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Melaleuca, Inc. v. Foeller

Supreme Court of Idaho, Twin Falls

February 7, 2014

MELALEUCA, INC., an Idaho corporation, Plaintiff-Respondent,
v.
Rick FOELLER and Natalie Foeller, Defendants-Appellants.

Page 911

May, Browning & May, Boise, for appellants. James Justin May argued.

Page 912

Thomsen Stephens Law Offices, PLLC, Idaho Falls and Ryan D. Nelson and Michael L. LaClare, Idaho Falls, for respondents. Ryan D. Nelson argued.

J. JONES, Justice.

In 1999, Rick and Natalie Foeller apparently [1] entered into an agreement with Melaleuca of Canada, Inc., under which the Foellers were to act as independent marketing executives in exchange for monthly commission payments. In 2008, the Foellers breached this agreement but Melaleuca continued to pay them commissions because it was unaware of the breach. Upon learning of the breach, Melaleuca sued to recover the payments it had made to the Foellers after they breached. The district court granted Melaleuca's motion for summary judgment, finding that under the forfeiture clause of its agreement with the Foellers, Melaleuca was simply excused from performing once the Foellers breached and ordered the Foellers to refund Melaleuca the commissions they received after their breach. The Foellers timely appealed, arguing that the district court erred because the forfeiture clause is an illegal penalty and Melaleuca is required to prove damages. We vacate the district court's judgment and remand the case for further proceedings.

I.

BACKGROUND

Melaleuca, Inc., an Idaho corporation, produces and markets nutritional and cosmetic goods. Rick and Natalie Foeller are former Melaleuca contractors who reside in Ontario, Canada. The Foellers entered into an Independent Marketing Executive Agreement (" IMEA" ) with Melaleuca in September 1999 and became " independent marketing executives." Independent marketing executives are eligible to receive commissions and bonuses for " buying" Melaleuca's products and for enrolling new independent marketing executives with Melaleuca. Melaleuca calculates the commissions it pays to its marketing executives " based on a number of factors, including the products purchased within their Melaleuca organization, the number of their personal enrollees, their status as a marketing executive, the organizational volume of their Melaleuca business, and the Leadership Points that they generate through specified activities." Melaleuca pays its marketing executives monthly, " contingent upon whether they were in good standing throughout that entire month."

To remain in good standing, a marketing executive must comply with the IMEA, which contains a non-compete clause and several provisions dealing with competition and solicitation. The IMEA's " Policy 20" provides as follows:

Marketing Executives are independent contractors and may be active in other business ventures while they are Marketing Executives for Melaleuca. However, ... [i]t is a violation of this policy to recruit a Melaleuca Customer or Marketing Executive to participate in another business venture....

In the event of a breach, the IMEA provides for a forfeiture of commissions under Policy 20(c)(i):

Violation of any provision of this Policy 20 constitutes a Marketing Executive's voluntary resignation and cancellation of his/her Independent Marketing Executive Agreement, effective as of the date of the violation, and the forfeiture by the Marketing Executive of all commissions or bonuses payable for and after the calendar month in which the violation occurred.

Policy 20(c)(ii) provides for a similar forfeiture, requiring a refund of any commissions paid after a breach:

If Melaleuca pays any bonuses or commissions to the Marketing Executive after the date of violation, all bonuses and commissions for and after the calendar month in

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which the violation occurred shall be refunded to Melaleuca.

The Foellers received monthly commission checks from Melaleuca. They received their last check from Melaleuca in October 2008 for September 2008 commissions. The Foellers do not dispute that at some point in 2008, in violation of Policy 20, they became involved with Melaleuca's competitor, Max International, and began enrolling Melaleuca customers in Max programs while still receiving Melaleuca commissions.[2] In November 2008, the Foellers ended their relationship with Melaleuca. After its relationship with the Foellers ended, Melaleuca learned of the Foellers' breach.

On April 29, 2009, Melaleuca filed a complaint seeking an injunction and damages.[3] Melaleuca alleged that the Foellers, " in violation of their agreement, and in violation of controlling law, used confidential and proprietary business information and trade secrets in an effort" to persuade other Melaleuca independent marketing executives and customers to leave Melaleuca and join Max International.

On July 9, 2010, Melaleuca filed a motion for summary judgment arguing that under Policy 20 of the IMEA, it was entitled to a return of commissions paid out to the Foellers from the time they first violated the IMEA in June 2008. [4] The Foellers countered that the amount requested by Melaleuca was incorrect and that Policy 20 was unenforceable. On December 1, 2010, the district court denied the motion, finding that a genuine issue ...


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