ORDER GRANTING MOTION FOR PRELIMINARY INJUNCTION On June 6, 2022, Plaintiffs The Avon Company, formerly known as New Avon LLC, and LG H&H Co., Ltd. (collectively “Plaintiffs”), sellers of beauty products, brought this suit against Defendants Fareva Morton Grove, Inc. and Fareva S.A. (collectively “Defendants”), seeking declaratory and injunctive relief and damages, caused by Defendants’ breach of a longterm Manufacturing and Supply Agreement (the “MSA”) (ECF No. 7-1), pursuant to which Defendants agreed to manufacture and supply a substantial number of Plaintiffs’ products. The MSA allows Defendants to terminate the MSA early in two circumstances-first, if Plaintiffs fails to pay a “material undisputed” amount within 60 days after receipt of written notice, or second, for convenience, with two-years written notice and payment of an early termination fee. In either case, the MSA requires that Defendants provide Transition Support and continue producing Plaintiffs’ products for a period of up to six months, while production is being transferred to another supplier. On March 29, 2022, citing Plaintiffs’ failure to pay a November 2021 invoice, Defendants gave Plaintiffs 30-day’s written notice of early termination, triggering an approximate May 1, 2022 termination date and the beginning of the six-month period during which Defendants were obligated to provide Transition Support. On June 1, 2022, Defendants notified Plaintiffs that if they failed to pay somewhere between $8 and $21 million by June 3, 2022, Defendants would cease production of Plaintiffs’ products. On June 2, 2022, Plaintiffs responded, disputing the invoices and requesting written assurance that Defendants would continue to manufacture Plaintiffs’ products regardless of the dispute over the invoices. On June 3, 2022, Defendants rejected Plaintiffs’ demand and notified Plaintiffs’ that they would stop production of all products starting June 6, 2022. Accordingly, Plaintiffs filed this suit and simultaneously moved for an order to show cause for emergency relief, seeking a temporary restraining order (“TRO”) and preliminary injunction under Fed. R. Civ. P. 65. (ECF Nos. 1 (Complaint “Compl.”), 5 (Motion), 6 (Memorandum)). On June 7, 2022, I ordered counsel for all parties to appear the next day to address Plaintiffs’ request for injunctive relief. With the parties’ consent, I held over the motion for a TRO and set an expedited briefing schedule for Plaintiffs’ motion for a preliminary injunction, with argument to be held on June 16, 2022. Having reviewed the parties’ briefing and heard arguments on the merits, for the reasons discussed below, I hold that Plaintiffs are entitled to injunctive relief and grant the motion for a preliminary injunction. BACKGROUND Plaintiff Avon is a leading beauty company that develops and commercializes quality beauty products in North America. Compl. 15.1 Plaintiffs sells their goods in the highly-competitive direct selling market, relying on Independent Sales Representatives who sell the products to their friends, family, and others within their communities.
16-17. Plaintiffs rely on the relationships and goodwill that their representatives develop with their customers, and with a reliable flow of goods to support their sales efforts. 17. The MSA Prior to 2018, Plaintiffs owned several manufacturing sites, including the site at Morton Grove, Illinois (now owned and operated by Defendants). 18. Over the years, Plaintiffs consolidated their manufacturing to the Morton Grove facility and, since 2012, the vast majority of their products have been exclusively manufactured at Morton Grove. 19. On December 1, 2018, Plaintiffs sold the Morton Grove facility to Defendants, pursuant to an Asset Purchase Agreement. 20. The parties also simultaneously executed the MSA, under which Defendants agreed to manufacture, test, and supply virtually all of Avon’s beauty products for a 10-year period, with an option to extend for an additional five years. 20. Plaintiffs sold Defendants the Morton Grove Facility for tens of millions of dollars below the value of the facility in exchange for Defendants’ agreement to manufacture Plaintiffs’ products at a discount rate. Defendants also agreed to a fixed rate price per unit for the first five years, to accept and fulfill each order placed by Plaintiffs so long as Plaintiffs satisfied minimum ordering requirements (“Realized Volume”) but did not exceed a projected ceiling, and to perform specified quality control measures. 23; see also MSA §2. As to Realized Volume, the MSA defined that term to obligate Plaintiffs meet the minimum ordering requirements, “regardless of whether the Product…[is] delivered in the applicable Contract Year.” Id. art. I (defining “Realized Volume”). In exchange for Defendants’ agreement to manufacture and supply Plaintiffs’ products, Plaintiffs agreed to pay for the same at prices agreed upon by the parties, subject to an upward or downward variance based on fluctuations in the cost of production materials, to be calculated by Defendants. Id. §4.1(b). In the case of an upward variance, Plaintiffs would owe Defendants for the increased costs, and in the case of a downward variance, Defendants would owe Plaintiffs the differential. Id. Both are payable within forty-five days of Defendants’ calculation of the variance, but if a dispute arises, then the forty-five-day timeframe applies only to the undisputed portion of the variance. Id. In addition, under Section 4.1(1), Plaintiffs retain the right to audit Defendants’ premises and records for compliance with the MSA and verifying the amounts paid or payable pursuant to the MSA. Id. §4.1(1). By virtue of the MSA, Defendants became the primary (or exclusive2) supplier for a significant portion of Plaintiffs’ products, and as relevant here, the MSA includes the following protective provisions. Although both parties could terminate the MSA, Section 13.3(c) limits Defendants’ right to terminate to two circumstances: (i) upon thirty (30) days written notice to [Plaintiffs], if [Plaintiffs] fails to pay a material undisputed amount owed by [Plaintiffs] to [Defendants], within sixty (60) days after receipt of written notice from [Defendants]; or (ii) upon two (2) years prior written notice to [Plaintiffs] (“Early Termination Notice”), for convenience; provided that, (a) the Early Termination Notice may not be given by [Defendants] prior to January 1, 2022, effective January 1, 2024, (b) termination shall not be effective if [Defendants were] in material breach of this Agreement as of the date of the Early Termination Notice or materially breaches this Agreement between the date of the Early Termination Notice and the specified effective date of termination, and (c) termination shall not be effective if Supplier has not paid [Plaintiffs] the Early Termination Fee set forth in Section 13.3(d) or any other amounts owed to [Plaintiffs] pursuant to this Agreement; provided further, that following receipt of an Early Termination Notice, [Plaintiffs] may elect to waive the exclusions in clause (b) or (c) and allow this Agreement to terminate on the specified effective date of termination. MSA §13.3(c)(i)-(ii).3 In addition, in the case of expiration or early termination, Section 9.2 requires Defendants to provide Transition Support: In the case of an expiration or a termination of this Agreement for any reason, a Supply Default, or a Force Majeure Event materially affecting [Defendants'] ability to supply the Products, for a period of up to six (6) months (the “Transition Period”) [Defendants] shall take all actions reasonably requested by [Plaintiffs], and otherwise use [Defendants'] commercially reasonable efforts, to transition responsibility for manufacturing and supplying the Products from [Defendants] to the applicable Manufacturing Recipients, as quickly and efficiently as reasonably possible with minimal disruption to [Plaintiffs'] business or the quality or availability of Products (such actions and efforts, the “Transition Support”). Unless otherwise directed by [Plaintiffs], [Defendants] shall perform the Transition Support in accordance with the Transition Plan (to the extent it exists and is applicable). Such transition may be on a temporary or partial basis in the event of a Supply Default or Force Majeure Event. During the Transition Period, [Defendants] shall continue to manufacture and supply Products, as directed by [Plaintiffs], in accordance with the terms of this Agreement, subject to Section 14.10 in the event of a Force Majeure Event. In the case of a termination of this Agreement for any reason, the term of this Agreement shall automatically extend for the full duration of the Transition Period as necessary for [Defendants] to perform [their] obligations under this Article IX. Transition Support shall include the following, to the extent reasonably requested by [Plaintiffs]: (a) documenting production processes and procedures, including Manufacturing Know-How; (b) training personnel of Manufacturing Recipients on production processes and procedures and Manufacturing Know-How; (c) identifying equipment and Tooling, and cooperating with Manufacturing Recipients in obtaining replacement equipment and Tooling; and (d) identifying all third-party suppliers and providing bills of materials and other information. MSA §9.2. Finally, as one other means of ensuring constant supply of products, Section 3.5 provides: In the event of a Supply Default or Force Majeure Event, (i) [Defendants] shall resume supply of the affected Products as soon as commercially practicable, (ii) [Defendants] shall not allocate any capacity to other Persons unless and until one hundred percent (100 percent) of [Plaintiffs'] Orders are being consistently fulfilled, (iii) [Defendants] shall keep [Plaintiffs] regularly apprised of the status of [their] efforts to resume supply of the affected Products, (iv) at [Plaintiffs'] request, [Defendants] shall use commercially reasonable efforts to engage an alternative supplier of the affected Products (in which case [Defendants] will be responsible for any increase in price for the Products in excess of the Price for such Products and any other [Plaintiffs'] costs in connection therewith) and (v) in any Contract Year that a Supply Default or Force Majeure Event occurs or continues, the Reference Volume for such Contract Year shall be reduced by the greater of (a) the number of units of Products that [Defendants] would have purchased from [Defendants] had the Supply Default or Force Majeure Event not occurred but that [Plaintiffs] did not purchase from [Defendants] and (b) the number of units of Products (or substantially similar products) that [Plaintiffs] purchases or agrees to purchase from alternative suppliers. In the event of a Supply Default or Force Majeure Event, [Plaintiffs] shall use reasonable efforts to limit the number of units of Products it purchases from an alternative supplier to [their] effective needs and any other amounts reasonabl[y] necessary to ensure uninterrupted service for [Plaintiffs'] customers and representatives and to otherwise protect [Plaintiffs'] business. MSA §9.2. Supply Default “means any material failure by [Defendants] to deliver any Products in accordance with the requirements of this Agreement and the applicable Order accepted (or required to be accepted) by [Defendants,]” MSA art. I, and Force Majeure Event includes “ fires, floods, earthquakes, embargoes, shortages, strikes, epidemics, quarantines, war, acts of war (whether war be declared or not), terrorist acts, insurrections, riots, civil commotion, acts of God, or acts, omissions, or delays in acting by any Governmental Authority, in each case to the extent beyond the reasonable control of the non-performing Party….” MSA §14.10. Finally, Section 14.2 provides that New York law governs. MSA §14.2. Background to the Instant Dispute On March 29, 2022, Defendants gave notice of early termination under Section 13.3(c)(i), citing Plaintiffs’ failure to pay an invoice dated November 21, 2021 for $621,000. 29. Defendants claimed that the amount was “undisputed;” however, Plaintiffs allege that they did dispute the invoice because the invoice overstated the amount owed and did not include certain offsets owed under the MSA, and that Defendants knew of the dispute based on numerous conversations between the parties.
