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Unisource Worldwide, Inc. v. Swope

United States District Court, D. Arizona

August 8, 2013

Unisource Worldwide, Inc., Plaintiff,
v.
Troy Swope, et al., Defendants

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[Copyrighted Material Omitted]

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[Copyrighted Material Omitted]

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For Unisource Worldwide Incorporated, a Delaware corporation, Plaintiff: Daniel P Hart, Robert C Stevens, LEAD ATTORNEYS, Benjamin D Briggs, Erin McPhail Wetty, Seyfarth Shaw LLP - Atlanta, Atlanta, GA; David B Rosenbaum, Scott William Rodgers, LEAD ATTORNEYS, Osborn Maledon PA, Phoenix, AZ.

For Troy Swope, Husband, Michelle Swope, Wife, Defendants: Kimberly Anne Warshawsky, Sara V Ransom, LEAD ATTORNEYS, Ballard Spahr LLP - Phoenix, AZ, Phoenix, AZ.

James Bennitt, Jr., Husband, Defendant, Pro se, Chandler, AZ.

Jane Doe Bennitt, Wife, Defendant, Pro se, Chandler, AZ.

For Jared " Gene" Bearinger, Husband, Jane Doe Bearinger, Wife, Earth Recycle Incorporated, an Arizona corporation, Defendants: Jonathan B Frutkin, Robert Neil Mann, LEAD ATTORNEYS, Frutkin Law Firm, Phoenix, AZ.

For Yoke Chung, Husband, Carrie Ann Chung, Wife, Cary Newton, Jr., Husband, Jane Doe Newton, Wife, Brandon Moore, Husband, Jane Doe Moore, Wife, Defendants: Dee Roland Giles, Michelle Lynn Swann, LEAD ATTORNEYS, Schneider & Onofry PC, Phoenix, AZ.

Dynamic Imaging Distribution LLC, an Arizona corporation, Defendant, Pro se, Chandler, AZ.

For Yoke Chung, Husband, Carrie Ann Chung, Wife, Counter Claimants: Dee Roland Giles, Michelle Lynn Swann, LEAD ATTORNEYS, Schneider & Onofry PC, Phoenix, AZ.

For Unisource Worldwide Incorporated, a Delaware corporation, Counter Defendant: Daniel P Hart, Robert C Stevens, LEAD ATTORNEYS, Benjamin D Briggs, Erin McPhail Wetty, Seyfarth Shaw LLP - Atlanta, Atlanta, GA; David B Rosenbaum, Scott William Rodgers, LEAD ATTORNEYS, Osborn Maledon PA, Phoenix, AZ.

For Troy Swope, Husband, Michelle Swope, Wife, Counter Claimants: Kimberly Anne Warshawsky, Sara V Ransom, LEAD ATTORNEYS, Ballard Spahr LLP - Phoenix, AZ, Phoenix, AZ.

OPINION

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Neil V. Wake, United States District Judge.

ORDER

Before the Court are Defendants Chung, Newton, and Moore's Motion for Judgment on the Pleadings on Counts One, Two, Three, Eleven, and Twelve of the Second Amended Complaint (" Defendants' Motion" ) (Doc. 111), the Response, and the Reply. Defendants' Motion will be granted in part and denied in part.

I. BACKGROUND

On September 25, 2012, Unisource Worldwide, Inc. (" Plaintiff" ), a company involved in the marketing, selling, and distribution of packaging, paper, and facilities supplies products throughout the United States and in other countries, brought suit against Troy Swope, a former employee, alleging breach of contract and other transgressions. Plaintiff's Second Amended Complaint (Doc. 64) added a number of additional defendants to the action, among them Defendants Yoke Chung, Cary Newton, Jr., and Brandon Moore. All three are former employees of United Global Solutions (" UGS" ), a single division of Unisource Worldwide, Inc. engaged in the design, sourcing, sale, and distribution of environmentally friendly packaging material. (Doc. 64 ¶ ¶ 31, 52, 66, 80.) According to Plaintiff, Defendant Chung was the Director of Products and Material Engineering for UGS starting on February 21, 2010; he resigned on November 14, 2012. ( Id. ¶ ¶ 52, 133, 135.) Defendant Newton was employed on November 3, 2010, as UGS' Manager of Business Development -- Technical Packaging, making him responsible for managing customer relationships. ( Id. ¶ ¶ 66-67.) UGS terminated Newton's employment on November 14, 2012. ( Id. ¶ 137.) Finally, Defendant Moore began as a UGS Product Specialist II on October 4, 2009, and was, on August 15, 2011, promoted to the position of Creative Design Engineer II, making him the lead designer for customized packaging designed to fulfill particular customer needs. ( Id. ¶ ¶ 80-82.) He resigned from UGS on November 12, 2012. ( Id. ¶ 133-34.)

The allegations against Defendants Chung, Newton, and Moore are as follows: (1) breach of the non-competition covenant by Chung and Newton (Count 1); (2) breach of the non-solicitation of customers covenant by Chung and Newton (Count 2); (3) breach of the non-recruitment of employees covenant by Chung and Newton (Count 3); and, against all three Defendants, (4) breach of the return of property and information covenants (Count 4); (5) breach of the covenant of confidentiality (Count 5); (6) breach of the duty of loyalty and fiduciary duty (Count 7); (7) violation of the Arizona Trade Secrets Act, sections 44-401 to 44-407 of the Arizona Revised Statutes (Count 10); (8) tortious interference with contractual and business relations (Count 11); (9) civil conspiracy (Count 12); and (10) business defamation (Count 13). Defendants Chung, Newton, and Moore now seek a judgment on the pleadings at to Counts One, Two, Three, Eleven, and Twelve.

II. LEGAL STANDARD FOR JUDGMENT ON THE PLEADINGS

A motion for judgment on the pleadings made pursuant to Federal Rule of Civil Procedure 12(c) is evaluated under the same standard as a Rule 12(b)(6) motion to dismiss. Dworkin v. Hustler Magazine, Inc., 867 F.2d 1188, 1192 (9th Cir. 1989). On a motion to dismiss under Rule 12(b)(6), and therefore on a motion under Rule 12(c), all allegations of material fact are assumed to be true and construed in the light most favorable to the non-moving party. See Cousins v. Lockyer, 568 F.3d 1063, 1067 (9th Cir. 2009). However, the principle that a court accepts as true all of

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the allegations in a complaint does not apply to legal conclusions or conclusory factual allegations. Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). Judgment on the pleadings is appropriate when there are no issues of material fact and when, as a result, the moving party is entitled to judgment as a matter of law. Gen. Conference Corp. of Seventh-Day Adventists v. Seventh-Day Adventist Congregational Church, 887 F.2d 228, 230 (9th Cir. 1989).

III. CLAIMS POTENTIALLY FACING PREEMPTION

Count Eleven alleges against all Defendants tortious interference with contractual and business relations, and Count Twelve alleges against all Defendants a civil conspiracy. (Doc. 64 ¶ ¶ 212-28.) Defendants contend that these counts are preempted by the Arizona Uniform Trade Secrets Act (" AUTSA" ), sections 44-401 through 44-407 of the Arizona Revised Statutes, and accordingly seek dismissal. Plaintiff asserts that the conduct alleged in Counts Eleven and Twelve goes beyond the scope of claims preempted by the ATSA; Plaintiff also seeks leave to amend if the claims in the two counts remain unclear.

A. Factual Overview

The factual allegations in Count Eleven include the following: (1) Defendants had knowledge of Plaintiff's customer and employee relationships; (2) Defendants solicited Plaintiff's customers to discontinue their business with Plaintiff and potentially to purchase the products and services that they had previously gotten from Plaintiff from a competitor; (3) Defendants sought to have Plaintiff's employees leave Plaintiff and work for a competitor; and (4) Defendants induced one another to violate their restrictive covenants and to disclose Plaintiff's confidential information and trade secrets. ( Id. ¶ ¶ 213-21.) For Count Twelve, Plaintiff alleges that Defendants, among other things, conspired to delete, share, and/or misappropriate Plaintiff's confidential information and trade secrets. ( Id. at ¶ ¶ 223-28.) In both counts, Plaintiff also incorporates by reference all preceding allegations in the Second Amended Complaint. ( Id. ¶ ¶ 212, 222.) Finally, Plaintiff separately alleges in Count Ten that Defendants' actions violated the AUTSA because Defendants acquired Plaintiff's trade secrets by improper means and used or disclosed those trade secrets without consent. ( Id. ¶ ¶ 206-11.)

B. Legal Background

The Arizona Uniform Trade Secrets Act (" AUTSA" ) codifies the common-law protection of trade secrets and lays out the relief available for misappropriation of a trade secret. A.R.S. § § 44-401 to 44-407. Under the statute, a " trade secret" is information that: (1) derives independent economic value from being not widely known and not easily determinable; and (2) is the subject of reasonable efforts to maintain its secrecy. Id. § 44-401(4). In broad terms, " misappropriation" is the acquisition of a trade secret by someone who knows that improper means were used to obtain the information, or the disclosure or use of a trade secret without the consent of its owner under certain circumstances. Id. § 44-401(2). Further, the AUTSA contains a preemption clause: " [T]his chapter displaces conflicting tort, restitutionary and other laws of this state providing civil remedies for misappropriation of a trade secret." Id. § 44-407. Contractual remedies, regardless of whether they are rooted in a misappropriation claim, and civil remedies that are not based on misappropriation claims remain unaffected by the AUTSA. Id.

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1. Preemption of Information other than Trade Secrets

Arizona state courts have not addressed the issue of whether the AUTSA only preempts claims based on misappropriation of information that meets the statutory definition of " trade secret" or whether claims based on misappropriation of information that falls short of that definition might likewise be preempted. In the absence of guidance from the state high court, a federal court evaluates the issue using intermediate appellate court decisions, decisions from other jurisdictions, treatises, and other sources. Vestar Dev. II, LLC v. Gen. Dynamics Corp., 249 F.3d 958, 960 (9th Cir. 2001) (citation omitted). A number of jurisdictions have identical preemption provisions in their trade-secrets statutes, as the statutes derive from the Uniform Trade Secrets Act (" UTSA" ). Among courts in those jurisdictions, " [t]he majority interpretation appears to be that the UTSA preempts all common law tort claims based on misappropriation of information, whether or not it meets the statutory definition of a trade secret." Firetrace USA, LLC v. Jesclard, 800 F.Supp.2d 1042, 1048 (D. Ariz. 2010); see also Hauck Mfg. Co. v. Astec Indus., Inc., 375 F.Supp.2d 649, 655 (E.D. Tenn. 2004) (noting that the preemption provision has " generally been interpreted to abolish all free-standing alternative causes of action for theft or misuse of confidential, proprietary, or otherwise secret information falling short of trade secret status" ).

Multiple justifications support the majority interpretation. First, the purpose of the statutory scheme was to " create a uniform business environment [with] more certain standards for protection of commercially valuable information." Firetrace, 800 F.Supp.2d at 1048 (quoting Mortg. Specialists, Inc. v. Davey, 153 N.H. 764, 775-76, 904 A.2d 652, 663 (2006)). Preemption in particular furthers the goals of " uniformity and clarity that motivated the creation and passage" of an act addressing trade-secret protection. Id. at 1049 (quoting Auto Channel, Inc. v. Speedvision Network, LLC, 144 F.Supp.2d 784, 789 (W.D. Ky. 2001)). If the AUTSA only preempted torts concerning misappropriation of bona fide trade secrets, then " [i]n every instance where a plaintiff could not meet the statutory requirements of the [AUTSA], the court would be forced to re-analyze the claim under the various common law theories." Auto Channel, 144 F.Supp.2d at 789. The effort to imbue the contours of trade-secret protection with some certainty would be undermined if the AUTSA preemption clause only applied when actual trade secrets, and not information falling short of that standard, were involved. Firetrace, 800 F.Supp.2d at 1048.

In addition, to the extent that a secondary objective of preemption is to promote efficiency and conserve judicial and party resources, that objective is undermined if the court must consider the often complex question of whether information constitutes a trade secret before addressing preemption. Accordingly, it must be the case that the AUTSA preempts torts ...


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