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Modus LLC v. Encore Legal Solutions Inc.

United States District Court, D. Arizona

April 16, 2014

Modus LLC, Plaintiff/Counter-Defendant/Third-Party Defendant,
v.
Encore Legal Solutions Inc., d/b/a Encore Discovery Solutions, Defendant/Counter-Plaintiff. and Epiq Systems, Inc., Third-Party Plaintiff

ORDER

JAMES A. TEILBORG, Senior District Judge.

Pending before the Court is Defendant/Counter-Plaintiff's and Third-Party Plaintiff's Motion for Leave to File Third Amended Answer, Counterclaim, and Third-Party Complaint (Doc. 107).

I. BACKGROUND

This dispute arises from Plaintiff Modus LLC's ("Modus") hiring of former employees of Defendant Encore Legal Solutions, Inc. ("Encore"). Encore, which is wholly owned by Epiq Systems, Inc. ("Epiq"), alleges it directly competes with Modus in the electronic discovery industry. (Doc. 68 at 9, 15). The employees at issue, Curtis Craghead, Michael Malone, Cean Siegel, and Michael Lindsey (collectively, the "Employees") were employed by Encore and each signed an employment agreement (the "Employment Agreement"). (Doc. 68 at 10-11). The Employment Agreement contained several restrictive covenants, including a confidentiality provision and a non-compete provision (the "Non-Compete Agreement"):

CONFIDENTIAL EPIQ INFORMATION. I agree at all times during the term of my employment and thereafter, to hold in strictest confidence, and not to use or disclose to any person, firm or corporation, except for the direct benefit of Epiq Systems, Inc. and its subsidiaries and affiliates (collectively, "Epiq"), without written authorization of the Board of Directors of Epiq Systems, Inc., any Confidential Information of Epiq or of any of its customers. I understand that "Confidential Information" means any information of Epiq, its vendors or its customers including but not limited to any proprietary information, technical data, trade secrets or know-how, information relating to research, product plans, products, services, customer lists, customers, markets, software, developments, inventions, processes, formulas, technology, designs, drawings, engineering, hardware configuration, marketing or finances, or other business information in any form including but not limited to electronic, oral, visual, or hard copy. I further understand that Confidential Information does not include any of the foregoing information or items that are publicly known and generally available through no wrongful act of mine or of others who were under confidentiality obligations as to the item(s) or information involved.
* * *
NON-COMPETITION.... I agree that for a period of six (6) months immediately following the termination of my employment with the Company for any reason, I will not participate in, provide, promote, associate my name with, supervise, finance or manage (as an employee, consultant, contractor, officer, owner, director, or otherwise) any activities or services on behalf of a Competitor that are the same or similar in function or purpose to those I performed, managed, or promoted for the Company in the two (2) year period preceding the termination of my employment (or such lesser time as I was employed). This restriction will only apply in the Restricted Area.... As used herein, a "Competitor" is any person or entity that provides a product and/or service that would displace or compete with a Company product or service that I was involved in or was provided Confidential Information about in the course of my employment and that the Company continues to provide as part of its business while this contract applies. The "Restricted Area" is the territories where I performed services for the Company....

(Doc. 71-1 at 34).

Each of the Employees resigned from Encore and subsequently was hired by Modus. (Doc. 68 at 16-17). After Encore confronted Modus about hiring the Employees in alleged violation of the Employment Agreement, Modus brought this action for a declaratory judgment. (Doc. 1 at 6-8). Encore (along with Epiq as a third-party plaintiff) counterclaimed for tortious interference with contractual relations and violation of the Arizona Trade Secrets Act, and sought injunctive relief. (Doc. 16; Doc. 68 at 22-26). The Court stayed the proceedings pending arbitration between Encore and the Employees. (Doc. 56). Following the lifting of the stay (Doc. 65) and the filing of the Second Amended Answer, Counterclaim and Third-Party Complaint (Doc. 68), Modus filed a motion to dismiss (Doc. 69). The Court issued a Federal Rule of Civil Procedure ("Rule") 16 Scheduling Order setting the deadline to amend the complaint as September 27, 2013, and the deadline to amend the answer as October 11, 2013. (Doc. 74). On December 17, 2013, the Court issued an Order granting in part and denying in part Modus' Motion to Dismiss the Second Amended Counterclaim and Third-Party Complaint. (Doc. 97).

On October 17, 2013, the Arizona Court of Appeals, as a matter of first impression for Arizona, held that the Arizona Uniform Trade Secrets Act ("AUTSA") does not preempt a common-law tort claim based on the misuse of confidential information that does not rise to the level of a trade secret. Orca Commc'ns Unltd., LLC v. Noder, 314 P.3d 89, 98 ΒΆ 30 (Ariz.Ct.App. 2013). On January 21, 2014, Encore and Epiq filed their Motion for Leave to File Third Amended Answer, Counterclaim, and Third Party Complaint, seeking to add "a [new] claim for unfair competition due to misappropriation of confidential information that does not rise to the level of trade secret information since this claim is no longer preempted by the AUTSA, " based on the Orca decision. (Doc. 107 at 4).

II. LEGAL STANDARD

Generally, Rule 15(a) governs a motion to amend pleadings to add claims or parties. However, in the present case, Rule 16 also applies because Plaintiffs requested leave to amend their complaint after the Rule 16 Scheduling Order deadline expired. Therefore, it is appropriate to discuss both Rule 15 and Rule 16.

Rule 15(a) provides in pertinent part:

(1) A party may amend the party's pleading once as a matter ...

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