Opinion
1 CA-CV 11-0507
02-14-2013
Goodson Manley Forakis, P.L.C. by John F. Goodson Attorneys for Plaintiff/Appellant Broening Oberg Woods & Wilson, P.C. by Richard E. Chambliss Sarah L. Barnes Attorneys for Defendants/Appellees
NOTICE: THIS DECISION DOES NOT CREATE LEGAL PRECEDENT AND MAY NOT BE CITED
EXCEPT AS AUTHORIZED BY APPLICABLE RULES.
See Ariz.R.Sup.Ct. 111(c); ARCAP 28(c);
Ariz.R.Crim.P. 31.24
MEMORANDUM DECISION
(Not for Publication -
Rule 28, Arizona Rules of
Civil Appellate Procedure)
Appeal from the Superior Court in Maricopa County
Cause No. CV2009-010961
The Honorable Jeanne M. Garcia, Judge
AFFIRMED
Goodson Manley Forakis, P.L.C.
by John F. Goodson
Attorneys for Plaintiff/Appellant
Phoenix Broening Oberg Woods & Wilson, P.C.
by Richard E. Chambliss
Sarah L. Barnes
Attorneys for Defendants/Appellees
Phoenix THUMMA, Judge ¶1 Plaintiff Treeline Design Group, Inc. (Treeline) appeals from the superior court's judgment entered in favor of defendants Matt and Christi Gonshorowski. Treeline argues the parties' alternative dispute resolution agreements divested the superior court of jurisdiction to find a covenant not to compete was unenforceable when considering Treeline's preliminary injunction request. Treeline also argues the superior court erred in failing to award liquidated damages for Gonshorowski's violation of that covenant and in imposing sanctions against Treeline. Finding no reversible error, the judgment is affirmed.
FACTS AND PROCEDURAL HISTORY
¶2 Treeline is a residential landscaping design company owned by James and Stanya Gorraiz. Matt Gonshorowski began designing residential landscaping for Treeline in 2003. In February 2007, Treeline, three individuals working for Treeline (including Gonshorowski) and others signed a Management Reorganization Agreement (MRA), Confidentiality Agreement and Integrity Agreement (collectively February 2007 Agreements). ¶3 The MRA restructured Treeline by providing, among other things, that the three individuals would constitute the Management Team, would operate Treeline and would receive compensation and benefits (including the possibility of a stock ownership interest in Treeline). The MRA contained the following covenant not to compete:
If any of the Team members leave at anytime they agree not to compete within two years in Maricopa County, Arizona, in anyThe MRA stated that "[a]ny dispute arising out of or in connection with this contract shall be settled by the" progressive alternative dispute resolution (ADR) stages specified in the Integrity Agreement. ¶4 The Integrity Agreement, in turn, detailed procedural requirements for five ADR "progressive stages:" (1) Notice of Discomfort; (2) Notice of Dispute; (3) Informal Negotiation; (4) Mediation and (5) Arbitration. Section 9 of the Integrity Agreement provided that, if a party violated the agreement's procedures, the other party "may immediately take the matter to arbitration" and "[a]ll attorney fees, reasonable arbitrators' fees . . . and out-of-pocket expenses incurred in the settlement of the dispute shall be paid by the party who violated the Agreement procedure, regardless of whether that party ultimately prevails." Filing "a complaint or other legal action against the other party at any time during the resolution process or while [the Integrity Agreement] is in force without first exhausting all specified non-court procedures specified" violated the Integrity Agreement, which triggered submission of the dispute to arbitration. ¶5 On January 6, 2009, Gonshorowski resigned from Treeline. In a March 30, 2009 letter purporting to be sent pursuant to ADR Stage 2 of the Integrity Agreement, Treeline accused Gonshorowski of breaching the February 2007 Agreements and other wrongful acts. Claiming substantial damages, this letter proposed that Gonshorowski pay Treeline liquidated damages for breaching the covenant not to compete as well as other monetary and non-monetary relief. The letter gave Gonshorowski until April 8, 2009 to respond, but indicated that Treeline would "hold back only until 12:00 pm on April 1, 2009, before filing an injunction to shut you down." ¶6 On April 3, 2009, in superior court, Treeline filed a verified complaint and separate application seeking a preliminary injunction against the Gonshorowskis. The complaint alleged Gonshorowski breached the February 2007 Agreements, including the covenant not to compete in the MRA. The complaint contained nine counts seeking money damages on contract, tort and equitable theories. A tenth count sought injunctive relief, alleging "[t]he Non-Compete Agreement [in the MRA] specifically permits the kind of injunctive relief Treeline seeks in this case." ¶7 The Gonshorowskis filed a motion to dismiss or stay the nine counts seeking money damages so the parties could exhaust the ADR stages required by the Integrity Agreement. The Gonshorowskis sought dismissal of the injunctive relief count, claiming the covenant not to compete was unenforceable because it was unreasonable (given its duration and geographic and activity restrictions) and did not protect legitimate interests. Treeline opposed the motion to dismiss, arguing that the covenant not to compete was reasonable and enforceable. ¶8 Following an evidentiary hearing, the superior court denied Treeline's application for a preliminary injunction, finding the covenant not to compete was unenforceable. The court stayed further court proceedings on the nine other counts until the completion of arbitration. Treeline filed a motion for reconsideration arguing, among other things, that the court erred in denying the application for a preliminary injunction and in finding the covenant not to compete invalid and asked that the reasonableness of the covenant be resolved through arbitration. In relevant part, the court denied Treeline's motion to reconsider. After further motion practice, the superior court found Treeline had breached the Integrity Agreement by filing the court complaint seeking money damages, triggering Paragraph 9 of the Integrity Agreement ("Penalty for Violating This Agreement"). The court then ordered the matter to arbitration. ¶9 A panel of three arbitrators found that Treeline "cannot litigate in this arbitration proceeding a claim for damages for violation of the non-compete agreement because the court has already made a legal determination that the non-compete agreement is unreasonable and unenforceable." After receiving evidence and additional briefing and argument, the panel awarded Treeline $4,189.00 in damages, finding Gonshorowski had breached his obligations to Treeline by retaining some design fees that belonged to Treeline. The arbitrators otherwise found in favor of the Gonshorowskis and ordered Treeline to pay all arbitrators' fees and to pay the Gonshorowskis $28,430 in attorneys' fees. ¶10 The Gonshorowskis sought to enforce the arbitration award in the superior court and also sought $21,312 in attorneys' fees incurred in the superior court proceedings prior to arbitration. Treeline opposed the Gonshorowskis' motions and moved to reopen the court proceedings based on the alleged discovery of "false and perjurious" testimony by Gonshorowski about the February 2007 Agreements and the May 2008 amendment during the preliminary injunction hearing. Treeline also alleged the court erred in considering the enforceability of the covenant not to compete in denying the preliminary injunction and that error tainted the arbitration proceedings. ¶11 The Gonshorowskis responded that the testimony did not constitute perjury and was unrelated to the court's ruling that the covenant not to compete was unreasonable. The Gonshorowskis also pointed out that Treeline's owners were present at the evidentiary hearing and could have disputed, and in fact did dispute, Gonshorowski's testimony. The Gonshorowskis requested sanctions under Arizona Rule of Civil Procedure 11 for what they characterized as Treeline's redundant and improper attempt to challenge the court ruling that the covenant not to compete was unenforceable. After oral argument, the superior court denied the motion to reopen and granted the motion for sanctions. ¶12 Ultimately, the superior court entered judgment awarding the Gonshorowskis, among other things, $13,957.50 in attorneys' fees incurred in superior court proceedings prior to arbitration and $18,334 in attorneys' fees as Rule 11 sanctions in connection with the post-arbitration briefing. Treeline timely appealed. This court has jurisdiction pursuant to Arizona Revised Statutes (A.R.S.) section 12-2101(A)(1).
business in which [Treeline] is involved at the time of their termination -- as an owner, agent, employee or in any other capacity. This covenant not to compete is enforceable under the Integrity Agreement or with a court injunction. The damages for the violation will be actual damages as proven but no less than $500 a day from the date the violation occurred. This covenant not to compete is warranted because [Treeline] will have given each Team member access to customers, education, experience, and other benefits making it inequitable and unfair for them to use those attributes thus acquired to harm [Treeline] and the other Team members.
In May 2008, Treeline and Gonshorowski signed an amendment to the MRA that changed Gonshorowski's responsibilities and compensation but, in all other respects, reaffirmed the February 2007 Agreements: "[W]ith the exception of the pay structure and job description, the original terms of the partnership contract will remain in place and will be enforced."
After the Gonshorowskis filed their motion to dismiss, Treeline filed a "Notice of Withdrawing Civil Damages Claims," stating Treeline "does not intend to pursue any civil damages in this case." That notice was filed before the Gonshorowskis answered the complaint and before Treeline opposed the motion to dismiss and, accordingly, was filed at a time when Treeline could amend its complaint without leave of court or stipulation. See Ariz. R. Civ. P. 15(a)(1)(B); see also Ariz. R. Civ. P. 7(a) (defining "pleading"). As applicable here, however, the complaint filed originally sought money damages and the notice did not purport to withdraw any count (as opposed to relief requested for certain counts). Accordingly, although the superior court incorrectly found that the notice was not timely, that ruling does not change the analysis on appeal.
Absent material revisions after the relevant dates, statutes cited refer to the current version unless otherwise indicated.
DISCUSSION
I. Applicable Standard of Review.
¶13 Treeline argues that, under the February 2007 Agreements, any dispute about the enforceability of the covenant not to compete was to be addressed through the contracts' ADR provisions and, therefore, the superior court lacked jurisdiction to declare the covenant unenforceable. According to Treeline, the court could only have determined whether a temporary restraining order should issue. Arguing the court could not declare the covenant unenforceable, Treeline asks this court to invalidate that ruling and to award Treeline liquidated damages for Gonshorowskis' alleged breach of the covenant. ¶14 The superior court's ruling on a request for preliminary injunction is reviewed for an abuse of discretion, giving deference to the court's findings of fact unless clearly erroneous. Valley Med. Specialists v. Farber, 194 Ariz. 363, 366, ¶ 9, 982 P.2d 1277, 1280 (1999); Ariz. Ass'n of Providers for Persons with Disabilities v. State, 223 Ariz. 6, 12, ¶ 14, 219 P.3d 216, 222 (App. 2009). Because determining the reasonableness of a covenant not to compete is a fact-intensive inquiry, the superior court's application of law to fact in this context is reviewed for an abuse of discretion. Valley Med. Specialists, 194 Ariz. at 367, ¶11, 982 P.2d at 1280-81. Pure questions of law are reviewed de novo. See In re Estate of Cortez, 226 Ariz. 207, 210, ¶ 3, 245 P.3d 892, 895 (App. 2010).
II. The Superior Court Properly Had Jurisdiction To Determine The Enforceability Of The Covenant Not To Compete.
¶15 A party to an arbitration agreement can waive provisions of that agreement by, among other things, engaging in conduct inconsistent with arbitration. See City of Cottonwood v. James L. Fann Contracting, Inc. , 179 Ariz. 185, 191, 877 P.2d 284, 290 (App. 1994); EFC Dev. Corp. v. F.F. Baugh Plumbing & Heating, Inc. , 24 Ariz. App. 566, 569, 540 P.2d 185, 188 (App. 1975). A party may waive the right to enforce an arbitration agreement by filing an action in superior court for relief available by way of arbitration. See Bolo Corp. v. Homes & Son Constr. Co., 105 Ariz. 343, 345-46, 464 P.2d 788, 790-91 (1970). Waiver occurs where a party "exhibits conduct that clearly warrants inference of an intentional relinquishment." Noel R. Shahan Irrevocable & Inter Vivos Trust v. Staley, 188 Ariz. 74, 78, 932 P.2d 1345, 1349 (App. 1996). ¶16 Treeline filed a complaint in superior court asserting one count for injunctive relief related to the non-compete agreement and nine counts for money damages. The MRA expressly provides that the covenant not to compete was enforceable "under the Integrity Agreement or with a court injunction" and Treeline clearly elected to seek a court injunction. In seeking a court injunction, Treeline repeatedly alleged that Gonshorowski violated the covenant not to compete and, accordingly, repeatedly put at issue with the court the enforceability of the covenant not to compete. ¶17 As Treeline told the superior court, a party seeking a preliminary injunction must show, among other things, "a strong likelihood that he will succeed at trial on the merits." See Shoen v. Shoen, 167 Ariz. 58, 63, 804 P.2d 787, 792 (App. 1990). In seeking a preliminary injunction, Treeline squarely placed at issue the enforceability of the covenant not to compete; in briefing the preliminary injunction (both before and after the evidentiary hearing), Treeline repeatedly and expressly argued the covenant not to compete was enforceable. When the Gonshorowskis argued the covenant not to compete was unenforceable, Treeline did not object to having the court decide the issue but, instead, argued that the covenant was enforceable. Treeline submitted proposed findings and conclusions that included a conclusion of law stating "the terms, conditions and restrictions imposed by the Non-Compete Agreement are reasonably tailored, valid and enforceable to protect the legitimate interests of Treeline." ¶18 After the superior court found the covenant not to compete was unenforceable, Treeline's motion for reconsideration again asked the superior court to find the covenant enforceable. It was not until more than a year later, when moving to reopen the superior court case after effectively losing the arbitration, that Treeline hinted at the suggestion that the superior court might have lacked the jurisdiction to decide the validity of the covenant not to compete. On these facts, Treeline has waived any claim that the court lacked jurisdiction to decide the validity of the covenant not to compete and that the matter had to be referred to arbitration. See Bolo Corp., 105 Ariz. at 345-46, 464 P.2d at 790-91. Having repeatedly argued the validity of the covenant and affirmatively asked the court to decide the validity of the covenant, Treeline waived any argument that the superior court could not decide the enforceability of the covenant not to compete.
Treeline asks this court to award it liquidated damages for Gonshorowski's breach of the covenant. This argument is contingent on Treeline's now-rejected argument that the superior court lacked jurisdiction to determine the validity of the covenant and that the covenant was valid. To the extent this argument is independent of Treeline's preliminary injunction request, it is subsumed in the arbitration award and, for that additional reason, fails.
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III. The Superior Court Did Not Abuse Its Discretion In Awarding Sanctions Against Treeline.
¶19 Treeline contends the superior court abused its discretion in imposing Rule 11 sanctions for Treeline's motion to reopen court proceedings. Rule 11 requires filings to be grounded in fact, supported by law and "not interposed for any improper purpose," and allows "an appropriate sanction" for violations. Ariz. R. Civ. P. 11(a). "The purpose of Rule 11 is to discourage wasteful, costly litigation battles by mandatory sanctions where the position of the lawyer will not support a sound basis in law or fact justifying the position asserted." Wells Fargo Credit Corp. v. Smith, 166 Ariz. 489, 497, 803 P.2d 900, 908 (App. 1990). The court must make specific findings to justify the imposition of Rule 11 sanctions. Id. On appeal, the imposition of Rule 11 sanctions is reviewed for an abuse of discretion. James, Cooke & Hobson, Inc. v. Lake Havasu Plumbing & Fire Prot. , 177 Ariz. 316, 319, 868 P.2d 329, 332 (App. 1993). The facts are viewed in the light most favorable to sustaining the sanctions imposed. Heuisler v. Phoenix Newspapers, Inc., 168 Ariz. 278, 284, 812 P.2d 1096, 1102 (App. 1991). ¶20 The superior court's minute entry imposing Rule 11 sanctions against Treeline states that the reasons for that ruling were "stated on the record." On appeal, Treeline has not provided a transcript of that hearing. Accordingly, the record of that hearing is presumed to support the imposition of Rule 11 sanctions. See Baker v. Baker, 183 Ariz. 70, 73, 900 P.2d 764, 767 (App. 1995) (noting party on appeal is obligated to ensure appellate record contains all information necessary to address issues raised; information not provided is presumed to support superior court's conclusions). ¶21 Quite apart from the lack of a transcript, the record supports the conclusion that Treeline's motion to reopen was not well founded. The superior court initially concluded that the covenant not to compete was unenforceable because it was unreasonable and did not support legitimate interests. Treeline's motion to reopen was based in part on Gonshorowski's allegedly perjurious testimony, none of which related to the bases on which the court had found the covenant was unenforceable and, accordingly, could not have altered that ruling. The motion to reopen was also based on the argument that the superior court erred in treating the circumstances surrounding the covenant not to compete as involving an employer and employee rather than the sale of a business, in which a covenant is more liberally construed. See Valley Med. Specialists, 194 Ariz. at 367-68, ¶ 13, 982 P.2d at 1281-82. This argument repeated an argument made and rejected twice before -- in Treeline's post-hearing brief and in its motion for reconsideration. Because the motion to reopen was not well founded and repeated arguments the court previously rejected, imposing Rule 11 sanctions was not an abuse of discretion.
IV. The Gonshorowskis Are Entitled To Attorneys' Fees On Appeal.
¶22 The Gonshorowskis seek attorneys' fees on appeal pursuant to the February 2007 Agreements. Paragraph 9 of the Integrity Agreement provides that, where a party violates the agreement leading to arbitration or litigation, "all attorney fees . . . and out-of-pocket expenses incurred in the settlement of the dispute shall be paid by the party who violated the Agreement procedures, regardless of whether that party ultimately prevails." The court and the arbitrators concluded that Treeline had violated the Integrity Agreement and was responsible for the Gonshorowskis' attorneys' fees. For these same reasons, the Gonshorowskis are entitled to an award of attorneys' fees incurred on appeal. See First Fed. Sav. & Loan Ass'n of Phoenix v. Ram, 135 Ariz. 178, 181, 659 P.2d 1323, 1326 (App. 1982) (court will enforce a contractual provision for attorneys' fees according to its terms). Having awarded attorneys' fees on appeal based on the provisions of the Integrity Agreement, the Gonshorowskis' request for attorneys' fees on appeal as a sanction is denied as moot.
CONCLUSION
¶23 The superior court's judgment is affirmed. The Gonshorowskis are awarded their attorneys' fees and costs incurred on appeal upon compliance with Rule 21(a), Arizona Rules of Civil Appellate Procedure.
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SAMUEL A. THUMMA, Presiding Judge
CONCURRING: ______________
MICHAEL J. BROWN, Judge
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DIANE M. JOHNSEN, Judge