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Clear Wireless, LLC v. Mountain State Cellular, Inc.

United States District Court, D. Idaho

May 12, 2017

CLEAR WIRELESS, LLC, an Arizona limited liability company, Plaintiff,
v.
MOUNTAIN STATE CELLULAR, INC. an Idaho corporation; and GO WIRELESS, INC., a Nevada corporation, Defendants.

          MEMORANDUM DECISION AND ORDER RE: DEFENDANTS' MOTION FOR SUMMARY JUDGMENT (DKT. 21); AND PLAINTIFF'S MOTION FOR PARTIAL SUMMARY JUDGMENT (DKT. 22)

          Honorable Candy W. Dale United States Magistrate Judge.

         INTRODUCTION

         Pending before the Court are two competing motions, both seeking summary judgment on claims raised in the Complaint. (Dkt. 21, 22.) The Court heard oral argument from the parties on April 11, 2017. After review of the record, consideration of the parties' arguments and relevant legal authorities, and otherwise being fully advised, the Court issues the following memorandum decision and order granting in part and denying in part both motions.

         FACTUAL BACKGROUND[1]

         Plaintiff Clear Wireless, LLC (“Clear”), and Defendant Mountain State Cellular, Inc. (“Mountain State”), [2] were sales agents of Verizon Wireless (“Verizon”). Both entities operated several brick and mortar locations selling Verizon phones and service plans. In early November of 2014, Nicasio Jones, owner of Clear, contacted Mountain State's sole shareholder, Mark Urness, regarding the potential sale of Clear to Mountain State. On November 18, 2014, Jones and Urness executed an Asset Purchase Agreement (“APA”) for Mountain State's purchase of Clear. (Dkt. 21-7 at 9.)

         Due to the entities' status as Verizon agents, they needed Verizon's approval of the sale. Accordingly, they included the following provision within the APA:

4.4.2 Verizon Wireless. Verizon Wireless shall have approved in writing and consented to the asset purchase and sale transaction subject to this Agreement, and shall have acknowledged its intent and consent to continue conducting business with the Buyer and the Business.

APA, § 4.4.2 (Dkt. 21-7 at 7). On December 5, 2014, Verizon approved the APA by executing the Verizon Agreements Amendment (“VAA”).[3] (Dkt. 21-7 at 47.) The VAA amended both Mountain State's and Clear's independent agent agreements with Verizon. In addition, pursuant to the provisions in the VAA, Mountain State assumed specific rights and obligations from Clear.

         The crux of this litigation relates to two alleged instances of breach of contract by Mountain State regarding the terms of the APA and VAA. To better understand the parties' arguments, the Court will outline briefly the parties' agency relationships with Verizon and the pertinent provisions of the VAA[4] and APA.

         I. Agent Relationship with Verizon

         Verizon agents purchase handset devices (i.e., cell phones and tablets) directly through Verizon and the costs of those devices are charged to the agent's individual Equipment Dymax Account, a system of accounting used by Verizon that allows its agents to order handset devices on credit. Dec. Urness, p. 57, ll 15-19 (Dkt. 26-2 at 67). Each agent has a maximum credit allowance with Verizon and, depending on what the agent orders during a given month, the agent must make monthly payments toward its Dymax Account balance. Id. at p. 58, ll 2-4. “Iconic Devices” are devices a Verizon agent does not have in stock and has to order for its customer, for example, newly released Apple or Samsung devices. (Dkt. 21-4 at 8). Iconic devices, like any other handset device, are ordered through the agent's Dymax Account. (Dkt. 21-4 at 6.)

         When an agent sells a handset device and Verizon service plan to a customer, the customer pays the agent for the device and will pay Verizon for the service plan. If a customer finances the purchase of the device, Verizon buys the financing plan from the agent.

         A central aspect to the agency relationship with Verizon is how Verizon pays its agents for the sale of handset devices and service plans. The commissions for these transactions are paid by Verizon to its agents approximately one month after activation of the service plan and consists of two components: (1) reimbursement for the expense of the handset device; and (2) the true commission for the sale of the service plan.[5] Pursuant to the agent's agreement with Verizon, to retain the commission Verizon pays on a new customer account with Verizon, the customer's account must remain active and payments current for a period of time, generally 180 days. If a customer cancels his or her service plan or fails to pay Verizon, Verizon will chargeback the full commission against the sales agent.

         Verizon provides also financial incentives to its sales agents to open new stores through a program called Market Development Funds (“MDFs”). This program works as follows. Verizon identifies a location where they want to open a store and reaches out to an agent who is interested in opening a new location. (Dkt. 26-2 at 10.) To entice the agent into opening the new store, Verizon offers the agent money, MDFs, to use to promote the new store. The amount of MDFs paid by Verizon to its agent is based upon what Verizon anticipates the store's annual sales will be. If the new store location does not meet defined sales goals during its start-up period (usually 18 months), Verizon will chargeback a prorated portion of the MDFs it paid to the agent.

         II. Verizon Agreements Amendment

         Verizon provided its written approval and consent to the APA by executing the VAA on December 5, 2014. (Dkt. 21-7 at 47.) Essentially, the VAA is one document that amends two independent agent agreements: (1) the Verizon agent agreement between Verizon and Mountain State; and (2) the Verizon agent agreement between Verizon and Clear.[6] The intent of the parties is expressed in the VAA as follows:

(i) transfer the Clear Locations as approved Locations to [Mountain State]; (ii) assign the Clear Customer Base and Clear [Customer Base Account Maintenance Fees (“CB AMF”)] to [Mountain State]; (iii) retain responsibility for the Clear Dymax Debt payment obligations to [Verizon]; (iv) and transfer of Clear's [Marked Development Fund (“MDF”)] risk to [Mountain State]; and (v) terminate the Clear Agreement as of midnight of the day prior to the Amendment Effective Date ….

VAA, Recitals (Dkt. 21-7 at 48).

         Pursuant to the terms of the VAA, Mountain State assumed specific rights and obligations from Clear, including liabilities for chargebacks for customer deactivations and cancellations and MDFs. Specifically, regarding customer deactivations and cancellations, the VAA provides:

[Mountain State] and Clear hereby agree, acknowledge, confirm and ratify that the rights and obligations with regard to the Clear Customer Base and the Clear CB AMF are assigned by Clear to [Mountain State] and are assumed from Clear by [Mountain State], effective as of the Amendment Effective Date, including but not limited to all Chargebacks and other offsets applicable to the Clear CB AMF paid or payable on the Clear Customer Base assigned and assumed hereunder, [Verizon] hereby consents to such assignment and assumption and, unless expressly stated herein, releases Clear from its obligations under the Clear Agreement for the Clear Customer Base. All terms and conditions of the [Mountain State] Agreement will apply to the Clear Customer Base, including without limitation (i) the payment of AMF thereon at the rate set forth in Section D.3., below, and (ii) the customer service obligations set forth therein. …

VAA, § D (Dkt. 21-7 at 50). Regarding transfer of Clear's MDF risk, the VAA provides:

         E. Transfer of Clear MDF Risk to [Mountain State].

1. For the four (4) Clear Locations identified below, [Verizon] previously paid to Clear MDF in the amount of $35, 000 for each Location. [Mountain State] agrees to accept potential deduction/ recoupment risks of these MDF monies, as follows. [Mountain State] agrees that in order to avoid a deduction/recoupment of all or a portion of the $35, 000 for each Clear Location, it assumes the obligation that Clear undertook to achieve or exceed sales of 1, 800 Gross Activations … during a defined 18-month Period …
2. If [Mountain State] does not achieve the above Minimum Attainment Level at one or more of the above Clear Locations, then any deduction/recoupment of monies for each Clear Location shall be done pursuant to the MDF terms and conditions in Exhibit B of the [Mountain State] Agent Agreement.

VAA, § E (Dkt. 21-7 at 50).

         As a result of the VAA, Clear's agent agreement with Verizon was terminated as of December 5, 2014. Essentially, the above VAA provisions permitted Verizon to apply chargebacks for customer deactivations and MDFs that originated from Clear's business against Mountain State's commission account. With regard to Clear's Dymax Account balance, Clear agreed to “zero-out” its account prior to the termination of its agent agreement with Verizon, which it did on November 28, 2014.

         Pursuant to the VAA, Verizon applied chargebacks against Mountain State commissions in the amount of $55, 553.47, for customer deactivations or cancellations of service plans that originated from Clear stores prior to closing.[7] Specifically, these customers had activated their accounts through Clear prior to closing on December 1, 2014, and Clear was paid a commission on these activations. These deactivations and cancelations occurred and were applied by Verizon for the six months of December 2014 through May 2015. In addition, after closing, Verizon applied two chargebacks against Mountain State related to MDFs accepted by two of Clear's locations in the amounts of $17, 500.00 and $4, 919.00. The total amount of Verizon chargebacks for customer deactivations and cancellations and MDFs was $77, 972.47.

         III. Asset Purchase Agreement

         On December 1, 2014, Clear and Mountain State closed on Mountain State's purchase of Clear's business. Both Clear and Mountain State agree the APA is a valid and enforceable contract.

         Pursuant to the APA, Mountain State agreed to purchase Clear for $2, 500, 00.00, plus the value of new and marketable inventory. The parties agreed Mountain State would structure its payments to Clear pursuant to the following schedule:

Prepayment on November 28, 2014

$500, 000.00

Due at closing, December 1, 2014 (less inventory)

$1, 500, 000.00

*Due June 1, 2015

$500, 00.00

*Due December 1, 2015

$500, 000.00

*Mountain State Cellular, Inc. corporately guarantees all remaining amounts due. A 5% annual interest rate on funds not paid at closing….

APA, Schedule 1.1 (Dkt. 21-7 at 29).

         Mountain State paid $1, 500, 000.00 to Clear on or before the December 1, 2014 closing date. (Dkt. 21-8.) Mountain State made an inventory payment to Clear on December 3, 2014, in the amount of $396, 000.00. (Id.) On June 1, 2015, Mountain State paid Clear $394, 832.32. (Dkt. 21-8 at 6, 19.) The June 1, 2015 payment consisted of the scheduled payment due of $500, 000.00 plus interest of $24, 931.51 and less: $74, 235.97[8]for Verizon chargebacks and $55, 863.22 for inventory “true-up, ” which included credit for iconic device gross profit.

         The issues in dispute relate to whether Mountain State was permitted, pursuant to the APA, to offset chargebacks from its June 1, 2015 payment to Clear and whether Mountain State was permitted to set-off from the same payment its inventory reconciliation.[9] The parties dispute also whether the June 1, 2015 payment included full payment for iconic devices.

         1. Verizon Wireless Chargebacks

         The APA expressly identifies “Customer Returns” and “Verizon Wireless Chargebacks” as “Seller's Retained Liabilities.” APA, § 2.12 (Dkt. 21-7 at 12). With respect to “Customer Returns” the APA provides:

2.12.4 Customer Returns. All of Seller's Customer's returned goods and services including, without limitation, cellular telephone units, cellular telephone service contracts cancellations, and related cellular telephone merchandise, goods, accessories and equipment arising out of or in connection with Seller's ownership, possession, operation and management of the Business prior to through closing-; and as more particularly provided in paragraph 2.12.7 below, Seller shall be liable for one hundred percent (100%) of all Verizon Wireless chargeback costs and risk incurred by seller and arising out of or in connection with Seller's ownership, possession, operation and management of the Business prior to and through closing.

(Id. at 13.) With regard to “Verizon Wireless Chargebacks, ” the APA provides:

2.12.7 Verizon Wireless Chargebacks. Seller shall be liable for one hundred percent (100%) of all Verizon Wireless chargeback costs and risk incurred by Seller and arising out of or in connection with Seller's ownership, possession, operation and management of the Business prior to and through closing date -. All chargeback costs shall be documented and invoiced from Buyer to Seller and paid by Seller, at the rate of one hundred percent (100%), to Buyer within ten (10) business days of Seller's receipt of such invoice. Buyer shall be entitled to offset the amount of any invoice for Verizon Wireless chargeback costs not paid by Seller within ten (10) days against payment of the Purchase Price.

(Id.)

         2. Inventory

         Pursuant to the APA, Mountain State agreed to purchase Clear's new, current, and marketable Verizon phone units and accessory inventory as of the December 1, 2014 closing date. Specifically, “Article 2 Transfer of Assets” of the APA provides:

2.4 Inventory. Buyer will purchase from Seller at pricing commensurate with-current Indirect Pricing, all new, current and marketable Verizon Wireless cellular telephone units, merchandise, goods, equipment & accessories for future sale, in the ordinary course of business - on the closing date of December 1, 2014 or earlier.

APA, § 2.4 (Dkt. 21-7 at 11). Pursuant to the APA, “Inventory” did not include certain “Obsolete Inventory; Returned and Warranty Items:”

2.12.8 Obsolete Inventory; Returned and Warranty Items. All obsolete, defective or returned inventory owned by Seller prior to closing date shall be identified and separated from current marketable inventory….

APA, § 2.12.8 (Dkt. 21-7 at 14).

         “Article 3-Purchase Price and Additional Consideration” of the APA set forth a process for valuing Clear's current and marketable inventory:

3.2 Inventory. Subject to the provisions of paragraphs 2.12.6 and 1.12.7 above, all phone & accessory inventory will be deemed marketable & appropriate by buyer & shall be preliminarily valued cooperatively between Buyer and Seller within 3 business days prior to closing. After closing and within 3 business days thereafter, Buyer will pay Seller for all inventory, separate from purchase price above.

APA, § 3.2 (Dkt. 21-7 at 14). In addition, the APA included a representation and warranty from Clear to Mountain State that:

12.1.16 All Due Diligence Materials and other data and information regarding the Business provided by Seller and disclosed to Buyer shall be and is certified and confirmed by Seller to be true, accurate and correct, without exception, as of the Effective Date and as of the Closing Date.

APA, § 12.1.16 (Dkt. 21-7 at 22).

         And, Schedule 1.1 of the APA, under the headline “Inventory ...


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