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Or-Cal Inc. v. Tessenderlo Kerley Inc.

United States District Court, D. Arizona

February 23, 2015

Or-Cal Incorporated, Plaintiff,
Tessenderlo Kerley Incorporated, Defendant.


DAVID G. CAMPBELL, District Judge.

The parties have filed cross-motions for summary judgment. Docs. 43, 44. At issue in this matter is the enforceability of a covenant not to compete. The motions are fully briefed. The Court will grant Defendant's motion for summary judgment and deny Plaintiff's motion for summary judgment.[1]

I. Background.

Plaintiff Or-Cal is an Oregon corporation owned by Steve Horn and George Baker. Doc. 45, ¶ 1. Defendant Tessenderlo Kerley, Inc. ("TKI") is a Delaware corporation and a subsidiary of Tessenderlo Group, a corporation headquartered in Phoenix, Arizona. Id., ¶ 2. Or-Cal and TKI "produce, manufacture, and distribute chemical products for use in agriculture, water treatment, animal supplements, and other specialty markets." Id., ¶ 3.

On January 29, 2004, the companies entered into a Manufacturing Agreement for tolling[2] lime sulfur, [3] wherein TKI agreed to "manufacture, formulate, label, package, and ship Product' to Or-Cal's customers in accordance with Or-Cal's specifications." Doc. 46, ¶¶ 2, 3 (the "Agreement"). "Product" is defined in the Agreement as: "28% Calcium Polysulfide Solution, CAPS or lime sulfur, formulated specifically to meet content requirements of all ORCAL agricultural labels...." Id., ¶ 13. Or-Cal's three agricultural labels[4] are listed in the Agreement as: (1) EPA registration number 71096-11, (2) EPA registration number 71096-0, and (3) Washington State SLN number WA-03008. Id.

The Agreement was negotiated over several weeks. Id., ¶ 4. Both parties were represented by counsel. Doc. 45, ¶ 27. The final version contained a covenant not to compete which prohibited TKI from "directly compet[ing] with ORCAL in sales of registered Product in agricultural markets in the United States for a period of two (2) years following the effective date of termination of [the] Agreement." Id., ¶ 9. The parties also stipulated that Arizona law would govern any disputes. Doc. 46, ¶ 20. The parties also entered into a Confidentiality Agreement to protect proprietary information that might be exchanged during the course of the business relationship. Doc. 49-1, Ex. 3.

Over the next several years, Or-Cal purchased large quantities of specially-formulated lime sulfur from TKI. Or-Cal would place an order, and TKI would ship Product to Or-Cal's customers in Oregon, Washington, California, and Texas. Doc. 46, ¶¶ 5, 7. TKI was not responsible for marketing or selling Or-Cal's Product. Id., ¶ 8.

In 2007, TKI acquired Best Sulfur Products and began manufacturing, marketing, and selling lime sulfur products. Id., ¶¶ 21, 22. TKI also obtained four registered labels for sale of agricultural lime sulfur products. Id., ¶ 23.

On December 17, 2013, TKI notified Or-Cal of its intent to terminate the Agreement effective December 31, 2014. Doc. 45-1, ¶ 11. In late June 2014, TKI informed Or-Cal that it did not intend to honor the covenant not to compete. Doc. 43 at 5. As a result, Or-Cal filed this action for declaratory and injunctive relief. Doc. 1.

II. Legal Standard.

A. Summary Judgment.

A party seeking summary judgment "bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of [the record] which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Summary judgment is appropriate if the evidence, viewed in the light most favorable to the nonmoving party, 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). Summary judgment is also appropriate against a party who "fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex, 477 U.S. at 322. Only disputes over facts that might affect the outcome of the suit will preclude the entry of summary judgment, and the disputed evidence must be "such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). When presented with cross-motions for summary judgment, "the court must consider each party's evidence, regardless under which motion the evidence is offered." Las Vegas Sands, LLC v. Nehme, 632 F.3d 526, 532 (9th Cir. 2011).

B. Covenant Not to Compete.

"Arizona law does not look kindly upon restrictive covenants." Unisource Worldwide, Inc. v. Swope, 964 F.Supp.2d 1050, 1063 (D. Ariz. 2013) (citing Valley Med. Specialists v. Farber, 982 P.2d 1277, 1281 (Ariz. 1999)). Covenants not to compete will be enforced if they are (1) "ancillary to contracts for employment or sale of a business" and (2) "reasonably limited as to time and territory." Gann v. Morris, 596 P.2d 43, 44 (Ariz.Ct.App. 1979). The enforceability of a covenant not to compete is a question of law. Farber, 982 P.2d at 1281. The covenant must protect a legitimate business interest and may not be used merely to stave off competition. Id. In addition, the scope of the covenant must not be greater than necessary to protect the legitimate business interests of the party seeking enforcement. Id. at 1284. ...

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