OKMYANSKY v. HERBALIFE INTERNATIONAL OF AMERICA

343 F.Supp.2d 57 (2004) | Cited 1 time | D. Massachusetts | November 8, 2004

MEMORANDUM

This is an action for breach of contract brought by EvgenyOkmyansky ("Okmyansky"), a Massachusetts resident and distributorof health and diet food supplement products. Defendant HerbalifeInternational of America, Inc. ("Herbalife") is a multi-level,health food marketing company. Herbalife is a Nevada corporationwith its principal place of business in California. Okmyanskyseeks to recover over $500,000 in commissions and othercompensation allegedly due under his distributorship agreement.Presently before this court are Okmyansky's and Herbalife'scross-motions for summary judgment.

Background

Herbalife develops and markets weight management products,dietary supplements, and nutritional foods.1 Herbalifesells its products through an international network ofindependent distributors.2 These independent distributors generateprofit in three ways. First, distributors purchase Herbalifeproducts at substantial discounts and sell to the public athigher prices.3 Second, distributors recruit otherindividuals to become Herbalife distributors.4 Herbalifepays a "commission" to the recruiting distributor ("sponsor")when these recruits ("down-line distributors") purchase Herbalifeproducts directly from the company.5 Third, a sponsor canearn "royalties" based on the volume of sales attributed to allof his down-line distributors and all of the sales attributed torecruits of his down-line distributors (or a sponsor's"lineage").6

In July of 1992, Okmyansky entered into a distributorshipagreement with Herbalife.7 In 1994, Okmyansky realizedthat several of the down-line distributors in his recruitmentlineage had been "enticed to sign separate and independentdistributorship agreements by other sponsors."8 UnderHerbalife's Rules of Conduct and Distributor Policies ("Rules ofConduct"), a distributor can be attributed to only onesponsor.9 The first sponsor to recruit a distributor is"considered the valid Distributorship."10 Within this marketingstructure, however, recruitment lineages frequently becomeentangled.11 Herbalife refers to this double-sponsorshipas a prohibited "dual-distributorship."12 With respect tothese dual-distributorship disputes, Rule 4-C of the Rules ofConduct specifically provides that "Herbalife has sole andabsolute discretion to determine the disposition of bothDistributorships."13

Okmyansky informed Herbalife that several of his down-linedistributors were operating under prohibiteddual-distributorships and requested monetary compensation for thepayments (royalties and commissions) that had been improperlydispersed to other sponsors.14 Between 1995 and 1999,Herbalife conducted an investigation and determined that thedown-line distributors belonged in Okmyansky's lineage.15Herbalife remedied the dual-distributorships by returning thedistributors to Okmyansky's lineage.16 Herbalife, though,refused to pay Okmyansky the commissions and royalties thatHerbalife had formerly dispersed to other sponsors.17Okmyansky contends that, under the distributorship agreement,Herbalife must pay him the commissions and royalties attributable to the activitiesof the down-line distributors throughout the period of theimproper dual-distributorships.18 Herbalife disagrees andargues that under the plain language of the Rules of Conduct, thecompany has broad discretion to remedydual-distributorships.19

In February of 2003, Okmyansky brought suit in the MiddlesexSuperior Court of the Commonwealth of Massachusetts.20 OnMarch 28, 2003, Herbalife removed this action pursuant to28 U.S.C. § 1441.21 This court has subject matterjurisdiction under 28 U.S.C. § 1332.

Discussion

As required by this court, Okmyansky and Herbalife filedcross-motions for summary judgment on the contractual issue ofwhether Herbalife had authority to refuse to pay Okmyansky thecommissions and royalties.22 A motion for summaryjudgment is meant "to pierce the boilerplate of the pleadings andassay the parties' proof in order to determine whether trial isactually required."23 Under Federal Rule of CivilProcedure 56, summary judgment is appropriate only if the recordreveals that there is "no genuine issue as to any material factand . . . the moving party [has demonstrated an] entitle[ment] to a judgment as amatter of law."24

It is the responsibility of the "party seeking summary judgment[to] make a preliminary showing that no genuine issue of materialfact exists. Once the movant has made this showing, the nonmovantmust contradict the showing by pointing to specific factsdemonstrating that there is, indeed, a trialworthyissue."25

In deciding whether to allow a motion for summary judgment, acourt "`must view the entire record in the light most hospitableto the party opposing summary judgment, indulging all reasonableinferences in that party's favor.'"26 But, a court "neednot credit `conclusory allegations, improbable inferences, andunsupported speculation.'"27

Of course, "[t]he happenstance that all parties seek summaryjudgment neither alters the yardstick nor empowers the trialcourt to resolve authentic disputes anent materialfacts."28 A court considering cross-motions for summaryjudgment "must evaluate each motion separately, being careful to draw inferences against each movant inturn."29

A. Law Governing the Contract

Okmyansky asserts that Massachusetts law governs this dispute,and Herbalife argues for California law. Under both Californiaand Massachusetts law, absent ambiguity, the plain meaning of thecontractual language controls.30 Neither party assertsthat California or Massachusetts courts would read the contractin a special or unique way. Because nothing turns on a differencebetween the contract laws of Massachusetts and California, thiscourt need not decide which body of law governs thedispute.31

B. Terms of the Contract

Both parties agree that the contract comprises more than thestandard Distributorship Agreement form signed by Okmyansky in1992.32 The written contract between the parties includesthe Herbalife Career Book, which contains the terms ofOkmyansky's compensation and the Rules of Conduct.33 Okmyansky received the CareerBook at the time he executed the Distributorship Agreement in1992.34 Although the Career Book has gone through manyeditions since that time,35 neither party claims that anyparticular edition would resolve the present dispute differentlythan any other edition.36 There is no dispute, therefore,over which documents constitute the written terms of thecontract. The parties simply disagree about whether the contractallows Herbalife to remedy a dual-distributorship withoutawarding retroactive compensation to the valid sponsor.

C. Herbalife's Discretion to Remedy Dual-Distributorships

Rule 4 of the Rules of Conduct specifically addresses theproblem of dual-distributorships. Rule 4-A provides that adown-line distributor may have only one sponsor.37 Rule4-C specifies that the first sponsor to successfully recruit adown-line distributor has priority over any subsequentsponsors.38 When subsequent sponsors enlist previouslyrecruited distributors, Rule 4-C gives Herbalife "sole andabsolute discretion to determine the disposition of bothDistributorships, as well as any penalties or sanctions it deemsnecessary and appropriate for the Distributorship and the Sponsoring organization(s)."39

Okmyansky argues that once Herbalife has exercised itsdiscretion and returned down-line distributors to the originalsponsor, Herbalife must compensate the rightful sponsor forroyalties and commissions wrongfully paid to other sponsorsthroughout the period of the dual-distributorships.40This court disagrees.

A "disposition" is a final arrangement, a settlement, or aresolution.41 Like the ordinary resolution of a civilcase, the disposition of "both" distributorships naturallyincludes a final arrangement of the recruitment lineages as wellas any monetary compensation. Under Rule 4-C, Herbalife had thediscretion to leave the down-line distributors in the secondsponsor's lineage, prospectively denying Okmyansky royaltiesand commissions attributable to future salesactivities.42 Here Herbalife chose instead to return thedown-line distributors to Okmyansky's lineage. This decision,though, does not obligate Herbalife to pay retroactivecompensation to the original sponsor.

This interpretation of Rule 4-C is confirmed by otherprovisions in the Rules of Conduct. The introduction to the Rulesof Conduct provides, In its sole and absolute discretion, Herbalife may impose any remedy or sanction it determines best addresses any breach of the Rules of Conduct & Distributor Policies. Herbalife also reserves the right in its absolute discretion to waive wholly or partially or to pardon or forgive wholly or partially any breach of any of the rules contained in this section.43Furthermore, Rule 8-L reiterates that whenever there is aviolation of the Rules of Conduct, "Herbalife may in its solediscretion take whatever actions or measures it deemsnecessary and appropriate."44

Understood in this context, a Rule 4-C "disposition" of thedistributorships includes any remedies, actions, or measures withrespect to "both Distributorships."45 Given the breadthof this language, this court finds that a refusal to payretroactive damages to an injured sponsor is within Herbalife'sdiscretion under the contract. Absent bad faith, this court mustdefer to Herbalife's disposition.46

Conclusion

For the foregoing reasons, Herbalife's motion for summaryjudgment is ALLOWED and Okmyansky's motion for summary judgmentis DENIED.

AN ORDER WILL ISSUE.

1. Local Rule 56.1 Statement of Material Facts not in Disputefor Issues Raised in the Order ("Def's. Statement of UndisputedFacts") ¶ 1.

2. Id.

3. Mem. in Supp. of Pl.'s Mot. for Summ. J. at 3.

4. Am. Compl. ¶ 5.

5. Aff. of Pavel Bespalko in Connection with Parties'Cross-Mot.'s for Summ. J. ("Bespalko Aff.") Ex. B at 7.

6. Mem. in Supp. of Pl.'s Mot. for Summ. J. at 3; BespalkoAff. Ex. B at 14 (defining "lineage").

7. Def.'s Statement of Undisputed Facts ¶ 2; Am. Compl. ¶ 4.

8. Am. Compl. ¶ 13.

9. Bespalko Aff. Ex. C at 3 (Rule 4-A).

10. Id. (Rule 4-C).

11. See, e.g., Miron v. Herbalife Int'l, Inc., No.99-17647, 2001 WL 564338 (9th Cir. May 28, 2001).

12. See Def.'s Statement of Undisputed Facts ¶ 5.

13. Bespalko Aff. Ex. C at 3 (emphasis added).

14. Am. Compl. ¶ 14; Decl. of Jackie Fisher, submitted insupp. of Mot. for Summ. J. of Def. ("Fisher Decl.") ¶ 4.

15. Fisher Decl. ¶ 5, Ex. 1.

16. Id. (explaining that Herbalife had moved the down-linedistributors to Okmyansky's lineage "without monetaryadjustments").

17. Id.

18. Mem. in Supp. of Pl.'s Mot. for Summ. J. at 6.

19. Mem. of Law in Supp. of Mot. for Summ. J. of Def. at13-15.

20. Def.'s Statement of Undisputed Facts ¶ 14.

21. Id.

22. See Order of this court on June 21, 2004 [#58].

23. Mullin v. Raytheon Co., 164 F.3d 696, 698 (1st Cir.1999) (quoting Wynne v. Tufts Univ. Sch. of Med., 976 F.2d 791,794 (1st Cir. 1992)).

24. Fed.R. Civ. P. 56(c). "In the lexicon of Rule 56,`genuine' connotes that the evidence on the point is such that areasonable jury, drawing favorable inferences, could resolve thefact in the manner urged by the nonmoving party, and `material'connotes that a contested fact has the potential to alter theoutcome of the suit under the governing law if the controversyover it is resolved satisfactorily to the nonmovant." Blackie v.Maine, 75 F.3d 716, 721 (1st Cir. 1996).

25. Id. (quoting Nat'l Amusements, Inc. v. Town of Dedham,43 F.3d 731, 735 (1st Cir. 1995)).

26. Mullin, 164 F.3d at 698 (quoting Griggs-Ryan v. Smith,904 F.2d 112, 115 (1st Cir. 1990)).

27. Bloomfield v. Bernardi Automall Trust, 170 F. Supp. 2d 36,40 (D. Mass. 2001) (quoting Medina-Munoz v. R.J. ReynoldsTobacco Co., 896 F.2d 5, 8(1st Cir. 1990)).

28. Griggs-Ryan v. Smith, 904 F.2d 112, 115 (1st Cir.1990).

29. Id.

30. See CAL. CIV. CODE § 1638 ("The language of a contractis to govern its interpretation, if the language is clear andexplicit, and does not involve an absurdity."); Miscione v.Barton Dev. Co., 52 Cal. App. 4th 1320, 1326 (Ct.App. 4th Dist.1997) ("Generally speaking, `the rules of interpretation ofwritten contracts are for the purpose of ascertaining the meaningof the words used therein.'") (citations omitted); CitationIns. Co. v. Gomez, 688 N.E.2d 951, 952 (Mass. 1998) (explainingthat if there is no ambiguity, courts will construe the words ofthe contract in their "usual and ordinary sense").

31. See Royal Bus. Group Inc. v. Realist, Inc.,933 F.2d 1056, 1064 (1st Cir. 1991); Fashion House, Inc. v. K MartCorp., 892 F.2d 1076, 1092 (1st Cir. 1989) ("When achoice-of-law question has been reduced to the point wherenothing turns on more precise refinement, that should be the endof the matter.").

32. Mem. in Supp. of Pl.'s Mot. for Summ. J. at 1-4; Def.'sStatement of Undisputed Facts ¶ 3.

33. Mem. in Supp. of Pl.'s Mot. for Summ. J. at 3-4; Def.'sStatement of Undisputed Facts ¶¶ 3-4.

34. Am. Compl. ¶¶ 8-9; Def.'s Statement of Undisputed Facts ¶4.

35. Def.'s Statement of Undisputed Facts ¶ 4.

36. This court will, therefore, refer to the version of theRules of Conduct provided by the Plaintiff in Exhibit C of theAffidavit of Pavel Bespalko.

37. Bespalko Aff. Ex. C at 3.

38. Id.

39. Id. (emphasis added).

40. Mem. in Supp. of Pl.'s Mot. for Summ. J. at 6.

41. WEBSTER'S NINTH NEW COLLEGIATE DICTIONARY 365 (1986).

42. Otherwise, Herbalife's "absolute discretion" to determinethe disposition of both Distributorships would have no meaning.See Bespalko Aff. Ex. C at 3 (Rule 4-C).

43. Id. at 1 (emphasis added).

44. Id. at 5 (emphasis added).

45. Id. at 1 (Introduction), 3 (Rule 4-C), 5 (Rule 8-L).

46. See Carma Developers, Inc. v. Marathon Dev. Cal.,Inc., 826 P.2d 710 (Cal. 1992) (deferring to a commerciallandlord's contractually authorized, good faith, exercise ofdiscretion to terminate a lease); see also Dunkin' Donuts,Inc. v. Gav-Stra Donuts, Inc., 139 F. Supp. 2d 147 (D. Mass.2001) (deferring to Dunkin' Donuts good faith decision toterminate a franchise).

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