10

11

".-;--

/ ~S/II1A () Ai Y

1

Q

So are you saying, as a master distributor, that

Q

Was it your opinion that the policies and

2 P r 0 c e d u res w 0 u 1. d not a p p 1. Y toy 0 u . s i m p 1. Y bee a li s e you we r e

3 an o wn e r ?

4

Well, it was my opinion, for sure, that the

5

non-compete provisions in the P&P didn't apply to me

6 because I was an owner, yes. Was I governed by the

7 conduct? Yes.

8 Q So you were governed by the conduct of the

9 policies and procedures?

A

I w o u l d say so.

Q

You need to wait for the questlon to finish.

12

So you did feel you were governed by the conduct

) in the policies and procedures; correct)

1':1:

To some extent, sure.

15

Q

To what extent were you governed?

16

Well, you know, I would say that, you know, no

17 defamation against the company, these types of things that

1 8 are i nth e ,- e .

19

20 you had a right to pick and choose among the policies and

21 procedures that you thought were appropriate to you, and

23

Q

Which ones did you not think were appropriate to

22 W h i c h o.n e 5 It-! ere n ' t ?

A

Yes.

211

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3
4
5
6
7
8
9
10
11
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12 14

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you, as a master distributor?

A Anything to do with competition beyond the date

that my contract said.

Q So you thought, as a master distributor, you had

a right to cross-recruit, as they call it, other people in the same organization you were the master distributor for?

I didn't cross-recruit anybody.

Whether I had

A

the right or not is irrelevant.

That's the question:

Did you feel you had the

Q

right to cross-recruit people In your same organization, where you were the master distributor?

A At what time?

o At any time.

A

Yes.

That's from the start, all the way until present? Well, I belie~e I had the time to cross -- I had

Q A

17 the ability to cross-recruit after the date of my

18 contract, which was August 31st.

19

20

Q

Well, you just said you thought it was at all

times.

So would that be:

True that when you first became

21 master distributor, you thought you had a right then,

22 also, to cross-recruit anybody in the organization)

2 3

A

No.

If that was the business that I was working

that time, why would I cross-recruit anybody? I

212

1

2

3

wouldn't.

I didn't.

Q

I don't think you're answering the question.

question is:

Did you think you had the ri ght to

4 cross-recruit, when up first became a master distributor

5

for IOIlIAJays)

Just yes or no?

A

I don't know.

Q

Wlth regard to the policies and procedures, isn't

8 it true that you went through numerous drafts of the

9 policies and procedures that you e-malled back and forth

10 to Ionways?

11

A

I know that Scott Warren had some comments about

12 the first draft that I did, and I think his e-mail -- not quoting exactly, but it's pretty close -- said, "I've got

14 t ~'J 0 c han g e 5, but t his i sap r e tty goo d j o b ."

15

You haven't answered the question.

Didn't you

The

Q

16 h a v e n u mer 0 use-mail s, b a c k and for t h 'rJ i t 11 Ion vi a y 5 ,

17 indicating changes you had in the policies and procedures?

18 19

20

21

22

23

Q A

"r~umerous," meani ng? More than six?

I don't recall.

Did you have more than one? I'm sure.

Did you have more than five?

Q

A I don 't k n ow .

213

10

11

1 distributor at the time, wouldn't you agree th~t you

2 solicited him?

J

Q

He said on conference calls he wasn't,

He said

4 he was the V.P. of 5ales.

I'm not asking you what he said.

I'm asking you

6 if he, In fact, was an independent d i s t r i b u t o r at the

8

I~. n cl

7 time. Do you agree that you solicited him?

In what fashion? As it pertains to some P&P that

9 I was gone from already, for a month?

Q

In the same fashion you just described the

soliciting of him.

You said you

Sure, I solicited n i rn .

said I could do it. ,J / f} I ~

VV ivtC--Y /U rlo{ 0 r (1M

14

Q With regard to Michael Hanley,

15

16

17

18

20

21

master distributor in Water Revolution?

A

No, he's not.

I am.

Q

He's represented on calls of Water Revolution

that he's a master distributor.

Well, I wouldn't refute it.

I mean, I actually

A

hold the master-distributorship position.

But I haven't

done much w i t h it, obviously.

We've been busy building

22 products in the shop, and everything else that we're

23 doing.

Q Are you the sole master distributor for Water

253

a separate contract.

Q Didn't you represent on one of the IrJater

3 Revolution calls, you're a new company, that it' sokay to

4 c r 0 5 5 - 1- e c r u it, e sse n t i all y, a s 1 0 n gas you p e 1- son all y k now

5 the person?

6 7 8 9

10

I have no idea.

Might I have said something like

A t h a t I

Sure.

I make mistakes every now and then.

Q A Q

But you think that's wrong? That particular statement?

You can't cross-recruit a person If you

personally know the person?

A

No, I -- right.

I mean, if you have an ongoing

relationship with somebody -- I mean, when does that

14 become -- Every network-marketing company, Your Honor, is

15 founded by distrlbutors that are cross-recruited out of

16

17

other c ornp an i es.

It's how this bUsiness works.

It' s 1 ike, i f I a \.J ned are c r L! i tin gag e n c y .

Am I

1 8 g u i 1 t Y 0 f r e c r u i tin g a n e x e cut i v e w hen I 11\ a k e off e r s, and

19

send golf clubs and money to a company?

No.

I tis a

2 0 bus -i n e s s .

22

This is the same business.

Let's not Pollyanna

this thing down,

In the real world, we cross-recruit

23 distributors that have experience in other companies, and they bring thei r following of people with them.

256

1

And everyone of these companies is founded

2 exactly the same way; including Ionways,

3

6

7

Q

W ell, i f you fee 1 it' s 0 kay t (I C 1- 0 S S - r e c r u it, why

do you have a section in your policies and procedures

t 1-1 a t --

A

Because you try to prevent it.

THE COURT:

Hold on.

Just finish the

Hold on.

8 question.

9 B Y i1 S, BON FA:

10

11

If you feel it's okay to c r o s s v r e c r u i t , t h e n why

do you have a non-crass-recruiting section in your

12 pol i c i e san d pro c e d u res t hat you d r aft e c! ?

14

15

16

Because you try to deter people from doing things

t h a two u 1 d dam age the com pan y . law,

Th a t cioesn't make it legal

So it's your position that the poliCies and

Q

17 procedures are recommendations, but that it's okay to

18 cross-I-ecruit, even though it says you can't, in the

19 policies and procedures?

20

A

I think if somebody earns money, as a distributor

2 1 i Il the C 0 111 pan y, i f the y , rea dis t 1- i but [I I", and the y

22 cross-recruit, then there ought to be an adjudicative

23 process that they go through to determine what the exact

nature of it is,

And that was also cal led for in your

257

3688

FILE 0

Electronically 03-29-2011 :04:34:51 PM Howard W. Conyers Clerk of the Court Transaction # 2124959

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17 ORDER GRANTING PRELIMINARY INJUNCTION

IN THE SECOND JUDICIAL DISTRICT COURT OF THE STATE OF NEVADA IN AND FOR THE COUNTY OF WASHOE

MICHAEL HANLEY, an individual, et ol.,

Hon. David A. Hardy

IONWAYS, LlC, a Nevada limited liability

Case No.: 011 O~03857

company,

Hearing Date: February 15-16,2011 Time: 9:00 a.m.

Dept. No.: B15

Plaintiff,

VS.

Defendants.

18 On February 15~ 16, 2011, the Court heard arguments and entertained witness testimony

19 and the presentation of evidence on plaintiff lonWeys, lLC's ("lonWays") motion for preliminary

20 injunction, filed January 12, 2011. Anabella Bonfa of Weltman & Warren LLP (appearing Pro Hac

21 Vice) and James Kachmar of Weintraub Genshlea Chediok, a law Corporation, appeared on

22 behalf of plaintiff Ion Ways. Robert W. Delong of Parsons Behle & Latimer appeared on behalf of

23 defendants Kirk Phinney, Catherine Phinny, Water Alive, lLC and Water Revolution} LlC.1

24 Defendants Michae1 Hanley and Delilah Olsson were also present in Court but were not

25 26 27 28

represented by counsel nor did they timely oppose lonWays' motion.

1 Although Water Alive and Water Revolution did not file a timely opposition to lonWoys' preliminary injunction motion pursuant to the deCJ~lines s~t forth in .the Order to Show Couse issued by the Court ~n January 1~, 2011, they filed a supplementa! opposition (with the Phmneys) on January 28,2011. The Court permhted Water Alive and Water Revolution to participate in the proceedings.

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. ORDER GRANTING PRELIMINARY INJUNCTION

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ORDER GRANTING PRELIMINARY INJUNCTION

PRELIMINARY INJUNCTlON

Upon consideration of the Order to Show Cause, it appears to the satisfaction of the Court that this is a proper case for granting 0 preliminary injunction in that lonWays has demonstrated that it enjoys a reasonable probability of success onlel merits and that the defendants' conduct, if allowed to continue, will result in irreparable harm for which compensatory damage is an inadequate remedy. {Boulder Oaks Cmty. Ass'n v, B&J Andrews Enter., LLC, 125 Nev. Adv. Rep. 33, 215 P.3d. 27, 31 (2007). Having reviewed and considered the testimony of witnesses and exhibits admitted during the hearing, and pleading on file in this motter, and the argument of counsel, and good couse appearing therefore, the Court now Orders as follows:

IT IS ORDERED that during the pendency of this action, unless otherwise specified, Defendants Kirk Phinney, Catherine Phinney, Water Alive, LLC, Water Revolution, LlC, Michael Hanley, Delilah Olsson and OH Water, Inc., and their agents, employees, representatives and all persons acting in concert or participating with them, are enjoined and restrained from engaging and committing or performing directly or Indirectly any and all of the following acts:

101 1 . "Raiding" or recruiting lonways' distributors in violation of the lonWoys Policies & Procedures (hereinafter 1Jp&ps"), which were attached as Exhibit 1 to the First Amended Complaint, induding but not limited to sedions 4.5., 4.5.1, 4.5.2, 4.20.2 and 4.20.3 of the P&Ps as well as the Summary of the P&Ps, sedion 4, subsections Il and IV of "Protection of Trade Secrets and NonCompetition" for the six month period provided by the P&Ps - said period to run from the termination of each defendant's distributor position with lonWays. For purposes of this Order, the applicable provisions of the P&Ps are set forth below:

Section 4.5 of the P&Ps provides as follows: o.

4.5 Unauthorized Recruiting of Ion Ways, LLC lAD's Prohibited (Anti-Raiding Clouse): lonWays, llC lAD's [Independent Authorized Distributors] may

partidpate in other direct selling or network marketing or multilevel

marketing ventures (collectively, "multilevel marketing"), and lAD's may

engage in selling activities related to non-lonwovs, lLC products and

services, jf they desire to do so.

2

1 2 3 4 5 6 7 8 9

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

c.

Although an lAD may elect to participate in another multilevel marketing opportunity, he/she is prohibited from unauthorized presentotion or recruiting activities, which include the following:

a) Recruiting, presenting or attempting to enroll any non-personally enrolled JonWays, LLC lAD for other multilevel marketing business ventures, either directly or through a third party.

This includes, but is not limited tOI presenting or assisting in the presentation of other multilevel marketing business ventures to any nonpersonally enrolled lonWays, LLC lAD i

b) Offering any competing non-Ion Ways, LLC products or opportunities in conjunction with the offering of lonWays, LLC products or business plan or at any 10nWays, lLC meeting, seminar, convention, trip or other !onWays, LLC function. Violations of this policy are especially detrimental to the growth and sales of other lAD's 10nWays, lLC Businesses and to 10nWays, LLC's business and will not be tolerated.

Section 4.5.1 of the P&Ps states as follows:

A former lAD sholl not directly or through a third party solicit any non. personally enrolled lonWays, LLC lAD to enroll in any direct sales, network marketing, or multilevel marketing program or opportunity for a period of six (6) months after the cancellation or termination of an individual or entity lAD Agreement. This provision shall survive the expiration of the lAD's obligations to 10nWoys, LLC, pursuant to the lAD Agreement.

Section 4.5.2 of the P&Ps states as follows:

4.5.2. Downline Geneaology Reports

All Downline Genealogy Reports are confidential and constitute proprietary business trade secrets belonging to lonWays, LLC. Downilne Genealogy Reports are made available to lAD's in strictest confidence for the sole purpose of assisting lAD's in developing their 10nWays, LLC businesses through their respective downline organizations. lAD's should use their Downline Genealogy Reports to manage, motivate, and train their downline lAD's. The lAD and 10nWays, lLC agree that, but for this agreement of confidentiality and nondisclosure, lonWays, LLC would not provide Downline Genealogy Reports to the lAD. During any term of the lAD Agreement and for a period of six (6) months after the termination or expiration of the lAD Agreement between lAD and fonWays, LlC, for any reason whatsoever, lAD shall not, on his/her own behalf or on behalf of any other person, partnership, association, corporation, or other entity:

a) Directly or indirectly disclose any information contained in any

Downline Genealogy Report to any third partYi

b) Use the information to compete with lonWays, LlC or for any

purpose other than promoting 10nWays, LLC;

3

ORDER GRANTING PRELIMINARY INJUNCTION

b.

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ORDER GRANTING PRELIMINARY INJUNCTION

c) Recruit or solicit any non-personally enrolled lAd of 10nWoys, ~LC listed on ?ny report or communication, or in any manner. attempt to Influence or Induce any lAD of lonWays; LLC to alter theIr business relationship with 10nWays, He; or

d) Use or disclose to any person, partnership, association, corporation, or other entity any information contained in any Downline Genealogy Report or Communication. This provision shaH survive the termination or expiration of this Agreement. This particular policy will be strictly enforced in order to protect the rights of lAD's, both individually and collectively.

d.

Section 4.20.2 of the P&Ps states as follows:

4.20.2 Cross-line Raiding

Cross-line raiding is strictly prohibited. "Cross-line raiding" is defined as the enrollment of an individual or Entity that already has an Online lAD Agreement on file with 10nWays, llC, or who has had such an agreement within the preceding six (6) calendar months within a different line of sponsorship. The use of trade names, DBAs1 assumed names, corporations, partnerships, trusts, social insurance numbers, tax lAD numbers, sodal security numbers, or fictitious lAD numbers or transfers to circumvent this policy is prohibited. lAD's may not demean, discredit, or invalidate other lonWays, LLC lAD's in an attempt to entice another lAD to become part of the first lAD's Downline Organization. If 10nWays, LLC determines that an lAD has engaged in cross-line raiding, it may toke any actions it deems appropriate to rectify the problems and inequities caused thereby. Any attempt to persuade a lonWoys, LLC !AD to engage in cross-line raiding, terminate his/her lAD's Distributors and Dealers business, or otherwise violate this policy in order to become part of the persuading lAd's Downline Organization will result in disciplinary aciton, to include possible involuntary cancellation of the persuading lAD's Independent 10nWays, LLC lAD's Distributors and Dealers business. This policy shall not prohibit the transfer of an lAD's Distributors and Dealers business in accordance with Section 4.14.

e.

Section 4.20.3 of the P&Ps states as follows:

4.20.3 Cross-line Selling

4

Cross-line selling is strictly prohibited. "Cross-line selling" is defined as the action of selling 2 products or services to an individual or Entity that already has an Online lAD Agreement on file with

3 lonvvoys, llC, or has hod such an agreement within the preceding six (6) calendar months within a

4 different line of sponsorship. The use of trade names, DBAs, assumed names, corporations,

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10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

partnerships, trusts, social insurance numbers, tax lAD numbers, social security numbers, or fictitious lAD numbers or transfers to circumvent this policy is prohibited. lAD's may not demean, discredit, or invalidate other lonWays, LlC lAD's in an attempt to entice another lAD to purchase from the first lAD. If lonWeys, LLC determines that on lAD has engaged in cross-line selling, it may toke ony actions it deems appropriate to rectify the problems and inequities caused thereby. Any attempt to persuade an lonWays, LlC lAD to engage in cross-selling, terminate his/her lAD's Distributors and Dealers business, will result in disciplinary action, to include possible involuntary cancellation of the persuading lAD's Independent lonWoys, llC lAD's Distributors and Dealers business.

f.

The Summary of the P&Ps, section 4, subsection II of "Protection of Trade Secrets and

Non-Competition" states as follows:

II. lAD's may not recruit or enroll any other 10nWoys, LLC lAD's, not personally enrolled, into another direct sales, multilevel marketing, or network marketing business.

g.

The Summary of the P&Ps, section 4, subsection IV of "Protection of Trade Secrets

and Non-Competition" states as follows:

IV. Sales of products competing with those of lonWays, LLC to

lonWoys, LLC lAD's or Customers are prohibited.

2.

Doing business with any current or former lonWoys' distributor recruited or presented

25 to in violation of the P&Ps for the six month period provided for in the P&Ps - said period to run 26 from the termination of each deiendont's distributor position with lonWaysi

27 3. Using, exploiting, misappropriating and/or receiving benefit from any of lonWays 28 Trade Secret information. (For purposes of this Order only, "Trade Secret information" is defined to

5

ORDER GRANTING PRELIMINARY INJUNCTION

:

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ORDER GRANTING PRELIMINARY INJUNCTION

6

include the identity and contact infor~ati ' , any 10 nw.ays , distributor and the content of any

, .~.. I-A.c;. k~v....u::J.. ..fWd- If IS .,-eASC> kaJ..

lonWays genealogy report(s).} liWu, ~ ~ ~Ilo~j~ -4'K.Cl'~"i CJ.j!. .

,._...u:! (U>...Qdu -s I a>~ o.f. {i:.w ....,.0 be e'S~h"<s!....a....:i IK fflll.

In granting injunctive relief, the Court Males, 'he (, .11. iWi"O fiidi~~6 based on the testimony

and evidence admitted during the hearing of lonWays' motion for injunctive relief:

1 .

k; the Master Distributor of 10nWays, Kirk and Catherine Phinney, through Water

6 Alive; LlC, were bound by terms and conditions of the lonWoys P&Ps and that they violated the

7 provisions of the P&Ps.

2.

As the fact finder, the Court is charged with weighing the credibility of witnesses. As

8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

to Kirk Phinney, and as to Catherine Phinney to a lesser extent, the Court finds their tesfimony to be less than credible. The Court flnds, among other things; that there were inconsistencies as to their testimony during the hearing. Furthermore, the Phinneys' attempts, os Master Distributor, to urge the Court to determine that they were not bound by fhe P&Ps strained common sense and

credibility. 101

3. At the time the Buy-Out Agreement was entered into between lonways on the one

hand and the Phinneys and Water Alive on the other, Water Alive and the Phinneys had every intention of pursuing their Master Distributor position with lonways;

4. The Buy-Out Agreement contemplates two separate duties of good faith on the part

of the Phinneys and Water Alive. The Buyout Agreement contains (1) an authorization for the Phinneys to travel at lonways' request and expense and (2) the requirement that lonWays was to use the following statement: "Kirk and Cathy simply decided that they wanted to focus their lonWays time on building their lonWays Master Distributorship." The required statement adopted by the Phinneys and Water Alive was, at the very least, evidence of an agreement that they would do no harm to 10nWays while serving as and building up the Master Distributor position.

5. The defendants enjoined herein unlawfully poached, raided, targeted and cross-

recruited 10nWays top distributors as demonstrated by evidence that out of 25 audible callers to Water Revolution's October 29, 2010 pre-launch telephone conference, 22 were identified as

10 as a result of the Phinneys and Water Alive selling their ownership interest, the Court finds that the

11 6-month non-compete period set forth in the P&Ps would run concurrently once the PhinneyslWoter

12 Alive's Mater Distributor position was terminated.

<

13

..

3

7.

Although the Buy-Out Agreement provides for a 12-month period of non-competition

7

lonWays' lADs, including four of the Top 5 and seven of the Top 10 of lonWays' most profitable 2 lADs.

6.

While the Buy-Out Agreement provides thai the Phinneys and Water Alive, in

4 exchange for selling their ownership interest in lonWays for valuable consideration would not

5 compete with lonWays for a 12-month period, the Court finds it is unlikely that the defendants did

6 not breach this agreement, given the evidence as to the level of preparation that went into forming

7 Water Revolution, lLC, and readying it for launch just after the one year expiration of the 12-month 8 period set forth in the Buy-Out Agreement.

9

8.

The Court further finds that the actions oi the enjoined defendants were intended to

14 be a preemptive strike against lonWays based on the various defendants' discontent over various 15 issues with lonWoys.

16 17 18 19 20 21 22 23 24 25 26 27 28

9.

The Court also finds that lonWays will be irreparably harmed if defendants are not

enjoined from continuing to raid or cross-recruit lonWays' lADs in that this wifl dismantle Ion Ways multi-level marketing structure and essentially "loot" its business. 10]

IT IS FURTHER ORDERED THAT, before this Preliminary Injunction shall take effect, plaintiff lonWays must file a bond in the amount of $100,000, as required by NRCP 65(cL for the purpose of indemnifying Defendants for any damages they may sustain by reason of this Preliminary Injunction if the Court finally decides that it should be used for the payment of such costs and damages as may be incurred or suffered by any party who is found to have been wrongfully enjoined or restrained.

IT IS FURTHER ORDERED THAT the Preliminary Injunction as set forth above shalf only become effective upon the filing of a bond in the sum specified above.

The Court reserves jurisdiction to modify this injunction as the ends of justice may require.

ORDER GRANTING PRELIMINARY INJUNCTION

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IT IS SO ORDERED.

~ z or - 2o[ I

Doted:- - [

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ORDER GRANTING PRELlMINARY INJl)NCTION