Opinion
1 CA-CV 23-0327
03-05-2024
BROWN & BROWN INSURANCE OF ARIZONA, INC., Plaintiff/Appellee, v. MARK NEW, et al., Defendants/Appellants.
Law Offices of James E. Vieh, PLLC, Scottsdale By James E. Vieh Counsel for Defendants/Appellants Squire Patton Boggs (US) LLP, Phoenix By Brian A. Cabianca, David S. Norris, Kaitlyn Hertzog Counsel for Plaintiff/Appellee
Not for Publication - Rule 111(c), Rules of the Arizona Supreme Court
Appeal from the Superior Court in Maricopa County No. CV2019-014651 The Honorable Sara J. Agne, Judge.
Law Offices of James E. Vieh, PLLC, Scottsdale
By James E. Vieh
Counsel for Defendants/Appellants
Squire Patton Boggs (US) LLP, Phoenix
By Brian A. Cabianca, David S. Norris, Kaitlyn Hertzog
Counsel for Plaintiff/Appellee
Judge Maria Elena Cruz delivered the decision of the Court, in which Presiding Judge Paul J. McMurdie and Judge Cynthia J. Bailey joined.
MEMORANDUM DECISION
CRUZ, JUDGE.
¶1 Mark New, Lorna New, Zachary Hope, and Jenna Hope ("Appellants") seek relief from the superior court's ruling that they violated non-solicitation provisions of their employment agreements by soliciting their employer's, Brown &Brown's, clients. Appellants also challenge the superior court's award of damages and attorneys' fees. For the following reasons, we affirm.
FACTUAL AND PROCEDURAL HISTORY
¶2 In 2016, Brown &Brown hired Zachary Hope as the sales manager for Brown &Brown's Employee Benefits Division. Hope was responsible for managing Brown &Brown's insurance brokers in the Employee Benefits Division, retaining existing clients, and bringing in new and prospective clients. In 2017, Brown &Brown hired Mark New as an insurance broker for the Employee Benefits Division. New was responsible for bringing new and prospective clients to Brown &Brown and retaining existing clients through account renewals.
¶3 In 2018, while employed by Brown &Brown, Appellants created a competing brokerage company, Dorado Benefit Advisors, LLC ("Dorado"). In September 2019, Brown &Brown discovered Appellants' competing company and terminated their employment. Appellants then began soliciting Brown &Brown's clients. In July 2020, Brown &Brown moved for a preliminary injunction, which the superior court granted, enjoining Appellants from continuing to solicit Brown &Brown's clients.
¶4 During discovery, Brown &Brown moved for an independent forensic examination of Appellants' electronic devices. The superior court granted the motion after finding Appellants failed to produce documents as required. After the superior court ordered Appellants to turn over their devices, they ran a computer software program to remove information from them. The anti-forensic software wiped over 200,000 files from their computers and 400 iMessage chats from their phones. The superior court held a hearing on the matter and entered an adverse inference against Appellants instructing the fact finder that the "Court has found the [Appellants] intentionally destroyed electronic information in this case and the jury is instructed to infer that the information that was destroyed was harmful to [Appellants]."
¶5 In October 2022, the superior court held a five-day bench trial and ruled in Brown &Brown's favor on every issue. Relevant to this appeal, the superior court found Appellants solicited and diverted clients from Brown &Brown to Dorado and that the non-solicitation provisions in Appellants' employment agreements with Brown &Brown were enforceable. The superior court awarded Brown &Brown $521,000 in compensatory damages, $260,500 in punitive damages, $260,500 in exemplary damages, $491,510 in attorneys' fees, and $12,479.49 in costs.
¶6 Appellants timely appealed. We have jurisdiction pursuant to Arizona Revised Statutes ("A.R.S.") section 12-2101(A)(1).
DISCUSSION
¶7 On appeal from a bench trial, we review the superior court's legal conclusions de novo and defer to its findings of fact unless clearly erroneous. Town of Marana v. Pima Cnty., 230 Ariz. 142, 152, ¶ 46 (App. 2012). "A finding of fact is not clearly erroneous if substantial evidence supports it, even if substantial conflicting evidence exists." Kocher v. Dep't of Revenue of Ariz., 206 Ariz. 480, 482, ¶ 9 (App. 2003).
¶8 "A trial court has broad discretion in ruling on disclosure and discovery matters, and this court will not disturb that ruling absent an abuse of discretion." Marquez v. Ortega, 231 Ariz. 437, 441, ¶ 14 (App. 2013). Likewise, an award of damages is reviewed for an abuse of discretion. Fernandez v. United Acceptance Corp., 125 Ariz. 459, 464 (App. 1980); Ahmed v. Collins, 23 Ariz.App. 54, 58 (1975). The determination of the successful party for purposes of attorneys' fees is a matter for the superior court's "sole discretion," and we will not overturn that decision "if any reasonable basis exists for it." Sanborn v. Brooker &Wake Prop. Mgmt., Inc., 178 Ariz. 425, 430 (App. 1994).
I. Employment Contracts
a) Adhesion Contracts
¶9 Appellants argue that their employment contracts were unenforceable because they are adhesion contracts. "An adhesion contract is typically a standardized form offered to consumers of goods and services on. . . a 'take it or leave it' basis without affording . . . a realistic opportunity to bargain and under such conditions that the consumer cannot obtain the desired product or services except by acquiescing in the form contract." Broemmer v. Abortion Servs. of Phoenix, Ltd., 173 Ariz. 148, 150 (1992) (citation and internal quotation marks omitted). Whether a contract is one of adhesion is not itself determinative of its enforceability. Id. at 151. An adhesion contract is fully enforceable unless it is unconscionable or violates reasonable expectations. See Bennett v. Appaloosa Horse Club, 201 Ariz. 372, 374-75, ¶ 8 (App. 2001).
¶10 Appellants presented no evidence at trial showing the employment agreements were unconscionable or violated reasonable expectations. New testified that non-solicitation agreements are standard in the industry, and he had signed a similar provision for his former employer. The superior court did not err by finding the employment agreements were enforceable.
¶11 Appellants also argue that for an adhesion contract to be enforceable, "provisions which lessen the protection sought as a primary purpose of the transaction" must be called to the party's attention. But this standard only applies to provisions outside a party's reasonable expectation. See Philadelphia Indem. Ins. Co. v. Barerra, 200 Ariz. 9, 18, ¶ 24 (2001). Here, the employment contracts were standard within the industry and Appellants' reasonable expectations. Additionally, Brown &Brown did call attention to the two-year non-solicitation agreement at the time of Appellants' hiring by discussing the provision with Appellants. Accordingly, the employment agreements are enforceable.
b) Non-Solicitation Agreements
¶12 In Arizona, the validity of a restrictive covenant is determined by its reasonableness. Valley Med. Specialists v. Farber, 194 Ariz. 363, 369, ¶ 20 (1999). "A restrictive covenant is reasonable and enforceable when it protects some legitimate interest of the employer beyond the mere interest in protecting itself from competition ...." Bed Mart, Inc. v. Kelley, 202 Ariz. 370, 372, ¶ 12 (App. 2002). A covenant not to compete precludes former employees from working in the same business as the employers for certain periods and are disfavored. Bryceland v. Northey, 160 Ariz. 213, 216 (App. 1989). But an agreement restricting a "terminated employee from soliciting customers of his former employer or making use of confidential information from his previous employer" is "ordinarily . . . not deemed unreasonable or oppressive." Hilb, Rogal &Hamilton Co. of Ariz. v. McKinney, 190 Ariz. 213, 216 (App. 1997).
¶13 Appellants argue that the employment agreements they signed are unenforceable because they are "non-compete" agreements. But Appellants signed non-solicitation agreements. Appellants agreed, for a two-year period after termination of their employment, not to solicit or divert any Brown &Brown customer or prospective customer they worked with or obtained confidential information about. The agreement Appellants signed did not preclude them from working in the same business as Brown &Brown. Non-solicitation agreements are ordinarily reasonable. See Hilb, 190 Ariz. at 216. The superior court did not err in finding the non-solicitation provision is enforceable.
¶14 Appellants argue the employment agreements are unenforceable because the non-solicitation agreements exclude any geographical limitation. A non-solicitation agreement is not considered unreasonable or oppressive because it contains no geographical restriction. Alpha Tax Servs., Inc. v. Stuart, 158 Ariz. 169, 171 (App. 1988). Appellants' argument relies on the assertion that the agreements were non-compete agreements instead of non-solicitation agreements. As the superior court noted, "[Appellants] were free to start competing the day after Brown &Brown fired them and they could have done so next door to Brown &Brown if they chose." The superior court did not err in finding the nonsolicitation agreement enforceable even though it contains no geographic restriction.
c) Two-Step Provision
¶15 "Arizona courts will 'blue pencil' restrictive covenants, eliminating grammatically severable, unreasonable provisions." Valley Med. Specialists, 194 Ariz. at 372, ¶ 30. Step-down provisions may be "a permissible application of Arizona's blue-pencil rule, if they permit a Court to cross-out some unreasonable sections in favor of more reasonable ones without rewriting them." Compass Bank v. Hartley, 430 F.Supp.2d 973, 981 (D. Ariz. 2006).
¶16 Appellants argue the employment agreements are unenforceable because they contain a step-down provision. The employment agreements state:
For a period of two (2) years following the Termination Date, or, if an arbitrator or court of competent jurisdiction determines that two years is overbroad and therefore unenforceable, then for a period of eighteen (18) months, or, if an arbitrator or court of competent jurisdiction determines that 18 months is overbroad and therefore unenforceable, then for a period of thirteen (13) months (the "Restricted Period")
¶17 At trial, Jones, the President of Brown &Brown of Arizona, testified that the two-year length of Brown &Brown's non-solicitation agreement is standard in the industry. Jones also testified it takes at least two years to establish a relationship with a client. No evidence was submitted showing that the step-down provision was unreasonable. And New previously had a two-year non-solicitation agreement with his former employer. Based on the evidence, the two-year non-solicitation provision was reasonable. Regardless, Appellants agreed the lesser period of 13 months is a reasonable length of time for a non-solicitation provision, and Appellants solicited every customer at issue in this dispute within the first 13 months of their termination from employment. The superior court did not err by finding the step-down provision did not make the employment agreement unenforceable.
II. Independent Forensic Examination
¶18 Appellants argue Brown &Brown violated the superior court's independent forensic examination order of Appellants' laptops when an undisclosed expert performed part of the examination. Appellants state they agreed Mr. Day of TERIS would perform the forensic examination but instead Mr. Kunkel performed the examination.
¶19 The superior court appointed TERIS "as the independent computer forensics expert to perform the analysis and report." TERIS regularly worked with Mr. Kunkel and chose to involve him. Brown &Brown played no role in the decision to involve Mr. Kunkel. For those reasons, the superior court found Mr. Kunkel's involvement consistent with the court order appointing TERIS as the independent computer forensics expert. The superior court has broad discretion to rule on discovery matters, and we "will not disturb that ruling absent an abuse of discretion." Marquez, 231 Ariz at 441, ¶ 14. The superior court did not abuse its discretion when it determined Mr. Kunkel's involvement did not violate the court's order. III. Solicitation
¶20 Appellants argue they did not solicit business from Brown & Brown because Brown &Brown clients contacted them and communicated that they wanted to take their business to Dorado. Appellants offered the testimony of seven witnesses from six former or prospective Brown &Brown clients who testified Appellants did not solicit them, but rather these clients approached Appellants.
¶21 The mere fact that a client initiated contact with a broker first does not preclude a finding of solicitation. See E*Trade Fin. Corp. v. Eaton, 305 F.Supp.3d 1029, 1034-35 (D. Ariz. 2018). Solicitation occurs whenever the "real purpose" in interacting with a former employer's clients is to "maximize the possibility" of those clients coming to the employee's competing company. Id.
¶22 Phone records show that New initiated contact with three of the testifying former or prospective Brown &Brown clients after being terminated. New contacted at least two of these clients within minutes of being terminated, and one signed a letter appointing Dorado as its broker of record the same day. Further, Appellants created a spreadsheet labeled "prospect pipeline," listing clients whom they met through their work with Brown &Brown and the potential of having that client come to Dorado. Appellants also sent emails to former or prospective Brown &Brown clients which included derogatory language about Brown &Brown and indicated Appellants wanted to be the clients' broker. The record reflects that Appellants acted in such a way as to maximize the possibility of those clients leaving Brown &Brown to come to Dorado. See E*Trade, 305 F.Supp.3d at 1034-35. The superior court's finding that Appellants solicited business from Brown &Brown was not clearly erroneous. See Kocher, 206 Ariz. at 482, ¶ 9.
IV. Testimony
¶23 "An objection to proffered testimony must be made either prior to or at the time it is given, and failure to do so constitutes a waiver." Estate of Reinen v. N. Ariz. Orthopedics, Ltd., 198 Ariz. 283, 286, ¶ 9 (2000). "[A]n objection to the admission of evidence on one ground will not preserve issues relating to the admission of that evidence on other grounds." State v. Hamilton, 177 Ariz. 403, 408 (App. 1993).
¶24 At trial, Jones testified about Brown &Brown's damages. Appellants argue Jones lacked the background required by Arizona Rule of Evidence ("Rule") 702 to testify as an expert.
¶25 Before the trial, Appellants filed a motion in limine to preclude Jones' testimony under the sham affidavit rule. Appellants objected to Jones' testimony at trial, citing the sham affidavit rule, and the superior court overruled the objection. But neither of these objections included a reference to Rule 702. At the trial, counsel for Appellants stated, "We will have serious foundation objections when [Jones] is asked to offer expert testimony." The superior court responded that no expert-type questions had been asked yet of Jones and those objections should be heard if and when such questions were asked. Appellants did not object to Jones' testimony citing Rule 702 until they filed their proposed findings of fact and conclusions of law after trial. Because Appellants did not timely object to Jones' testimony under Rule 702, they have waived their argument. See Hamilton, 177 Ariz. at 408.
V. Damages
a) Compensatory Damages
¶26 Appellants argue the superior court's award of compensatory damages is unsupported by evidence because Jones testified at a deposition that he could not quantify any damages.
¶27 At trial, Jones testified that he could not quantify damages during the deposition or the preliminary injunction hearing because "[t]here was so much data that we needed to gather forensically, because Mark and Zach were not giving up the information that Judge Viola asked for." Jones additionally testified that at the time of the deposition and preliminary injunction hearing Brown &Brown was still gathering information and did not know "what [Appellants] diverted to Dorado . . . who they've solicited, and at what time the accounts are going to stay or leave." By the time of trial, Brown &Brown could forensically examine Dorado's files and quantify damages. The superior court did not abuse its discretion when awarding compensatory damages.
¶28 Appellants also argue the compensatory damages were unduly speculative because Brown &Brown offered one witness who relied on one document to show damages.
¶29 "Past and future lost wages are an appropriate measure of damages under Arizona law." Felder v. Physiotherapy Assocs., 215 Ariz. 154, 162, ¶ 38 (App. 2007) (citations and internal quotation marks omitted). A plaintiff's evidence must provide some basis for estimating loss. Id. "[C]onjecture or speculation cannot provide the basis for an award of damages," and "[t]he evidence required will depend on the individual circumstances of each case." Id. (citations and internal quotation marks omitted).
¶30 When Appellants diverted accounts to Dorado, Brown & Brown was harmed because it never received the commission it would have if Appellants had not solicited the accounts from Brown &Brown. The superior court relied on the testimony of Jones and a document Appellants prepared that listed the annual revenue they expected to receive for each client they diverted or solicited. The superior court found Appellants' annual revenue on the accounts they solicited from Brown &Brown was comparable to Brown &Brown's latest annual revenue figures on those accounts. Because the compensatory damages awarded are not unduly speculative, we find no abuse of discretion.
b) Punitive Damages
¶31 Punitive damages are allowed in Arizona if the defendant "acts with the requisite evil mind" because he "deliberately interferes with the rights of others, consciously disregarding the unjustifiable substantial risk of significant harm to them." Security Title Agency, Inc. v. Pope, 219 Ariz. 480, 498, ¶ 81 (App. 2008) (citation and internal quotation marks omitted). "The amount of an award for punitive damages is a matter of discretion with the trier of fact, and such award will not be disturbed unless it is so unreasonable in regard to the circumstances as to show influence of passion or prejudice." Nienstedt v. Wetzel, 133 Ariz. 348, 357 (App. 1982).
¶32 Appellants argue that Brown &Brown failed to provide the required evidence to award punitive damages. Specifically, Appellants argue evidence of their net worth was necessary to award punitive damages. This is not the case. Evidence of wealth is not a prerequisite to an award of punitive damages. Id. Therefore, the superior court did not abuse its discretion when it awarded punitive damages without considering evidence of wealth.
¶33 Appellants also argue that punitive damages are improper because Plaintiffs are only entitled to compensatory damages in a breach of contract litigation. "Under Arizona law, punitive damages are properly awarded for breach of fiduciary duty whe[n] the defendant's conduct reaches the requisite level of culpability." Rhue v. Dawson, 173 Ariz. 220, 232 (App. 1992).
¶34 The superior court awarded punitive damages for Appellants' breach of their fiduciary duty of loyalty. The superior court found Appellants' conduct arose to the requisite level of culpability based on four reasons:
1. Defendants deliberately interfered with Brown &Brown's rights. . . by creating a competing company, working for that competing company for over a year, and diverting seven separate accounts to that competing company.
2. Defendants knew their conduct was wrongful and took considerable lengths to conceal their misconduct.
3. Defendants refused to take responsibility for their actions.
4. Defendants repeatedly showed disregard for truth and transparency.
Based on the superior court's findings, it did not abuse its discretion when it awarded punitive damages.
VI. Attorneys' Fees
¶35 Appellants argue the superior court's award of attorneys' fees was excessive because no damages were shown. Appellants rely on findings the superior court issued after an evidentiary hearing held two years before the trial to determine whether to grant a preliminary injunction. During the evidentiary hearing, the superior court found Jones could not "quantify the harm to the client relationship in terms of dollars." But the superior court noted in the same minute entry "the parties have not conducted significant discovery and the record is not fully developed. Accordingly, the Court notes that a factfinder may take a different view of the evidence once the record is fully developed." At trial, Jones was able to testify to quantifiable damages.
¶36 "The court may award reasonable attorney fees to the prevailing party for . . . [w]illful and malicious misappropriation." A.R.S. § 44-404(3). "In any contested action arising out of a contract, express or implied, the court may award the successful party reasonable attorney fees." A.R.S. § 12-341.01(A).
¶37 Brown &Brown prevailed in showing Appellants willfully and maliciously misappropriated Brown &Brown's trade secrets, customer information, account and revenue information, and other confidential information by using this information to solicit Brown &Brown's clients, then destroying evidence to cover up their wrongful conduct. Appellants damaged Brown &Brown by engaging in unfair competition and violating the Arizona Trade Secrets Act. Further, Brown &Brown prevailed in showing Appellants violated their employment agreements. Therefore, the superior court did not abuse its discretion when it awarded attorneys' fees.
¶38 Appellants also argue Brown &Brown is not entitled to make claims for attorneys' fees because it has not already paid counsel for all services rendered. We disagree. "The award of reasonable attorney fees . . . need not equal or relate to the attorney fees actually paid or contracted, but the award may not exceed the amount paid or agreed to be paid." A.R.S. § 12-341.01(B).
¶39 Additionally, Appellants argue that Brown &Brown's counsel has not produced billing records that Appellants subpoenaed. The subpoena Appellants cite was issued in June 2021 in connection with the attorneys' fees awarded as a sanction for Appellants' destruction of evidence. The superior court denied Appellants requests. But Appellants do not appeal the attorneys' fees awarded as a sanction. Appellants only appeal the attorneys' fees awarded post-trial, which are separate from the attorneys' fees awarded as a sanction. Appellants did not issue a subpoena or make discovery requests concerning the attorneys' fees awarded posttrial.
¶40 "[T]he affidavit submitted in connection with an application for fees must indicate the agreed upon hourly billing rate between the lawyer and the client for services performed ...." Schweiger v. China Doll Rest., Inc., 138 Ariz. 183, 188 (App. 1983). Additionally, "[t]he affidavit of counsel should indicate the type of legal services provided, the date the service was provided, the attorney providing the service . . . and the time spent in providing the service." Id.
¶41 Brown &Brown provided the agreed-upon hourly billing rate, the date of legal services provided, the type of legal services provided, and the time spent providing those services in its application for attorneys' fees and costs. The superior court did not abuse its discretion when it awarded attorneys' fees.
CONCLUSION
¶42 We affirm. We grant Brown &Brown costs and reasonable attorneys' fees on appeal under A.R.S. §§ 12-341 and -341.01 upon compliance with ARCAP 21.