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Smith v. Nerium International, LLC

Court of Appeals of Texas, Fifth District, Dallas

August 5, 2019


          On Appeal from the 134th Judicial District Court Dallas County, Texas Trial Court Cause No. DC-18-03726

          Before Justices Whitehill, Molberg, and Reichek



         This is an interlocutory appeal from a temporary injunction.

         Appellants were formerly associated with appellee Nerium International, LLC, a multilevel marketing. After they left Nerium and joined a competitor, Nerium sued appellants and obtained a temporary injunction prohibiting them from recruiting or soliciting any of Nerium's sales force to join any other direct sales, multi-level, or network marketing company.

         Appellants raise six issues on appeal. The case largely concerns the nature and extent of (i) benefit a multi-level marketing company provides for its independent contractor sales force and (ii) such company's interest in protecting its relationships with its sales force. Based on the record before us, we conclude that the evidence was sufficient for the trial court to conclude at this early stage that a temporary injunction was warranted. Accordingly, we reject appellants' issues and affirm without opining on the case's ultimate outcome.

         I. Background

         A. Facts

         Except as otherwise noted, we draw the following facts from the evidence admitted at the temporary injunction hearing.

         1. Nerium and Its Policies and Procedures

         Nerium International, LLC, is a multi-level marketing company that sells skin care and wellness anti-aging products. Nerium started in August 2011 in the United States and now operates in twelve countries.

         Nerium relies on independent contractors called "brand partners" (BPs) to sell its products to customers and to recruit other BPs. A BP's recruits, and all recruits who flow from those recruits, make up the BP's "downline." BPs receive commissions on both their own sales and their downline's sales.

         A new BP receives a launch kit that includes brochures for customers and training materials. A new BP also gets a personalized web site that he or she can use to enroll both customers and new BPs. Most Nerium product orders come through the BPs' websites. Nerium BPs may work as much or as little as they want. They do not have assigned sales territories and can market anywhere in the world through social media. BPs also get computer access to "the back office," which (i) gives them access to marketing materials and training and (ii) shows them sales performance data for themselves and everyone on their teams. They also have access to ongoing training, public relations supports, promotions, incentives, and other events.

         BPs must comply with the terms found in the Nerium policies and procedures manual.

         This case involves § 11.06 of Nerium's policies and procedures, which concerns solicitation and competition. The case particularly focuses on the following non-solicitation clause:

[I]n consideration for all of the rights granted by this Agreement, including the protection this non-solicitation provision affords to Brand Partner, for the term of this Agreement and for two (2) years after termination hereof, for any reason, Brand Partner agrees not to, directly or indirectly, recruit or solicit any of Company's other Brand Partners to join other direct sales, multi-level or network marketing companies.

         2. Appellants' Relationships with Nerium

         Appellant Mark Smith joined Nerium in 2011 soon after it launched. Smith and his wife later formed Mark & Tammy Smith, LLC.

         Smith became acquainted with Nerium founder and CEO Jeff Olson when they were both working with a different multi-level marketing company called Prepaid Legal Services. When he was preparing to start Nerium, Olson reached out to Smith and asked him to join Nerium.

         Smith testified that he and Olson agreed that Smith and his wife would each get 5% equity in Nerium, they would receive 15% of the "back office fees," and they would be considered "master distributors" entitled to a percentage of revenue.

         Smith succeeded at Nerium, working his way up to the level of "diamond national marketing director" and "gold international marketing director." In less than seven years with the company, he received compensation of approximately $14 million. Smith was featured in many Nerium videos and at "huge" Nerium events both in the United States and abroad.

         Appellant Darin Kidd became a Nerium BP in 2011 and a Nerium five star national marketing director.

         Appellant Tee Daniel's wife, Cassie, started with Nerium in 2012. Daniel himself became a Nerium BP no later than 2016 and became a Nerium one star national marketing director.

         By early 2018, Smith was unhappy at Nerium and was thinking about leaving. In early March 2018, Smith, Kidd, and others visited another company called Jeunesse. According to the parties' briefs, Jeunesse is also a "multi-level marketing" or "network-marketing" company.

         On or about March 13, 2018, Smith and Kidd "enrolled" with Jeunesse. Cassie Daniel signed up with Jeunesse in mid-March, and Tee Daniel engaged in marketing and training to support Cassie's Jeunesse account.

         B. Procedural History

         On March 20, 2018, Nerium sued Smith, Mark & Tammy Smith, LLC, and others. Several days later, Nerium filed an amended petition that added Kidd and others as defendants.

         On April 24, 2018, Nerium filed a second amended petition that added Daniel and others as defendants. That petition included claims against appellants for contract breach and tortious interference with contract, and it requested injunctive relief. That same day, the trial judge signed a temporary restraining order against appellants.

         The trial judge held an evidentiary temporary injunction hearing at which Amber Rourke (Nerium's chief marketing officer) and appellant Smith testified.

         After the hearing, the trial judge signed a temporary injunction, which provides:

The Injunction Restrained Parties [i.e., appellants and certain categories of people affiliated with them] are prohibited from directly or indirectly recruiting or soliciting any of Nerium's Brand Partners to join any other direct-sales, multi-level marketing, or network-marketing company, including but not limited to Jeunesse Global Holdings, LLC.

         This interlocutory appeal followed.

         II. Law of Temporary Injunctions and Standard of Review

         A temporary injunction is an extraordinary remedy granted to preserve the status quo of the litigation's subject matter pending a trial on the merits. Butnaru v. Ford Motor Co., 84 S.W.3d 198, 204 (Tex. 2002). It does not issue as a matter of right. Id. Rather, the applicant must plead and prove the following elements: (i) a cause of action against the defendant, (ii) a probable right to the relief sought, and (iii) a probable, imminent, and irreparable injury in the interim. Id.

         Appellants don't contest the first element, so we start with the probable right to recovery element. That element does not require the applicant to show that it will prevail at trial, nor does it require the trial court to evaluate the probability that the applicant will prevail at trial. Austin v. Mitchell, No. 05-18-00052-CV, 2018 WL 2949443, at *3 (Tex. App.-Dallas June 13, 2018, no pet.) (mem. op.); Intercontinental Terminals Co., LLC v. Vopak N. Am., Inc., 354 S.W.3d 887, 897 (Tex. App.-Houston [1st Dist.] 2011, no pet.). Rather, it requires the applicant to present enough evidence to raise a bona fide issue as to its right to ultimate relief. Austin, 2018 WL 2949443, at *3. This requires the applicant to produce some evidence supporting every element of at least one valid legal theory. Id.; Tex. Health Res. v. Pham, No. 05-15-01283-CV, 2016 WL 4205732, at *3 (Tex. App.-Dallas Aug. 3, 2016, no pet.) (mem. op.).

         The irreparable injury requirement is sometimes described in terms of the injured party having an inadequate legal remedy. See Butnaru, 84 S.W.3d at 211 ("[A] party can rarely establish an irreparable injury and an inadequate legal remedy when damages for breach of contract are available."); see also id. at 204 ("An injury is irreparable if the injured party cannot be adequately compensated in damages or if the damages cannot be measured by any certain pecuniary standard.").

         We review a temporary injunction for abuse of discretion. Id. The trial court abuses its discretion if (i) it misapplies the law to established facts or (ii) the evidence does not reasonably support the court's determinations as to probable right of recovery or probable injury. Loye v. Travelhost, Inc., 156 S.W.3d 615, 619 (Tex. App.-Dallas 2004, no pet.). In our review, we draw all legitimate inferences from the evidence in the light most favorable to the order, and the trial court does not abuse its discretion if it makes a decision based on conflicting evidence. Id. We review any legal determinations de novo. Id.

         III. Analysis

         A. Issue One: Did the trial court abuse its discretion by failing to conclude that the non- solicitation clause is unreasonable and therefore unenforceable?

         Appellants argue that Nerium failed to show a probable right to recover because the non-solicitation clause is unreasonable, and therefore unenforceable, for several reasons. But first we address two procedural issues that Nerium raises.

         1. Is enforceability a relevant issue at the temporary injunction stage?

         In a supplemental letter brief, Nerium suggests that we recently held that a non-solicitation agreement's (un)enforceability is not a relevant consideration in determining whether the applicant has shown a probable right of recovery. See White v. Impact Floors of Tex., LP, No. 05-18-00384-CV, 2018 WL 6616973, at *5 (Tex. App.-Dallas Dec. 18, 2018, no pet.) (mem. op.). Thus, Nerium suggests, we should decline to consider appellants' arguments that the non-solicitation agreement in this case is unenforceable. Appellants disagree.

         Because we conclude for the reasons discussed below that the trial court could reasonably rule that this non-solicitation clause is enforceable, we need not decide whether Nerium's interpretation of White is correct.

         2. Which side bears the burden of proof on § 15.50's enforceability criteria?

         Under Texas law, the general rule regarding covenants not to compete is this:

[A] covenant not to compete is enforceable if it is ancillary to or part of an otherwise enforceable agreement at the time the agreement is made to the extent that it contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee.

Tex. Bus. & Com. Code § 15.50(a). Which party bears the burden of proof on these criteria depends on the facts of the case:

If the primary purpose of the agreement to which the covenant is ancillary is to obligate the promisor to render personal services, for a term or at will, the promisee has the burden of establishing that the covenant meets the criteria specified by Section 15.50 of this code. If the agreement has a different primary purpose, the promisor has the burden of establishing that the covenant does not meet those criteria.

Id. § 15.51(b).

         Nerium argues that (i) § 15.51(b) applies at the temporary injunction stage of the case, (ii) under § 15.51(b), appellants bore the burden of proof to negate the § 15.50(a) criteria, and (iii) because the criteria are defensive matters in this case, the trial court has the discretion to defer considering them at all at the temporary injunction stage. Appellants disagree, arguing that Nerium bore the burden of proof on the § 15.50(a) criteria because (i) § 15.51(b)'s burden-shifting provisions do not apply at the temporary injunction stage and (ii) even if § 15.51(b) applies at the temporary injunction stage, Nerium still bore the burden of proof.

         As will be seen below, we conclude that Nerium adduced sufficient evidence of the § 15.50(a) enforceability criteria to support the temporary injunction. Accordingly, for purposes of this appeal, we assume without deciding that Nerium bore the burden of proof on the § 15.50(a) criteria.

         3. The Law Governing Covenants Not to Compete

         By statute, the general rule is that every contract "in restraint of trade or commerce" is unlawful. Id. § 15.05(a). "Trade" is broadly defined and includes not only the sale of services but also any economic activity that (i) is undertaken in whole or in part for financial gain and (ii) involves or relates to goods or services. Id. § 15.03(5). Nerium does not dispute that the non-solicitation agreement involved here is a contract in restraint of trade.

         Section 15.50, discussed above, excepts from § 15.05 covenants not to compete that meet certain criteria. Id. § 15.50.

         Appellants contend, and Nerium does not dispute, that the non-solicitation agreement in this case-which forbids appellants from soliciting Nerium's BPs-are legally equivalent to covenants not to compete. Although the statute does not define "covenant not to compete," the supreme court holds that a covenant restricting former employees from soliciting their "former employers' customers and employees" is a restraint of trade subject to § 15.50. Marsh USA Inc. v. Cook, 354 S.W.3d 764, ...

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