United States District Court, D. Arizona
CINDY K. JORGENSON, District Judge.
Plaintiffs Joshua David Mellberg, LLC, dba J.D. Mellberg Financial, and Joshua David Mellberg filed a First Amended Complaint asserting 11 counts against various Defendants. (Doc. 9, FAC) Four motions are now pending before the Court: (1) Partial Motion to Dismiss filed by Defendants Jovan Will and Tree Fine (Doc. 22); (2) Motion to Dismiss filed by Defendant the Impact Partnership (Doc. 27); (3) Partial Motion to Dismiss filed by Defendants Fernando & Geovanna Godinez (Doc. 30); and (4) Motion to Dismiss filed by Defendant Carly Uretz (Doc. 34). Following oral argument on November 13, 2014, Magistrate Judge Charles R. Pyle issued a Report and Recommendation (R & R) on February 9, 2015, (1) denying in part and granting in part Defendant Will and Fine's Partial Motion to Dismiss; (2) granting Defendant Impact Partnership's Motion to Dismiss; (3) granting Defendant Godinez' Partial Motion to Dismiss; and (4) granting Defendant Uretz' Motion to Dismiss. (Doc. 45.) With the exception of certain claims in the Third Claim (Unfair Competition), the Magistrate Judge recommended that all dismissed claims be dismissed with leave to amend. ( Id. at 33.)
Plaintiffs files objections to the R & R to the extent that it recommends that certain unfair competition claims be dismissed as based on theories too novel to be permitted to go forward. (Doc. 46.) Defendant Jovan Will objects to the R & R on the ground that the FAC contains no plain statement that Will misappropriated trade secrets. (Doc. 47.) Defendant Tree Fine objects to the R & R on the ground that the Confidentiality Agreement is facially unenforceable. (Doc. 48.)
The Court overrules the objections and adopts the R & R.
Plaintiffs are Joshua David Mellberg, LLC, dba J.D. Mellberg Financial, and Joshua David Mellberg, an individual (collectively referred to as "JDM" or "Plaintiffs"). Joshua David Mellberg is the owner and President of JDM. (FAC ¶16.) He is a nationally known financial advisor based in Tucson, Arizona, and "is a pioneer and leader in marketing and selling annuities via the Internet." ( Id. ¶¶17, 18.) JDM Mellberg Financial is a nationwide retail and wholesale insurance agency specializing "in capturing internet based leads and supplying them to a network of agents across the country. JDM began developing internet based marketing and sales funnels in 2009." ( Id. ¶22; see also id. ¶23 (JDM has expended in excess of $30 million refining its sales funnels)) JDM advertises and promotes the services and products that it offers, including annuities. ( Id. ¶¶21, 22.) A significant portion of JDM's advertising and promotional activities in the field of annuities is conducted on the internet. ( Id. ¶21).
The individual Defendants are former employees of JDM. Also named as a Defendant is The Impact Partnership, which is a business entity that some or all of the individual Defendants are alleged to have joined or otherwise furthered the interests thereof. ( See e.g., id. ¶¶62, 75, 87-88, 118, 138.) As stated in the R & R, JDM's theory of the case is that the individual Defendants "devised a scheme to steal JDM's trade secrets and confidential information, attempted to destroy evidence of their theft, and are now using that stolen information in a competing venture." (Doc. 45 at 6.)
JDM alleges the following claims for relief: (1) violation of the Computer Fraud and Abuse Act, 18 U.S.C. § 1030 (First Claim) against all Defendants; (2) violation of the Arizona Uniform Trade Secrets Act ("AUTSA"), A.R.S. § 44-401, et. seq., against all Defendants (Second Claim); (3) unfair competition against all Defendants (Third Claim); (4) breach of contract against Defendants Fine, Arceo and Godinez (Fourth Claim); (5) unjust enrichment against all Defendants (Fifth Claim); (6) breach of fiduciary duty/duty of loyalty against Defendants Fine and Will (Sixth Claim); (7) breach of duties regarding Alpha Academy Advisors, LLC, against Defendant Will (Seventh Claim); (8) trespass to chattel against Defendant Fine (Eighth Claim); (9) theft/conversion against Defendant Fine (Ninth Claim); (10) civil conspiracy against all Defendants (Tenth Claim); and (11) aiding and abetting against all Defendants (Eleventh Claim).
Pursuant to Fed.R.Civ.P. 12(b)(6), Defendants Will, Fine, Godinez, Uretz, and The Impact Partnership seek dismissal of JDM's Second, Third, Fifth, Tenth, and Eleventh Claims for failure to state a claim. Additionally, Defendants Fine and Godinez seek dismissal of JDM's Fourth Claim for relief for failure to state a claim, and Defendants Fine and Will seek dismissal of JDM's Sixth Claim for relief for failure state a claim.
II. Standard of Review
The Court reviews de novo the objected-to portions of the Report and Recommendation. 28 U.S.C. § 636(b)(1); Fed.R.Civ.P. 72(b). The Court reviews for clear error the unobjected-to portions of the Report and Recommendation. Johnson v. Zema Systems Corp., 170 F.3d 734, 739 (7th Cir. 1999); see also, Conley v. Crabtree, 14 F.Supp.2d 1203, 1204 (D. Or. 1998).
The standard for a motion to dismiss is correctly stated in the R & R and will not be repeated here. (Doc. 45 at 3-5.)
III. Findings and Conclusions of the Magistrate Judge and Parties' Objections
A. Plaintiffs' Objection
Plaintiffs' Third Claim is for unfair competition against all Defendants. The FAC alleges as unfair competition that, inter alia, "Defendants have engaged in unlawful business acts or practices by committing acts including computer fraud, trespass, conversion, and other illegal acts as practices as alleged above, all in an effort to gain unfair competitive advantage over JDM." (FAC ¶147.) The R & R recognizes a cause of action in Arizona for unfair competition based on the misappropriation of confidential information that does not rise to the level of a trade secret under the Arizona Uniform Trade Secrets Act (AUTSA). (Doc. 45 at 25.) But Magistrate Judge Pyle dismissed certain claims in the Third Claim; he recommended that the Court should be reluctant to allow Plaintiffs' unfair competition claims based on specifically alleged unfair business practices-conversion, trespass, and computer fraud-that are novel to Arizona. (Doc. 45 at 25.) Plaintiffs object to the latter recommendation as reflective of an overly narrow view of unfair competition law that is inconsistent with Arizona authorities.
The Arizona Supreme Court has recently held that the AUTSA "creates an exclusive cause of action-and displaces conflicting causes of action-for claims based on the misappropriation of trade secrets." Orca Commc'ns. Unlimited, LLC v. Noder, 337 P.3d 545, 546 (Ariz. 2014) ( Orca II ). The Court also held that assuming the viability of a common law claim for misappropriation of confidential information, AUTSA "does not displace common-law claims based on alleged misappropriation of confidential information that is not a trade secret." Id. The Court, which was reviewing the lower courts' decision on a motion to dismiss, declined to "decide today what aspects, if any, of the confidential information alleged in [the plaintiff's] unfair competition claim might fall within AUTSA's broad definition of trade secret' and therefore be displaced.... That determination will not hinge on the claim's label, but rather will depend on discovery and further litigation that has not yet occurred." Id. at 549 (citations omitted). Magistrate Judge Pyle ruled that in light of Orca II, it cannot be said at this point in the litigation that JDM's claim is preempted by AUTSA to the extent it may involve confidential information that does not constitute trade secrets. (Doc. 45 at 23.)
The Arizona Supreme Court also declined to decide whether Arizona recognizes a common-law claim for unfair competition as alleged in Orca's complaint.
Nor do we decide whether Arizona recognizes a common-law claim for unfair competition as alleged in Orca's complaint. Cf. Restatement (First) of Torts §§ 757, 759 (1939) (enumerating several theories of liability, including disclosure or use of another's trade secret, and improper acquisition of information, whether or not it constitutes a trade secret, to advance a rival business interest). Compare Fairway Constructors, Inc. v. Ahern, 193 Ariz. 122, 124 ¶¶ 8-9, 970 P.2d 954, 956 (App.1998) (finding plaintiff's unfair-competition claim preempted by federal copyright law, and noting that such a claim is "based on principles of equity" and "encompasses several tort theories, " including "misappropriation"), with Restatement (Third) of Unfair Competition § 1 cmt. g (1995) (noting that the "specific forms of unfair competition [described therein] do not fully exhaust the scope of statutory or common law liability for unfair methods of competition"), and Restatement (Second) of Agency §§ 395, 396 (1958) (describing agent's duty not to use or disclose confidential information acquired during the course of his agency in competition with principal).
Orca II, 337 P.3d at 549-550.
Plaintiffs argue that Arizona courts have stated that "[t]he common law doctrine of unfair competition is based on principles of equity, " Fairway Constructors, Inc., 970 P.2d at 956, and because of the doctrine's equitable underpinning, the "tort of unfair competition is extremely flexible[.]" Golden Nugget, Inc. v. American Stock Exchange, Inc., 828 F.2d 586, 591 (9th Cir. 1987). Plaintiffs contend that the only requirements in Arizona for the tort of unfair competition are that the plaintiff show either "that it was engaged in competitive business with [the defendant] or that [the defendant's] actions were likely to produce public confusion[.]" Sutter Home Winery, Inc. v. Vintage Selections, Ltd., 971 F.2d 401, 407 (9th Cir. 1992) (emphasis added). In declining to decide whether Arizona recognizes a common-law claim for unfair competition, the Court pointed to Restatement (Third) of Unfair Competition, which suggests that lower Arizona courts may follow the Restatement: Restatement (Third) of Unfair Competition § 1 cmt. g (1995) (noting that the "specific forms of unfair competition [described therein] do not fully exhaust the scope of statutory or common law liability for unfair methods of competition"). Orca II, 337 P.3d at 549. Plaintiffs argue that this is consistent with the rule in Arizona that in the absence of controlling Arizona authority, Arizona courts follow the Restatement of the Law. See Lerner v. DMB Realty, LLC, 322 P.3d 909, 916 n.7 (Ariz. App. 2014). The Restatement Third of Unfair Competition acknowledges the flexible nature of the doctrine:
One who causes harm to the commercial relations of another by engaging in a business or trade is not subject to liability to the other for such harm unless: (a) the harm results from acts or practices of the actor actionable by the other under the rules of this Restatement relating to: (1) deceptive marketing, as specified in Chapter Two; (2) infringement of trademarks and other indicia of identification, as specified in Chapter Three; (3) appropriation of intangible trade values including trade secrets and the right of publicity, as specified in Chapter Four; or 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.
§ 1 (emphasis added). Plaintiffs further contend that Comment (g) to this section of the Restatement further elucidates the broad and flexible application of the doctrine:
A primary purpose of the law of unfair competition is the identification and redress of business practices that hinder rather than promote the efficient operation of the market. Certain recurring patterns of objectionable practices form the basis of the traditional categories of liability specifically enumerated in Subsection (a)(1)-(3). However, these specific forms of unfair competition do not fully exhaust the scope of statutory or common law liability for unfair methods of ...