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stating that under Arizona law, “ ‘ list of customers, if their trade and patronage have been secured by years of business effort and advertising and the expenditure of time and money’ has been held to ‘constitute an important part of a business' that merits protection as a trade secret”
Summary of this case from Unisource Worldwide, Inc. v. SwopeOpinion
No. CIV 07-866 PHX RCB.
June 12, 2007
ORDER
This matter arises out of a diversity action brought in this Court by Plaintiffs Inter-Tel (Delaware), Inc., Inter-Tel Integrated Systems, Inc., and Inter-Tel Technologies, Inc. (collectively "Inter-Tel") based on allegations of unfair competition, breach of contract, misappropriation of trade secrets, and other statutory violations and tortious conduct. Compl. (doc. # 1). Currently pending before the Court are Plaintiffs' motion for preliminary injunction (doc. # 2) against Defendant Fulton Communications Telephone Company, Inc. ("Fulton") and a related motion for expedited discovery (doc. # 3).
The record reflects that Fulton was served on April 27, 2007, but did not file an answer to the complaint until May 21, 2007. Summons (doc. # 7); Answer (doc. # 8). Fulton has not yet filed a response in opposition to either of Plaintiffs' pending motions (doc. ## 2-3), both of which were filed on April 25, 2007, and the time to serve and file a responsive memorandum has long since passed. See LRCiv 7.2(c) and App. A ("Time Chart"). Under Local Rule of Civil Procedure 7.2(i), the Court may deem a party's lack of opposition — or untimely opposition — as consent to the granting of a motion, and may grant the motion summarily if it is facially meritorious. LRCiv 7.2(i); Henry v. Gill Indus., Inc., 983 F.2d 943, 950 (9th Cir. 1993). Although Plaintiffs had requested an evidentiary hearing, the Court finds the matter suitable for decision without oral argument under these circumstances. See LRCiv 7.2(f). Having carefully considered the arguments raised, the Court now rules.
Because counsel has appeared on its behalf, the Court has jurisdiction over Fulton.
I. BACKGROUND
Inter-Tel is involved in the business of selling and leasing telecommunications products and services through arrangements with third party dealers as well as its own direct sales efforts. Compl. (doc. # 1), Ex. 1 ¶¶ 4-5. This case concerns a dispute with one of those dealers, Fulton, which has hired three former Inter-Tel employees who have allegedly divulged confidential lists of Inter-Tel's customers to Fulton in violation of restrictive covenants in their employment agreements with Inter-Tel. Fulton, for its part, is alleged to have violated its dealer agreement with Inter-Tel by failing to notify Inter-Tel of the known conversion of its customer lists. As such, this case revolves around the trade secrets provision of Fulton's dealer agreement as well as the restrictive covenants in the employment agreements of former Inter-Tel employees Benjamin Treadway, Brian Hawk, and Brian McPherson.
A. Former Inter-Tel Employees
Treadway is currently Fulton's President and Chief Executive Officer. Id. ¶ 6. Prior to his work with Fulton, Treadway was employed by Inter-Tel from January 11, 1993 until his resignation on March 8, 2006, at which time he served as Inter-Tel's Regional Vice President of Technologies, Eastern Region. Id.
Hawk is currently Fulton's Sales Manager. Before joining Fulton, Hawk was employed by Inter-Tel from July 29, 1997 until May 26, 2006, when he resigned from his position as General Manager of Inter-Tel's Atlanta office. See Mot. (doc. # 2), Ex. C.
McPherson is currently a Fulton Sales Representative. Previous to that, McPherson was employed by Inter-Tel from September 3, 2002 until April 3, 2007, when he resigned from his position as Sales Manager. See Mot. (doc. # 2), Ex. D.
B. Customer Lists
As sales employees, Treadway, Hawk, and McPherson had access to Inter-Tel's customer lists. Compl. (doc. # 1), Ex. 1 ¶ 13. These lists, maintained on different electronic databases, contain such information as customers' names, contact persons, maintenance histories, warranty records, contract prices, and contract expiration dates. Id. ¶ 15. According to Inter-Tel, this information, which has been generated over several years of operation, is critical to the success of its sales efforts, allowing its representatives to make timely offers to customers for the renewal or upgrade of their equipment and service contracts. See id. ¶¶ 15-16. As a result, Inter-Tel has limited the availability of this information to selected individuals within its organization, has admonished those individuals not to share the information, has frequently discussed the importance of its confidentiality at regional and senior-level sales meetings — many of which have been attended by Treadway, Hawk, and McPherson — and, most importantly, has incorporated restrictive covenants into the employment agreements of those representatives expected to come into contact with the confidential customer lists. Id. ¶¶ 18-19.
C. The Employment Agreements
The employment contracts of Treadway, Hawk, and McPherson all contain a non-disclosure provision operative both during and subsequent to their employment with Inter-Tel, prohibiting the use or disclosure of Inter-Tel's "Confidential Information" without prior written authorization. See Mot. (doc. # 2), Ex. B, C, D. The agreements further state that "Confidential Information" includes, inter alia, "Customer Information," which is defined as follows:
Customer lists, including the names, addresses and telephone numbers of the contact persons or decision makers for any customers or prospective customers of the Company, as well as information related to the history of negotiations, buying history, financial plans or data provided by the customer in confidence, billing information, business plans, particular needs, service history and the terms of any contracts or proposals made to any customer or prospective customer of the Company and any other information provided by the customer in confidence.See, e.g., Mot. (doc. # 2), Ex. B at 3. The agreements further prohibit the employees from copying or disclosing such information "except in furtherance of [Inter-Tel's] business."Id.
Other post-employment restrictive covenants in the above employment agreements include a covenant against unfair competition, a covenant not to solicit Inter-Tel customers for a period of one-year following employment with Inter-Tel, a covenant not to interfere with contracts, and a covenant not to solicit employees, vendors, suppliers, and contractors. See, e.g., id. at 4-5.
D. Violations of Restrictive Covenants by Former Employees
Inter-Tel alleges that McPherson and the others have breached these covenants before and after their departures from Inter-Tel. In particular, Inter-Tel has presented evidence that McPherson was in communication with Treadway and Hawk about possible employment with Fulton as early as February 19, 2007 — one month prior to his announced resignation from Inter-Tel. See Mot. (doc. # 2), Ex. E.
On March 13, 2007, one week prior to his resignation and nearly three weeks before his employment with Inter-Tel ended, McPherson sent an email from his Inter-Tel account to Hawk's email account at Fulton with an attached document surreptitiously titled "Mapquest Directions.xls." Mot. (doc. # 2), Ex. H. Inter-Tel believes that this file actually contains confidential and valuable customer information. See Mot. (doc. # 2) at 9.
The Court takes judicial notice of the fact that (1) the ".xls" file extension denotes a computer file accessible by the Microsoft Excel spreadsheet application, and (2) that the popular Internet utility, MapQuest, does not transmit driving directions to users in this file format.
Shortly thereafter, McPherson sent a second email from his Inter-Tel account to his personal account carrying an attached document titled "Atlanta Jan 2007 maint.xls." Mot. (doc. # 2), Ex. G. Inter-Tel believes that the document transferred by McPherson is a customer list of more than 2,200 active accounts including details of their installed systems and products, monthly contract revenue, and remaining contract duration. See Mot. (doc. # 2) at 9; Compl (doc. # 1), Ex. 1 ¶ 20.
McPherson sent a third email from his Inter-Tel account to his personal account with the subject header "FW: Cust List-All," carrying an attached document titled "ATLANTA STANDARD CONTRACTS.xls." Mot. (doc. # 2), Ex. G.
There is also evidence of email correspondence between McPherson and Inter-Tel employee Jackie Gorham on April 19, 2007 in which McPherson attempts to solicit Gorham to leave Inter-Tel to join Fulton. Compl. (doc. # 1), Ex. 4.
E. The Dealer Agreement
Fulton became an Inter-Tel dealer shortly after Treadway's departure from Inter-Tel. Compl. (doc. # 1), Ex. 1 ¶ 7. As an Inter-Tel dealer, Fulton is privy to sensitive information, id. ¶ 9, and has covenanted accordingly in its dealer agreement to protect the confidentiality of that information as follows:
[Fulton] shall use its best efforts to ensure that neither [Fulton] not any of its employees will convert to their own use or to the use of any other party any industrial secrets, copyrights, trade secrets, patents, manufacturing or other processes (confidential information) or the like, owned by Inter-Tel, that is obtained by [Fulton] by reason of [the Dealer] Agreement or otherwise.
Mot. (doc. # 2), Ex. A at 14. Fulton further agreed to notify Inter-Tel in writing of any suspected act of conversion of such confidential information. Id. Under the dealer agreement, Fulton's failure to provide Inter-Tel such notice constitutes a material breach allowing immediate unilateral termination by Inter-Tel. Id.
F. Violation of the Dealer Agreement
Inter-Tel has recently received notice from some of its larger direct sales clients that they have been solicited by Fulton, and has surmised from these contacts and the record of McPherson's email correspondence that these clients were solicited by its former employees through the use of the misappropriated customer lists. See Compl. (doc. # 1), Ex. 1 ¶ 23. Given Treadway's role as Fulton's current CEO, and the former Inter-Tel employees' positions in Fulton's sales organization, Inter-Tel believes that Fulton is aware of the conversion and improper use of its confidential information, has failed to give notice of the same, and is therefore in breach of its dealer agreement.
Inter-Tel filed this action and this motion seeking preliminary injunctive relief on April 25, 2007. It has apparently also initiated parallel arbitration proceedings against Treadway, Hawk, and McPherson. See Mot. (doc. # 2) at 3-4, n. 3.
II. STANDARD OF REVIEW
The purpose of a preliminary injunction is to preserve the status quo among the parties pending a final decision on the merits of the action. See Fed.R.Civ.P. 65; Dep't of Parks Recreation v. Bazaar Del Mundo, Inc., 448 F.3d 1118, 1124 (9th Cir. 2006). The Court may grant a preliminary injunction if the moving party demonstrates (1) a probability of success on the merits and the possibility of irreparable harm, or (2) that the lawsuit raises serious questions and the balance of hardship tips sharply in the movant's favor. Save Our Sonoran, Inc. v. Flowers, 408 F.3d 1113, 1120 (9th Cir. 2005). "These two formulations represent two points on a sliding scale in which the required degree of irreparable harm increases as the probability of success decreases. They are not separate tests but outer reaches of a single continuum." Id. (internal quotation and citation omitted).
III. CHOICE OF LAW
In addition to seeking relief under Arizona's Uniform Trade Secrets Act, Ariz. Rev. Stat. §§ 44-401 et seq., and the Federal Computer Fraud and Abuse Act, 18 U.S.C. § 1030, Inter-Tel has asserted various state law claims for alleged tortious conduct and breach of contract by Fulton. Compl. (doc. # 1) ¶¶ 59-117. Because this is a diversity case arising in part from alleged misconduct occurring in Georgia, the Court applies federal procedural law and state substantive law. Erie R.R. v. Tompkins, 304 U.S. 64, 78-79 (1938). Inter-Tel points to two clauses in its dealer agreement with Fulton providing (1) that Arizona law would govern the parties' rights and liabilities under the dealer agreement, and (2) that the parties would waive any defenses relating to venue for actions brought in the state or federal courts located in Maricopa County, Arizona. Mot. (doc. # 2) at 3 n. 2. The Court will consider first the enforceability of the forum selection clause.
That choice of law provisions states that "[the dealer agreement] shall be governed by and construed in accordance with the laws of the State of Arizona without giving effect to choice of law doctrines." Mot. (doc. # 2), Ex. A at 15.
For purposes of determining venue, Erie principles require that federal law apply to both the enforcement and interpretation of forum selection clauses. Manetti-Farrow, Inc. v. Gucci Am., Inc., 858 F.2d 509, 512-13 (9th Cir. 1988). Forum selection clauses are presumptively valid. See The Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 10 (1972). Because Defendants have not challenged its enforceability, the Court will proceed on the basis that the forum selection clause is enforceable.
Notwithstanding the dealer agreement's choice of law provision, the Court must apply Arizona choice of law rules. See Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487 (1941); Orr v. Bank of Am., 285 F.3d 764, 772 n. 4 (9th Cir. 2002). Arizona courts apply the principles of conflict of laws as expressed in the Restatement, even in the face of contractual choice of law provisions, as the one employed here, which purport to preclude the courts from engaging such analysis. Jackson v. Chandler, 204 Ariz. 135, 61 P.3d 17 (2003); Swanson v. Image Bank, Inc., 206 Ariz. 264, 77 P.3d 439, 441 n. 2 (2003) (rejecting parties' attempt to preclude court from applying conflict of laws principles as "unsound and contrary to the intent of [the Restatement]"); cf. Magellan Real Estate Inv. Trust v. Losch, 109 F. Supp. 2d 1144, 1155 (D. Ariz. 2000) (finding choice of law provision inapplicable to tort claims asserted by one contracting party against another). Because the dealer agreement's choice of law provision is not dispositive under Arizona law, the Court will determine what law to apply to Inter-Tel's contract and tort claims according to principles of conflicts of laws.
With respect to Inter-Tel's contract claims, Compl. (doc. # 1) ¶¶ 79-94, the Court is satisfied that, for reasons of certainty, predictability and convenience, Arizona law should govern the parties' contractual rights and duties as they have agreed in the dealer agreement. See Restatement (Second) of Conflict of Laws § 187 (1971).
As to Inter-Tel's claims of conversion, tortious interference with contract, and unfair competition, Compl. (doc. # 1) ¶¶ 73-78, 102-17, the Court will determine the parties' rights and liabilities according to "the local law of the state which, with respect to that issue, has the most significant relationship to the occurrence and the parties under the principles stated in [Restatement] § 6." See Restatement (Second) of Conflict of Laws § 145(1) (1971). The principles stated in § 6 include the following:
(a) the needs of the interstate and international systems,
(b) the relevant policies of the forum,
(c) the relevant policies of other interested states and the relative interests of those states in the determination of the particular issue,
(d) the protection of justified expectations,
(e) the basic policies underlying the particular field of law,
(f) certainty, predictability and uniformity of result, and
(g) ease in the determination and application of the law to be applied.Id. § 6(2). In applying these principles, the Court will also consider "(a) the place where the injury occurred, (b) the place where the conduct causing the injury occurred, (c) the domicil, residence, nationality, place of incorporation and place of business of the parties, and (d) the place where the relationship, if any, between the parties is centered." Id. § 145(2).
In the present case, the conduct allegedly causing Inter-Tel's injuries appears to have occurred solely in Georgia. See Compl. (doc. # 1) ¶¶ 19-58; Mot. (doc. # 2) at 2-11. Likewise, the injuries of which Inter-Tel complains are primarily those of economic harm to its business interests in the Georgia market.See Mot. (doc. # 2), Ex. 1 ¶ 23; Mot. (doc. # 2) at 15-16; Compl. (doc. # 1), Ex. 4. Although Inter-Tel's principal place of business is located in Arizona, Fulton is a Georgia corporation with its principal place of business in Georgia. Compl. (doc. # 1) ¶¶ 1-6. Finally, it is clear that the parties' business relationship at the time of Fulton's alleged misconduct was based in Georgia. Id. ¶¶ 8, 19-58. Collectively, these factors strongly favor the application of Georgia law to the tort issues in this case.
Given the prevalence of the Georgia contacts, the Court finds that the "further[ance] of harmonious relations between states" and the "facilitat[ion] [of] commercial intercourse between them" counsels for the application of Georgia law. See id. § 6, cmt. d (regarding needs of the interstate system). It may have been a countervailing, although not determinative, consideration if the relevant policies of Arizona, as the forum state, differed significantly from Georgia law on the relevant tort issues. See id. § 6(2)(b) (relevant policies of the forum). Since there are no other interested states, the Court concludes that the policies of the forum and interested states favor the application of Georgia law. See id. § 6(a), (b), and (c). Moreover, the mere fact that the parties have expressed a preference for Arizona law in the dealer agreement does not create any "justified expectations" or interest in "uniformity of result" with regard to their rights and liabilities for any tortious conduct. See Restatement (Second) of Conflict of Laws § 6, cmt. g; Id. § 145, cmt. b.
For all of the foregoing reasons, the Court finds that Georgia is the state with the most significant relationship to the occurrence and the parties with respect to Inter-Tel's claims of conversion, tortious interference with contract, and unfair competition. Therefore, Georgia law will apply to the resolution of those claims.
Although the issue of choice of law had not been briefed, the Court finds it necessary to decide these questions in determining the extent of injunctive relief to which Inter-Tel may be entitled. The Court does so, however, without prejudice to the right of any party to revisit questions of choice of law in the future.
IV. DISCUSSION
Inter-Tel seeks a preliminary injunction to enjoin Fulton from (1) using or disclosing any of Inter-Tel's confidential information to anyone, (2) entering into a contract with, soliciting, or attempting to solicit any Inter-Tel customer that is identified on any Inter-Tel customer lists in the possession of Fulton or its agents for the purpose of selling or leasing telecommunications equipment, and (3) soliciting or encouraging any Inter-Tel employee based in Georgia from leaving the employ of Inter-Tel. Mot. (doc. # 2) at 1-2.
A. Probability of Success on the Merits
Inter-Tel's request is based on its breach of contract claim, Arizona Uniform Trade Secrets Act claim, and unfair competition claim. Id. at 11-15. The Court considers each theory in turn.
1. Breach of Contract Claim
Under the dealer agreement, Fulton agreed "to use its best efforts to ensure that neither it nor any of its employees w[ould] convert to their own use" any of Inter-Tel's confidential information." Mot. (doc. # 2), Ex. A at 14. Here, it appears that Fulton not only failed to use its best efforts to protect Inter-Tel's confidential information, but acted with a deliberate design to obtain Inter-Tel's client lists and convert them to its own use, as evidenced by McPherson's emails and Fulton's subsequent solicitation of Inter-Tel's customers. See Mot. (doc. # 2), Ex. F, G, H; Compl. (doc. # 1), Ex. 1 ¶ 23. Therefore, Inter-Tel's unopposed motion for preliminary injunction demonstrates a strong probability of success on the merits of the breach of contract claim. See Coml. (doc. # 1) ¶¶ 79-87; Mot. (doc. # 2) at 11-12.
2. Arizona Uniform Trade Secrets Act
Under Arizona's Uniform Trade Secrets Act, the Court may enjoin "[a]ctual or threatened misappropriation" of a trade secret, and may compel other "affirmative acts to protect a trade secret." Ariz. Rev. Stat. § 44-402(A), (C) (West 2003). While matters of public knowledge cannot be protected as such, a trade secret may consist of a combination of such elements. Enter. Leasing Co. v. Ehmke, 197 Ariz. 144, 149, 3 P.3d 1064, 1069 (Ct.App. 1999). "A list of customers, if their trade and patronage have been secured by years of business effort and advertising and the expenditure of time and money" has been held to "constitute an important part of a business" that merits protection as a trade secret.Prudential Ins. Co. v. Pochiro, 153 Ariz. 368, 371, 736 P.2d 1180, 1183 (Ct. App. 1987) (quotations and citation omitted).
In the present case, Inter-Tel's customer lists are clearly in the nature of a trade secret, particularly in light of the contract, maintenance, and warranty information that is not generally known outside of Inter-Tel's sales organization, as well as the affirmative acts taken by Inter-Tel to protect the secrecy of this information. Moreover, in light of circumstances indicative of Fulton's wrongful conduct in obtaining and using Inter-Tel's customer lists, Inter-Tel has demonstrated a substantial probability of success on the merits of its claim under the Arizona Uniform Trade Secrets Act.
3. Unfair Competition
Under the principles of unfair competition, a person "who causes harm to the commercial relations of another by engaging in a business or trade" may be liable to the other for such harm arising "from other acts or practices of the actor determined to be actionable as an unfair method of competition, taking into account the nature of the conduct and its likely effect on both the person seeking relief and the public." Restatement (Third) of Unfair Competition § 1 (1995). While a person is generally not liable for soliciting a competitor's employees who are not under contract, the former employer does have a cause of action where the soliciting competitor "is guilty of some concomitant, unconscionable conduct." See, e.g., Reeves v. Hanlon, 33 Cal. 4th 1140, 1150, 95 P.3d 513, 518 (2004).
Inter-Tel has not cited any Georgia law in support of its unfair competition theory. However, based on the above persuasive authority, and the evidence of McPherson's attempts to solicit an Inter-Tel employee to join Fulton in violation of the post-employment non-solicitation clause in his employment contract with Inter-Tel, see Compl. (doc. # 1), Ex. 4; Mot. (doc. # 2), Ex. D at 6, the Court finds that Inter-Tel has demonstrated a reasonable probability of success on the merits of its unfair competition claim.
B. Possibility of Irreparable Harm
Under Arizona law, "once a protectable interest is established, irreparable injury is presumed to follow if the interest is not protected." Phoenix Orthopaedic Surgeons, Ltd. v. Peairs, 164 Ariz. 54, 59, 790 P.2d 752, 757 (Ct.App. 1989). The possibility of irreparable injury to Inter-Tel from Fulton's alleged misconduct is palpable. The Court has no reason to question Inter-Tel's assertion that Fulton's efforts to lure its employees and largest customers away by the use of its allegedly misappropriated customer lists would cause lasting and irreparable damage to Inter-Tel's business interests in the Georgia market. See Compl. (doc. # 1), Ex. 1 ¶¶ 22-23. With respect to the alleged violations of the non-solicitation clauses of the former Inter-Tel employees' contracts, injunctive relief will provide an effective enforcement mechanism during the limited duration of those restrictive covenants. With regard to Fulton's alleged misappropriation and use of Inter-Tel's confidential customer lists, injunctive relief may be the only effective avenue of relief.
For all of the foregoing reasons, Inter-Tel's unopposed motion for preliminary injunction (doc. # 2) will be granted as facially meritorious. LRCiv 7.2(i); Henry v. Gill Indus., Inc., 983 F.2d 943, 950 (9th Cir. 1993). The matter of preliminary injunctive relief being resolved, Plaintiff's related motion for expedited discovery (doc. # 3) will be denied as moot.
IT IS THEREFORE ORDERED that Inter-Tel's motion for preliminary injunction is GRANTED.
IT IS FURTHER ORDERED directing Defendant Fulton, until further notice from the Court, to refrain from (1) using or disclosing any of Inter-Tel's confidential information to anyone, (2) entering into a contract with, soliciting, or attempting to solicit, for the purpose of selling or leasing telecommunications equipment, any Inter-Tel customer that is identified on any Inter-Tel customer lists in the possession of Fulton or its agents, and (3) encouraging, soliciting, or attempting to solicit any Inter-Tel employee based in Georgia from leaving the employ of Inter-Tel to join Fulton.
IT IS FURTHER ORDERED that Inter-Tel's motion for expedited discovery (doc. # 3) is DENIED as moot.