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Zrii, LLC v. Wellness Acquisition Group, Inc., et al., C.A. No. 4374-VCP (Del. Ch. Sept. 21, 2009)

September 21, 2009

In this decision, the Court of Chancery granted a preliminary injunction where the plaintiff demonstrated a reasonable probability of success on the merits of a civil conspiracy claim.

The plaintiff in this case, Zrii, LLC (“Zrii,” or the “Company”), is a direct marketing company that specializes in nutritional drinks. Zrii is located in Utah and is managed by William Farley, who owns a controlling interest. The defendants are former officers, employees and contractors of Zrii, as well as Wellness Acquisition Group, a company created by the individual defendants in order to acquire Zrii. Zrii uses a network marketing business model and earns its revenues by enrolling a large group of contractors who serve as its distributors, or Independent Executives (“IE”). IEs earn money by selling Zrii’s product and by recruiting new IEs. IEs receive a percentage of sales made by the IEs “downstream” (i.e, the IEs they have recruited). Each IE is required to sign a non-solicitation contract agreeing not to recruit or solicit other distributors or customers away from Zrii, or to otherwise interfere with their relationship with Zrii, for a period of six months after the IE leaves Zrii.

In late 2008 and early 2009, the individual defendants hatched a plan to acquire Zrii from Farley by securing the cooperation of its high level employees at a secret meeting during a company retreat, then misappropriating its confidential information, causing damage to its computer systems, disrupting its distribution network, and staging a walkout of its workers by promising them future employment. When Farley refused to accede to the individual defendant‘s demands to sell the Company, defendants instead determined to dismantle Zrii and joined forces with another network marketing company, LifeVantage, in order to do so. At LifeVantage, the defendants recruited Zrii’s distributors, essentially crippling Zrii’s ability to operate profitably.

After these events, Zrii filed a complaint in the Delaware Court of Chancery alleging breaches of contract and fiduciary duty, as well as various other torts, and moved for a preliminary injunction and for expedited proceedings. After noting that the merits of the dispute would likely be resolved in arbitration in Utah, the Court ruled on Zrii’s motion for injunctive relief. In concluding that Zrii had shown a reasonable probability of success on the merits of its civil conspiracy claim, the Court found that (1) the alleged facts supported a finding that the individual defendants participated in a conspiracy; (2) the individual defendants had a common objective to wrest control of Zrii from Farley or to dismantle it; (3) the alleged facts indicated the existence of a meeting of the minds in support of the conspiracy; (4) the alleged facts indicated several unlawful acts in furtherance of the conspiracy, including the illegal download of Zrii’s confidential information, breaches of fiduciary duty by two of the individual defendants who were officers of Zrii, and the breach by two of the individual defendants of their non-solicitation contracts with Zrii; and (5) Zrii was reasonably likely to be able to prove damages as a result of the defendants’ actions. The Court went on to find that Zrii faced imminent and irreparable harm if the defendants were not enjoined from recruiting its distributors, and that the balance of the equities tilted in favor of entering an injunction against the defendants for a period of three months, prohibiting the defendants from disclosing or using any trade secret information of Zrii and from knowingly recruiting or enrolling any Zrii distributor for any other network marketing company, including LifeVantage. The Court also noted that any additional remedy would have to be awarded in Utah through arbitration or litigation.

The full opinion is available here