Opinion
No. CV-20-01588-PHX-DWL
2022-10-19
NCWC INCORPORATED, Plaintiff, v. CARGUARD ADMINISTRATION INCORPORATED, Defendant.
Erika Marie Lopes-McLeman, Pro Hac Vice, Kelly Lloyd Lankford, Pro Hac Vice, Dentons U.S. LLP, Short Hills, NJ, Erin Norris Bass, Erin Elizabeth Bradham, Dentons U.S. LLP, Phoenix, AZ, Sarah E. Schneider Carlson, Pro Hac Vice, Dentons U.S. LLP, St. Louis, MO, for Plaintiff. Keely Lynn Verstegen, Kenneth Ward Welsh, Jr., Welsh Law Group PLC, Phoenix, AZ, for Defendant.
Erika Marie Lopes-McLeman, Pro Hac Vice, Kelly Lloyd Lankford, Pro Hac Vice, Dentons U.S. LLP, Short Hills, NJ, Erin Norris Bass, Erin Elizabeth Bradham, Dentons U.S. LLP, Phoenix, AZ, Sarah E. Schneider Carlson, Pro Hac Vice, Dentons U.S. LLP, St. Louis, MO, for Plaintiff. Keely Lynn Verstegen, Kenneth Ward Welsh, Jr., Welsh Law Group PLC, Phoenix, AZ, for Defendant.
ORDER
Dominic W. Lanza, United States District Judge
Plaintiff N.C.W.C. Inc. ("NCWC") and Defendant CarGuard Administration, Inc. ("CarGuard") both operate in the aftermarket extended vehicle warranty industry. In September 2018, NCWC entered into a contract with non-party Peace of Mind, Inc. ("POM") under which POM agreed to market and sell NCWC's warranties. This contract contained an exclusivity provision that forbade POM from promoting other companies' warranties. Despite this provision, POM entered into a separate contract with CarGuard in June 2019 under which POM agreed to market and sell CarGuard's warranties. After NCWC became aware that POM was working for CarGuard, it brought two lawsuits. First, in an action in the District of New Jersey (which has since been resolved via settlement), NCWC sued POM for, inter alia, breach of the exclusivity provision in the parties' contract. Second, in this action, NCWC asserts a pair of tortious interference claims against CarGuard.
Now pending before the Court is CarGuard's motion for summary judgment. (Doc. 82.) For the following reasons, the motion is denied.
BACKGROUND
I. Facts
The facts summarized below, and detailed throughout this order, are taken from the parties' summary judgment submissions and other documents in the record. The facts are uncontroverted unless otherwise noted.
NCWC is a provider of aftermarket extended vehicle service contracts. (Doc. 87-1 at 2.) Palmer Administrative Services ("Palmer") is an NCWC affiliate that administers the contracts. (Id.) NCWC uses third-party sellers called producers to market directly to consumers. (Id.) Some of the relevant individuals associated with NCWC include Michael Shaftel, NCWC's owner; Ganna Frieberg, an NCWC employee; and Clayton Churchill, a long-time industry consultant.
CarGuard is an administrator of aftermarket extended vehicle service contracts. (Doc. 82-1 at 17-18.) CarGuard's CEO is Trevor Smith.
POM is a producer owned by Michael Musallam. (Doc. 82-1 at 67-68; 87-1 at 14.)
On September 18, 2018, NCWC and POM entered into a Sales Representative Agreement ("Agreement"). (Doc. 87-1.) Under the Agreement, POM would exclusively sell NCWC warranties for a five-year term. (Id. at 10-11.) POM also agreed not to promote, market, or sell non-NCWC service contracts "for a period of two (2) years [ ]after" the end of the five-year term. (Id. at 11.) Additionally, POM agreed to "not induce the lapse, cancellation, or termination of any vehicle service contract sold by [NCWC]." (Id. at 6.) Termination of the Agreement could occur only under specific circumstances not at issue here. (Id. at 10.)
NCWC's representatives acknowledge that this sort of exclusivity arrangement is unusual in the industry. (Doc. 82-1 at 5 [Shaftel, agreeing that "oftentimes sellers sell for multiple administrators in this industry" and that NCWC's use of "exclusive agreements" is "the exception"]; Doc. 87-5 at 4 [Frieberg, agreeing that NCWC's use of exclusive agreements "is "different" and that she is "not aware of anybody else that ran something similar to us"].)
Musallam and Smith, CarGuard's CEO, have known each other "for years while working for different companies." (Doc. 87-9 at 6-7.) In mid-2019, Musallam expressed to Nick Long, a broker, his desire to sell for another administrator due to dissatisfaction with the return on POM's arrangement with NCWC. (Doc. 87-2 at 5; see also Doc. 87-6 at 5 ["I don't make any money selling for Palmer. I get jerked around about my money, and I can't really build a business around it."].) Following this conversation, Long called Smith and said, "I have a seller that's interested in selling policies for you. Can we meet with him?" (Doc. 87-2 at 5.) Long had a "handshake gentleman's agreement" with Smith, for about $100 per referral. (Doc. 87-8 at 6.)
On May 28, 2019, Musallam, Long, and Smith met for lunch. (Doc. 87-2 at 5.) The participants do not recall the details of the meeting. (Doc. 87-8 at 4 [Long: "Man, I don't know. I mean that's a very, very specific question that would require very granular details."].) Long recounts some sales pitching about CarGuard and the products it offers (Doc. 87-8 at 3-5), which Smith corroborates (Doc. 87-2 at 6). Musallam did not disclose anything about his current arrangement with POM, nor did Smith ask. (Doc. 87-8 at 5-6.)
A person named "J.P." also attended the meeting, but the significance of his presence is unclear. (Doc. 87-2 at 6.)
On June 11, 2019 (i.e., about two weeks after the lunch meeting), CarGuard and POM executed a contract under which POM agreed to engage in the direct marketing of warranties administered by CarGuard. (Doc. 82-1 at 47-64.)
Following the execution of this contract, POM began conducting sales activities on behalf of CarGuard. For example, on June 19, 2019, Musallam texted Smith: "I think I need to put this deal with you now. How can I do that[?]." (Doc. 87-10 at 2.) From June to August 2019, Musallam continued to update Smith on his current sales numbers. (See, e.g., id. at 5-6 [Smith: "Yo, what happened today?" Musallam: "What u mean? We did 12 deals. None for u?" Smith: "0 for me. Yep, zip. Nada."].) Smith also encouraged Musallam to persuade NCWC customers to switch to CarGuard. For example, in July 2019, Musallam informed Smith that although his numbers were low, he had "2 we are switching over" and Smith responded: "Tell [the sales guys] I'm feeling the pain over here." (Id. at 6.) Musallam responded: "they will switch them over in the morning. I'm feeling the pain." (Id.) Smith responded: "Cool, go hard for me tomorrow." (Id.)
At some point during the summer of 2019, NCWC advanced funds to POM to help with its cashflow problems. (Doc. 87-4 at 7 [$30,000 advance].)
On August 9, 2019, Musallam again updated Smith: "Today I have 11 deals. 7 for you. 4 for palmer. Make that 12 total deals. 8 for you 4 for palmer. 25 for you in 3 days. I wanna get away from Palmer bro. I'm sad and tired of it." (Doc. 87-10 at 11.) Smith responded: "It's time for sure, it's only gonna get worse with more deals in there." (Id. at 12.) In another exchange, Musallam said: "10 deals for you today because you are my friend." (Id. at 13.) Smith replied: "Boom baby! Let's go!" (Id.) Musallam replied: "I want today to be my last Palmer day of selling. Soon as I get my wire tmrw [tomorrow]." (Id.) Smith replied: "Fuck yeah, I'm your biggest fan lol." (Id.)
By late August 2019, NCWC experienced a significant drop in sales and a significant increase in cancellations. (Doc. 87-4 at 4-5; Doc. 87-13 at 3 [graph].) Churchill, on behalf of NCWC, then contacted Musallam about an in-store visit. (Doc. 87-4 at 5.) Musallam told Churchill he was not in the office. (Id. ["Today is not a good day. I'm in Temecula."].) Disbelieving him, Churchill dropped by POM only to discover Musallam "standing there and he almost fell off of his feet when he saw [Churchill]." (Id. at 6.) Musallam then admitted "I've gotta be honest with you, bro, I've left you. I've gone with somebody else." (Id. at 6-7.) But Musallam refused reveal the new administrator. (Id. at 7.) Churchill explicitly warned Musallam of POM's exclusivity obligations under the Agreement and told him POM was in breach. (Id.) Afterward, POM's "sales norm [on behalf of NCWC] went down to one or zero and [POM's] cancellations went through the roof to four times . . . the normal rate." (Id.)
In October 2019, NCWC's lawyers sent a formal letter to Musallam about the breaches. (Doc. 1-3.)
In February 2020, NCWC filed a lawsuit against POM in the U.S. District Court for the District of New Jersey. (Doc. 87-15.) That case settled in December 2021. (Doc. 87-14 at 1 [sealed and docketed at Doc. 91].)
In August 2020, NCWC initiated this lawsuit against CarGuard. (Doc. 1.)
POM continued to sell for CarGuard through August or September of 2021. (Doc. 87-6 at 3 [Musallam deposition of October 14, 2021: Q: "And when did [selling for CarGuard] stop?" A: "Probably about . . . one to two months ago."].)
II. Procedural History
On August 11, 2020, NCWC filed the complaint. (Doc. 1.) On April 19, 2022, CarGuard filed its motion for summary judgment. (Doc. 82.) After the Court resolved a discovery dispute, NCWC filed its response. (Doc. 87.) The motion is now fully briefed. (Doc. 92.)
NCWC's request for oral argument is denied because the issues have been fully briefed and oral argument will not aid the decisional process. See LRCiv 7.2(f).
LEGAL STANDARD
"The court shall grant summary judgment if [a] movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). "A fact is 'material' only if it might affect the outcome of the case, and a dispute is 'genuine' only if a reasonable trier of fact could resolve the issue in the non-movant's favor." Fresno Motors, LLC v. Mercedes Benz USA, LLC, 771 F.3d 1119, 1125 (9th Cir. 2014). The court "must view the evidence in the light most favorable to the nonmoving party and draw all reasonable inference in the nonmoving party's favor." Rookaird v. BNSF Ry. Co., 908 F.3d 451, 459 (9th Cir. 2018). "Summary judgment is improper where divergent ultimate inferences may reasonably be drawn from the undisputed facts." Fresno Motors, 771 F.3d at 1125.
A party moving for summary judgment "bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of 'the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any,' which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). "In order to carry its burden of production, the moving party must either produce evidence negating an essential element of the nonmoving party's claim or defense or show that the nonmoving party does not have enough evidence of an essential element to carry its ultimate burden of persuasion at trial." Nissan Fire & Marine Ins. Co. v. Fritz Cos., 210 F.3d 1099, 1102 (9th Cir. 2000). "If . . . [the] moving party carries its burden of production, the nonmoving party must produce evidence to support its claim or defense." Id. at 1103.
"If the nonmoving party fails to produce enough evidence to create a genuine issue of material fact, the moving party wins the motion for summary judgment." Id. There is no issue for trial unless enough evidence favors the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). "If the evidence is merely colorable or is not significantly probative, summary judgment may be granted." Id. at 249-50, 106 S.Ct. 2505. At the same time, the evidence of the non-movant is "to be believed, and all justifiable inferences are to be drawn in his favor." Id. at 255, 106 S.Ct. 2505. "[I]n ruling on a motion for summary judgment, the judge must view the evidence presented through the prism of the substantive evidentiary burden." Id. at 254, 106 S.Ct. 2505. Thus, "the trial judge's summary judgment inquiry as to whether a genuine issue exists will be whether the evidence presented is such that a jury applying that evidentiary standard could reasonably find for either the plaintiff or the defendant." Id. at 255, 106 S.Ct. 2505.
DISCUSSION
In the two-count complaint, NCWC asserts claims against CarGuard for (1) intentional interference with contract and (2) intentional interference with business relationships and expectancies. (Doc. 1 ¶¶ 43-58.) The former focuses on CarGuard's interference with NCWC's contract with POM while the latter focuses on CarGuard's efforts "to encourage NCWC's customers to terminate, cancel or lapse their vehicle service contracts with NCWC and instead purchase similar contracts sold by [CarGuard]." (Id.)
Although each claim has a slightly different focus, the elements are the same. "A prima facie case of intentional interference requires: (1) existence of a valid contractual relationship [or business expectancy], (2) knowledge of the relationship on the part of the interferor, (3) intentional interference inducing or causing a breach, (4) resultant damage to the party whose relationship has been disrupted, and (5) that the defendant acted improperly." Wells Fargo Bank v. Ariz. Laborers, Teamsters & Cement Masons Loc. No. 395 Pension Tr. Fund, 201 Ariz. 474, 38 P.3d 12, 31 (2002). See also Ulan v. Vend-A-Coin, Inc., 27 Ariz.App. 713, 558 P.2d 741, 745 (1976) ("The tort has been expanded in Arizona to cover not only interference with valid contractual relations but also with business expectancies.").
CarGuard's motion focuses on elements two through five. (See generally Doc. 82 at 9-13.) CarGuard does not, in contrast, appear to dispute (at least for summary judgment purposes) that NCWC and POM had a valid contractual relationship or that NCWC had a valid business relationship and expectancy with respect to customers.
I. Knowledge And Intent
A. The Parties' Arguments
CarGuard argues it "was wholly unaware of the Exclusivity Provision when POM allegedly breached the NCWC Contract by agreeing to sell CarGuard's products and therefore could not have intentionally interfered with a contractual provision for which it had no knowledge." (Doc. 82 at 8.) CarGuard contends it did not become aware of the exclusivity provision until it was served with the complaint in this action in August 2020, which is too late because the relevant timeframe is knowledge "at the time that POM's breach was allegedly induced." (Id. at 10.)
In response, NCWC identifies six reasons why a reasonable jury could conclude that CarGuard had the requisite knowledge and intent: "(i) CarGuard has an established history of attempting to interfere with NCWC's producer relationships; (ii) CarGuard learned about the non-compete from other NCWC producers; (iii) CarGuard complained about the non-compete; (iv) CarGuard operates in a small and interrelated industry in which the non-compete was common knowledge; (v) CarGuard admits it knew POM had a producer relationship with NCWC; and (vi) CarGuard interfered with NCWC and POM's relationship." (Doc. 87 at 12.) NCWC also argues that timing "is merely an issue of fact" and that "CarGuard cannot deny that it was aware of the non-compete when the Agreement was attached to the Complaint filed against CarGuard." (Id.) In support of its allegations regarding CarGuard's knowledge and intent, NCWC cites the following evidence.
The Court notes that several documents on which NCWC relies are not attached as exhibits to its response. (See, e.g., Doc. 87 at 4 [Ex. G at 56:5-57:3], id. at 8 [Ex. E at 84:4-85:8 and Ex. Gat 107:16-107:25].)
• Direct Knowledge: Frieberg, an NCWC employee, testified that "James Gutierrez," a NCWC producer, "specifically told [Frieberg] that he's had conversations with [Smith] and [Smith] knows that we have exclusive agreements with all of our producers." (Doc. 87-5 at 16.) More specifically, Frieberg recalls "James Gutierrez told me that [Smith] stopped by his office . . . because James also sells marketing. So he wanted to inquire about buying some of the marketing that James has to sell, maybe to some of his producers. And he also asked them, why don't you come sell CarGuard's product, you could make a lot more money than you're making with Palmer. And James's response to him was that, I'm in an exclusive agreement and if I leave, Palmer doesn't mess around, they sue everybody that attempts to break the agreement." (Id. at 17-18.) Frieberg equivocated on the exact timing of that conversation but believed it was in November or December 2019 and clarified that some species of that conversation happened "several times." (Id. at 18.) Similarly, Shaftel, NCWC's owner, testified that he recalled a conversation with an "Erica Walters," "the rep for Forte Data Systems," who related that "Trevor [Smith]" was "complaining[ ] about our agreement and can't understand why people would sign the agreement and stuff like that." (Doc. 87-7 at 6-7.)
• Industry Knowledge: Churchill, an NCWC consultant, testified that when he worked for "Royal," a competitor of NCWC, he knew about the exclusivity agreement because "[w]hen I had my sales hat on, the rule of sellers, know your competition. Nobody goes around and doesn't have a pretty good handle on what people offer, because it was a very different model." (Doc. 87-4 at 3.) Similarly, Frieberg testified: "I've been in the industry for quite a while. All the third-party vendors know of me and the model that we developed over at NCWC's different than the typical vehicle service contract model." (Doc. 87-5 at 3.) And again, Shaftel testified that NCWC's exclusivity provision is "just common knowledge in the industry." (Doc. 87-7 at 6.)
In reply, CarGuard argues that "the Opposition brief simply infers, in conclusory fashion, that the existence of an exclusivity provision between Mr. Gutierrez and NCWC would provide notice to CarGuard that NCWC had such a provision in its agreement with POM." (Doc. 92 at 4.) CarGuard further argues that "NCWC's reliance on other self-serving hearsay testimony from its officers and employees fares no better." (Id. at 5.) As for Churchill's testimony, CarGuard argues that "providing hearsay testimony that Trevor Smith would recruit numerous NCWC sellers provides zero probative value as to whether CarGuard had knowledge of the Exclusivity Provision in POM's contract." (Id.) Finally, CarGuard argues that "the self-important characterization from NCWC's employees that 'everyone knew' about their exclusivity provision is likewise inapposite as to the pertinent material question of fact: did CarGuard possess [knowledge] of the Exclusivity Provision at the time NCWC alleges POM breached its agreement with NCWC?" (Id. at 6.)
B. Analysis
As an initial matter, the parties disagree over the showing of knowledge and intent that is required to prevail on an intentional interference claim under Arizona law. CarGuard argues the threshold is "actual knowledge" (Doc. 92 at 3) while NCWC suggests "willful ignorance" would suffice (Doc. 87 at 12).
The Court finds it unnecessary to resolve this dispute because NCWC's proffered evidence creates a genuine dispute of material fact under either standard. At a minimum, it is indisputable (and seemingly undisputed) that CarGuard possessed actual knowledge of the exclusivity provision in the Agreement upon being served with this lawsuit in August 2020. (Doc. 87 at 10.) Nevertheless, NCWC presents evidence that CarGuard continued to allow "POM to sell contracts for CarGuard until at least August or September 2021." (Doc. 87 at 10, citing Doc. 87-6 at 3.)
CarGuard responds that any knowledge it acquired in August 2020 is irrelevant because "NCWC cannot retroactively apply knowledge to the time that the inducement allegedly occurred an[d] all times between that date and the service of the Complaint." (Doc. 92 at 8.) The difficulty with this argument is that CarGuard has failed to establish its position is consistent with Arizona law. In Synergy Logistics Co. LLC v. Singh, 2021 WL 1625516 (Ariz. Ct. App. 2021), which is the only Arizona case cited by the parties on this issue, Synergy prevailed on an intentional inference claim against a competitor, Super Logistics, for hiring a former Synergy employee who was subject to a non-compete agreement. Id. at *1-2. On appeal, the defendant argued the intentional-interference claim failed as a matter of law because it "did not know of [the employee's] Non-Compete before she joined" but the Arizona Court of Appeals rejected this argument and affirmed, holding that "[t]his argument incorrectly presumes that the only alleged act of interference was [the defendant's] decision to hire [the employee]" and that "[t]here is ample evidence showing [the defendant] learned of the Non-Compete shortly after hiring [the employee] and subsequently interfered with it." Id. at *4.
The Court acknowledges that Synergy Logistics is a fairly thin reed on which to rely. Not only is an unpublished decision, but the appellate court proceeded to identify other evidence suggesting the defendant may have had knowledge of the non-compete provision before it made the hiring decision. Id. at *5. Additionally, CarGuard has identified decisions from outside Arizona that seem to reject the notion that after-acquired knowledge is sufficient when it comes to tortious-interference-with-contract claims. See, e.g., Sophia's Cure Inc. v. AveXis, Inc., 2017 WL 4541449, *7 (S.D. Ohio 2017) ("To be liable for tortious interference, a tortfeasor must not only have knowledge of the contract, he must have knowledge of the contract at the time of, or before, the alleged breach."). Nevertheless, Synergy Logistics is not an outlier in holding that a defendant may be held liable for intentional interference with a third-party contract containing a non-compete clause, even it was unaware of the non-compete restriction at the time it entered into its own contract with the restricted party, by subsequently becoming aware of the non-compete provision and continuing its course of dealing with the restricted party after acquiring that knowledge. Aerotek, Inc. v. Zahn, 625 F. App'x 394, 395-96 (11th Cir. 2015) (reinstating tortious interference claim, which the district court had dismissed on the ground that the defendant did not become aware that several of its employees were subject to non-compete agreements with a former employer until after it had hired them, because "there are reasonable inferences that each day that the Employees worked in violation of the covenants constituted a separate breach, and that each day that [the defendant] employed Employees knowing that they were acting in violation of the Non-Compete covenant and/or the Non-Solicitation covenant constituted a separate breach," and thus "it was not only the hiring of the Employees that breached the covenants").
If the only claim in this case were NCWC's claim in Count I for intentional interference with contract, the closeness of this question might counsel in favor of ordering supplemental briefing regarding the status of Arizona law on this point. But NCWC's claims are not so limited—in Count II, NCWC asserts a claim for intentional interference with business relationships and expectancies. As to that claim, the Court has little trouble concluding that the evidence of CarGuard's knowledge and intent is sufficient to avoid summary judgment. Unlike Count I, which is premised on the theory that CarGuard improperly induced the breach of one specific contract, Count II is premised on the theory that CarGuard improperly induced POM and other producers to encourage various customers to "terminate, cancel, or lapse" their vehicle service contracts with NCWC. (Doc. 1 ¶ 54.) Although some of these terminations occurred before August 2020, NCWC has presented evidence that some of the terminations occurred after that date. (See, e.g., Doc. 87-12 at 3.) Thus, even if NCWC were unable to establish at trial that CarGuard possessed the requisite knowledge and intent before August 2020, this would at most reduce (but not eliminate) the potential damages associated with NCWC's intentional interference claim in Count II.
Accordingly, CarGuard is not entitled to summary judgment based on its challenge to the sufficiency of NCWC's knowledge and intent evidence. This is without prejudice to CarGuard renewing its argument, at a later stage of this case (and based on more developed briefing), that after-acquired knowledge of a contract is insufficient to support an intentional-interference-with-contract claim under Arizona law under the circumstances of this case. This outcome also makes it unnecessary to decide whether NCWC has shown that its proffered evidence of earlier-acquired knowledge could be presented in an admissible form at trial and, even if so, whether that evidence would be sufficient to create a triable issue of fact as to earlier-acquired knowledge.
The Court is skeptical that NCWC made the required showing as to the statements by Gutierrez and Walters. Although a non-movant can avoid summary judgment by offering evidence that isn't in an admissible form, the non-movant bears the burden of explaining, with specificity, why the evidence can be admitted in an admissible form at trial. See, e.g., Brown v. Perez, 835 F.3d 1223, 1232-33 (10th Cir. 2016) ("The requirement is that the party submitting the evidence show that it will be possible to put the information, the substance or content of the evidence, into an admissible form. Here, the agency neglects to show that it could put the substance of the letter into an admissible form. No representative of Elsevier has filed an affidavit in this case, and the agency's affidavit does not suggest that a representative of Elsevier would testify to the letter's competitive injury assertions at trial . . . . Because the agency has not shown that the letter or its contents would be admissible at trial, we may not consider it on summary judgment.") (cleaned up). Here, NCWC simply referred to the Gutierrez and Walters statements without even acknowledging the hearsay problem posed by those statements, let alone explaining how it would overcome the hearsay problem at trial. Nevertheless, because summary judgment is being denied on other grounds, the issue is moot.
The decision in BAE Systems Mobility & Protection Sys., Inc. v. ArmorWorks Enters., LLC, 2011 WL 1192987, (D. Ariz. 2011), suggests that NCWC's evidence of "industry knowledge" would alone be insufficient to establish that CarGuard had sufficient knowledge of the exclusivity provision in the NCWC-POM contract before August 2020. Id. at *5 ("ArmorWorks argues that . . . it was common knowledge at . . . that Alanx was committed to ArmorWorks; [that] Armor Holdings had a practice of obtaining confidential information about ArmorWorks's business; . . . [and that] Armor Holdings was aware that exclusive supply arrangements were commonplace in the industry. Assuming this circumstantial evidence is true, these facts are insufficient to establish that Armor Holdings had knowledge about the specific ArmorWorks/Alanx supply arrangement when Armor Holdings acquired ceramic tile from Alanx in August 2005."). But, again, it is unnecessary to resolve that issue here because summary judgment is being denied on other grounds.
II. Improper Interference
A. The Parties' Arguments
CarGuard next argues that "simply engaging POM to sell its policies is not an 'improper' act that could give rise to a tortious interference claim." (Doc. 82 at 11.) CarGuard reasons that "at best, NCWC can attempt to argue that there is a material issue of fact that CarGuard engaged POM to sell its policies in direct competition with POM's sales for NCWC." (Id. at 12.) CarGuard contends that its "motivation was solely its own economic interests (and undoubtedly at least in part was motivated as such)" and it is therefore "entitled to summary judgment for the additional reason that its use of POM is covered by the competitive privilege and cannot be considered improper." (Id.)
In response, NCWC argues that the evidence of impropriety is sufficient to survive summary judgment because "[v]iolation of a non-compete is evidence of an improper means of interference." (Doc. 87 at 13-14.) As for CarGuard's invocation of the competitive privilege, NCWC argues this invocation fails for three reasons: (1) the underlying contract was not terminable at will; (2) CarGuard employed "wrongful means" under the Restatement (Second) of Torts § 768, thus barring any competitive privilege claim; and (3) because "Car Guard denies the companies are competitors," it cannot "avail itself of a competitive privilege while denying it is a competitor." (Id. at 15-at 16.)
In reply, CarGuard addresses NCWC's arguments in only cursory fashion, arguing they fail because they are all "predicated on NCWC's misplaced position that CarGuard possessed knowledge of the Exclusivity Provision." (Doc. 92 at 6-7.)
B. Analysis
"[P]roof that an actor intentionally induced a breach of contract is not sufficient to establish that the actor's conduct was improper. Rather, 'there is a requirement that the interference be both intentional and improper.' " Safeway Ins. Co. v. Guerrero, 210 Ariz. 5, 106 P.3d 1020, 1026 (2005) (quoting Restatement (Second) of Torts § 767 cmt. a). Under Arizona law, there are seven factors, gleaned from § 767 of the Restatement, that courts ordinarily consider when determining whether a party engaged in an improper form of interference: "(a) the nature of the actor's conduct, (b) the actor's motive, (c) the interests of the other with which the actor's conduct interferes, (d) the interest sought to be advanced by the actor, (e) the social interests in protecting the freedom of action of the actor and the contractual interests of the other, (f) the proximity or remoteness of the actor's conduct to the interference, and (g) the relations between the parties." Wells Fargo Bank, 38 P.3d at 32 (citation omitted). However, "[w]here the alleged interference arises in the context of business competition, . . . the factors listed in Section 767 are supplanted by the factors listed in Section 768." Zalkow v. Taymor Indus. U.S.A., Inc., 2014 WL 12538160, *3 (D. Ariz. 2014) (citing Restatement (Second) of Torts § 767 cmt. a). Under § 768, one "does not interfere improperly with the other's relation if (a) the relation concerns a matter involved in the competition between the actor and the other and (b) the actor does not employ wrongful means and (c) his action does not create or continue an unlawful restraint of trade and (d) his purpose is at least in part to advance his interest in competing with the other." Id. This is sometimes known as the "competitive privilege" or "competition privilege." BAE Systems Mobility & Protection Sys., Inc. v. ArmorWorks Enters., LLC, 2011 WL 1192987, *7 (D. Ariz. 2011).
The Court agrees with NCWC that the competitive privilege does not bar NCWC's claim in Count I. When deciding whether "business inducements are tortious in nature," "a distinction exists between inducements involving contracts of a definite period of duration and at-will business relationships." Ulan, 558 P.2d at 745. "In the former case, intentional interference by a third party, inducing its breach, is actionable even in the absence of malice and even where the motive is the self-interest of the third party." Id. (citation omitted). Accordingly, CarGuard cannot invoke the competitive privilege as a defense to Count I. That claim is premised on CarGuard's alleged interference with NCWC's contract with POM. NCWC correctly notes that there were several "years left on the [exclusivity provision's] five year term, with another two year non-competition period," and that the Agreement that was "terminable only under limited circumstances." (Doc. 87 at 15.) It follows that CarGuard did not have a competitive privilege under § 768 to interfere with the Agreement—it was not an at-will contract but a contract with a definite duration.
The applicability of the competitive privilege to Count II presents a closer call. The theory underlying Count II is not that CarGuard interfered with NCWC's contractual relationship with POM but that CarGuard interfered with NCWC's "business relationships and expectations with [NCWC's] customers," by "encourag[ing] [those] customers to terminate, cancel or lapse their vehicle service contracts with N.C.W.C. and instead purchase similar contracts sold by [CarGuard]." (Doc. 1 ¶¶ 53-54.) It appears that NCWC's service contracts with its customers were at-will contracts without a definite duration—indeed, NCWC's complaint is that CarGuard was able to rapidly induce these customers to "flip" to CarGuard—and NCWC has not, at any rate, submitted any evidence (as it was required to do under Celotex once CarGuard moved for summary judgment) to create a triable issue of fact on this point. The at-will nature of NCWC's relationship with such customers is potentially significant because "there is no liability for inducing a termination of [an at-will business] relationship for the purpose of advancing economic self-interest of the third party; mere inducement to discontinue such relationship is not actionable unless the purpose of the actor was solely to produce damage, or unless the means employed were dishonest or unfair." Ulan, 558 P.2d at 745 (citations omitted). See also Motorola, Inc. v. Fairchild Camera & Instrument Corp., 366 F.Supp. 1173, 1181 (D. Ariz. 1973) ("The privilege of competition . . . applies to contracts which are terminable at will.") (citation omitted); Restatement (Second) Torts § 768 cmt. h ("When B is legally free to deal either with C or with A, freedom to engage in competition implies a privilege on the part of A to induce B to deal with him rather than with C.").
The caveat to this principle, however, is that interference with an at-will contract is privileged under § 768(1)(b) only if "the actor does not employ wrongful means" in the course of the interference. Here, NCWC's theory is that CarGuard employed wrongful means by relying on POM to induce NCWC's customers to switch to CarGuard, which was improper because it violated the exclusivity provision in the contract between NCWC and POM. (Doc. 87 at 15 ["CarGuard acted improperly in breaching the non-compete."].) The parties' briefing, unfortunately, sheds little light on what it means for conduct to be "wrongful" for purposes of § 768. Nor has the Court found any definitive guidance on this point through its own research. See, e.g., Ulan, 558 P.2d at 745 (in this context, "improper means" means "dishonest or unfair"); Restatement (Second) Torts § 768 cmt. e ("If the actor employs improper means, he is not privileged under the rule stated in this Section. The predatory means discussed in § 767, Comment b, physical violence, fraud, civil suits and criminal prosecutions, are all improper in the situation covered by this Section. The actor may use persuasion and he may exert some economic pressure.").
With that said, NCWC has identified at least one Arizona decision that suggests it is "wrongful," within the meaning of § 768, for a company to hire an agent who previously worked for a competitor, in violation of a non-compete clause, and then use that agent to persuade the competitor's at-will customers to divert their business. Physical Excellence, Inc. v. Dow, 2006 WL 8441227, *7-8 (D. Ariz. 2006). CarGuard, in contrast, has not identified any case with analogous facts suggesting the type of conduct at issue here would not be considered "wrongful" for purposes of § 768.
Although CarGuard identifies ArmorWorks as a case supporting its position, it acknowledges that the plaintiff there had no knowledge of the exclusivity provision. (Doc. 82 at 12.) In contrast, and as discussed in Part I above, there is evidence that CarGuard had knowledge of the exclusivity provision during at least a portion of the period of challenged conduct.
Given this backdrop, and in light of the fact that "when there is room for different views, the determination of whether the interference was improper or not is ordinarily left to the jury, to obtain its common feel for the state of community mores and for the manner in which they would operate upon the facts in question," Restatement (Second) Torts § 767, cmt. 1, the Court concludes that CarGuard is not entitled to summary judgment on Count II based on the competition privilege. Whether the privilege applies is a question of fact for the jury.
For the sake of completeness, the Court notes that there is no merit to one of NCWC's alternative arguments related to the competitive privilege, which is that whether NCWC and CarGuard are competitors is a "disputed issue of fact." (Doc. 87 at 16.) The term competitor is defined broadly under the Restatement: "The rule stated in this Section applies whether the actor and the person harmed are competing as sellers or buyers or in any other way, and regardless of the plane on which they compete . . . . It applies also to the indirect competition between a manufacturer whose goods are marketed by independent retailers and a retailer who markets the competing goods of another manufacturer." Id. § 768 cmt. c. Here, the theory underlying Count II is that CarGuard took "actions to encourage N.C.W.C.'s customers to terminate, cancel or lapse their vehicle service contracts with N.C.W.C. and instead purchase similar contracts sold by Defendant." (Doc. 1 ¶ 54.) This is a quintessential example of competition within the meaning of § 768.
III. Damages
A. The Parties' Arguments
CarGuard's final argument is that NCWC's claims must be dismissed because any recovery in this case would result in an impermissible "double recovery." (Doc. 82 at 12-13.) According to CarGuard, NCWC's damages in this case "are precisely the expectation damages that it alleges it would have otherwise obtained if not for POM's alleged breach of the agreement," and because NCWC's breach of contract claim in the New Jersey action has now been "resolved through settlement," it follows that "the expectation damages have been stipulated by NCWC to be the amount of settlement, and . . . no further damages are recoverable from CarGuard." (Id.) CarGuard also cites the Restatement (Second) of Torts § 774(A) to argue that, at a minimum, "any damages in fact paid by the [breaching party] will reduce the damages actually recoverable on the judgment." (Id. at 13.)
NCWC responds that "[t]his litigation and the New Jersey litigation involve separate wrongs that gave rise to separate causes of action and caused separate damages. In such circumstances, courts hold breach of contract and tortious interference damages are separate." (Doc. 87 at 16.) NCWC adds that "[f]our of the six New Jersey causes of action related to the advanced funds—which are not at issue here. The contractual claims in the New Jersey litigation also involved failure to sell and wrongful termination—not just the non-compete. Further, NCWC received a relatively small payment." (Id. at 16-17.) NCWC also notes that its damages expert "did not include the value of the advanced funds or the 'flipped contracts.' " (Id. at 17.) Accordingly, NCWC concludes that, "at most, the New Jersey settlement reduces NCWC's recovery." (Id.)
In its reply, which was prepared after receiving a copy of the New Jersey settlement agreement, CarGuard makes two arguments. First, CarGuard argues that "NCWC has submitted no evidence or argument to dispute that the damages sought against CarGuard are precisely the same expectation damages (i.e., lost profit arising from the alleged breach) asserted as part of the damages settled with POM." (Doc. 92 at 9.) Second, CarGuard argues that the settlement agreement provides, "The Parties understand and agree that the settlement payment made under this Agreement is intended to settle the claims asserted in the Lawsuit and any claims which could have been made, and/or could conceivably be made, arising out of and/or relating to any matter alleged in the Lawsuit." (Id. at 10.) According to CarGuard, this language shows that "the POM Settlement does purport to serve as a full and complete resolution of damages arising from POM's alleged breach." (Id.) CarGuard contends that "[b]ecause POM and NCWC decided to draft a settlement agreement that defines its scope so broadly as to necessarily include the resulting claims asserted in this suit," NCWC is "precluded from a monetary damage award." (Id.)
B. Analysis
The Court agrees with NCWC that the settlement proceeds from the New Jersey litigation may, at most, result in a reduction of any damage award NCWC obtains at the conclusion of this case. The settlement does not, in contrast, require the dismissal of NCWC's claims against CarGuard at summary judgment.
The general rule, under the Restatement (Second) of Torts § 774A(2), is that "[i]n an action for interference with a contract by inducing or causing a third person to break the contract with the other, the fact that the third person is liable for the breach does not affect the amount of damages awardable against the actor; but any damages in fact paid by the third person will reduce the damages actually recoverable on the judgment." See also Ball Corp. v. George, 27 Ariz.App. 540, 556 P.2d 1143, 1148 (1976) ("Ordinarily, any amount received for the release of one joint tortfeasor must be credited to any judgment received against the other. There can be no double recovery.").
If NCWC had stipulated in its settlement agreement with POM that the settlement proceeds were, in fact, sufficient to compensate it for all of the losses it had sustained as a result of POM's breach of the parties' contract, there might be an argument that NCWC is precluded from pursuing a tort claim against CarGuard for intentionally interfering with that contract. In IMAF, S.p.A. v. J.C. Penney Co., 1991 WL 66892 (S.D.N.Y. 1991), which is the primary case on which CarGuard relies, the plaintiff (IMAF) brought a breach of contract action against a contractual counterparty (Primavera), which ended in a settlement. Id. *1. The settlement agreement included an unusual provision stating that IMAF considered itself "fully and equally compensated" for all losses arising from the breach. Id. Afterward, IMAF brought a tortious interference claim against a different defendant (Penney), but the district court held that claim was subject to dismissal under § 774(A)(2) in light of the "fully compensated" language in the settlement agreement: "[G]iven that it was 'fully compensated' for its claims against Primavera, [IMAF] cannot seek to be compensated, a second time, from Penney." Id. at *2.
Here, the settlement agreement between NCWC and POM does not contain an avowal that NCWC has been fully compensated for all of its damages arising from POM's alleged breach of the parties' contract. Instead, the recitals merely provide that "[t]he Parties understand and agree that the settlement payment made under this Agreement is intended to settle the claims asserted in the Lawsuit and any claims which could have been made, and/or could conceivably be made, arising out of and/or relating to any matter alleged in the Lawsuit." (Doc. 91 at 3-4.) The recitals further explain that the parties agreed to enter into a settlement "in order to avoid the mutual risk, inconvenience, and expense of litigation and for valuable consideration." (Id. at 3.) Finally, the settlement agreement expressly notes that "[n]othing in . . . this Agreement shall amount to a release of CarGuard Administration Inc." (Id. at 6.)
As these provisions make clear, NCWC's decision to accept a certain sum to settle its claims against POM was not tantamount to an admission that the agreed-to sum constituted full compensation for NCWC's losses (let alone an admission that the agreed-to sum constituted full compensation for all of NCWC's related tort claims against CarGuard). Nor should this conclusion be surprising. Because parties choose to settle for all sorts of reasons, a settlement agreement should not—absent the sort of unusual language that was present in the IMAF settlement agreement—be viewed as some sort of binding admission that the settlement terms constitute full compensation. See generally McDermott, Inc. v. AmClyde, 511 U.S. 202, 213, 114 S.Ct. 1461, 128 L.Ed.2d 148 (1994) (noting that "settlements seldom reflect an entirely accurate prediction of the outcome of a trial" and "reflect[ ] the uncertainty of trial"); Airline Stewards & Stewardesses Ass'n, Local 550, TWU, AFL-CIO v. Am. Airlines, Inc., 573 F.2d 960, 963 (7th Cir. 1978) ("[I]t is generally recognized that settlements are entered into because of the very uncertainties of outcome in litigation, as well as the avoidance of wasteful litigation and expense. Based on these considerations, this court has held that a district court in reviewing a settlement agreement should not attempt to decide the merits of the controversy . . . because any virtue which may reside in a compromise is based upon doing away with the effect of such a decision.") (cleaned up).
Given these principles, there is no need—at least for now—to conduct a deep dive into the specific claims that were brought in the New Jersey litigation and compare the damages that were potentially available under those claims to the damages NCWC seeks here. Any offset analysis can be conducted following trial.
Accordingly,
IT IS ORDERED that CarGuard's motion for summary judgment (Doc. 82) is denied.