Opinion
CV-22-00049-TUC-CKJ
06-27-2024
Berkadia Real Estate Advisors LLC, Plaintiff, v. Arthur R Wadlund, et al., Defendants.
Plaintiff/Counterdefendant: Jorge Eduardo Coss Ortega, Robert A Hill, Stephanie J Quincy Defendants/Counterclaimants: Joel Louis Herz, Jonathan Marc Saffer
UNDER SEAL
(WO)
Plaintiff/Counterdefendant: Jorge Eduardo Coss Ortega, Robert A Hill, Stephanie J Quincy
Defendants/Counterclaimants: Joel Louis Herz, Jonathan Marc Saffer
ORDER
HON, CINDY K. JORGENSON JUDGE
For reasons explained herein, the Court denies the Plaintiff's Motion for Partial Summary Judgment. The Court grants in part Defendants' Motion for Summary Judgment for Counts 1, 5-8, and 11-15 as explained below. The Court denies in part summary judgment for Counts 2-4, 9 and 10. The Court denies summary judgment on the Counterclaim.
OVERVIEW
Although both parties have requested oral argument, the Court concludes that none is necessary because the parties have had an adequate opportunity to provide the Court with evidence and legal memoranda supporting their respective positions and oral argument would not significantly aid the decisional process. See Partridge v. Reich, 141 F.3d 920, 926 (9th Cir.1998), see also LRCiv. 7.2(f) (the court may decide motions without oral argument).
Plaintiff, Berkadia Real Estate Advisors, provides real estate investment services, including sales, mortgage banking, and mortgage servicing. It is a national brokerage firm specializing in apartment and multi-family buildings, with 64 locations nationwide. Both Defendants are licensed commercial real estate brokers, who worked for Plaintiff in the Tucson office. Defendant Arthur Wadlund (A. Wadlund) has more than 41 years of commercial real estate experience as a broker in Tucson. He worked for Hendricks and Partners (H&P) when Plaintiff purchased it in December 2012. He stayed, and his son, Defendant Clint Wadlund (C. Wadlund), joined Plaintiff in 2013.
On January 10, 2022, without notice, the Defendants resigned effective immediately to take broker positions with Institutional Property Advisors (“IPA”) a Tucson division of Marcus & Millichap, a direct competitor with Plaintiff. Before giving notice and leaving, Defendant C. Wadlund forwarded from his Berkadia email account to his IPA email account approximately 300 emails allegedly containing proprietary documents and information. Simultaneously with hiring the Defendants, IPA also hired Lisa Ringo and Krista Ying, who were Berkadia employees and worked in the Tucson office with the Defendants. (Order, Findings of Fact (FOF) ¶¶ 29-31 (Doc. 31) at 9.) Plaintiff alleges Defendants, who owned the leased office space for Plaintiff's Tucson operations and cancelled the lease, then leased the space to IPA, virtually erased Plaintiff's Tucson footprint. To be clear, Defendants employment by IPA did not involve a physical move from one location to another; Defendants owned the building where they worked during the periods of employment with both Plaintiff and IPA.
Plaintiff contends Defendants violated restrictive covenants because they took confidential client information and trade secrets, as follows: Broker's Opinions of Value (BOV), rent rolls/T12 income statements, Letters of Intent and client lease and sale terms, and property proformas. At the time, Plaintiff was servicing four transactions in escrow that were listed by Defendants before they left Plaintiff, and Defendants file counterclaims for nonpayment of commissions owed Defendants for these sales. (Id. ¶¶ 29-33.
This Court has federal question jurisdiction over Plaintiff's trade secret claim under 18 U.S.C. § 1836, the Defend Trade Secrets Act (“DTSA”) (Count 9), which is virtually identical to the Plaintiff's state law claim under the Arizona Uniform Trade Secret Act (AUTSA) (Count 10). The Court exercises supplemental jurisdiction pursuant to 28 U.S.C. § 1367 over the state law claims, including the breach of contract claims and related tort claims.
Plaintiff alleges the following: Count 1) the Transactional Compensation and Release Agreement (TCRA) (A. Wadlund), (SAC, Ex. 1: TCRA (Doc. 91-3 Sealed); Counts 2 (A.Wadlund) and 4 (C. Wadlund); the Independent Contractor Agreements (ICA), id., Ex. 2: ICA (Doc. 91-4 Sealed); Count 3) the Technology Policy Agreements (TPA), id., Ex. 3: TPA (Doc. 91-6 Sealed); Counts 5 (A. Wadlund) and 6 (C. Wadlund)) Tortious Interference with Contract; Count 7) Tortious Interference with Contract; Count 8) Tortious Interference with Business Relations; Count 11) Civil Conspiracy, Count 12) Conversion); Count 13) Unjust Enrichment; Count 14) Duty of Loyalty, and Count 15) Permanent Injunction. (Second Amended Complaint (SAC) (Doc. 91 Sealed)).
The Court cites to the ICA for A. Wadlund which is the same in all relevant parts as the ICA signed by C. Wadlund.
The Court cites to the TPA for A. Wadlund which is the same in all relevant parts as the TPA signed by C. Wadlund.
The Court cites to the sealed record in this Order, without so stating hereinafter, and provides parallel citations for redacted documents as follows: SAC (Doc. 91 (Sealed), Doc. 82 Redacted), Ex. 1: TCRA (Doc. 91-3 Sealed), (Doc. 82-3), Ex. 2: ICA (Doc. 91-4), (Doc. 82-4), Ex. 3: TPA (Doc. 91-6), (Doc. 82-6); Plaintiff's Response to Defendants Motion for Summary Judgment (P Resp. D MSJ) (Doc. 239 Sealed), (Doc. 238 Redacted), SOF (Doc. 233), and Plaintiff's Motion for Partial Summary Judgement (P MPSJ) (Doc. 226), SOF (Doc. 228 (Sealed), (Doc. 221 Redacted). The Court files this Order under seal but intends for it to be filed into the public record, subsequent to being advised by the Parties as to any portions of the Order that should be redacted.
Plaintiff seeks partial summary judgment on Counts 1 through 4, the breach of contract claims based on restrictive covenants in the Defendants' ICAs and restrictive covenants in the TCRA signed by A. Wadlund, Hendricks-Berkadia LLC, Plaintiff's predecessor in interest, and nonparty H&P (D. B. Hendricks) in 2012 when Plaintiff acquired H&P.
Defendants seek summary judgment in their favor on all the claims brought against them. In part, Defendants argue that all Plaintiff's claims fail because Plaintiff has not suffered any damages as a result of any of Defendants' actions. (Defendants' Motion for Summary Judgment (D MSJ) (Doc. 216) at 4.) The Court treats Defendants' argument as being a challenge that “Berkadia has not shown the ‘fact of damages.'” (Defendants' Reply Supporting Motion for Summary Judgment (D Reply MSJ) (Doc. 245) at 10.) See also Grummel v. Hollenstein, 367 P.2d 960, 963 (Ariz. 1962) (explaining the burden to prove damages with reasonable certainty when the fact of damages is proven is not essential to recovery, if there is evidence providing some basis for estimating loss).
Defendants also seek summary judgment on their counterclaim for nonpayment of commissions owed pursuant to the ICAs. Defendant A. Wadlund asks the Court to declare the noncompetition provisions in the TCRA unenforceable.
A. Standard of Review for Summary Judgment
On summary judgment, the moving party is entitled to judgment as a matter of law if the Court determines that in the record before it there exists “no genuine issue as to material fact.” Fed.R.Civ.P. 56(a). The moving party bears the initial burden of demonstrating the absence of a genuine issue of material fact but is not required to support its motion with affidavits or other similar materials negating the opponent's claim. Celotex Corp. v. Catrett, 477 U.S. 317, 323-325 (1986). In determining whether to grant summary judgment, the Court views the facts and inferences from these facts in the light most favorable to the non-moving party. Matsushita Elec. Co. v. Zenith Radio Corp., 475 U.S. 574, 577 (1986).
The mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986). A material fact is any factual dispute that might affect the outcome of the case under the governing substantive law. Id. at 248. A factual dispute is genuine if the evidence is such that a reasonable jury could resolve the dispute in favor of the non-moving party. Id.
The moving party is under no obligation to negate or disprove matters on which the non-moving party bears the burden of proof at trial. Id. at 325. Rather, the moving party need only demonstrate that there is an absence of evidence to support the non-moving party's case. Id.
If the moving party meets its burden, it then shifts to the non-moving party to "designate 'specific facts showing that there is a genuine issue for trial.'" Id. at 324 (quoting Fed.R.Civ.P. 56(e)). To carry this burden, the party opposing a motion for summary judgment cannot rest upon mere allegations or denials in the pleadings or papers. Anderson, 477 U.S. at 252. The non-moving party must "do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita, 475 U.S. at 586. "The mere existence of a scintilla of evidence ... will be insufficient; there must be evidence on which the jury could reasonably find for the [non-moving party]." Anderson, 477 U.S. at 252.
This trilogy of 1986 cases opened the door for the district courts to rely on summary judgment to weed out frivolous lawsuits and avoid wasteful trials. Rand v. Rowland, 154 F.3d 952, 956 -957 (9th Cir. 1998);10A Charles A Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice & Procedure, § 2727, at 468 (1998). As explained in Celotex: "the plain language of Rule 56(c) mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex, 477 U.S. at 322.
The judge's role on a motion for summary judgment is not to determine the truth of the matter or to weigh the evidence, or determine credibility, but to determine whether there is a genuine issue for trial. Anderson, 477 U.S. at 252.
B. The Contracts: Restrictive Covenants
It is undisputed that A. Wadlund did not have an ownership interest in H&P that made him a signatory to the sale. According to Plaintiff, A. Wadlund's “ownership interest” in H&P was through a Phantom Stock Appreciation Award Agreement (PSAAA) that he entered into with H&P on March 20, 2012, just a few months before Berkadia bought H&P. The PSAAA granted A. Wadlund a non-voting equity interest in H&P. Plaintiff submits that the value of A. Wadlund's Phantom Stock was wholly dependent on H&P's subsequent sale. According to the Plaintiff, the purpose of the PSAAA was to incentivize H&P's most valuable brokers, including A. Wadlund, to stay through the company's sale. (Plaintiff's Motion for Partial Summary Judgment (P MPSJ) (Doc. 227) at 3-4.)
The documents have not changed since the Court's Order denying preliminary injunctive relief, and the Court relies on them here. When Plaintiff acquired H&P, H&P owed A. Wadlund about $1.36 million under the PSAAA. (Order, FOF ¶ 11 (Doc. 31) at 3.) At the time of acquisition, Plaintiff entered into a Transitional Compensation and Release Agreement (TCRA) with A. Wadlund and H&P. Id. ¶ 12. “Under the TCRA, A. Wadlund was to be paid a “Closing Phantom Award Payment” of $1,341,474 upon the closing of the acquisition,” subject to a claw back provision applied upon A. Wadlund's termination for up to three years from the closing date. Id. ¶ 14. Additionally, A. Wadlund would receive a “Closing Bonus” of $18,526 upon the closing the acquisition, subject to the same claw back provision. Id. ¶ 13.
The TCRA afforded A. Wadlund the opportunity to participate in the Berkadia Long-Term Incentive Plan (LTIP) and earn additional amounts (Earn-Out Amounts) if he stayed with Plaintiff. This “participation interest” became fully vested in five years after the acquisition closed. Id. ¶15. The express purpose of the LTIP was “to provide an incentive to certain former employees and independent contractors of H&P, and other persons, who become service providers of the [Plaintiff] to contribute to the Company's business and to reward such Participants for their contributions to the [Plaintiff] following the Closing.”].” Id. ¶ 16 (quoting LTIP (Doc. 14-1) at 200 § 1.1)).
Both Defendants signed ICAs that included restrictive covenants and TPAs governing the use of confidential and trade secret information contained in Berkadia's Technology Resources, broadly defined as everything from hardware like computers and cell phones and including “data, email, voicemail, instant messages, software packages, documentation,” and providing that all such Technology Resources are considered Berkadia property, deemed confidential, and to be used solely for Plaintiff's business purposes. (SAC, Ex. 3: TPA ¶¶ 1, 2, 4, 6 (Doc. 91-6) at 2.)
C. Enforceability of Restrictive Covenants (Counts 1-4)
Historically, covenants restricting competition were viewed as restraints of trade and were invalid at common law, but over time ancillary restraints, such as restraints incident to employment or partnership agreements, were enforced under the rule of reason. Valley Medical Specialists v. Farber, 982 P.2d 1277, 1280 (Ariz. 1999) (en banc) (cleaned up). “‘The test of validity of restrictive covenants is one of reasonableness.'” (Order, Conclusions of Law (COL) ¶ 14 (Doc. 31) at 13 (quoting Olliver/Pilcher Ins., Inc. v. Daniels, 715 P.2d 1218, 1220 (Ariz. 1986) (en banc) (quoting Gann v. Morris, 596 P.2d 43, 44 (Ariz. App. 1979)). The courts look to accommodate (1) the right to work, (2) the right to contract, and (3) the public's right to competition. Amex Distributing Co. Inc. v. Mascari, 724 P.2d 596, 600 (Ariz. App. 1986). Restrictive covenants ancillary to employment agreements will be strictly construed against an employer. Id.
Courts look to the subject matter of the contract, the kind and character of the business, the purpose of the restriction, and the intent of the parties. (Order, COL ¶ 16 (Doc. 31) at 13 (citing Or-Cal Inc. v. Tessenderlo Kerley Inc., No. CV-14-01980-PHX-DGC, 2015 WL 751212, at *2 (D. Ariz. Feb. 23, 2015) (citing Gann, 596 P.2d at 44)). In this way, greater deference may be afforded to restrictive covenants entered into between businesses as compared to restrictive covenants entered into between employer and employee, where for example, “‘the seller of a business is more likely to have equal bargaining power in negotiating such covenants...'” Id. ¶ 17 (quoting Or-Cal Inc., 2015 WL 751212, at *2 (citing Rent-A-Center, Inc., v. Canyon Television & Appliance Rental, Inc., 944 F.2d 597, 600-01 (9th Cir. 1991)). Similarly, “[a] non-solicitation covenant is reasonable only if it is ‘no broader than necessary to protect the employer's legitimate business interest.'” Id. ¶ 18 (quoting Hilb, Rogal & Hamilton Co. of Ariz. v. McKinney, 946 P.2d 464, 467 (Ariz. App. 1997)).
The Court determines the reasonableness of a restrictive covenant as a question of law based on a fact-intensive inquiry that depends on weighing the totality of the circumstances. Id. ¶19 (citing ZEP Inc. v. Brody Chem. Co., Inc., No. CV-09-0505-PHX-NVW, 2010 WL 1381896, at *5 (Ariz. Apr. 6, 2010) (quoting Farber, 982 P.2d at 128081)). “‘If it is clear from its terms that a contract was intended to be severable, the court can enforce the lawful part and ignore the unlawful part. '” Id. ¶ 20 (quoting ZEP Inc., 2010 WL 1381896, at *5 (quoting Olliver/Pilcher, 715 P.2d at 1221)). “‘Under this ‘blue pencil rule' a court can eliminate ‘grammatically severable, unreasonable provisions,' but cannot add terms or otherwise rewrite unenforceable restrictive covenants.'” Id. (quoting ZEP, Inc., 2010 WL 1381896, at *5 (quoting Farber, 982 P.2d at 1286)).
1. Transitional Compensation and Release Agreement (TCRA) (Count 1)
The Court finds that the TCRA was ancillary to the 2012 sale of H&P to Plaintiff. See (Plaintiff's Response to Defendants' Motion for Summary Judgment (P Resp. D MSJ) (Doc. 239) at 10 (relying on Statement of Facts (SOF) ¶¶ 70-75 (Doc. 240) (arguing TCRA restrictive covenants “Ancillary Agreements” because closing was conditioned on TCRA being fully executed by A. Wadlund). The Court, however, finds that the restrictive covenants in the TCRA are unenforceable for the reasons explained below.
As an “inducement” to H&P and Plaintiff and in exchange for the PSAAA and other incentives, Service Provider [Arthur Wadlund]” agreed to four restrictive covenants: Noncompetition; Customer Non-Solicitation; Employee Non-Hiring, and Employee Nonsolicitation. See (Order (Doc. 31) at 4-7 (quoting the TCRA restrictive covenants). These restrictive covenants were applicable as follows:
8.2 Exclusion Periods. The Restrictive Covenants shall apply from the Closing Date through (a) with respect to the Non-Competition Covenant and the Customer Non-Solicitation Covenant, the date which is eighteen (18) months following the Termination Date and (b) with respect to the Employee Non Hiring Covenant and the Employee Non-Solicitation Covenant, the date which is twenty-four (24) months following the Termination Date, such periods being the “Exclusion Periods.”
8.3 Geographic Scope. The parties acknowledge that as of the Closing Date, the Business is conducted throughout the United States of America, and therefore the Restrictive Covenants shall apply anywhere in the United States, provided however that if a court should determine the nationwide geographic scope is overly broad, then the Restrictive Covenants shall apply only in the states of California, Arizona, Washington, Michigan and Texas (the “Geographic Scope”).
8.4 Business Scope. The parties acknowledge that as of the Closing Date, the “Business” means the following (i) providing commercial property services, including, without limitation, commercial property investment sales (including acquisition and disposition services, asset review and financial analysis, investment strategy development and due diligence support, market analysis, portfolio and property valuation, rehabilitation and repositioning feasibility analysis and potential development analysis), structured finance advisory services (including debt, equity, and structured finance for the acquisition, refinance, or recapitalizations of market rate, affordable, senior and student housing), apartment advisory services (including research and valuation, debt and equity partner restructuring, lender workout services, feasibility studies, due diligence and asset management), and other consulting and brokerage services, (ii) any business that uses any trademark, trade names or slogans similar to the “Berkadia,” “Hendricks-Berkadia,” “Hendricks & Partners,” or H&P” trademarks, trade names (including associated logos, designs or trade dress) or slogans or any derivation thereof, or (iii) any activities that are otherwise competitive with the business of H&P or any subsidiary of Berkadia Commercial Mortgage Holding LLC as conducted at any time on or before the Closing Date.Id. at 5-6; (SAC, Ex. 1: TCRA § 8 (Doc. 91-3 Sealed) at 8-10) (emphasis in original).
The TCRA speaks for itself. H&P, not Berkadia, paid A. Wadlund the Closing Bonus and the Closing Phantom Award. (Second Amended Complaint (SAC, Ex. 1: TCRA, Recitals ¶ D (Doc. 91-3) at 2.) The Closing Bonus, $18,526.00, was an amount “to which [A. Wadlund] would not otherwise be entitled,” id., and given in consideration of the payments to him as provided under the TCRA “which [he] acknowledge [d] and agree[d] constitute[d] adequate legal consideration for the promises and representations made by him in [the TCRA],” Id. § 9.1 at 10, he agreed to release H&P and any parent and subsidiary corporations, and affiliated corporations, partnerships or other affiliated entities of H&P, past and present “from all claims related in any way to the transactions or occurrences between them to date, to the fullest extent permitted by law, including, but not limited to employment with H&P, the Phantom Award and all equity granted to him by H&P,” Id. § 9.1 at 11.
The release refers to the Phantom Stock Appreciation Award Agreement (PSAAA), executed March 20, 2012, approximately nine months before the sale by H&P to Plaintiff. (P Resp. D MPSJ, Ex. 19: Notice of Phantom Stock Award (Doc. 240-5) at 19. Vesting and payment under the PSAAA occurred upon a Change of Control/Change of Ownership. Id. at 21: §§ 4, 6. Consideration for the Phantom Stock Award was for past and future services rendered by A. Wadlund. The TCRA released his rights thereunder, which were replaced by rights granted pursuant to the TCRA based on consideration “to which [he] would not [have] otherwise [been] entitled.”
Under the TCRA, the Closing Phantom Award, like the Closing Bonus, was paid outright by H&P to A. Wadlund upon Plaintiff's acquisition of H&P, subject to a claw back provision that required A. Wadlund to pay both back to “Plaintiff (on behalf of H&P)” if he terminated his employment after the sale. The claw back provisions were for 100% if termination occurred prior to one year from the closing date of the acquisition, 67% if it was prior to two years, 33% if prior to three years, and no claw back after three years. (SAC, Ex.1: TCRA §§ 1.2, 2.2 (Doc. 91-3) at 3-4.)
The TCRA afforded Defendant A. Wadlund an opportunity to participate in Plaintiff's Long Term Incentive Plan (LTIP), designed to provide additional Earn-Out amounts to service providers, like A. Wadlund, as an incentive to stay with Berkadia and contribute the company's business. This incentive program vested at five years. (Order, FOF ¶¶ 15-16 (Doc. 31) at 4.)
When the Court denied the Plaintiff's request for a preliminary injunction, it rejected Plaintiff's assertion that the TCRA was ancillary to the H&P acquisition. The Court has revisited that analysis and now agrees with the Plaintiff that the TCRA was ancillary to the 2013 acquisition of H&P by Plaintiff. The Court finds that the amount Plaintiff paid to acquire H&P in 2013 included compensation for A. Wadlund's promise to stay for three years after the acquisition. The Court basis this finding on the fact that any claw back payments would go to the Plaintiff, not H&P.
“Courts distinguish between covenants incidental to employment contracts and those incidental to sales of businesses because the policy considerations necessarily differ.” Restrictive covenants in employment contracts prevent an employee from using his personal skills and experience and may seriously impair his ability to earn a living. Courts scrutinize employer-employee agreements closely because of this potential hardship and the uneven bargaining positions of the parties. Mascari, 724 P.2d at 600. Restrictive covenants ancillary to employment agreements will be strictly construed against an employer. Id. Courts are more reluctant to interfere where the contract involves the sale of a business. Farber, 982 P.2d at 1282 (citations omitted).
Because the Court finds the TCRA is more akin to an agreement ancillary to the sale of a business, the restrictive noncompete/nonsolicitation provisions should not be strictly construed against Plaintiff. Mascari, 724 P.2d at 600 (explaining leniency when enforcing restrictive covenants connected to sale of business because there is a need to effectively transfer goodwill).
The Court finds that the three-year claw back provisions for the Closing Phantom Award and five-year vesting for the LTIP reflect the contemporaneous estimates made by the parties regarding reasonable time periods needed post-sale to protect the buyer, Plaintiff, from losing the goodwill value of the H&P acquisition, if H&P's top agents and brokers, i.e., A. Wadlund, left the company after the sale. This is a legitimate purpose for a restrictive covenant. “‘Often the seller of a going concern cannot effectively alienate the intangible property which he has accumulated (in the form of good will) unless his buyer can have a valid, contractual assurance that the seller will not immediately set himself up in competition with the business he just sold.'” Id., COL ¶ 13 (Doc. 31) at 13) (quoting Three Phoenix Co. v. Pace Indus., Inc, 659 P.2d 1258, 1262-63 (Ariz. 1983)). This is enough. It is not enough to simply try to extract assurances against competition; “[any business transaction is enhanced substantially by the seller's assurances against competition from a rival firm”. Id. “The proposition that one may not merely seek to eliminate competition per se,” . . . “in principle means in practice that a noncompetition covenant cannot stand when there is no other, valid interest of the employer to protect.” Mascari, 724 P.2d at 604.
With the totality of circumstances in mind, the Court considers the restrictive covenants in the TCRA, including the noncompetition and customer nonsolicitation (noncompete) covenants, and employee non-hiring and nonsolicitation (employee nonsolicitation). (SAC, Ex. 1: TCRA § 8 (Doc. 91-3) at 8-10). The noncompete covenants have an exclusion period of 18 months following Defendant A. Wadlund's termination date. The employee nonsolicitation covenants have an exclusion period of 24 months following his termination date. All the restrictive covenants applied geographically “throughout the United States of America” or alternatively to several southwestern states, including all of Arizona, and the business scope reached “any activities that are otherwise competitive with the business of H&P or any subsidiary of [Berkadia] on or before the Closing Date the time of sale.” (Order, FOF ¶ 19 (Doc. 31) at 5-6.)
The restrictive covenants prohibited A. Wadlund from competing within this broad geographic scope, “directly or indirectly, individually or in association or in combination with any other person or entity, (SAC, Ex. 1: TCRA § 8.1(a) (Doc. 91-3)), prohibited him from “directly or indirectly,” soliciting “a customer or other business relation of H&P or any subsidiary of Berkadia Commercial Mortgage Holding LLC,” Id. §8.1(b), and likewise prohibited solicitation of employees of H&P or any subsidiary of Plaintiff, Id. §8.1(c). Pursuant to the “direct or indirect” language, the noncompete restrictive covenants reached third-party conduct and pursuant to the language “any subsidiary of Berkadia Commercial Mortgage Holding LLC,” the nonsolicitation restrictive covenants, reached beyond Tucson, and given Plaintiff's national operations, reached beyond Arizona. See, Orca Commc'ns Unlimited, LLC v. Noder, 314 P.3d 89, 95-96 (Ariz. 2013), affd and ordered depublished, 337 P.3d 545 (2014) (“Although [employers have] a protectable interest in customer relationships when an employee leaves, an employer has no protectable interest in persons or entities as customers when the employer has no business ties to them.”). The Noder case involved a public relations business. In the context of the insurance brokerage industry, InfoArmor Inc. v. Ballard, No. CV-21-01844-PHX-SMB, 2022 WL 394735, at *3 (D. Ariz. Jan. 26, 2022), the court illustrated the problem with such a broad provision: “[I]f Ballard in February 2017 asked a co-worker to call a potential customer, and if such a potential customer never even called back, [Allstate]'s Agreement would still purport to prohibit Ballard from soliciting or even working in any manner with that potential customer.” Id.
The Plaintiff argues these cases are distinguishable because the real estate industry is relationship-driven with the success of brokerages depending on these relationships to generate repeat customers. While perhaps true, this is not unique to the real estate industry and a similar argument was rejected in Mascari, a case involving a produce brokerage business where the court it well established that assiduous application of this principle was largely responsible for the brokerage's success over the years. Mascari, 724 P.2d at 602. Nevertheless, a person who has worked in a particular field cannot be compelled to erase from his mind all the general skills, knowledge and expertise acquired through his experience. Id. at 603. Noting a line of Illinois cases holding that customer information is not proprietary and its use not unlawful when the customers characteristically did business with more than one source so that the customer was known to the competition, Id. at 603, the court Mascari took an easier approach and simply held customer information is not subject to restrictions of indefinite duration, “especially in a field where customers are known and generally accessible to competitors.” Id.
In the real estate industry, customers (owners of property) are known and generally accessible to all competitors. Specifically relevant to Plaintiff's business, “the ownership of every apartment complex in Arizona is a matter of public record and there is nothing secret or proprietary about this information. (Defendants Motion for Summary Judgment (D MSJ) (Doc. 216) at 14 (citing SOF ¶ 24 (Doc. 217) at 5.) “Contact information, phone numbers and email addresses are available from subscription services.” Id. ¶ 25.
The Court applies Nodar, Ballard, and Mascari. If Defendant A Wadlund asked a co-worker, like Lisa Hartley, to call a potential customer, and if such a potential customer never even called back, the TCRA would purport to prohibit A. Wadlund from soliciting or even working in any manner with that potential customer. Like the courts did in these cases, this Court finds the restrictive covenants in the TCRA included overly broad language that reached persons where Plaintiff had no business ties to them in an industry where customers are generally known and accessible to competitors.
Arizona approaches the issue of restrictive covenants by asking a single controlling question: is the restriction reasonably limited in time and space so that it is not broader than the buyer's legitimately protectable interest. “Where limited as to time and space, the covenant is ordinarily valid unless it is to refrain from all business whatsoever.” Continental Promotion Group Inc. v. Garvin, CV 08-70-PHX-SRB 2008 WL 11338887 * 8, (Ariz. May 8, 2008) (citing Henderson v. Jacobs, 239 P.2d 1082 (Ariz. 1952)). In making this determination, courts following Arizona precedent must examine the totality of the circumstances surrounding the parties' sale of business agreement before determining whether the restrictive covenants are reasonable, including the intent of the parties. Id. (citing Gann, 596 P.2d at 44 ; Farber, 928 P.2d at 1282; Mascari, 724 P.2d at 600).
In Gann, the seller agreed not to enter into the silk screening or lettering shop business within Tucson and a 100-mile radius of Tucson for 10 years. The court held the restrictive covenant was reasonable, finding the restriction on the seller from competing in any manner whatsoever, was “clearly limited by the subject matter of the entire contract to the kind and character of the business sold.” Gann, 596 P.2d d. at 44. “The sale of such a business necessarily includes the sale of good will and the purchaser has the right to assure himself as best he can of the transfer of the good will.” Id. at 45.
On summary judgment, the Court construes the facts and inferences from these facts in the light most favorable to the non-moving party. Matsushita Elec. Co. v. Zenith Radio Corp., 475 U.S. 574, 577 (1986). In assessing Defendants' dispositive motion, the Court applies the more lenient standard even though the TCRA was not between partners and A. Wadlund was not the seller of H&P. For the purpose of this dispositive motion, the Court treats the TCRA as an agreement ancillary to the sale of H&P because the value of the business' goodwill, including its experienced sales representatives, would have figured significantly into the purchase price. Pursuant to the TCRA, A. Wadlund was offered due consideration to secure for the purpose of the H&P sale to Plaintiff, the business' goodwill flowing from his H&P employment as a sales representative. While A. Wadlund is not the former owner from which Plaintiff deserves some protection from competition, nevertheless, the Court finds there was significant business goodwill related to A. Wadlund's H&P employment as a sales representative. The totality of the circumstances, including actions taken by H&P leading up to the sale and the express provisions of the TCRA reflect an intent to transfer the business goodwill associated with A. Wadlund's employment at H&P to Plaintiff. In other words, it was necessary to retain A. Wadlund's employment after the sale for Plaintiff to get the full goodwill value for H&P for which it paid in 2013. With this purpose in mind the Court considers the TCRA restrictive covenants.
The TCRA restricts the scope of activity for “any activities that are otherwise competitive with the business of H&P” and goes further to restrict any activities otherwise competitive with the business of “any subsidiary of Berkadia Commercial Mortgage Holding LLC as conducted at any time on or before the Closing Date.”
Unlike the Court in Gann, this Court cannot find that the restricted activity is clearly limited by the subject matter of the entire contract to the kind and character of the business sold because the restrictive covenants in the TCRA reached post-purchase operations. While both H&P and Plaintiff operated nationally at the time of the H&P acquisition, H&P had only approximately 30 offices, (P Resp. D MSJ, SOF, Ex. 22: Hendricks Depo. (Doc. 233-2) at 305 and operated primarily in the western and midwestern portions of the United States, Id. at 308. The owner of H&P, Hendricks, attests that to grow H&P, he wanted someone dominate in the east and active in mortgage lending. Id. at 306. “[P]ulling in Berkshire Hathaway and Berkadia, that was a big thing.” He planned on H&P ending up in the mortgage banking business, and he did end up with “an 800-pound gorilla partner.” This was how he described the acquisition of H&P by Plaintiff. Id. at 312. The Court notes that the goodwill acquired from H&P was not equivalent to the goodwill that existed immediately after the 2013 acquisition or that exists today. Plaintiff cannot measure the scope for protecting the goodwill being acquired from A. Wadlund ancillary to the 2013 purchase by the scope of operations expanded to account for what it brought to the table.
At the time Plaintiff purchased H&P, there is no evidence that A. Wadlund was working in any of H&P's out-of-state offices. The Court is not persuaded by arguments that during his years of employment with Plaintiff, he has earned referral fees related to transactions outside of Arizona and provided services to clients outside of Arizona. A. Wadlund has at all times only been licensed in Arizona and has always worked in Tucson.
Likewise, the reasonable duration of the restrictive covenant must be related to a legitimate purpose. With respect to sales representatives, the “employer's protectable interest [is limited] to those customers to whom the employee represented the employer's goodwill,” Mascari, 724 P.2d at 604, making the relevant focus the customer base at the time of the acquisition. “When the restraint is for the purpose of protecting customer relationships, its duration is reasonable only if it is no longer than necessary for the employer to put a new man on the job and for the new employee to have a reasonable opportunity to demonstrate his effectiveness to the customers.'” Farber, 928 P.2d at 1284 (quoting Mascari, 724 P.2d at 604). It follows that a noncompetition covenant may not be wholly without temporal limitation and would accordingly be invalid. Mascari, 724 P.2d at 600 (citing Wright v. Palmer, 464 P.2d 363 (Ariz. 1970) (further citations omitted).
The TCRA's durational restrictions of 18 and 24 months do not start to run until the termination of A. Wadlund's employment. This leaves the temporal scope of the TCRA restrictive covenants dependent on the triggering event of A. Wadlund's termination of employment. So, while it is not wholly without temporal limitation, the limitation has no relationship to the ancillary purpose of the covenants which was to purchase H&P's goodwill at the time of the sale. This being the purpose, the duration of this covenant must be no longer than necessary for Plaintiff to demonstrate its effectiveness of operations postacquisition. The parties' interests in this regard are reflected in the three-year claw back and five-year earn-out provisions. These provisions reflect the period of time the parties believed was essential to retain A. Wadlund as its broker in Tucson for this purpose. See also, Compass Bank v. Hartley, 430 F.Supp.2d 975, 979-980 (Ariz. 2006) (compiling list of Arizona cases enforcing restrictive covenants in the financial-services industry with duration requirements for only one year, finding one-year post-employment nonsolicitation restrictive covenant ancillary to stock option agreement reasonable in financial-service industry for new portfolio manager to gain confidence of clients, rejecting excuse that company failed to turn over customers to new manager).
The restrictive covenants were legitimate in the context of protecting the intangible “good will” interest related to the H&P acquisition to restrict A. Wadlund from terminating his employment with Berkadia within three to five years. Thereafter, Plaintiff had received the benefit of its bargained for “good will.” The Plaintiff cannot bootstrap future goodwill developed by A. Wadlund over the next 10 years of employment to the good will acquired pursuant to the TCRA ancillary to the 2013 purchase of H&P.
The Court finds that the scope of activity, the geographic scope, and the duration of the TCRA restrictive covenants, singularly and in combination, are unreasonable. They are unenforceable in the context of the alleged violations in this case. The blue pencil rule cannot save them because the Court cannot edit out its overbreadth. The Court would have to rewrite the provisions, such as adding Tucson instead of “Arizona” or 12 months or some lesser duration of time instead of “18 months or 24 months.” This goes beyond blue-penciled edits, and the Court declines to do it. The Court finds the TCRA is facially unenforceable, and Defendants' Motion for Summary Judgment is granted on Count 1.
2. Independent Contractor Agreements (ICA) (Counts 2 and 4)
The Court notes that the TCRA did not proport to be an employment agreement and it expressly provided for A. Wadlund to continue as an independent contractor pursuant to the terms of his ICA with H&P, which was to remain in effect until he entered into a new independent contractor agreement with Plaintiff. (SAC, Ex. 1: TCRA § B (Doc. 91-3) at 2.) Approximately six months after the H&P acquisition, A. Wadlund signed an ICA with Plaintiff, effective June 14, 2013. Id., Ex. 2: ICA (Doc. 91-2) at 2.) Plaintiff did not include a restrictive noncompete covenant in the ICA that mirrored the TCRA. Defendant C. Wadlund signed his ICA with Plaintiff on September 3, 2013. Id., Ex. 4: ICA (Doc. 91-7) at 2.) The ICAs for both Defendants were essentially the same and defined the relationship for Defendants, serving as Plaintiff's Sales Associates, as independent contractors.
The ICAs provided that the Sales Associate had the ability, as a licensed real estate salesperson or broker, to choose from among a variety of brokerage firms that might be interested in contracting for his services, and he had the ability at any time to terminate his services with one firm and instead contract to provide services to a different firm. (SAC, Ex. 2: ICA Recitals (Doc. 91-4) at 2.) He had “sole discretion and judgment” over how to perform his work, including absolute autonomy over “manner and means” for accomplishing desired results of “listing, selling, or exchanging real estate” and Plaintiff had no control over the means by which he performed his work activities, including managing his leads. Id. § 2(B).
Within employer-employee relationships, it is a legitimate purpose to restrict “‘a skilled employee from leaving an employer and, based on his skill acquired from that employment, luring away the employer's clients or business while the employer is vulnerable-that is-before the employer has had a chance to replace the employee with someone qualified to do the job.'” See Farber, 982 P.2d at 1284 (quoting Bryceland, [] 772 P.2d at 40.”) See also supra. (explaining reasonableness standard as being no more restrictive than necessary to accomplish the legitimate purpose of the covenant). The ICAs included such restrictive covenants aimed at protecting Plaintiff's trade secrets, confidentiality interests, and conflicts of interest.
a. Section 7 Restrictive Covenants
The ICA, Section 7, included restrictive covenants of nondisclosure to anyone, except where compelled to perform their jobs, of trade secrets and other confidential information, defining “confidential or trade secrets” of Plaintiff or its “actual or prospective clients” as follows: “business plans and strategies, the Software, sales forecasts, client information, personnel information, marketing or business strategies, sales data, training programs, Company Data, finances or financial information” concerning Plaintiff, “its personnel, clients or prospective clients, and any other of [Plaintiff's] non-public and/or technical information, whether related to past, present or prospective projects, services, and/or clients or prospective clients.” (SAC, Ex. 2: ICA § 7 (Doc. 91-4) at 8) (emphasis added).
Section 7 defined “Company Data” as: “to the maximum extent permissible under applicable law, all information and data with respect to prospective and actual customers or clients,” including but not limited to material submitted “by fax, by mail or email, text, through the internet via [Plaintiff's] web-site, or through other websites, as well as all papers, files, memoranda, correspondence, and documents of any nature, including electronic documents (and including all copies . . . relating to any closed, pending, or prospective transactions or matter pertaining to [Plaintiff]...which may be in the possession, custody or control of [Defendants] and shall at all times be the personal property of [Plaintiff] and/or its actual or prospective clients or customers” and must be returned to Plaintiff upon termination of this Agreement. (SAC, Ex. 2: ICA § 7 (Doc. 914) at 7) (emphasis added).
Section 7 provided that “[a]ny use” by Defendants of any confidential information or trade secrets, including Software and/or proprietary, trade secret or confidential information belonging to the property owner or Plaintiff, without limitation “to the maximum extent permissible under applicable law,” shall be deemed “unfair competition.” Id. (emphasis added). The conflict-of-interest restrictive covenant in Section 7 defined a conflict of interest to include “when one party's own interests are not aligned, or not perceived to be aligned, with the interests of another party, such as between [Defendants] and Plaintiff, or between an actual or prospective client and [Defendants] or [Plaintiff].” Id.
The Section 7 restrictive covenants are overbroad by including prospective clients and customers, and applying to “past, present or prospective projects, services and/or clients or prospective clients,” “all material submitted at or to Plaintiff by any means” including “through other websites, as well as all papers, files, memoranda, [etc.,] of any nature” . . . “relating to any closed, pending, or prospective transactions or matters pertaining to Plaintiff.” However, this is the type of overbreadth that can be saved by the blue pencil rule so that the agreement is enforceable. Arguably, “the maximum extent of the law” creates an overbreadth issue until that breadth is determined by a court of law but at a minimum it creates a lack of clarity regarding the reach of the restrictive covenants.
What cannot be corrected by the blue pencil rule or judicial clarification is Section 7's durational lack of a limitation. It provides that “[a]ll the restrictive covenants in Section 7 and those “obligations shall survive the expiration or termination of this Agreement, i.e., that SALES ASSOCIATE shall fully honor and abide by all of the provisions of this Agreement at all times in the future.” Id. at 9 (emphasis added).
In Mascari, the court held an agreement to not use customer information boiled down to a noncompete covenant because it was wholly without temporal limitation and concluded that a noncompete covenant without temporal limitation to necessarily unreasonable and invalid. Mascari, 724 P.2d at 600-603 (explaining valid restrictive covenant must be of reasonable duration in time as needed to put a new man on the job; employer may not seek to eliminate competition per se, therefore, noncompete covenant cannot stand once there is no valid interest remaining to protect). Plaintiff's assertion that real estate is relationship-driven and Plaintiff depends on this relationship to drive repeat customers does not overwhelm the principles in Mascari that restrictive covenants cannot force “an alert salesperson . . . to undergo a prefrontal lobotomy.” Mascari, 724 P.2d at 603.
Restrictive covenants ancillary to employment agreements, like Section 7, will be strictly construed against the employer. Mascari, 724 P.2d at 600. Arizona disfavors overbroad restrictive covenants, and employers who draft such provisions risk them being found unreasonable and unenforceable in their entirety. The burden falls on the party seeking to enforce an employment restrictive covenant to demonstrate it is no greater than necessary to protect the employer's legitimate interest, and the employer's interest may not outweigh the hardship to the employee from restricting his gainful employment and the likely injury to the public from the lack of competition. Again, the reasonableness of the restrictive covenant is a question of law based on a totality of the circumstances. Farber, 982 P.2d at 1280-81.
These standards are important when the Court considers enforcing a restrictive covenant and/or applying the blue pencil rule to cure overbreadth because “[f]or every [restrictive covenant] that makes its way to court, many more do not,” which has “an in terrorem effect on departing employees,” and employers draft overbroad provisions hoping “that if the words are challenged, courts will modify the agreement to make it enforceable.” Varsity Gold v. Porzio, 45 P.3d 352, 355-56 (Ariz. App. 2002) (“By simply authorizing a court to rewrite unreasonable restrictions, an employer may relieve itself of crafting a reasonable restriction with the added benefit that departing employees may adhere to an onerous covenant ... [which is] precisely the result that the Farber court sought to avoid.”).
Guided by these principles, the Court strictly construes the restrictive covenants in Section 7 of the ICAs against the employer, Plaintiff, and finds them overly broad and unreasonable in duration. The Court agrees with Plaintiff that, alternatively, the ICA remains in full force for restrictions on Defendants during the time of Defendants' employment with Plaintiff. See (SAC, Ex. 2: ICA § 2(B) (Doc. 91-4) at 3) (providing noncompete provisions enforceable: “during the term of time in which this Agreement is effective”; “during the term of his [] affiliation with Company”).
b. ICA Violations During Defendants' Employment with Plaintiff
This leaves Plaintiff relying on Section 2, Authority and Obligations of Sales Associate, in the ICA. While Defendants could leave Plaintiff's employment at any time and go work for any competitor, “[d]uring the period of time in which [the] Agreement [was] effective, [they] agree[d] not to provide services of any form to any other firm or entity that is in any manner connected with the sale, listing, or marketing of real estate (including title or mortgage),” and “agree[d] not to compete with [Plaintiff] either individually or as part of a different firm in this regard.” (SAC, Ex. 2: ICA § 2(B) (Doc. 91-4) at 3.) Likewise, Defendants were restricted from soliciting Plaintiff's employees “during the term of the agreement and for a period of twelve (12) months thereafter (the ‘Time Limit').” Id., Ex. 2: ICA § 11 (Doc. 91-5) at 2.)
Plaintiff seeks partial summary judgment on the breach of contract claims because Defendants allegedly provided services to IPA and competed against Plaintiff during their employment with Plaintiff. Allegedly, Defendants solicited Plaintiff's employees, Lisa Hartley and Krista Ying, to leave Plaintiff's employment and join IPA. Additionally, Plaintiff argues that under the common law there is a duty of loyalty that all employees have to their employers to not compete with the employer during the course of employment and Defendants breached this duty.
The parties posit controverting arguments and supporting facts and evidence related to allegations that Defendants violated the ICA restrictive covenants during their employment with Plaintiff in the days and months before they left and commenced working for IPA, effective January 10, 2022. (P Resp. D MSJ (Doc. 239) at 19 (citing SOF ¶ 39 (Doc. 240 S) at 20)).
(i). Employee Nonsolicitation Restrictive Covenant.
Plaintiff asserts: “The undisputed evidence reveals that, before leaving Berkadia, Defendants asked the office staff, Lisa Hartley and Krista Ying, to go with them to IPA.” Id. at 7 (citing SOF ¶¶ 160, 165, 168-169 (Doc. 240) at 42-43). Their supporting evidence, however, includes depositions from A. Wadlund, Hartley, and Ying wherein they admit only that A. Wadlund told Hartley and Ying that he and C. Wadlund were leaving Plaintiff and going to work for IPA. Emails reflect that Defendant A. Wadlund provided Hartley and Ying's emails and salary information to IPA, and IPA understood that Hartley joining A. Wadlund was “non-negotiable.” Id. (citing SOF ¶¶ 165, 168.) Both Defendants, Hartley and Ying, left Plaintiff and started with IPA on the same day as Defendants started working for IPA. Id. (citing SOF ¶ 169.) Plaintiff argues that the reasonableness of the 12-month, post-termination, restriction against recruiting Plaintiff's employees in the ICAs is irrelevant because the evidence reflects Defendants violated the restrictive covenant during their employment.
In Reply, Defendants present deposition testimony from Hartley and Ying reflecting that “[n]either Arthur nor Clint Wadlund ever solicited Lisa Hartley or Krista Ying.” (Defendants' Response to Plaintiff's Motion for Partial Summary Judgment (D Resp. P MPSJ), SOF ¶ 41 (Doc. 244-1) at 8-9 (citing Ying Depo. at 24 (reflecting she asked A. Wadlund if she could follow him to IPA); Hartley Depo. at 246 (explaining there was no solicitation because it was a given that she would not stay at Berkadia if A. Wadlund left). “Neither Arthur nor Clint Wadlund requested Lisa Hartley or Krista Ying to leave Berkadia, or to join IPA.” (D Resp. D MSJ, SOF ¶ 42 (Doc. 244-1) at 9 (citing A. Wadlund Affid. ¶ 28 (Doc. 244-2); C. Wadlund Affid. ¶ 24 (Doc. 244-3)). Plaintiff presents no evidence that C. Wadlund talked to either Hartley or Ying about the move to IPA or had any related contacts with IPA. As noted by Defendants, “solicit” must mean something; there must be evidence to suggest something more than merely informing Hartley and Ying that Defendants were leaving, such as something more akin to its dictionary meaning of: to urge, entice, lure or “to try to obtain by unusually urgent requests or pleas.” (D Resp. P MPSJ (Doc. 244) at 6 (citing JPMorgan Sec. LLC v. Vallery, No. CV-23-00651-PHX-JAT, 2023 WL 3160988, at *4 (D. Ariz. Apr. 28, 2023)); see also Sec. Title Agency, Inc. v. Pope, 200 P.3d 977, 989-90 (Ct. App. 2008) (employee of title company breached fiduciary duty by improper solicitation of title company's employees).
Plaintiff asks the Court to disregard the Defendants' evidence because they failed to attach and/or reference the Hartley and Ying depositions in the record. (Plaintiff's Reply Supporting Motion for Partial Summary Judgment (P Reply MPSJ) (Doc. 253) at 2.) Plaintiff correctly points out that “[a] party cannot rely on documents that it has neither attached nor identified anywhere else in the record before the court.” Id. “‘In failing to attach the relevant documents or otherwise cite to that part of the record where the documents may be found, Defendants fail to comply with Rule 56(c)(1)(A).'” Id. (quoting Mason v. Ryan, CV 17-8098 PCT-DGC (MHB), 2019 WL 1014896, at *3 (Ariz. March 4, 2019)). While correct, the Plaintiff ignores that the Defendants provide quoted excerpts from the depositions they rely on directly in Statement of Fact ¶ 41 for both Ying and Hartley. The Plaintiff, unlike the Court, has copies of the Ying and Hartley depositions. The Defendants provided page citations for those depositions, pages 24 for Ying and 246 for Hartley. Under Fed.R.Civ.P. 32(a)(6), a party may use part of a deposition, and then an adverse party may require the offeror to introduce other parts that in fairness should be considered. Plaintiff has not done this or argued that the excerpted portions of the Hartley and Ying depositions unfairly misrepresent Ying and/or Hartley's attestations. The Court will not disregard the quoted depositions by Ying and Hartley which are generally in agreement with the more detailed transcripts of these depositions provided by Plaintiff, which as noted above are not definitive on the question of solicitation.
On summary judgment, the Court does not weigh the evidence or determine credibility. The judge's role on a motion for summary judgment is not to determine the truth of the matter but to determine whether there is a genuine issue for trial. Anderson, 477 U.S. at 252. The Court, therefore, rejects this evidentiary challenge and, likewise, rejects the Plaintiff's challenge to Defendants' presentation of allegedly self-serving affidavits as supporting evidence. This goes to the credibility of the attestations and weight of the evidence, not its admissibility.
The Court finds that there are genuine issues of material fact in dispute precluding summary judgment for Plaintiff on the breach of contract claims related to provisions in the ICA related to allegations that A. Wadlund solicited Plaintiff's employees during or within 12 months of his employment with Plaintiff. The Court could, but need not, bluepencil out the 12-month restriction because it is not an issue given the facts of the case. Here, the parties assert that A. Wadlund either did or did not solicit Plaintiff's employees Hartley and Ying to leave, and it is undisputed that Hartley and Ying did simultaneously leave Plaintiff's employment with the Defendants on January 10, 2013. Any solicitation, necessarily, occurred during his employment with Plaintiff.
Additionally, in response to Defendants' Motion for Summary Judgment on the tortious interference claims, Counts 5 through 8, Plaintiff supports Count 5 by alleging that A. Wadlund tortiously interfered with Plaintiff's contracts with C. Wadlund and alleges the reverse against C. Wadlund in Count 6.
The elements that Plaintiff needs to establish to prove tortious interference (Counts 5-8) are that Defendants intentionally and improperly interfered with Berkadia's contractual relationships and business expectancies that were known to Defendants at the time, thereby causing Plaintiff damages. Id. (citing Antwerp Diamond Exch. of Am., Inc. v. Better Bus. Bureau of Maricopa Cnty., Inc., 637 P.2d 733, 740 (Ariz. 1981)). Plaintiff argues that “the evidence raises at least four jury issues under these counts,” Id., as follows:
First, under Count 5, a jury could find that Arthur interfered with Berkadia's contracts with Clint. Arthur communicated to Clint the “idea of somehow teaming up with Hamid and IPA one way or the other.” (CSOF ¶ 39.) He instructed Clint to “jump on the IPA and CBRE thing” because he was “running out of gas.” (CSOF ¶ 39.) This prompted Clint to approach Hamid Panahi at IPA. (CSOF ¶ 39.) Thereafter, Clint invited Arthur to join discussions with IPA. (CSOF ¶ 39.) Arthur then negotiated his and Clint's agreements with IPA, and Arthur decided when Defendants were “ready to sign.” (CSOF ¶ 39.) Defendants also jointly entered into a Co-Investment Support Program Agreement & Promissory Note with IPA, under which they received a combined $3 million forgivable loan tor joining. (CSOF ¶ 39.) Arthur submitted a resignation letter to Berkadia on his and Clint's behalf, and they joined IPA at the same time as a team. (CSOF ¶ 39.)
Second, under Count 6, ajury could find that Clint interfered with Berkadia's contracts with Arthur. Clint approached Panahi at IPA, and then invited Arthur to join the conversations. (CSOF ¶ 40.) Clint sent financial information about Berkadia's Tucson office from his personal email to IPA without authorization, copying Arthur. (CSOF ¶ 40.) Clint helped persuade Arthur by telling him that it was “[t]ime for me to make you $$ for working less. You still add tremendous value. That is something IPA gets.” (CSOF ¶ 40.) Again, Defendants jointly entered into a contract with IPA, providing for a $3 million forgivable loan. (CSOF ¶ 40.) Defendants left Berkadia at the same time. (CSOF ¶ 40.)(P Resp. D MSJ (Doc. 239) at 20.) The Court notes that Plaintiff did not argue these facts to support its Motion for Partial Summary Judgment on Counts 1 through 4. The Court does not assume this to be an oversight because the above allegations do not rise to the level of solicitation.
More importantly, disposition of the tortious interference claims will rise or fall based on the common law duty of loyalty an employee has to not compete with his employer during a period of employment. For reasons explained later in this Order, the tortious interference claims fail, including Counts 5 and 6.
(ii). Noncompete Restrictive Covenants.
The question remains: whether any conduct by Defendants during the time of their employment with Plaintiff other than the alleged solicitation of Plaintiff's employees breached enforceable restrictive covenants in the ICAs?
Plaintiff relies on the second half of Section 2(B) of the ICAs, which memorialized that the primary value of entering into the ICAs was for Plaintiff to obtain the Defendants' “services exclusively” through the promise that “during the period of time in which this Agreement is effective,” Defendants agreed “not to provide services of any form to any other firm or entity that is in any manner connected with the sale, listing, or marketing of real estate (including title or mortgage).” (SAC, Ex. 2: ICA § 2(B) (Doc. 91-4) at 3.) In other words, the Defendants promised to not compete.
The Court is not persuaded by Plaintiff's arguments that Defendants breached the ICAs by undertaking activities with IPA before leaving Plaintiff's employment, such as preparing their biographies to be posted on IPA's website or negotiating ICAs and compensation agreements with IPA. (P MPSJ (Doc. 227) at 9.) “Although an employee may not compete prior to termination, ‘[the employee] may take action [during employment], not otherwise wrongful, to prepare for competition following termination of the agency relationship.'” Cf., Taser Inern. Inc. v. Ward, 231 P.3d 921, 926 (Ariz. 2010) (quoting 10 Restatement (Third) of Agency § 8.04) (finding, based on principles of agency where employee was at-will and without contract, employee may take actions during employment to prepare for competition following termination but ‘[p]reparation cannot take the form of “acts in direct competition with the employer's business.' McCallister Co. [v. Kastella], 825 P.2d [980,] [] 982-83 [(Ariz. App. 1992)].” The Court rejects the Plaintiff's allegations that “[i]n September 2021, while still at Berkadia, Defendants began secret negotiations with at least two other firms.” Id at 8; cf., Taser Int'l. Inc., 231 P.3d at 827 (explaining an employee (agent) who plans to compete with an employer (principal) has no duty to disclose this fact). Defendants' termination of Plaintiff's lease of office space, which Defendants owned, including lease negotiations and leasing the offices to IPA, was solidly outside the confines of their employment agreements with Plaintiff and could not and did not violate any provisions of the ICAs.
Substantively, the Court considers Plaintiff's charge that at the end of 2021 when Defendants knew they were leaving, they delayed client communications to “mid-January” or “early 2022,” (P Reply MSJ (Doc. 253) at 3-5 (citing D Resp. P MPSJ, SOF ¶¶ 89-92, 94, 96, 98-100, 106-111, 124 (Doc. 244-1)) (objecting to relevancy otherwise admitting)), and “slow played” listing properties until they joined IPA, Id. (citing ¶ 96 (same), ¶ 97 (same). Plaintiff presents evidence that property owners of Equinox on Prince asked Defendants for an engagement letter on January 5, 2022, which Defendants delayed sending until they joined IPA. Id. ¶ 38. Plaintiff alleges, generally, that multiple owners asked Defendants for BOVs which Defendants delayed sending until they were at IPA, id. and there is evidence that from January 6 through the 9th, Defendants sent Hamid Panahi, a broker at IPA, emails related to immediate work that needed to be done for Equinox on Prince, Monier, Peaks at Redington, Canyon Heights, Aspen Ridge and Cinnamon Tree, Elevate, and the Zone, that included BOVs, Proformas, T12 income statements, and rent rolls. (P MPSJ (Doc. 227) at 9 (citing SOF ¶¶ 103, 148-49 (Doc. 228) at 17-19.)
Plaintiff supports this assertion with evidence that Defendants sent multiple listing agreements to owners within the first two days at IPA, specifically, for Equinox on Prince, Peeks at Redington, Canyon Heights, Aspen Ridge and Cinnamon Tree. Id. ¶¶ 176, 178. By the end of January, they had obtained listing agreements for Equinox on Prince, Monier, Canyon Heights, Aspen Ridge, Cinnamon Tree, and the Zone. (P Resp. D MSJ, SOF ¶¶ 176-178 (citing Ex. 108 (Doc. 240-14) at 2.) Additionally, Plaintiff alleges that Defendant A. Wadlund listed “and/or ” sold properties at IPA that he knew about during his employment with Plaintiff, specifically these eight properties, plus Highlands I and II. Id. ¶ 182(a)-(h)).
Plaintiff also alleges that when A. Wadlund left, he disclosed a pipeline of only five properties but on January 12, 2022, two days after leaving Plaintiff, he reported approximately twenty properties on a list titled “Potential Properties.” This list included four of the properties identified by Plaintiff as listed by Defendants in January in violation of ICAs' restrictive covenant not to compete during their employment, which are: Equinox at Prince, Peaks at Reddington, Canyon Heights, Aspen Ridge, and Cinnamon Tree. The additional properties included: Prairie Hills, The Benedictine, Midtown on Seneca, Mountain/Drachman, Cherry Street Lofts, Zona Rio, the Vintage, Rezi-SFR, Rio Cancion, FW Group Portfolio, Coronado Villas, Transwest Portfolio-Oklahoma, Park Place, Hansen Portfolio, University Manor, and Cordova Village. (P MPSJ (Doc. 227) at 11-12.) The additional properties are distinguishable from the properties listed by Defendants in January because there is no evidence, which even by inference, connects them to any arguable customer inquiry made during Defendants' employment with Plaintiff after Defendants decided to leave and left on January 10, 2022. Discovery has been completed. Within its own data systems, including the returned cell telephones and laptops used by Defendants during their employment, Plaintiff had ample opportunity to discover some connection. Also, verifying actual listings and/or sales related to these 20 properties was easily discoverable. The Court is mindful that a person who has worked in a particular field cannot be compelled to erase from his mind all the general skills, knowledge and expertise acquired through his experience. Mascari, 724 P.2d at 603. Plaintiff fails to create even an inference that the 20 properties, except for four duplications from the properties that were listed in January, were connected to Plaintiff in some way beyond simply being in A. Wadlund's mind. The Court concludes that the properties on this list, other than the four duplicates, are exactly what A. Wadlund described them as being: “Potential Properties” for prospective customers.
Defendants rely on the first half of Section 2(B) which grants them absolute discretion to manage the delivery of services to Plaintiff, including managing leads. Defendants assert they simply exercised this discretion and judgment as to the manner and means for conducting lead activities related to these properties during the final weeks of employment with Plaintiff. Defendants submit: “These were not customers or clients of Berkadia, they were ‘leads' or ‘potential customers' developed by Arthur and Clint Wadlund.” (D Reply MSJ (Doc. 244) at 5 (relying on Traditions Health LLC v. Paulson, No. CV-23-01876-PHX-SMB, at *8 (D. Ariz. Sep. 27, 2023) (criticizing nonsolicitation provision for overreach because it included not only present customers but “potential customers” with whom the employee either “directly or indirectly” called on in the last two years of employment); see also, Ballard, No. CV-21-01844-PHX-SMB, 2022 WL 394735, at *3 (describing language as too broad because it encompassed potential customers and too vague because it applied to potential customers who were solicited by other employees, who worked independently or in combination with named employees).
Defendants are correct that the law is crystal clear that noncompete restrictive covenants cannot be applied to potential customers or applied indirectly, such as where there is no connection to the Defendants' activities during their employment with Plaintiff. The Court, however, rejects Defendants' depiction of these allegedly lead-related activities as representing potential/prospective customers, unless and until the property is actually listed for sale. While this may be true in the context of the real estate industry, the Court will not as a matter of law find that listing a property for sale is determinative for the limitation on restrictive covenants to actual customers rather than prospective customers. Receiving an inquiry related to listing a property, arguably, is a customer inquiry related to services provided by Plaintiff. Accordingly, the Court rejects the Defendants' argument that regardless of any violation, the claim fails because Plaintiff has not asked, and therefore fails to establish, that any one of these property owners would have actually listed the property with Plaintiff, if the lead had been accordingly routed there.
Likewise, the Court rejects the corresponding argument that the claim fails without such evidence because Plaintiff can make no showing of actual damages. According to Defendants, the properties, Equinox on Prince, Monier, Peaks at Redington, Canyon Heights, Aspen Ridge, Cinnamon Tree, Elevate, and the Zone, totaled $372,600,000 or at least $874,975.20 in commissions for Plaintiff. (P Resp. D MSJ (Doc. 239) at 2, 6 (citing P SOF ¶¶ 178, 182(a)-(h) (Doc. 240)). Plaintiff alleges damage in fact by asserting Defendants “slow played” responses to inquiries for services, i.e., customer inquires, received by Defendants during their employment with Plaintiff related to these properties.
On summary judgment the Court construes the evidence and any inferences derived from evidence in favor of the nonmoving party. Here, the parties file cross motions, therefore, the Court considers whether either side must prevail if the evidence and inferences are construed in favor of the other. Defendants provide the signed listing agreements that reflect listing dates as follows: Equinox on Prince (1/31/2022), Monier (1/14/2022), Canyon Heights (1/23/2022), Aspen Ridge and Cinnamon Tree (2/1/2022), and the Zone (1/25/2022). In March, Defendants listed the Peaks at Redington (3/24/2022) and Highlands I and II (3/10/2022). Elevate was listed June 12, 2022. (D Resp. P MPSJ, SOF ¶ 132 (Doc. 244-1) at 75-78.) The record does not reflect which properties were sold and when, but the Court assumes for purposes of the dispositive motions that these properties sold pursuant to the listings secured by Defendants in January. Together, with evidence that Defendants had communications related to several of these properties during the time they were employed by Plaintiff after they decided to leave and go to IPA, there is a material question of fact that precludes summary judgment. The values of the respective properties raise a jury question as to whether Plaintiff incurred damages caused by Defendants' alleged conduct; Plaintiff does not need to establish the amount of those damages before trial. See, e.g., Felder v. Physiotherapy Assocs., 215 Ariz. 154, 162 (App. 2007) (“Once the right to damages is established, uncertainty as to the amount of damages does not preclude recovery”). The Court denies the Defendants' Summary Judgment motion on Counts 2-4.
The Court does not, however, grant summary judgment for Plaintiff related to these specific properties because Defendants submit that “all these leads were generated by Arthur and Clint Wadlund, and not a single one of them was generated by Berkadia.” (D Reply MSJ (Doc. 244) at 6.) The ICAs place the full responsibility on Defendants to generate and manage leads at their discretion. The Defendants present evidence that they operated and paid their own business expenses. (D Resp. D MPSJ, SOF ¶¶ 37-40 (Doc. 244) (relying on A. Wadlund Affid. ¶ 27 (Doc. 244-2); C. Wadlund Affid. ¶ 23 (Doc. 2443)). They additionally attest that they in fact did not use Plaintiff's Technology Resources and/or Company Date, and instead, created all their own materials. (D Resp. P MPSJ (Doc. 224) at 4) (arguing they did not take confidential or trade secrets because they didn't use Plaintiff's BOVs or proformas). The ICAs provided for such discretion. See (SAC, Ex. 2: ICA § 3 (Doc. 91-4) at 4-5 (expressly limiting Plaintiff's obligations to make materials and training available to Defendants and leaving it solely to Defendants' judgment and discretion whether and to what degree to use such things). But see (SAC, Ex. 2: ICA § 7 (Doc. 91-4) at 8) (describing protected proprietary property to include Company Data defined as “material submitted at or to Company by fax, mail or email, text or through internet via Company's website); see also (SAC, Ex. 3: TPA ¶¶ 2, 4, 6 (Doc. 91-6) at 2 (describing Berkadia Technology Resources same)).
The burden is on Plaintiff to establish reasonableness which may be “‘no broader than necessary to protect the employer's legitimate business interest.'” Noder, 314 P.3d at 95 (quoting Hilb, Rogal & Hamilton Co., 946 P.2d at 467). “Plaintiff does have a legitimate interest in restraining a former employee ‘from appropriating valuable trade information and customer relationships' acquired during employment.” Id. (quoting Bryceland v. Northey, 772 P.2d 36, 39 (Ariz. App.1989) (quoting Restatement (Second) of Contracts § 188, comment b (1981)). Plaintiff may “‘not eliminate competition per se, and a restrictive covenant that goes beyond protecting a legitimate business interest and prevents a former employee from using skills and talents learned on a former job is unenforceable.'” Id. at 39-40. Plaintiff may proceed to trial on Counts 2 through 4 against Defendants for allegedly breaching, during their employment with Plaintiff, the ICA restrictive noncompete covenants for these properties: Equinox on Prince, Monier, Peaks at Redington, Canyon Heights, Aspen Ridge, Cinnamon Tree, Elevate, the Zone, and Highlands I and II.
Except for the claims alleging these violations of the ICAs during Defendants' employment for breaches of employee nonsolicitation and noncompete restrictive covenants, Plaintiff must look to the TPA to state breach of contract claims related to misappropriation alleged in Counts 9 and 10.
3. The Technology Policy Agreements (TPA) (Count 3)
Both Defendants signed identical TPAs setting out the “rules, restrictions and policies” applying with equal force to on-premises and off-premises use of technology resources owned, leased or licensed by Berkadia.” (SAC, Ex. 3: TPA ¶ 1(Doc. 91-6) at 2.) Technology Resources included hardware and software like computers, fax machines, keyboards, laptops, cell phones, etc., and software packages, including data entered in such software, email, voicemail, instant messages, documentation, and access to third-party vendor technology resources. Id. ¶¶ 2-3. Defendants confirmed they understood that Plaintiff provided e-mail, instant messaging, and that all messages were considered Plaintiff's property whether sent or received. Id. ¶ 6. All data and information accessed through Plaintiff's Technology Resources was “deemed” confidential, Id. ¶7, defined as, including but not limited to: “all technology, programs, know-how processes, trade secrets, proprietary information, all historical and projected financial information, operational and organizational data or data systems, organizational and cost structures, names of borrowers, names of employees, computer software, data base technologies, business methods.” Id. ¶ 8. Defendants agreed that Plaintiff's Technology Resources were to be used “solely for Berkadia purposes,” Id. ¶ 1, and that “copying, distributing and/or downloading” any of Plaintiff's Technology Resources to be “both illegal and strictly forbidden,” unless done for Plaintiff's business purposes, Id. ¶ 4, and that upon termination of employment, Defendants would “surrender any and all items and/or copies of Berkadia Technology Resources” to Plaintiff, Id. ¶ 11. Breaching the TPA was grounds for immediate termination of employment/contract agreement, for cause and could result in other sanctions including criminal and civil liability. Id. ¶¶ 12, 15.
For purposes of discussing the TPA, the Court considers the law applicable to misappropriation of trade secrets under the Arizona Uniform Trade Secrets Act (AUTSA), which is strikingly similar to the federal Defend Trade Secrets Act (DTSA). Misappropriation is analyzed similarly under both. ReBath LLC v. HD Sols. LLC, No. CV-19-04873-PHX-JJT, 2020 WL 7000071 (D. Ariz. Sept. 18, 2020). The AUTSA preempts all civil remedies that are based on misappropriation of a trade secret but does not preempt a claim based on the misappropriation of confidential information that does not rise to the level of a trade secret. Noder, 314 P.3d at 99. Plaintiff's trade secret claims are made in Counts 9 and 10, respectively. (P Resp. D MSJ (Doc. 239) at 14-18.)
Under both the DTSA and AUTSA, it is unlawful to misappropriate trade secrets. 28 U.S.C. § 1832, A.R.S. § 44-401. To state a colorable claim for misappropriation, Plaintiff must allege that (1) it owns a trade secret, (2) that was misappropriated by Defendants, and (3) this caused damages. Gordon Grado M.D., Inc. v. Phoenix Cancer & Blood Disorder Treatment Inst. PLLC, 603 F.Supp.3d 799, 809 (Ariz. 2022); 18 U.S.C. § 1839(5).
First, Plaintiff must establish that a legally protectable trade secret exists. Calisi v. Unified Fin. Servs., LLC, 302 P.3d 628, 631 (Ariz. App. 2013).
The DTSA defines “trade secret” as: “all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if ... the owner thereof has taken reasonable measures to keep such information secret; and ... the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information . . ..” 18 U.S.C. § 1839(3).
The AUTSA defines “trade secret” as: “[information, including a formula, pattern, compilation, program, device, method, technique or process, that both: (a) Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (b) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” A.R.S. § 44-401(4).
Once Plaintiff establishes a trade secret exists, it must show Defendants misappropriated the secret, i.e., improper acquisition, with knowledge it's a trade secret, and use, including disclosure, of the trade secret. 18 U.S.C. § 1839(5), A.R.S. § 44-401(2)(a), (b)(i)-(iii). In other words, the simple admitted act of copying allegedly protected documents may violate the TPA, but “possession of some confidential information does not equal disclosure of the same.” Traditions Health, No. CV-23-01876-PHX-SMB, 2023 WL 6318015 at * 5. Only the use or disclosure of such protected information can cause Plaintiff an injury, with a failure to return protected property, arguably, posing only a potential for future injury to Plaintiff. See Franz v. Johnson, 999 P.2d 351, 359 (Nev. 2000) (finding causation in misappropriation of trade secret case is question of fact which may be inferred from the circumstantial evidence presented at trial), cf., Smethers v. Campion, 210 Ariz. 167, 108 P.3d 946, 949 (Ariz. App.2005) (finding action for breach of fiduciary duty requires proof of: duty owed, breach of that duty, and damages causally related to such breach.).
Arizona rejects the “inevitable disclosure” rule. Meritage Homes Corp. v. Hancock, 522 F.Supp.2d 1203, 1220 (Ariz. 2007).
To survive summary judgment, Plaintiff must present evidence that could support a finding that Defendants used the allegedly confidential and trade secret material they allegedly took when they left Plaintiff. The Court backends the analysis by the relevant time period as set out in the TPA, which required Defendants to return and discontinue use of Plaintiff's proprietary, confidential and trade secret materials and information, upon termination of employment. This frames the relevant period for the inquiry to beginning when Defendants decided to leave Plaintiff, through the time they left on January 10, 2022, and on the record currently before the Court appears to end within a month or so.
By early February, 2022, the Plaintiff had collected all its property, including the Defendants' laptops, computers and cell phones, and Defendants had returned or sequestered all Plaintiff's allegedly protected documents and files, including the BOVs allegedly taken by A. Wadlund and the approximately 300 emails taken by C. Wadlund,but not the backup hard drive which has been lost. See (Notice of Compliance, Ex. 1: A. Wadlund Affid. ¶ 3 (Doc. 206) at 3, Ex. 2: C. Wadlund Affid. ¶ 3 (Doc. 206) at 8) (Defendants attesting that neither of them ever had possession of the backup hard drive).
See (D Reply MSJ, Ex. B: A Wadlund 1/31/2022 letter (Doc. 245-2) at 12, Ex. D: Plaintiff 2/2/2022 letter (Doc. 245-2) at 19-21(reflecting A. Wadlund asked to return to employment with Plaintiff and offered to sequester records that Plaintiff accused him of taking, including emails and transactional history records he was obligated by law to keep). He deactivated his real estate license from approximately January 17, 2022 through April 6, 2022. (D Resp. P MPSJ, SOF, Ex. A. Wadlund Affid. ¶ 86 (Doc. 244-2) at 10.)
With respect to the allegedly confidential and trade secret information sent by C. Wadlund to himself at IPA, he retained an expert to identify all the allegedly protected materials including the approximately 300 emails, and they were sequestered as of January 27, 2022; he no longer had access to any of Plaintiff's files or records. (Order, FOF ¶ 39 (Doc. 31) at 10 (citing D Resp. to TRO, Ex. C: Chase Depo. (forensic expert) ¶¶ 6-11, 14-16 (Doc. 16-3)).
See (Order (Doc. 201) at 2-3; Notice of Compliance, Ex. 3: Hartley Affid. ¶ 4 (Doc. 206) at 13) (after conducting detailed investigation into the loss of the backup hard drive created and maintained for A. Wadlund by his Transactional Manager, Lisa Hartley, concluding she possessed it when Defendants ended their employment with Plaintiff, and thereafter she gave it to someone at IPA with the understanding it needed to be quarantined).
“IPA completed a remediation similar to Clint Wadlund's remediation and, as of January 17, 2022, no licensee associated with IPA ha[d] attempted, or been able, to access any email or other electronically stored information belonging to or previously uploaded by Arthur Wadlund, and emails and electronically stored information related to Clint Wadlund and Lisa Ringo (Hartley) ha[d] been isolated and preserved with access limited to authorized personnel within Marcus & Millichap's Legal and Information Systems Departments.” (Order, FOF ¶ 40 (Doc. 31) at 10 (citing D Resp. to TRO, Ex. D: Millichap Depo. ¶¶ 3-5 (Doc. 16-4) at 2-5.)
Accordingly, it is undisputed that once leaving Plaintiff's employment, the Defendants no longer had access to Plaintiff's computer systems and data. See (D Reply MSJ (Doc. 245) at 9-11 (arguing Plaintiff's claim of injury is mere speculation). The Plaintiff's proffered evidence of use reflects listings primarily in January 2022 and at the latest in March.
In an action for misappropriation, the Plaintiff “must identify the trade secrets and carry the burden of showing that they exist.” MAI Sys. Corp. v. Peak Computer, Inc., 991 F.2d 511, 522 (9th Cir. 1993); Calisi, 302 P.3d at 631. It is well established that “[a]lthough matters of general knowledge cannot be appropriated as secret, a trade secret may consist of a combination of elements even though each individual component may be a matter of common knowledge.” Enter. Leasing Co. of Phoenix v. Ehmke, 3 P.3d 1064, 1069 (Ariz. App. 1999). Accordingly, Plaintiff “should describe the subject matter of the trade secret with sufficient particularity to separate it from matters of general knowledge in the trade or of special knowledge of those persons ... skilled in the trade.” Imax Corp. v. Cinema Techs., Inc., 152 F.3d 1161, 1164-65 (9th Cir. 1998). Courts and juries require such precision and will not have the expertise to define a claim that the party leaves abstract. InteliClear, LLC v. ETC Glob. Holdings, Inc., 978 F.3d 653, 658 (9th Cir. 2020).
Courts have found that naming or listing specific documents provides sufficient particularity to identify a trade secret. See Arthur J. Gallagher & Co. v. Tarantino, 498 F.Supp.3d 1155, 1172 (Calif. 2020) (identifying “nine specific documents” containing trade secrets, leaving “little doubt” that “Defendants have been put on adequate notice”).
Plaintiff alleges Defendants breached the TPAs because they copied, distributed, and/or downloaded protected property, failed to return Berkadia Technology Resources to Plaintiff when they terminated their employment and used protected, confidential and trade secret, information for other purposes than Plaintiff's business. Plaintiff considers confidential information as including: sales forecasts, client information, personnel information, marketing or business strategies, sales data, and finances or financial information. (P MPSJ (Doc. 227) at 8 (relying on IAC § 7)). As examples, Plaintiff submits that A. Wadlund forwarded BOVs he allegedly created during his employment with Plaintiff “from his Berkadia email address to his IPA and Marcus & Millichap email addresses,” and alleges C. Wadlund “sent over 300 emails from his Berkadia account to his IPA account the evening and morning before resigning that contained BOVs, Proformas, T12 Income Statements, Rent Rolls, and other financial information for properties on which Defendants worked while at Berkadia.” Id. at 10. Lisa Hartley, A. Wadlund's Transaction Manager, took the backup external hard drive to IPA “with over 20 years of documents and information collected while at Berkadia, including BOVs, proformas with custom, imbedded valuation formulas, and other confidential information for every property on which Art had worked.” (P MPSJ (Doc. 227) at 8.)
BOVs reflect a broker's estimated valuation of a commercial property based on market research and client-specific rent and operational information. Rent Rolls include historical rent data and T12 income statements identifying the income from a commercial property. Letters of Intent summarize property sales offers, including those that do not reach closing and are not made publicly available, and are used to analyze the viability of a deal as compared against a client's specific tolerances and specifications. Proformas reflect financial projections to assess a property's earning potential and operating costs post-sale, including consideration of property taxes, future expenses, and income. (Order, FOF ¶¶ 33-37 (Doc. 31) at 9-10.)
Defendants do not dispute they copied the alleged materials, and the Court assumes that the copied materials are the types of materials that may be trade secrets. These allegations, generally, are not presented with sufficient particularity for the Court to discern which, if any, of the approximately 300 emails allegedly copied were in fact trade secrets or if any of the allegedly copied BOVs or proformas were trade secrets, or whether any such trade secret was used by the Defendants for purposes not related to Plaintiff's business or disclosed to IPA.
Plaintiff, however, further submits that from January 6 through the 9th, Defendants sent Hamid Panahi, a broker at IPA, confidential information that included BOVs, Proformas, T12 income statements, and rent rolls for: Equinox on Prince, (P MPSJ (Doc. 227) at 9 (citing SOF ¶ 103 (Doc. 228) at 17-19 (relying on Ex. 54, 1/6/2022 Email)); Monier, Id. (relying on Ex. 55, 1/7/2022 Group text messages, Ex. 56, 1/9/2022 Email); Peaks at Redington, Id. (relying on Ex. 57, 1/9/22 Email re: BOV, Ex. 58, 1/9/22 Email re: Rent Roll, Ex. 59, 1/9/22 Email re: T12 Income Statement, Ex. 60, 1/10/2022 email re: Peaks at Redington); Canyon Heights, Id. (relying on Ex. 61, 1/9/2022 Email re: BOV); Aspen Ridge & Cinnamon Tree, Id. (relying on Ex. 62, 1/5/2022 Email re: Proformas; Ex. 63, 1/6/22 Email Re: Financials; 1/6/2022 email re: marketing flyer for various properties, including Aspen Ridge and Cinnamon Tree; Ex. 64, 1/10/2022 Email re: Cinnamon Tree Valuation), Elevate, Id. (relying on Ex. 65, 1/10/2022 Email; Ex. 66, 1/10/22 Email Re: BOV), and the Zone, Id. (relying on email sending financial information for various properties). Plaintiff also produced evidence that in October 2021, Defendant C. Wadlund sent allegedly confidential financial information regarding Plaintiff's Tucson Office to IPA. (P MPSJ (Doc. 227) at 8 (citing SOF ¶ 76 (Doc. 228) (referencing Ex. 24: 10/26/21 email (reflecting Defendants sales transactions from 2017 through 2019 and brokerage fees paid from 2018 through 2021)). This is enough to state the trade secret claim with particularity supporting the claim that Defendants used these materials and information that they admittedly copied and took when they ended their employment with Plaintiff.
Defendants respond that the documents and files they copied before leaving and took when they moved to IPA were not confidential or trade secrets and/or instead belonged to Defendants or third-party property owners. (D Resp. P MPSJ (Doc. 224) at 45) (asserting they prepared BOVs, proformas, etc. of their own and did not use Plaintiff's Excel spreadsheet formulas), see also (SAC, Ex. 2: ICA § 3 (Doc. 91-4) at 4-5 (expressly limiting Plaintiff's obligations to make materials and training available to Defendants, and leaving it solely to Defendants' judgment and discretion whether and to what degree to use them).
Even when a trade secret claim provides sufficient particularity to identify the trade secret, the existence of a trade secret is a "question of fact." Lear Siegler, Inc. v. Ark-Ell Springs, Inc., 569 F.2d 286, 289 (5th Cir. 1978) A trade secret “is one of the most elusive and difficult concepts in the law to define, with the question of whether an item taken from an employer constitutes a "trade secret," being the type “normally resolved by a fact finder after full presentation of evidence from each side.” Id.
The Court finds the Plaintiff's trade secret claims in Counts 9 and 10 must take this normal course for resolution. Material questions of fact remain as to whether the allegedly protected material used by Defendants were kept secret, had independent economic value from not being generally known or readily ascertainable by proper means by other persons who can obtain economic value from its disclosure or use. Counts 9 and 10 remain for trial for the trade secret claims alleged with particularity as referenced above.
D. Duty of Loyalty (Count 14)
Under Noder, Count 14, breach of the duty of loyalty, is preempted for claims based on allegations that Defendants took and used Plaintiff's trade secret and confidential information obtained during their employment. Preemption does not, however, preclude the claim that Defendants breached their duty of loyalty by competing with Plaintiff during their relationship, and usurping Plaintiff's business opportunities. See Noder, 314 P.3d at 99 (finding plain language of AUTSA does not preempt a claim based on the misuse of confidential information that does not rise to the level of a trade secret claim).
“In Arizona, an employee/agent owes his or her employer/principal a fiduciary duty. Restatement (Second) of Agency § 2 (1958); see also Valley National Bank v. Milmoe, [], 248 P.2d 740 (1952); Mallamo v. Hartman, [], 219 P.2d 1039 (1950); Starkweather v. Conner, [], 38 P.2d 311 (1934).” McCallister Co., 825 P.2d at 982-83. Whether a fiduciary relationship exists is generally a question of fact unless the evidence would be insufficient to support a verdict as a matter of law. Cook v. Orkin Exterminating Co. Inc., 258 P.3d 149, 151-152 (Ariz. App. 2011) (citing Standard Chartered PLC v. Price Waterhouse, 945 P.2d 317, 335 (Ariz. App.1996)).
A fiduciary relationship is akin to “‘something approximating business agency, professional relationship, or family tie impelling or inducing the trusting party to relax the care and vigilance he would ordinarily exercise.'” Id. at 152 (quoting Taeger v. Catholic Family and Cmty. Servs., 995 P.2d 721, 726 (Ariz. App.1999) (quoting In re McDonnell's Estate, 179 P.2d 238, 241 (Ariz. 1947)). The relation of the parties must be such that “one is bound to act for the benefit of the other,” Taeger, 995 P.2d at 726, and may be characterized by relationships involving “great intimacy, disclosure of secrets, [or] intrusting (sic) of power, i.e., confidentiality” Rhoads v. Harvey Publ'ns, Inc., 700 P.2d 840, 847 (Ariz. App.1984)). “Generally, commercial transactions do not create a fiduciary relationship unless one party agrees to serve in a fiduciary capacity.” Urias, 118 P.3d at 29, see also Cook, 258 P.3d at 152. The party asserting an agency relationship has the burden to prove it. Urias, 118 P.3d at 36 (citing Salt River Valley Water Users' Ass'n v. Giglio, 549 P.2d 162, 167 (Ariz. 1976); Brown v. Ariz. Dep't of Real Estate, 890 P.2d 615, 621 (Ariz. App.1995)).
A confidential relationship exists when one party is bound to act for the benefit of the other and can take no advantage to himself from his acts relating to the interest of the other. Taeger, 995 P.2d at 726 (citing In re McDonnell's Estate, 179 P.2d 238, 241 (Ariz. 1947) (quoting 37 C.J.S. Fraud, § 2(2), pp. 213-14). Mostly, the phrases “fiduciary relationship” and “confidential relationship” are used synonymously. Taeger, 995 P.2d at 726. The category is not well-defined with the exception of a few specially designated relationships that have been given the distinction under the law, such as trustee and cestui, executor or administrator and creditors, next of kin or legatees, guardian and ward, principal and agent, attorney and client, and corporate director and corporation. There are other relationships, however, with equal degrees of intimacy, disclosure of secrets, entrusting of power, and superiority of position by the representative. Id. When not exactly defined as a relationship of trust or executorship, if it is so similar in its creation and operation that it should have like results, then it is said to be a fiduciary relationship. Id. In Tager, the court explained that the relationship between adoptive parents and the adoption agency was a fiduciary relationship based on confidentiality in large part because the adoptive parents were entirely dependent on the adoption agency to provide all necessary information regarding health and welfare for the adopted child, including medical history. Adoptive parents had no ability to access to this information and were entirely dependent on the agency to provide it. Id.
Deference or reliance on another's expertise does not transform an arm's length relationship into one of confidence, unless the knowledge is of a kind beyond the fair and reasonable reach of the alleged beneficiary and inaccessible through the exercise of reasonable diligence. Id., Standard Chartered, 945 P.2d at 336.
To support its claim of agency, Plaintiff submits that a jury could find Defendants acted as Plaintiff's agents and assumed a duty of loyalty because “Defendants worked for Plaintiff in a specialized industry for years, performed this work exclusively for Plaintiff under the terms of the ICAs, and concomitantly were obligated to “avoid competing with, sharing the confidential information of, or creating conflicts of interest with Berkadia.” (P Resp. D MSJ (Doc. 239) at 22) (citing SOF ¶¶ 111-114 (Doc. 240)). It is “standard practice” for brokers to work for only one firm at a time. Id. ¶ 117. Plaintiff paid for and provided Defendants with office space and all office supplies and support staff. Id. (citing SOF ¶ 2 (Doc. 240)). “Consequently, Defendants maintained a unique relationship with Berkadia that looked substantially different than typical independent contractors without loyalty obligations.” Id.
The industry practice of exclusivity that Plaintiff relies on is mandated by law. See (P Resp. D MSJ, SOF ¶ 117, Ex. 59, Sarbinoff Depo. at 72-75 (Doc. 240-9) at 46-47 (explaining Arizona law requires a real estate salesperson to hang his license with a broker of record and there can only be one broker of record at any given time). There is no showing or argument that the purpose of this statutory mandated exclusivity is to the create a fiduciary relationship; the Court has not found any support to conclude that the relationship between broker and real estate salesperson is a fiduciary relationship as a matter of law. While Plaintiff asserts Defendants maintained a unique relationship with Berkadia, the factors that allegedly made it dissimilar from the typical independent contractor relationship are not factors suggesting confidentiality such as the fiduciary relationships recognized by law (e.g., attorney/client or corporate director/corporation). Tager does not apply because nothing about the relationship between Plaintiff and Defendants reflects that Plaintiff was entirely dependent on Defendants, except by choice. Plaintiff is one of the largest real estate brokerages in the country and entirely capable of transacting business in Tucson, Arizona. There is no assertion otherwise. Plaintiff did nothing more than defer and rely on Defendants' expertise, which does not transform an arm's length relationship into one of confidence.
The ICAs do not support the Plaintiff's position that the parties intended Defendants to act as Plaintiff's agents. The ICAs created an arms-length relationship by expressly stating the parties intended to “establish an Independent Contractor relationship rather than an employer-employee relationship in forming the association” agreed to in the ICA. (SAC, Ex. 2: ICA, Recitals (Doc. 91-4) at 2.) The ICAs spelled out the relationship between the parties as “broker/independent contractor, rather than a hiring of employment,” and expressly stated: “Sales Associate shall not otherwise be an agent, servant, employee, or partner of Company.” Id. Nothing could be clearer, and neither party disputes the language in the ICAs. Both sides rely on the ICAs, and simply argue different positions regarding the enforceability of the restrictive covenants, with Plaintiff relying on them as binding agreements. The unique factors relied on by Plaintiff to support the assertion of agency do not create any ambiguity in the contract language.
This case is similar to First Charter Fin. Corp. v. Pandey Hotel Corp., where the court granted summary judgment even though questions of fact involving employeeemployer relationships are best left to the fact-finder because it found there were no material fact disputes as to what was contained in two agreements. First Charter Fin. Corp., No. CV-15-02361-PHX-DJH, 2018 WL 8264641, at *8-9 (Ariz. May 22, 2018) (citing Salvation Army v. Bryson, 211 (Ariz. App. 2012) (“Generally, whether an agency relationship exists is a question of fact, although we may determine the existence of such a relationship as a matter of law when the material facts are not in dispute.”) In First Charter, the court decided the case based on the parties' two agreements. Pandy, the principal, alleged that First Charter, the lender, acted as its agent but First Charter asserted its role was something akin to an independent contractor. The agreements were silent regarding the intended relationship except for specifying that First Charter was engaged as a mortgage broker and financial consultant, and provided that either party could cancel the agreements at any time with 30 days written notice. The agreements laid out a commission like payment structure with First Charter's compensation based solely on the amount of the financing received from First Charter. The court recognized that Pandey had a degree of control over First Charter but noted that First Charter consented to that control as part of the agreements. Id. at 7 (referencing Brown v. Ariz. Dep't of Real Estate, 890 P.2d 615, 621 (Ariz. App. 1995)).
Agency may be proven by an express contract between the parties to create such a relationship or by facts implying a contract. Brown, 890 P.2d 615, 621 (Ariz. App. 1995) (citing Corral v. Fidelity Bankers Life Ins. Co., 630 P.2d 1055, 1058 (Ariz. App.1981)). Also, “[w]hen a principal has intentionally or inadvertently induced a third person to believe an agency exists, an apparent or ostensible agency is created.” Id. (citing Reed v. Gershweir, 772 P.2d 26, 28 (Ariz. App.1989).
This is not the latter case, where the language of the contract is not determinative because contract terms between principal and agent are not binding on a third party. “[I]f one is injured by the servant of another, it is immaterial to the injured third party what the terms of agreement are between employer and employee because the liability flows from the fact that the employer exercises control over the actions of the person in his employment. In claims such as those invoking vicarious liability, the fundamental criterion is the extent of control the principal exercises or may exercise over the agent that determines whether an employer-employee relationship exists.
According to Plaintiff: “Contract language purporting to deny an agency relationship, however, is not determinative.” (P Resp. D MSJ (Doc. 239) at 21 (citing e.g., Santiago v. Phoenix Newspapers, Inc., 794 P.2d 138, 141 (Ariz. 1990)). “Agency is generally a question of intent.” Id. (citing Urias v. PCS Health Sys., Inc., 118 P.3d 29, 36 (Ariz. App. 2005)). Plaintiff refers the Court to eight factors, which are used to determine whether an actor is an agent: 1) the extent of control exercised by the master over details of the work and the degree of supervision; 2) distinct nature of the worker's business; 3) specialization or skilled occupation; 4) provider materials and place of work; 5) duration of employment; 6) method of payment, 7) relationship of work done to the regular business of the employer, and the 8) belief of the parties. Santiago v. Phoenix Newspapers, Inc. 749 P.2d 138, 141-142 (Ariz. 1990). (P Resp. D MSJ (Doc. 239) at 21-22.) When considering these factors, contract language is not determinative, and “[w]hether an individual is an employee or an independent contractor is fundamentally a question of control.” Santorii v. MartinezRusso, LLC., 381 P.3d 248, 254 (Ariz. 2016) (citing Santiago and Thoorp v. F.E. Young & Co., 382 P.2d 560 (Ariz. 1963) (wrongful death case)).
In Santorii, the court looked to the terms of an independent contractor agreement between a real estate broker and his salesperson in a wrongful death case brought by a wife alleging the real estate agent, who caused an automobile collision that led to her husband's death, was an employee of the real estate company. The court found that the exclusive nature of the relationship did not overcome the complete discretion held by the salesman over his work activities, time, energy, effort and skill, to perform as he saw fit. Optional office space, administrative services, sales leads, and training were not required. The court concluded that the degree of control retained by the broker was only related to real estate transactions which were not at issue in Santorii. It was undisputed that the broker did not control any aspect of the salesman's driving activities. It did not tell him which houses to visit or routes to take. In short, the principal was not in control and had not authorized the real estate agent's manner of driving. The court affirmed granting summary judgment for the real estate company because the real estate agent was an independent contractor. If the Court relied on Santiaglo and Santorii it would find that Plaintiff did not control the Defendants' activities related to listing or selling properties.
Plaintiff relies on Wiggs v. City of Phoenix, 10 P.3d 625, 628 (Ariz. 2000), holding that an independent contractor and an agency relationship are not mutually exclusive concepts. Plaintiff distinguishes between master/servant relationships, where it is always true that an independent contractor is not a servant, and an independent contractor relationship, where under certain circumstances the independent contractor may be an agent. “An agent who is not a servant is, therefore, an independent contractor when he contracts to act on account of the principal.” Id. (quoting Restatement (Second) of Agency § 2 cmt. b (1958)). Where there is a non-delegable duty, the principal is “‘held liable for the negligence of his agent, whether his agent was an employee, or an independent contractor.'” Id. (quoting Maloney v. Rath, 445 P.2d 513, 515 (Calif. 1968)). “APS contracted to act on the City's behalf to maintain the streetlights, APS was therefore the City's agent for the performance of that non-delegable duty.” Id. The court found error where the trial court refused to give a jury instruction to hold the City vicariously liable if its contractor, APS, acted negligently and plaintiff's child was hit and crossing the street at dusk. Wiggs is of minimal, if any, value to the Plaintiff because it looks at the question of agency from the perspective of liability to a third-party, which is not the relevant question here where the parties established their relationship by contract.
In spite of relying on the above case law, the Plaintiff understands that “[a]gency is generally a question of intent.” (P Resp. D MSJ (Doc. 239) at 21-22.) (citing Urias, 118 P.3d at 36 (finding agency is generally a question of intent in a contract case and looking to the agreements to determine whether principal had the right to control the purported agent's conduct for the transaction at issue in the case). This case is like First Charter, which was decided based on the terms of the contract. The interpretation of a contract is a matter of law and not a question of fact. Hadley v. Southwest Properties, Inc., 570 P.2d 190 (Ariz. 1977). The Court finds the logic and reasoning in First Charter solid and follows its approach here.
The Court looks to the four corners of a contract to determine the intent of the contracting parties. If the contract's language is clear and unambiguous on its face, the intent of the parties is most readily ascertained from simply reading the contract. Cent. Arizona Water Conservation Dist. v. United States, 32 F.Supp.2d 1117, 1127-28 (Ariz. 1998); Spurlock v. Santa Fe Pac. R. Co., 694 P.2d 299, 309 (Ariz. App. 1984). Summary judgment may be granted where a question turns solely on interpretation of contract provisions, if once interpretation issues are resolved there are no genuine issues of material fact to be decided. See e.g., D.Q.S.A. LLC v. American Dairy Queen Corp., 680 F.Supp. 3rd 1113, 1119 (Ariz. 2023).
The Court looks to the ICAs, which provided: “In conducting all aspects of Sales Associate's [Defendants'] work activities, [they] shall retain sole discretion and judgment as to the manner and means of accomplishing the desired result of listing, selling, or exchanging real estate as well as promoting and selling related real estate services hereunder. Beyond assuring that the [Plaintiff's] operations are in conformity with the law, [Plaintiff] will not control the means by which [Defendants conduct their] activities, including but not limited to . . . hours, dress, leads, sales meetings, training, vacation time off, or other activities.” (SAC, Ex. 2: ICA Recitals § 2(B) (Doc. 91-4) at 3.) The ICAs expressly stated the status of the relationship was an independent contractor and Defendants were responsible for all their own business expenses, including required continuing education and maintaining their license in good standing and memberships in industry-related organizations and multiple listing associations. Id. §§ 2(H), 5(A). Defendants were responsible for securing liability insurance, § 5(B), and agreed to have no authority to bind Plaintiff by any acts, omissions, statements, promises, or representations, unless specifically authorized to do so in writing, Id. § 5(C). The Plaintiff agreed to make available certain services, such as Plaintiff's listings, centralized client data bases, market information, and operational policies and orientation programs, including technology tools, web services and business processes. Id. § 3(A)-(C). In each instance, use of these services and opportunities was left to the sole discretion of the Defendants. Id. The Plaintiff provided office space and office supplies. Id. § 3(C) and(D). Compensation was limited to a commission basis, and Defendants expressly disavowed any right to receive other remuneration based on hours worked. Id. § 1(C).
It is clear from the four corners of the ICAs that the parties intended to create a relationship of independent contractor and intended to NOT create an employer-employee agency relationship. “[I]f the reciprocal obligations arise out of the same contract and the parties have expressly characterized their legal relationship, such characterization will be persuasive on the issue of the parties' capacities.” Urias, 118 P.3d at 35. See Taylor v. State Farm Mut. Auto. Ins. Co., 854 P.2d 1134, 1138 (1993) (indicating court should attempt to enforce a contract according to the parties' intent). Rather than creating a fiduciary agency relationship, the ICAs created a contractual arrangement whereby Defendants agreed to perform services and Plaintiff agreed to pay for those services. Urias, 118 P.3d at 35.
The ICAs reflect purely commercial transactions that do not give rise to a fiduciary relationship because Defendants did not agree to serve in a fiduciary capacity Id. (citing In re Koreag, 961 F.2d 341, 353 (2nd Cir.1992) (“Purely commercial transactions do not give rise to a fiduciary relationship”), Morgan v. Am. Fid. Fire Ins. Co., 210 F.2d 53, 54-56 (8th Cir.1954) (commercial contract creates a fiduciary relationship only when one party agrees to serve in a fiduciary capacity). If Plaintiff had intended to create a fiduciary relationship, it could have done so-instead the ICAs do not contain such language and instead contain language designed to avoid creating an agency/fiduciary relationship.
Normally, the issue of whether a fiduciary duty of loyalty has been breached is a question of fact to be determined by the trier of fact, McCallister Co., 825 P.2d at 984, but Plaintiff carries the burden to prove this claim and, therefore, is obliged to rebut Defendants' Motion for Summary Judgment with more than a “scintilla of evidence.” Evidence that is “merely colorable” or “not significantly probative,” is not sufficient to present a genuine issue of material fact for the trier of fact to resolve. Anderson, 477 U.S. at 254); Nelson v. Pima Community College, 83 F.3d 1075, 1081-82 (9th Cir.1975) (finding scintilla of evidence not enough to create a genuine issue of material fact to preclude summary judgment; mere allegation and speculation do not create a factual dispute). Plaintiff does not present even a scintilla of evidence suggesting any ambiguity in the ICA contracts relevant to the question of the parties' relationship.
The Court, without weighing the evidence and without making any credibility determinations, concludes as a matter of law that Count 14, Breach of Duty of Loyalty, fails. The Court grants summary judgment for Defendants on all the tortious interference claims which are based on the common law agency theory of liability, Counts 5 through 8.
E. Defendants' Motion for Summary Judgment (Count 11, Civil Conspiracy; Count 12, Conversion; Count 13, Unjust Enrichment, and Count 15, Injunctive Relief)
In Arizona, “there is no such thing as a civil action for conspiracy; the action is one for damages arising out of acts committed pursuant to the conspiracy....” Perry v. Apache Junction Elementary Sch. Dist. No. 43 Bd. of Trs., 514 P.2d 514, 517 (Ariz. App. 1973), and “liability for civil conspiracy requires that two or more individuals agree and thereupon accomplish ‘an underlying tort which the alleged conspirators agreed to commit,” Wells Fargo Bank v. Ariz. Laborers, Teamsters & Cement Masons Local No. 395 Pension Trust Fund, 38 P.3d 12, 36 (2002) (en banc) (quoting Baker v. Stewart Title & Trust of Phx., 542, 5 P.3d 249, 259 (Ariz. App. 2000)). Because the only claims remaining going forward are based in contract, the civil conspiracy claim, Count 11, fails as a matter of law.
“An action for conversion ordinarily lies only for personal property that is tangible, or to intangible property that is merged in, or identified with, some document.” Barton & Assocs. v. Trainor, 507 F.Supp.3d 1163, 1170 (Ariz. 2020), Miller v. Hehlen, 104 P.3d 193 (Ariz. App. 2005) (explaining no conversion claim for customer list unless it is in the form of a single, unified document that had value as tangible property.”) Plaintiff cannot save this claim based on allegations that Defendants “took literally everything from Plaintiff's Tucson office, including the space itself and at least one portable hard drive of documents. The office space was owned by Defendants, and Defendants' lease arrangement to Plaintiff was not the subject of any of the contracts at issue in this case. Plaintiff does not dispute that their tangible property, like computers, lap-tops and cell phones were returned. Plaintiff submits its conversion claims, Count 12, are secondary to its trade secret claims, (P Resp. D MSJ (Doc. 239) at 17 n. 7) (citing Miller), but do not identify the trade secret material it considers to be tangible or intangible but merged in an identifiable tangible document having value.
When "there is a specific contract which governs the relationship of the parties, the doctrine of unjust enrichment has no application." Brooks v. Valley Nat'l Bank, 548 P.2d 1166, 1171 (Ariz. 1976). Because the Court has dismissed the tortious interference claims and only the breach of contract claims remain, Defendants are correct that Count 13 fails as a matter of law.
Defendants are wrong that Plaintiff's claim for injunctive relief (Count 15) fails as a matter of law because the request for preliminary injunction was denied. According to well-established principles of equity, however, a plaintiff seeking a permanent injunction must satisfy a four-factor test before a court may grant such relief. A plaintiff must demonstrate: (1) that it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction. Weinberger v. Romero-Barcelo, 456 U.S. 305, 311-313 (1982); Amoco Production Co. v. Gambell, 480 U.S. 531, 542 (1987). The decision to grant or deny permanent injunctive relief is an act of equitable discretion by the district court. Romero-Barcelo, 456 U.S. at 320. Based on the record now before the Court, it appears that damages will provide full relief to the Plaintiff, therefore, Count 15 fails as a matter of law.
Because these counts fail as a matter of law, the Court grants summary judgment for Defendants on Counts 11-13 and 15.
F. Defendants' Counterclaim (Nonpayment of Commissions)
Defendants move for summary judgment for an award of $665,640 in unpaid commissions due from Plaintiff as follows: 1) Las Terrazas Apartment Complex, closed on January 12, 2022 ($23,000); 2) Alterra Apartment Complex, closed on March 4, 2022 ($297,000); 3) The U at Park Apartment Complex, closed on March 22, 2022 ($127,200), and 4) San Xavier Apartments, closed on April 26, 2022 ($218,400) Defendants allege the commissions on these properties have been paid in full to Plaintiff, and the above 60% commissions are due and owing Defendants in the amount of $665,640.00.
Defendants allege Plaintiff has violated the ICA provisions requiring posttermination commissions to be paid to Defendants, therefore, the Defendants are entitled to treble damages, for a total award of $1,996,920.00, for non-payment of the commission under A.R.S. § 44-1798, and/or under Arizona's wage statute, A.R.S. § 23-355(A). Defendants also seek pre-and post-judgment interest for liquidated damages at Arizona's 10% annual rate. A.R.S. § 44-1201(A). See John C. Lincoln Hosp. v Maricopa County, 96 P.3d 530, 542 (Ariz. App. 2004) (explaining prejudgment interest for hospital because claims were liquidated; “A claim is liquidated if the plaintiff provides a basis for precisely calculating the amounts owed.”)
The Court finds that Defendants may not proceed under A.R.S. § 44-1798, Arizona's sales representative contracts statute because the article, expressly, does not apply to: “A person who holds a real estate salesperson's license . . . and who has a claim for payment of a real estate commission or compensation against the real estate broker with whom such real estate salesperson is affiliated.” A.R.S. § 44-1798.05(3).
Defendants seek treble damages under Arizona's wage statute, which provides: “ . . ., if an employer, in violation of this chapter, fails to pay wages due any employee, the employee may recover in a civil action against an employer or former employer an amount that is treble the amount of the unpaid wages.” A.R.S. 23-355(B). The parties argue in reverse their positions for summary judgment on the theory of agency relevant to the tortious interference claims based on the duty of loyalty. Now, Defendants argue they are employees, and Plaintiff argues they are not employees. For purposes of coverage under Arizona's wage statute, the following definitions are provided in A.R.S. § 23-350 as follow:
2. “Employee” means any person who performs services for an employer under a contract of employment either made in this state or to be performed wholly or partly within this state.
3. “Employer” means any individual, partnership, association, joint stock company, trust or corporation, the administrator or executor of the estate of a deceased individual or the receiver, trustee or successor of any of such persons employing any person. Employer also includes this state and any county, municipality, school district or other political subdivision of this state.
7. “Wages” means nondiscretionary compensation due an employee in return for labor or services rendered by an employee for which the employee has a reasonable expectation to be paid whether determined by a time, task, piece, commission or other method of calculation.
The wage statute is part of Article 23, Chapter 2, Employment Practices and Working Conditions (§§ 23-201 to 23-495.01), which includes § 23-216, Independent contractors; applicability, which specifies: “For the purposes of this article, independent contractor status applies to an individual who performs services and is not an employee pursuant to 3508 of the internal revenue code.”
Plaintiff is correct: “Contract language purporting to deny an agency, i.e., employee, relationship, however, is not determinative,” (P Resp. D MSJ (Doc. 239) at 21) (citing e.g., Santiago, 794 P.2d at 141, and “[a]gency is generally a question of intent, Id. (citing Urias, 118 P.3d at 36. Again, the Court looks to the four corners of the ICA as evidence of the parties' intent related to the question of what type of employment relationship they created. As this Court determined when it considered the issue of agency, above, these parties intended to not create an employee-employer (agency) relationship. The evidence reflects that Defendants intended to, and the parties agreed to, create an independent contractor employment relationship. Under the ICAs, Defendants' engagement was “as a qualified real estate agent under Section 3508 of the Internal Revenue Code.” (SAC, ICA § 1(B)). The Court finds that Defendants are not employees as defined under A.R.S. § 23-350, A.R.S. § 23-216, and may not seek treble damages under A.R.S. § 23-355(B).
Plaintiff also challenges the Defendants' asserted liquidated amount they claim as damages for the counterclaim. According to Plaintiff, Defendants are entitled to only partial (75%) commissions for Alterra and U at Park because certain contingencies were not satisfied when Defendants left, and the listing was not signed for San Xavier so Defendants receive zero percent of that commission. (P Resp. D MSJ (Doc. 239) at 25.)
The Court does not grant summary judgment for Defendants on the counterclaim because material issues of fact remain regarding liability by Defendants on the breach of contract claims and the amount of damages owed as between the parties, if any. The Court does not address the Plaintiff's argument that a breach by Defendants precludes them as a matter of law from recovering these commissions.
CONCLUSION
Based on the law and findings explained in this Order, the case goes forward to trial on Counts 2-4 and 9 and 10. The Court denies the Plaintiff's Motion for Partial Summary Judgment. The Court grants in part Defendants' Motion for Summary Judgment for Counts 1, 5-8, and 11-15. The Court denies summary judgment for Counts 2-4, 9 and 10. The Court denies summary judgment on the Counterclaim.
The Court intends for this Order to be filed in the public record rather than being sealed. The Court is aware that the parties, pursuant to a stipulated protective order have filed various briefs and exhibits redacted and under seal. On the other hand, there has been disclosure of some of the same materials in prior orders without objection. See e.g. (Order (Doc. 31) at 3 (referencing various amounts of payments made under the TCRA)). The Court has compared the redacted contracts with the unredacted (sealed) copies and can't of its own accord recognize clear distinctions that require many of the redactions that have been made in the documents. For example, the ICA was filed with all provisions redacted except for Section 7, without any clear distinction for why Section 7 is not, but Section 2 is, protected from disclosure. This is important because this Order includes discussions related to redacted sections of the ICA. “In this circuit, we start with a strong presumption in favor of access to court records.” Foltz v. State Farm Mut. Auto. Ins. Co., 331 F.3d 1122, 1135 (9th Cir.2003)). Before this Court will seal court records, the parties must overcome this presumption by showing compelling reasons for denying public access to judicial records. Id. The Court must find such reasons have been established and “articulate the factual basis for [the] ruling, without relying on hypothesis or conjecture.” Id. The Court believes that this Order should be filed in the public record, without being sealed and without redaction. It has, however, filed it under seal temporarily to afford the parties an opportunity to explain why this Order should be sealed in its entirety and/or redacted. The Court does not intend for any sealed documents cited to or relied on in this Order to be unsealed.
Accordingly,
IT IS ORDERED that the Plaintiff's Motion for Partial Summary Judgment (Doc. 226/227) is DENIED.
IT IS FURTHER ORDERED that the Defendants' Motion for Summary Judgment (Doc. 216) is GRANTED IN PART AND DENIED IN PART, as follows: GRANTING summary judgment on all Counts, except DENYING summary judgment for Counts 2-4 and 9-10. The Court DENIES summary judgment on the Counterclaim.
IT IS FURTHER ORDERED that within 30 days of the filing date of this Order, the parties shall file the Joint Pretrial Order.
IT IS FURTHER ORDERED that the Clerk of the Court shall file this Order UNDER SEAL, temporarily, in the event the Court lifts the seal.
IT IS FURTHER ORDERED that within 21 days of the filing date of this Order, the parties may move to continue the directive that this Order be sealed, identifying what information in the Order should be redacted and explaining why the redaction is necessary. Subsequently, the Court will issue a redacted order, accordingly, or issue a directive to unseal this Order.