A Legal Shot
Can a company maintain and build market share by aggressively suing its rivals? Consider the David vs. Goliath legal battle between Birmingham's On Go Energy drink and Farmington Hills's 5-Hour Energy drink.
Derrick George was about to pitch his new energy drink to a group of national distributors at a trade show in Chicago when his office called. They said the FBI was at the back door of his business, Aspen Fitness Products in Birmingham, with a search warrant.
The agents, who arrived in three unmarked white vans, proceeded to seize and haul away several boxes of company records. They also interrogated Aspen’s staff, including a new crop of interns, about whether George was a chemist and whether he was a manufacturer, along with other pertinent questions. “All the interns knew was that I was a lawyer, and they pointed to my diploma on the wall,” George says of the May 2009 incident.
“I can’t say for sure who said what to have the FBI search my offices, but my biggest competitor (5-Hour Energy) was across the aisle from me at the trade show. And just as I’m about to present my energy drink to the distributors, the FBI is banging on my door at my office in Birmingham. The timing was rather suspicious.”
It wasn’t until March 2011 that the FBI returned Aspen’s records, sources say. Gina Balaya, public information officer for the U.S. Attorney’s Office in Detroit, says she can neither confirm nor deny that a raid took place. “No charges have been filed against Mr. George or Aspen Fitness Products,” she says.
Soon after the search, George says he heard from various channels who said they were concerned Aspen was under investigation by the FBI. “You can bet I didn’t tell any of my suppliers or contacts the FBI had raided my offices, but someone was out there spreading the news to my network,” George says. “And I’m sure it wasn’t the FBI. They don’t talk to anyone.”
It wasn’t long after the FBI returned his company records that Innovation Ventures in Farmington Hills, which produces, distributes, and sells the popular 5-Hour Energy drink, sued George and Aspen Fitness Products in U.S. District Court. The complaint, which revived similar allegations from a lawsuit in Oakland County Circuit Court that was dismissed in May 2009, claimed Aspen obtained stolen “trade secret formulas” and customer or vendor lists via a former 5-Hour Energy executive. The case is now in discovery.
“I certainly understand a company wanting to maintain its monopoly in a given industry, but at some point the steady flow of lawsuits seeking protection of trademarks or packaging has to end,” says Michael Bernacchi, marketing professor at the University of Detroit Mercy in Detroit. “Coca-Cola was rather aggressive about protecting its brands in the early years, but you don’t hear much about that now. You have to ask yourself at the end of the day, does it help sell the product?”
In one corner is 5-Hour Energy, which was launched in 2004 and is now available at the front counter of numerous grocers and convenience stores. Although energy drinks like Red Bull, Monster, and Rockstar play in the market, 5-Hour Energy was one of the first to offer a caffeinated drink in a two-ounce container, albeit at $3 per shot.
The success of 5-Hour Energy has become a nationwide story, although coverage often neglects to report that its founder and CEO is a Farmington Hills resident. Manoj Bhargava, a native of India, got his career start in the beverage industry in 1998 when he bought the formula for Chaser, an anti-hangover drug developed by a chemist in New Jersey. The product is no longer sold.
Bhargava turned to 5-Hour Energy and followed the path of other successful entrepreneurs: He thought differently about how to brand, market, and merchandise an energy drink. Instead of trying to compete with giants in the traditional soft drink category, he tested his product at store counters, first at the health food chain GNC, and then elsewhere. As sales picked up, Bhargava expanded and turned 5-Hour Energy into a $1.2 billion brand.
Earlier this year, he made the Forbes list of billionaires — No. 960 in the world, No. 353 in the U.S. — with a projected net worth of $1.3 billion.
As 5-Hour Energy became a success, Bhargava was determined to put competitors on the defensive if he thought they were infringing on his product. He recently told an audience at the industry conference, BevNET Live, that he spends $1 million a month on legal fees. He has seven lawyers on staff, and two more are in the process of being hired. “We’ve become semi-big now, so we’re going to be on the suing side,” he told the conference attendees.
Bhargava’s bio in Forbes highlights his strategy: “He’s known to be litigious, so copycat brands beware.”
Bhargava takes his legal conquests a step further. In a recent Forbes profile story, he proudly displayed the “graveyard” of competitors he has taken down with legal action. The cemetery sits on a small shelf and consists of rival energy bottles that have since gone out of business. Next to each failed company is a cardboard tombstone Bhargava created that reads, “RIP.”
In the more than 40 lawsuits that Innovation Ventures has initiated or responded to in the last six years (federal and state cases), the company has been accused of spreading rumors that their competitors’ products were under recall, were being investigated by the FBI or other government regulators, or were soon to be sued by Bhargava’s companies — 5-Hour Energy’s parent firm is Living Essentials; the umbrella company is Innovation Ventures.
In the other corner is Aspen Fitness Products, whose founder and CEO, Derrick George, entered the energy-shot market with enthusiasm and confidence, only to find himself and his company the target of Bhargava and 5-Hour Energy. On Go Energy is one of many competitors seeking to grab a piece of the market, of which 5-Hour Energy controls roughly 90 percent.
In the Aspen case, Bhargava and Innovation Ventures are asking the federal court to order George and Aspen to pay damages and to cease and desist in the use of extensive data — including distributor information and 5-Hour Energy’s product formula — in the running of Aspen and in the marketing of On Go Energy drink. Aspen denies it is using such data.
As a practical matter, On Go retails for 99 cents for a two-ounce container, roughly a third of the price of 5-Hour Energy. On Go, which is offered in six flavors, recently launched On Go Extra Strength, which retails for $1.59 for a two-ounce portion.
George says Living Essentials’ lawsuit makes no sense to him because he doesn’t view 5-Hour Energy as a rival. George says he launched On Go in late 2006 because he saw an opportunity to appeal to an entirely different market. “I never looked at 5-Hour Energy as competition,” George says. He decided to focus on taste and flavor, attributes that he believes 5-Hour Energy lacks.
A Michigan native who left the state to attend law school at the University of Denver, George returned shortly after earning his degree in 2004 to tend to his terminally ill father. He spent the next 10 months caring for his father, who died of lung cancer in October 2005 at the age of 51.
By the following summer, George developed an interest in creating an innovative consumer product that he could sell through the Detroit area wholesale and retail contacts he established as a youth, when he worked at his grandfather’s party store in Southfield. To get started, he attended a trade conference in Las Vegas.
“I was at Natural Products Expo West, and I met a manufacturer by the name of Custom Nutrition Laboratories (CNL), which made a line of two-ounce, sugar-free energy drinks,” George says. “I thought, what a unique concept that would work well with my distribution and retail contacts. This was like Starbucks re-invented, and would give consumers an alternative to all the other highly caffeinated, high-sugar, high-fructose corn syrup-type products. After trying one of the samples, I felt rejuvenated and alert after a long day at a trade show.”
What George didn’t know at the time was that CNL also produced 5-Hour Energy. After making inquiries, he says CNL assured him their relationship with 5-Hour Energy presented no issues. “CNL stated that there was no conflict with manufacturing for my brand, and they were looking to expand their energy-shot capabilities,” George says. “Then it hit me, the name On Go Energy Shot. I ran it through my intellectual property lawyer, and he said it was good to go, no pun intended. I am not a chemist nor a manufacturer, so while CNL took care of that, I put my energy and focus into the marketing, branding, and distribution of On Go.”
But George was about to face more trouble than he could have imagined.
It started in 2008 when George met Kevin Zwierzchowski, a one-time employee of Innovation Ventures, who indicated he was familiar with the marketing of energy-shot products and could help George generate sales of On Go. Zwierzchowski served as controller and operations manager for Innovation Ventures from March 2006 through September 2007.
Innovation Ventures alleges in the Aspen-lawsuit that Zwierzchowski, aware that he was about to be terminated, took confidential information about the company’s operations, including the product formula, so he could use it after his employment ended.
George says none of that information was relevant to him. “Kevin made it clear that by doing any work for On Go, it was not in conflict with 5-Hour Energy,” George says. “Kevin stated that he had no non-compete agreement or any other agreement that prohibited him from doing work for On Go. So I hired him to draft a business plan and a financial model for On Go, and paid him (as a 1099 contractor) for that work. I also shared with him On Go-related information, so he could put the plan together.”
Bhargava and his lawyers didn’t see it that way. They were convinced Zwierzchowski revealed protected trade secrets to George, and initiated legal action on Aug. 12, 2011.
Innovation Ventures cites court testimony from Zwierzchowski admitting that he gave information about 5-Hour Energy to George that he knew was supposed to be confidential, including the product formula and the company’s distributor contacts.
To George, the charge is ridiculous because he didn’t own the formula for On Go at the time. He says he came up with the brand, and began to market and distribute CNL’s formula.
“I did not need any information from Kevin regarding Innovation, as I had my own customer lists and did not operate my business according to how Innovation operates their business,” George says. “Due to my experience in the industry and my research materials, I did not need any help with distributors and customers, since I was already generating — or had generated — my own contact list. I guess you can say that it is somewhat flattering that a billion-dollar company is suing me. I must be doing something right.”
A LEGAL MATTER
George suggests Bhargava may be testing the limits of the federal judiciary’s patience.
“Federal court judges are very smart and are generally not fond of frivolous lawsuits,” George says. “He already lost in Circuit Court. I know justice will prevail and the facts will come out. 5-Hour may have an arsenal of attorneys whose job is to make their competition disappear, but the facts are the facts and justice will prevail. I am actually surprised they initiated a lawsuit. Considering all the damage they have caused me and my company, they have much more to lose in this case.”
Bhargava declined to talk to DBusiness for this story, but Innovation Ventures issued responses to several questions through its spokeswoman, Elaine Lutz. She denies Innovation Ventures is exceedingly litigious.
“Having a successful brand creates an incentive for others to unfairly compete and attempt to confuse the public with copycat products,” Lutz states.
“As part of our monitoring efforts, we are sometimes placed in a position where protecting our intellectual property involves litigation. There are a few legal actions currently pending and we do not discuss the specifics of any particular ongoing legal action.”
Lutz says Innovation Venture’s aggressive intellectual property strategy is a matter of protecting its brand and preventing consumers from getting mixed up. “Innovation Ventures LLC engages in the protection of its intellectual property responsibly and lawfully,” Lutz states. “We have an affirmative obligation to protect our intellectual property from misuse. If we did not actively monitor the relevant market and enforce our rights, it would weaken the value of our brand.”
One of Innovation Ventures’ allegations is that On Go copied its disclaimer language verbatim for use on its container, and that 5-Hour Energy’s “running man” icon was also used with On Go’s packaging. In its legal filing, Innovation Ventures included photos of the two packages side-by-side, illustrating the duplicate language and the use of the “running man” image.
George says the disclaimer language came from CNL, while the “running man” was a design prototype that was never sold to consumers. Rather, it was provided to a website, www.bevnet.com, that was conducting a taste test of various energy drinks. Innovation Ventures took screen shots from the website and is trying to infer that Aspen made it available to consumers — which is false, George says.
In his presentation at BevNET Live, Bhargava said he sees the market as one in which larger companies routinely use their capital to fund aggressive litigation strategies against smaller competitors they see as a threat to take market share. “Big guys have capital, which they use pretty well for suing you,” Bhargava told the conference. “It’s not nice, but it’s a strategy.”
And that, George believes, explains the real meaning of Bhargava’s action against him.
“Manoj did say he is more afraid of the small guy than he is of the big guy,” George says. “We both sell something where the largest ingredient is purified water. The fact that On Go sells for 99 cents a bottle and 5-Hour sells for $3 a bottle is the real reason we’re getting sued. He’s trying to eliminate his competition, but we’re not going away. We’re in 20 states, and we’ve opened up distribution channels in North America, South America, and Europe.”
He adds that On Go is on pace to sell 1 million units per month, and will be available in 10,000 outlets by year’s end, double the number of outlets it was offered in last year. “I remember seeing Manoj at a trade show, and he kept saying to me in a loud voice, ‘Aren’t we suing you? Aren’t we suing you?’ In my opinion, there’s no reason to be adversarial. I view our relationship as friendly competition. He should do the same thing.” db