”Capstone deceived MusclePharm by overselling its ability to fulfill MusclePharm’s needs and understating the significant problems at its manufacturing facilities. Capstone then breached the parties' agreement by failing -- as it knew it would -- to deliver millions of dollars of products that MusclePharm ordered,” said Marc Kasowitz, MusclePharm’s attorney with Kasowitz, Benson, Torres & Friedman LLP. “MusclePharm and its customers were damaged by Capstone's conduct, and by Medley Capital’s wrongful decision to shut down Capstone’s facility and cease deliveries to MusclePharm.”
Capstone’s initial complaint, filed in District Court for the District of Colorado, sought more than $65 million in damages resulting from what it alleged was MusclePharm’s breach of the parties’ manufacturing contract. Capstone said it filed the complaint following numerous attempts to resolve the matter with MusclePharm. Capstone, based in Ogden, UT, is seeking damages for what it called multiple contractual breaches by MusclePharm, including non-payment of more than $22.5 million for product that MusclePharm ordered and accepted delivery of without payment and more than $40 million for MusclePharm’s failure to meet its minimum volume requirements.
Capstone failed on its end, suit alleges
In its countersuit, filed in the same Colorado court, MusclePharm, which is based in Denver, alleges that Capstone’s suit mischaracterizes the breach between the two parties in that it was Capstone that was unable to meet its contractual obligations to MusclePharm. Shortly after MusclePharm and Capstone signed their first contract, Capstone merged with another contract manufacturer called Cornerstone. Capstone and its parent company, IRI, assured MusclePharm that it would be able to deliver MusclePharm’s orders on time even with the simultaneous burden of merging the two manufacturing systems and building a new plant in Spring Hill, TN to meet MusclePharm’s production needs. MusclePharm’s suit alleges that IRI and Capstone knew all along that the manufacturing targets would not be met.
“Unbeknownst to MusclePharm at the time, Capstone and INI knew that the integration of the Capstone and Cornerstone systems, combined with the contemporaneous transition of manufacturing facilities, would cause significant interruption to MusclePharm’s business and would result in months of delivery delays, lost customers and damaged goodwill that would cost MusclePharm tens of millions of dollars,” MusclePharm’s suit alleges.
Takeover ploy
MusclePharm’s suit further alleges that a lender called Medley Capital acquired an equity stake in INI and Capstone and viewed the relationship with MusclePharm as a way to try to tap into the fast-growing sports nutrition company’s revenue. The shuttering of the Spring Hill facility was not in response to MusclePharm's nonpayment but was instead part of a plan to try to take control of MusclePharm, the suit alleges.
“Medley Capital and INI planned to shut down the Spring Hill facility, and to leverage Capstone’s $22 million payable from MusclePharm—a payable that resulted from Capstone’s own breaches—into an opportunity to gain control of MusclePharm and its significant revenue-generating business. When MusclePharm refused Medley Capital’s demand for a security interest in MusclePharm’s assets and an equity stake in the company—a brazen effort to use the payable to acquire an interest in MusclePharm’s business—Medley Capital and INI caused Capstone to cease delivery of products to MusclePharm in breach of the parties’ manufacturing agreement,” the suit reads.
MusclePharm said it lost $32 million in sales in 2015 as a result of being unable to deliver products to retail channels in a timely fashion, and incurred an additional $4 million in costs in sourcing products from other, higher-cost vendors in small production runs.
MusclePharm, which has had its own problems with internal governance that led to the payment of a hefty SEC fine and the departure of former CEO and founder Brad Pyatt, is seeking a rescission of its contract with Capstone and the payment of damages to be determined at trial.
Capstone and Medley replied to the countersuit with the following statements supplied to NutraIngredients-USA.
Medley: “The claims made by MusclePharm are utterly baseless. Medley Capital Corporation fully supports Capstone’s efforts to recover $65 million in damages on account of MusclePharm’s breach as described in Capstone’s original May 20, 2016 complaint.”
Capstone: "MusclePharm’s counterclaim is baseless and represent nothing more than a futile attempt to delay payment on account of $65 million in product that MusclePharm agreed to purchase, including $22.5 million for product that it actually received. We intend to prosecute our claim vigorously.”