Lawsuit: Burke Hedges versus LifeVantage
by Ted Nuyten on October 25, 2011
Burke Hedges is a world-renowned author, speaker and trainer, Burke Hedges travels the globe teaching sold-out audiences the art of entrepreneurship and how to transform their lives. He signed up as a LifeVantage distributor in 2009 through this deal:
- $20,000 per month for the first three months;
- $10,000 per month for the subsequent nine months of the Support Period;
- An option to purchase 120,000 shares of LVN's common stock at $0.70 per share;
- full qualification at the highest active rank under LVN' s compensation plan; and
- Paying travel expenses up to $5,000 per month.
Seems LifeVantage did not pay him and terminated his distributorship without cause.
Below text is an OCR transcription:
Wood Jenkins LLC
Mary Anne Q. Wood, No. 3539 Richard J. Armstrong, No. 7461 500 Eagle Gate Tower 60 East South Temple Salt Lake City, Utah 84111 Telephone (80]) 366-6060 Attorneys/or Plaintiffs
IN THE THIRD JUDICIAL DISTRICT COURT FOR THE STATE OF UTAH IN AND FOR SALT LAKE COUNTY BACKBONE WORLDWIDE, INC., a Florida corporation; and BURKE HEDGES, an individual,
Plaintiffs, v. LIFEVANTAGE CORPORATION, a Colorado corporation; DAVID W. BROWN, an individual; ERIC E. MARCHANT, an individual; KIRBY ZENGER, an individual; JOHN DOES 1 THROUGH 10, Defendants.
COMPLAINT AND JURY DEMAND Civil No. 110918424
Plaintiffs Backbone Worldwide, Inc., and Burke Hedges, by and through their counsel of record, hereby complain of Defendants as follows: PARTIES, JURISDICTION, AND VENUE
I. Plaintiff Backbone Worldwide, Inc. ("Backbone"), is a Florida corporation and a former independent distributor of Defendant Life Vantage Corporation.
2. Plaintiff Burke Hedges is a resident of Clearwater, Florida.
3. Defendant Life Vantage Corporation LVN is a Colorado corporation, publically traded on the OTCBB under the letters LFVN. LVN's corporate offices are located at 10813 S. River Front Parkway, Suite 500, South Jordan, Utah 84095.
4. Defendant David W. Brown is the current President of L VN, and at the relevant time, was the Chief Executive Officer of L VN, and resides in San Diego, California.
5. Defendant Eric E. Marchant is a Vice President of L VN and, upon information and belief, resides in Salt Lake County, Utah.
6. Defendant Kirby Zenger is the current Chief Operating Officer of LVN, and resides in Salt Lake County, Utah.
7. Defendants John Does 1 through 10 are individuals and/or business entities associated with LVN.
8. Jurisdiction and venue are proper in this Court pursuant to Utah Code Ann. § 78A-5-102(l) and Utah Code Ann. § 78B-3-304(2).
9. This is an action for breach and wrongful termination of an Independent Distributor Agreement dated May 4, 2009, an "Amendment of Independent Distributor Agreement" dated May 5, 2009, an action for defamation, and an action for tortious interference
with business relations.
10. LVN primarily manufactures and sells through its distributors a nutritional supplement named Protandim, as well as skin care products. Protandim is sold by LVN as a proven anti-aging supplement that provides a substantial benefit to help with the challenge of healthy aging.
11. As a network marketing company, LVN utilizes a direct selling distribution model that markets its products directly to consumers by means of independent distributors on a referral and direct selling approach. Generally, LVN distributors are
independent business owners and are paid commissions based on their personal and organizational volume based on product sales within their business organizations.
12. LVN business owners develop their independent distributor organizations by recruiting other business owners to purchase the product and to further develop a customer base that currently operates in the United States, Mexico, and Japan. The burden and expense of building such businesses fall on the distributor, not on LVN.
13. Generally, distributors earn a commission based on the sales of products by their downline organization, which includes their own independent sales activities and the leveraged sales efforts of their downline organization.
14. The commissions owed and paid to LVN's distributors are based on a hybrid compensation plan, which employs a general "Unilevel" component which pays commissions on sales made within nine (9) dynamically compressed levels, and a bonus
component, consisting generally of "fast start" and "matching" bonuses.
15. To avoid violating state and federal anti-pyramid scheme or "endless chain" laws, the payment of commissions to distributors must be based on the sale of products, and not on the recruitment of other independent distributors into the company.
16. Mr. Hedges has worked in the network marketing industry as a consultant and speaker for more than 24 years. He is also a world-renowned author, speaker and corporate trainer in the network marketing industry. His clients have consisted of Avon, Mary Kaye, Amway, and other such companies.
17. Since 1985, Mr. Hedges has founded numerous companies and written seven best-selling books. To date, his books have sold more than 4 million copies and been translated into 20 different languages.
18. His latest book, The Parable of the Pipeline, has been adapted into an internet-based prospecting presentation used widely throughout the network marketing industry.
19. Mr. Hedges is a principal and shareholder of Backbone.
20. Direct sales companies like LVN hire Mr. Hedges and Backbone to consult and work in the development and growth of such companies in the risky and fragile startup phases of the company.
21. On May 3, 2009, Backbone entered into a general independent distributor agreement with L VN (the "Original Agreement"). Under the Original Agreement, Backbone became an independent distributor of LVN. A true and correct copy of the Original Agreement is attached hereto as Exhibit A.
22. According to the Original Agreement, the prevailing party in any lawsuit is entitled to recover "50% of that prevailing party's (i) reasonable attorneys' fees, (ii) related out of pocket expenses, including expert witness fees, and (iii) fees, costs and expenses charged by a court.
23. In Section 4.2 of the Original Agreement, the parties agreed that the Original Agreement could be amended.
24. Accordingly, two days after entering into the Original Agreement, on May 5, 2009, Backbone entered into the "Amendment ofIndependent Distributor Agreement" (the "Amendment") with LVN. A true and correct copy of the Amendment is attached hereto as Exhibit B and incorporated herein by this reference.
25. According to the Amendment, except for the express changes made in the Amendment, the Original Agreement remained unchanged and in full force and effect.
26. Under the Original Agreement and the Amendment, Backbone was not an employee, agent, partner, or franchisee of L VN. Rather, Backbone's relationship with LVN was that of an independent contractor.
27. In the Amendment, Backbone agreed to provide the following during the twelve month period beginning May 2009 (the "Support Period"):
a. attend meetings and training events;
b. support, recruit, and train other L VN distributors; and
c. work to develop sales aids to be sold to L VN' s distributor force using Mr. Hedges' likeness.
28. In consideration of these additional duties by Backbone, LVN agreed to provide Backbone with the following compensation:
a. $20,000 per month for the first three months;
b. $10,000 per month for the subsequent nine months of the Support Period;
c. an option to purchase 120,000 shares ofLVN's common stock at $0.70 per share;
d. full qualification at the highest active rank under L VN' s compensation plan; and
e. paying Backbone's travel expenses up to $5,000 per month.
29. The Amendment was signed by Defendant David Brown on behalf of LVN, and by Mr. Hedges on behalf of Backbone.
30. Shortly after entering into the Original Agreement and Amendment, LVN issued a press release announcing Mr. Hedge's decision to join L VN as an independent distributor. A true and correct copy of this press release is attached hereto as Exhibit C.
31. In the press release, LVN stated that Burke Hedges "is considered an icon in the network marketing industry." The press release also quoted LVN's President and CEO, David Brown, as follows:
Burke Hedges is considered to be a legend in the network marketing indnstry. He has a track record of building incredible organizations, and he has consulted for many of the top network marketing companies in the world. His expertise and insight is sought after by countless organizations and leaders. It is an honor to welcome Burke to the Life Vantage family. Ex. C (emphasis added).
32. In addition to this press release, Mr. Hedges was highlighted in a distributor profile article in Prosper, a network marketing industry periodical. A true and correct copy of the Prosper article is attached hereto as Exhibit D.
33. During Backbone's relationship with LVN, Mr. Hedges and Defendant Eric Marchant, L VN' s compliance officer, participated in a recorded webinar relating to Backbone's use of "Opus," a leadership development and marketing system designed and
produced exclusively for LVN distributors.
34. During this webinar, Mr. Marchant approved of Backbone's use and advocacy of Opus.
35. Backbone complied with its obligations wlder the Original Agreement and the Amendment.
36. Pursuant to the Amendment, LVN began using Mr. Hedges' name and likeness to market Protandim and the LVN business opportunity, Mr. Hedges' name and likeness appeared in L VN' s print publications, LVN' s web site, video presentations, and press releases, distributed on the Internet and to LVN distributors and customers, This was done to
promote the credibility of LVN.
37. LVN has failed and continues to fail to pay Backbone all amounts due and owing under the Original Agreement and Amendment, despite Backbone's full compliance with the Original Agreement and the Amendment.
38. Backbone and Mr. Hedges have attempted numerous times to obtain payment of amounts due under the Original Agreement and Amendment from LVN, but to no avail.
39. On May 4, 2010, after the Support Period had lapsed and the Amendment had gone "hard," Mr. Brown, LVN's president and CEO, held a telephone conversation with Mr. Hedges in which Mr. Brown told Mr. Hedges that LVN did not want to continue paying
Backbone under the Amendment, and wanted to re-negotiate the agreement.
40. During this conversation, Mr. Brown re-confirmed that LVN wanted Mr. Hedges to remain with LVN.
41. Mr. Hedges never agreed, however, to alter the terms of the Amendment.
42. At no time during this conversation did Mr. Brown tell Mr. Hedges that there were any concerns about Backbone's or Mr. Hedges' actions in relation to L VN, its governing policies and procedures, or its distributors or customers.
43. On May 13,2010, Mr. Hedges received a warning letter from Eric Marchant. The letter was dated May 5,2010, merely one day after the telephone conversation with Mr. Brown in which Mr. Hedges had not agreed to alter the Original Agreement and/or the
Amendment (the "Marchant Letter").
44. In the Marchant Letter, a copy of which is attached hereto as Exhibit E. Mr. Marchant stated that LVN had received complaints regarding Mr. Hedges and Backbone. This was the first time Mr. Hedges had heard such allegations.
45. Mr. Hedges responded to the Marchant Letter, a copy of which is attached hereto as Exhibit F. The events giving rise to the complaints in the Marchant Letter were from Fall 2010, eight months prior, and after Mr. Hedges had appeared on-stage at LVN conferences as a keynote speaker.
46. The Marchant Letter did not list any specifics regarding allegations of misconduct. For instance, the Marchant Letter did not name who had made the allegations, when they were made, or the content of the allegations.
47. In his response to Mr. Marchant, Mr. Hedges requested that LVN provide factual details regarding the allegations so that he could adequately respond to the allegations and address any perceived problems. LVN did not provide any details before terminating Backbone's business relationship with L VN and its distributors.
48. LVN did not provide any factual detail about the allegations as requested by Mr. Hedges.
49. Upon information and belief, LVN, and Defendants Brown, Marchant, and Zenger, have told others that Mr. Hedges has engaged in, among other things, rude, chauvinistic, harassing, and condescending behavior toward other LVN distributors.
50. On August 27, 2010, LVN sent a letter (the "August 27 Letter") to Backbone in which it terminated Backbone's distributorship. A true and correct copy of this letter is attached hereto as Exhibit G.
51. According to the August 27 Letter, the reasons for the terminations were:
(1) "Taking prospects from other LifeVantage Distributors in violation of Section 6.3 [of the P&P Manual]- Cross-sponsoring";
(2) "Aggressive, intimidating and harassing behavior in violation of Section 3 [of the P&P Manual]- Rules of Conduct"; (3) "Making disparaging comments about Life Vantage and Executives of Life Vantage in violation of Section 5.3 [of the P&P Manual]- Non-Disparagement"; and (4) "Not including the term 'LifeVantage Independent Distributor" in violation of Section 8.7 [of the P&P Manual- Trademarks and Copyrights."
52. As with the Marchant Letter, aside from the foregoing general accusations of wrongdoing, the August 27 Letter was completely devoid of any specific information regarding the alleged conduct.
53. Furthermore, although one of the reasons set forth in the August 27 Letter for terminating Backbone's distributorship was that Backbone had not included the term "LifeVantage Independent Distributor" on some unspecifIed document/web site/etc., which allegedly was a violation of Section 8.7 of the P&P Manual, Section 8.7 actually places no affirmative obligation upon any L VN distributor to include those words on anything. Indeed, regarding the words "LifeVantage Independent Distributor," Section 8.7 merely states that "[all Independent Distributors may list themselves as 'Life Vantage Independent Distributor' in the white or yellow pages of the telephone directory under their own name." (Emphasis added).
54. In correspondence, meetings, and telephone calls, with LVN since the August 27 Letter, L VN has still failed to provide any details regarding the allegations that led to Backbone's termination as an LVN distributor. Moreover, LVN has still not compensated Backbone under the Amendment.
55. In an attempt to explain its decision, LVN provided cursory narratives of several encounters between Mr. Hedges and various individuals connected to LVN. Instead of providing details of the encounters, however, LVN gave all of the individuals involved in the narratives fictitious names.
56. Since terminating Backbone, L VN has continued to use Mr. Hedges' name and likeness to market and promote the LVN opportunity and its products.
57. After LVN terminated Backbone's distributorship, on a number of occasions, and as recent as July 20, 2011 in a meeting with LVN's current CEO, Douglas Robinson, Mr. Hedges demanded that LVN immediately cease using his name and/or likeness in any way. LVN has refused to do so.
58. Despite Mr. Hedges' demands to cease and desist, LVN continues to use Mr. Hedges' name and likeness to sell and promote the LVN opportunity and products.
FIRST CAUSE OF ACTION (Breach of Original Agreement – LifeVantage Corporation)
59. Plaintiffs incorporate and reallege the foregoing paragraphs by this reference.
60. The Original Agreement is a valid and binding contract. See Ex. A.
61. Plaintiffs have complied with all obligations imposed by the Original Agreement.
62. LVN has breached its contractual obligation to Backbone by failing to pay all amounts due and owing under the Original Agreement.
63. LVN has breached its contractual obligation to Backbone by terminating its distributorship without legal or factual justification.
64. Thus, LVN's breach of the Original Agreement has damaged Backbone in an amount to be determined at trial, but not less than $5 million.
SECOND CAUSE OF ACTION (Breach of Amendment – LifeVantage Corporation)
65. Plaintiffs incorporate and reallege the foregoing paragraphs by this reference.
66. The Amendment is a valid and binding contract. See Ex. B.
67. Plaintiff Backbone has complied with all obligations imposed by the Amendment.
68. LVN has breached its contractnal obligations to Backbone by failing to pay all amounts dne and owing under the Amendment.
69. LVN has breached its contractual obligations to Backbone by terminating the distributorship of Backbone without legal or factual justification.
70. Thus, LVN's breach of the Amendment has damaged Backbone 111 an amount to be determined at trial but not less than $350,000.
THIRD CAUSE OF ACTION (Breach of the Covenant of Good Faith and Fair Dealing – Life Vantage Corporation)
71. Plaintiffs incorporate and reallege the foregoing paragraphs by this reference.
72. In Utah, "a covenant of good faith and fair dealing inheres in most, if not all, contractual relationships." St. Benedict's Dev. Co. v. St. Benedict's Hosp., 811 P.2d 194, 199 (Utah 1991). "Under the covenant of good faith and fair dealing, each party impliedly promises that he will not intentionally or purposely do anything which will destroy or injure the other party's right to receive the fruits of the contract."
73. By terminating Backbone's distributorship without legal, contractual or factual justification, LVN has violated the covenant of good faith and fair dealing inherent in both the Original Agreement and the Amendment.
74. Backbone has been damaged as a direct result in an amount to be proven at trial, but not less than $5,350,000.
FOURTH CAUSE OF ACTION (Declaratory Relief Regarding Original Agreement and Amendment -LifeVantage Corporation)
75. Plaintiffs incorporate and reallege the foregoing paragraphs by this reference.
76. A person with an interest in a written contract, or a person whose rights, status, or other legal relations are affected by a contract, may request the district court to determine any question of construction or validity arising under the contract and obtain a
declaration of rights, status, or other legal relations. See Utah Code Ann. § 78B-6-408.
77. A contract may be construed before or after there has been a breach. See Utah Code Ann. § 78B-6-409.
78. The Original Agreement and the Amendment are valid binding contracts.
79. By engaging in the conduct as set forth herein, including, but not limited to, its admitted inability to pay Backbone all amounts due and owing under the Original Agreement and/or the Amendment, L VN has materially breached the Original Agreementand the Amendment and cannot enforce their provisions against Plaintiff, including any of the remedies set forth in Section 14 of the P&P Manual.
80. Plaintiff Backbone is entitled to a decree from this Court that Defendants' conduct as set forth herein, and as will be shown at a trial in this matter, constitutes material breaches of the Original Agreement and the Amendment.
81. Plaintiff Backbone is entitled to a decree from this Court that Plaintiffs have fully performed their obligations under the Original Agreement and the Amendment.
82. Declaratory relief is presently necessary and appropriate so that Plaintiff Backbone may determine its rights under the Original Agreement and the Amendment.
FIFTH CAUSE OF ACTION (Misappropriation of Likeness – LifeVantage Corporation)
83. Plaintiffs incorporate and reallege the foregoing paragraphs by this
84. Mr. Hedges is well-known and influential in the network marketing industry. Thus, his name and likeness have independent intrinsic value for network marketing companies such as LVN. Indeed, it is because of this intrinsic value that LVN executed the
Amendment with Backbone.
85. LVN's failure to pay Mr. Hedges for their use, and despite Mr. Hedge's demand that L VN stop using them, after terminating Backbone's distributorship, LVN has used and continues to use Mr. Hedges' name and/or likeness without Mr. Hedges' permission. Mr. Hedges has received no remuneration for LVN's post-termination use of his name and/or likeness.
86. LVN has and continues to profit from Mr. Hedges' name and/or likeness to Mr. Hedges' detriment.
87. Mr. Hedges has been damaged as a direct result ofLVN's conduct in an amount to be proven at trial
SIXTH CAUSE OF ACTION (Defamation – LifeVantagc Corporation, David W. Brown, Eric E. Marchant, and Kirby Zenger)
88. Plaintiffs incorporate and reallege the foregoing paragraphs by this reference.
89. LVN, Mr. Brown, Mr. Marchant, and Mr. Zenger, made false statements regarding Mr. Hedges. Specifically, defendants falsely stated that Mr. Hedges had engaged in, among other things, rude, chauvinistic, harassing, and condescending behavior toward other LVN distributors. behavior – allegations of which no defendant has ever provided any supporting evidence.
90. Upon infomlation and belief, these statements have been disseminated and published to management at L VN, as well as to L VN distributors and customers.
91. Defendants have used these stories as part of their efforts to concoct an expost facto justification for their own admitted breaches of the Original Agreement and the Amendment.
92. Defendants' statements impugning Mr. Hedges' reputation and character were defamatory in that they have, at the very least, injured Mr. Hedges' reputation and character
within the network marketing industry worldwide.
93. Defendants acted at least recklessly, if not with malice, in making the false statements. To this day, Defendants have not provided any evidence supporting their allegations.
94. Defendants' defamatory statements were not subject to any privilege.
95. As a result of these statements and their publication, Mr. Hedges has suffered significant emotional distress and other actual and presumed damages in an amount to be proven at trial.
96. Defendants' conduct constitutes malicious and reckless conduct, such that Mr. Hedges is entitled to an award of punitive damages in an amount to be proven at trial, but not less than $3 million.
SEVENTH CAUSE OF ACTION (Tortious Interference With Existing Business Relationships LifeVantage, David W. Brown, Eric E. Marchant, Kirby Zenger)
97. Plaintiffs incorporate and reallege the foregoing paragraphs by this reference.
98. Backbone had valid and existing contractual business relations with all other independent distributors and customers in its downlines.
99. LVN knew of these relationships by virtue of the nature of LVN's business model and its ownership and control of business records and reports that identified these relationships.
100. LVN therefore knew of the numerous existing business relationships that Backbone had established with its downline distributors and their customers.
101. LVN, Mr. Brown, Mr. Marchant, and Mr. Zenger, knowingly engaged in intentional acts intended and designed to disrupt the business relationships between Backbone and all of their downlinc distributors and their customers – i.e., they actively defamed Mr. Hedges knowing that this was a means of cobbling together an after-the-fact pretextual justification for breaching their own contractual obligations.
102. LVN has, through improper means and for an improper purpose, intentionally interfered with Backbone's contractual relationships and business relations with their downline distributors and their customers.
103. LVN's interference with Backbone's business relationships actually interfered with and disrupted business relations with all of their downline distributors and their customers.
104. As a direct and proximate result of L VN' s interference, Backbone has been damaged in an amount to be proven at trial, but not less than $3 million.
EIGHTH CAUSE OF ACTION (Interference with Prospective Business Relations – LifeVantage, David W. Brown, Eric E. Marchant, Kirby Zenger)
105. Plaintiffs incorporate and reallege the foregoing paragraphs by this reference.
106. Backbone was actively involved in locating, developing, and creating new distributors and customers in the United States and Mexico.
107. LVN knew that Backbone was active and highly motivated to market and purchase LVN products, and to further grow and develop its downline organization.
108. Based on Backbone's first year of lucrative sales production for LVN, which at the end of the 12-month period had reached $100,000 per month in downline organizational sales, LVN knew that Backbone was actively working to develop prospective
109. Twelve months later, the sales had increased to approximately $350,000 in sales per month.
110. LVN knowingly engaged in intentional acts intended and designed to disrupt Backbone's prospective business relationships.
111. LVN has, through improper means and/or for an improper purpose, intentionally interfered with Backbone's prospective contractual relationships and business relations with potential distributors and their customers.
112. LVN's interference with Backbone's prospective business relationships actually interfered with and disrupted business relations with prospective new distributors and their customers.
113. As a direct and proximate result of LVN's interference with Backbone's prospective business relationships, Backbone has been damaged in an amount to be proven at trial, but not less than $3 million.
WHEREFORE, Plaintiffs pray for judgment as follows:
A. Awarding Plaintiffs actual, compensatory, special, and presumed damages as appropriate and in an amount to be determined at trial;
B. Awarding Plaintiffs punitive damages of not less than $3 million;
C. Awarding Plaintiffs their attorneys' fees and court costs pursuant to the Original Agreement;
D. Awarding any other relief that the Court may deem just and proper.
Pursuant to Utah Rule of Civil Procedure 38(a), Plaintiffs respectfully demand a trial by jury of any issue triable of right by a jury. DATED this 14th of October, 2011.