v.
ACS TECHNOLOGY aka Mionix CO.; SAFE-pHix, LLC, a Wyoming limited liability company; and WALTER LARRY L'HOTTA, an individual, Defendants.

          FINDINGS, CONCLUSIONS, ORDER OF JUDGMENT

          R. Brooke Jackson United States District Judge.

         This case was tried to the Court June 4-6, 2018. The parties subsequently submitted post-trial briefs, which the Court has considered. For the reasons set forth in this order, the Court generally resolves the issues in favor of the plaintiffs and awards disgorgement of profits in the amount of $31, 678.65 plus reasonable attorney's fees, costs, and injunctive relief.

         FINDINGS OF FACT

         1. Mionix, LLC is a Nevada limited liability company formed in 2015 when it acquired the assets of Mionix Corporation, a Delaware corporation. Mionix LLC has two members: Mionix Corporation and Frank Powell, a California resident. I will refer to Mionix Corporation and Mionix LLC collectively as “Mionix” unless the context requires otherwise.

         2. Mionix is a biotechnology company that, among other things, sells a product line called acidic calcium sulfate, often referred to as “ACS.” This product is used to manage bacterial contamination in feed and food products.

         3. Mionix invested a great deal of time, effort and money in the research and development of its ACS products, including commissioning studies, applying for and receiving patent and trademark rights, and obtaining regulatory approvals.

         4. In the Spring of 2005 Mionix hired Larry L'Hotta as its National Sales Manager for its ACS products, and about one year later he was promoted to Director of Sales and Marketing. Mr. L'Hotta, a resident of Colorado Springs, Colorado, had served in the Special Forces, then completed a college degree in forensic science while working as a police officer, and then worked for several years in sales positions. He earned a master's degree in Strategic Marketing in 2009.

         5. Mr. L'Hotta's assignment was to help Mionix move out of the research and development stage and into the sales and marketing stage. The parties agree that Mr. L'Hotta excelled in his positions at Mionix, and that he helped the company generate good will in its ACS products and in the Mionix brand.

         6. Despite Mr. L'Hotta's efforts and successes, however, Mionix did not thrive financially. In about December 2006 Mionix informed its employees that it planned to close down operations in four to six months. Employees began to leave when they found other opportunities, but Mr. L'Hotta stayed on, hoping that the inroads he had made with potential new customers might cause the company to change its mind. He was finally laid off in August 2007.

         7. However, still convinced that the products he had been trying to sell were good products, and that he could sell them, Mr. L'Hotta proposed that he be allowed to continue to market the product as a licensee and pay Mionix a royalty on whatever he could sell. Mionix agreed.

         8. To effectuate this agreement, Mr. L'Hotta formed a company called ACS Technology. For a couple of months Mr. L'Hotta worked without a written contract, but on October 4, 2007 ACS Technology and Mionix entered into a written agreement entitled “Mionix and ACS License Agreement” (“License Agreement”) that would govern their new business relationship. Plaintiffs' Ex. 8.

         9. The License Agreement granted ACS Technology (a) a “non-exclusive” license (b) “to manufacture and have manufactured, market and have marketed, and sell and have sold” (c) “Licensed Products” (d) in a designated “Territory” (e) for a period of two years. Id. at ¶¶2.1, 8.1.

         10. The “Licensed Products” were ACS 100, ACS 50, RTE-01, RTE-03, FreshFlo 100, and pHixr 100. Id. ¶1.2 and Schedule 1.

         11. The Territory was the United States, its territories and Mexico, excluding “any customers[] that have purchased products from Mionix in 2007 or that are currently evaluating or have evaluated in 2007 the use of Mionix products as of the date of this agreement.” Id. at ¶1.4.

         12. ACS Technology agreed to use commercially reasonable efforts to manufacture (or have manufactured), market and sell the Licensed Products, and to pay Mionix a royalty of 10% of Net Sales until Mionix had earned and received $75, 000, at which point the royalty was reduced to 6% of Net Sales. Id. at ¶¶3.1, 4.2. The first royalty payment was due within six months of the date of the agreement. Id. at ¶4.3.

         13. As part of his marketing efforts, and consistent with the License Agreement, Mr. L'Hotta put the research studies that Mionix had commissioned, Mionix's patents, and Material Safety Data Sheets created for Mionix's products on ACS Technology's website. A Material Safety Data Sheet or “MSDS” provides safety information concerning the product's ingredients and what to do in case of a spill or other emergency.

         14. Mionix had been using Hydrite Chemical Company as a “toll manufacturer” of its ACS products, meaning that Hydrite manufactured the products according to the formulations provided by Mionix.

         15. Michael Cunha was, at the time, the Chairman of the Board and President of Mionix Corporation (Mionix, LLC did not yet exist). He sent a letter to Hydrite dated October 16, 2007 informing Hydrite of the License Agreement and authorizing Hydrite to manufacturer and ship Mionix products to ACS Technology and its customers on approved orders by either Mionix or ACS Technology. Plaintiffs' Ex. 22 at 2.

         16. There is a dispute about whether Mr. L'Hotta paid royalties during the first few months of the License Agreement. He says he paid a small amount in the range of $500 or so. Mr. Cunha testified that Mr. L'Hotta asked whether he could accumulate royalty obligations rather than pay in small dribs and drabs, and that he approved this, but Mionix never received any royalties. Regardless, it does not appear that any significant sales were made during the early months.

         17. During those same early months of the two-year term of the License Agreement the problems that ultimately resulted in the lawsuit began to surface. The first red flag was hoisted when Mr. L'Hotta discovered that Mionix had developed or was trying to develop an arrangement with a company called Ivesco to purchase or distribute Mionix's ACS products.

         18. Mr. Cunha believes he told Mr. L'Hotta that Mionix planned to reorganize and minimize the company in order best to deal with the financial constraints the company was facing. Mionix also had a potential opportunity in China that Mr. Cunha hoped would generate cash that could be used to bolster Mionix's U.S. operations. Mr. Cunha might have said these things. However, he did not clearly disclose to Mr. L'Hotta when they were negotiating the License Agreement that Mionix might stay in the business and compete with him.

         19. Nevertheless, the terms of the License Agreement should have been a clue that Mionix was having second thoughts about dropping out of the ACS business. As I have noted, the License Agreement made his license “non-exclusive, ” and it carved out from ACS Technology's territory any customers or prospects Mionix had in 2007. It appears that Mr. L'Hotta signed the License Agreement as drafted by Mionix without thinking too much about what some of the terms might mean for him.

         20. When Mr. L'Hotta learned about Mionix's plans he decided that Mionix no longer supported the License Agreement. He learned that Mionix had purchased all or at least a substantial part of Hydrite's remaining inventory of ACS products, probably FreshFlo 100, and he thought that this was done so that ACS Technology wouldn't have a supplier. He also believed that Mionix had informed Hydrite that Hydrite was no longer allowed to sell ACS products to him. In Mr. L'Hotta's words, Mionix “cut me off from product, from my supplier, ” leaving him with “no product to sell.”

         21. According to Mr. Cunha, however, what actually happened is that in late 2007 or early 2008 Hydrite informed Mionix that it was not willing to continue to manufacture products for Mionix because Mionix was not purchasing enough product and was behind in paying its bills. At that time Hydrite had 48 totes of product in inventory. Mionix purchased some of them in order to have product to supply its own customers until it could find a new manufacturer. Later, when Hydrite was down to nine remaining totes, it demanded that Mionix purchase those “as part of our settlement, ” which Mionix did. It is not clear how many of the 48 totes Mionix purchased, and if not all of them, what happened to the remainder.

         22. Mr. Cunha denies that that Mionix wanted to terminate the License Agreement. According to him, Mionix wanted Mr. L'Hotta to make sales and pay royalties. There is no written evidence that Mionix tried to terminate the License Agreement or that either side ever declared that the License Agreement was terminated. However, Mionix's conduct during most of the remainder of the term of the License Agreement indicates that its desire to support ACS Technology and Mr. L'Hotta was lukewarm, at best. Mionix was again attempting to sell its ACS products, and as discussed below, Mionix seemingly paid no attention to the fact that it was not receiving communications or royalties from Mr. L'Hotta.

         23. Nevertheless, Mr. L'Hotta feared that his relationship with Mionix was probably over. He sent a letter to Mr. Cunha on March 21, 2008 in which he expressed unhappiness about Mionix's competing with him for business. Defendants' Ex. G2. He stated that he would not have entered into the License Agreement if he had thought that Mionix would be reentering the food industry market. After indicating that he hoped that their relationship could get back on track, he offered in the alternative to negotiate a termination of the License Agreement for “an acceptable compensation.” Id. Mionix did not respond to his letter.

         24. Mr. L'Hotta also decided that he could no longer sell products manufactured to Mionix's proprietary formulations. I find no evidence in the record that supports that perception. Mr. Cunha denies that Mionix informed Hydrite that it no longer wanted Hydrite to provide Mionix products to Mr. L'Hotta or his company. Mionix never retracted the October 16, 2007 letter authorizing Hydrite to supply product to ACS Technology during the term of the License Agreement. Notably, Hydrite did not perceive that Mionix wanted it to stop selling Mionix products to Mr. L'Hotta. Indeed, there is no evidence that Mr. L'Hotta even asked Hydrite to continue manufacturing the Mionix formulation for ACS Technology.

         25. But Mr. L'Hotta decided that he needed a new product to sell. After searching a little bit for another manufacturer, Mr. L'Hotta went to Hydrite and asked whether it could develop another formulation. From this point forward I will focus primarily on one product, FreshFlo 100, which is used to improve the quality of drinking water in the poultry industry. It is just one of the six Licensed Products, but it is at the center of the parties' present dispute.

         26. Hydrite did develop a new formulation. Christopher Lorang, Hydrite's Product Quality Manager, was deposed in this case as Hydrite's Rule 30(b)(6) representative. The deposition is marked as Plaintiffs' Ex. 114 with the parts presented to the Court by video highlighted. He testified that the two formulations differ in terms of raw materials, reaction chemistry and the manufacturing process. Id. at 25. One significant difference is that the original formulation contains calcium hydroxide, but the formulation Hydrite developed for Mr. L'Hotta does not. Id. at 27.

         27. Once the new formulation was available, it was the only formulation that Mr. L'Hotta marketed or sold. Mr. L'Hotta called the new formulation FreshFlo, the name of the Mionix product. He claims that it was his right to use that name under the License Agreement, but he otherwise acted as if the License Agreement was no longer in effect. He did not notify Mionix that he was no longer attempting to market Mionix's formulation of FreshFlo (or other Mionix products), or that he was marketing a different formulation under the name FreshFlo. He did not pay royalties.

         28. As Mr. L'Hotta moved ahead with his new product he represented on his website that his product had USDA and FDA approval, that it was a patented product, and that it was based on studies and tests. None of these representations was true. Essentially, he piggybacked on Mionix's studies, tests, intellectual property, and regulatory approvals as if they all applied to the product he was selling.

         29. Mr. L'Hotta says that he learned that customers were complaining and returning shipments of the old formulation of FreshFlo because the chemicals separated from the water while the product sat on shelves in bottles. Mr. L'Hotta claims that the new formulation did not have that problem, so sometime during 2009, still within the term of the License Agreement, he renamed his formulation LpH 100.

         30. Thus, during the majority of the License Period ACS Technology was actively marketing and selling his new formulation, first under the name FreshFlo 100, later as LpH 100. He was not paying royalties or communicating with Mionix. Meanwhile, Mionix, which of course was not receiving royalties, was not communicating with Mr. L'Hotta. Both sides now claim that the License Agreement remained in effect, but neither party acted like it at the time.

         31. Mionix claims that ACS Technology sold some product to Mionix's customers, including De-Chem. If sales were made to buyers who were customers or prospects being evaluated by Mionix in the year 2007, then any such sales would be in violation of the License Agreement. If such sales were made to customers not falling into that category, then either it would be a violation of the requirement in the License Agreement that ACS use commercially reasonable efforts to market Mionix's products or ACS Technology would have owed royalties to Mionix. However, neither Mionix nor ACS Technology seemed to pay much attention to the requirements of the License Agreement at the time. Mionix has not claimed entitlement to any additional royalties under the License Agreement.

         32. After the License Agreement expired in October 2009 ACS Technology continued to market and sell LpH 100. It also sold occasional small amounts of RTE-01, ACS 100 and FreshFlo 100 which were Mionix products that were included as Licensed Products during the term of the License Agreement but which Mr. L'Hotta and ACS Technology no longer had a license to sell. Nevertheless, approximately three and a half more years went by without a word from Mionix.

         33. Things changed in the spring of 2013. On March 28, 2013 an attorney for Mionix, Sudee Mirsafian Wright of Husch Blackwell's Denver office, sent a letter to Mr. L'Hotta accusing him of unlawfully using the FreshFlo trademark “in connection with the manufacture, sale and distribution of a competing and substantially identical product.” Plaintiffs' Ex. 19. She demanded that he cease using the FreshFlo trademark or any derivative of it, and that he similarly stop using any label or MSDS “that includes test results or other data generated for Mionix's Product.” Id. Ms. Wright informed Mr. L'Hotta that Mionix would consider legal action ...


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