Karp v. Avella of Deer Valley Incorporated

Filing 16

ORDER: Plaintiff's motion for a preliminary injunction [Doc. 1-6] is granted in part and denied in part; Defendants cross-motion for preliminary injunction [Doc. 11] is granted in part and denied in part. Signed by Judge David G Campbell on 9/30/2013. (see order for complete details)(TCA)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE DISTRICT OF ARIZONA

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Jeffrey Karp, a married man,
Plaintiff,

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No. CV13-1885 PHX DGC
ORDER AND PRLIMINARY
INJUNCTION

v.
Avella of Deer Valley Incorporated, et al.,
Defendants.

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On September 27, 2013, the Court held a hearing on Plaintiff’s motion for

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preliminary injunction and Defendant’s cross-motion. Docs. 1-6, 11. After considering

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testimony presented at the hearing, declarations and documents submitted by the parties,

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and the parties’ written and oral arguments, the Court reaches the following conclusions.

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Under Arizona law, “[t]he validity of a restrictive covenant is determined by its

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reasonableness.” Phoenix Orthopaedic Surgeons, Ltd. v. Peairs, 790 P.2d 752, 758

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(Ariz. Ct. App. 1989). A restrictive covenant is reasonable and therefore enforceable by

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injunction where (1) the restraint does not exceed that necessary to protect the employer’s

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legitimate interests, (2) the restraint would not cause undue hardship to the employee, and

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(3) the restraint would not cause harm to the public interest. See id. at 757; Valley Med.

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Specialists v. Farber, 982 P.2d 1277, 1283 (Ariz. 1999) (en banc).

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A preliminary injunction may be granted only where the movant shows that “he is

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likely to succeed on the merits, that he is likely to suffer irreparable harm in the absence

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of preliminary relief, that the balance of equities tips in his favor, and that an injunction is

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in the public interest.” Winter v. Natural Res. Def. Council, Inc., 555 U.S. 7, 20, (2008);

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Am. Trucking Ass’n, Inc. v. City of Los Angeles, 559 F.3d 1046, 1052 (9th Cir. 2009).

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I.

Likelihood of Success on the Merits.

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A.

The Non-solicitation Provision is Likely Unenforceable.

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The non-solicitation provision prohibits Plaintiff, for a period of 30 months, from

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soliciting any customer, merchant, vendor, or supplier of the Defendant. Doc. 1-4 at 7.

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For three reasons, the Court finds the provision likely unenforceable under Arizona law.

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First, the non-solicitation provision applies to “any” customer or supplier of

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Defendant, whether or not Plaintiff ever did business with that customer or supplier or

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even worked on the category of medications the customer or supplier purchased or

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supplied. The provision thus prohibits Plaintiff from having contact even with customers

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or suppliers with whom he had no prior relationship on behalf of Defendant. Arizona

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courts do not enforce such provisions. See Amex Distrib. Co. v. Mascari, 724 P.2d 596,

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603-04 (Ariz. Ct. App. 1986) (an employer can restrict a former employee’s ability to

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service the former employer’s customers only with respect to those customers to whom

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the employee represented the employer’s good will); see also Nouveau Riche Corp. v.

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Tree, No. CV 08-1627, 2008 WL 5381513, at *5 (D. Ariz. Dec. 23, 2008) (“a non-

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solicitation restriction may only protect against solicitation of those individuals with

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whom the [d]efendants have formed a meaningful relationship”).

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Second, the provision contains no geographical limitation. Although this would be

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less problematic if the provision was limited to customers or suppliers with whom

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Plaintiff previously did business, it is clearly overbroad when it bars Plaintiff from

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contacting a customer supplier anywhere in the United States and with whom Plaintiff

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had no prior contact on behalf of Defendant. This is particularly true given the mail-

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order nature of Defendant’s business and the companies with whom Plaintiff has

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considered employment. Mail-order customers are located nationwide, and it is not even

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clear Plaintiff could identify individuals potentially reached by his new employer’s

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advertising who had a previous mail-order relationship with Defendant. This Court,
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applying Arizona law, has not favored restrictive employment provisions with unlimited

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geographical reach.

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agreement overly broad and therefore unlikely to be enforceable); Liss v. Exel Transp.

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Servs., Inc., No. CV 04-2201, 2007 WL 891167, at *8 (D. Ariz. Mar. 20, 2007) (finding

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the geographic scope of restrictive covenant overly broad and therefore unenforceable).

See id. at *7 (finding the geographic scope of a non-compete

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Third, the provision is ambiguous. It states that Plaintiff may not “solicit or take

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away, directly or indirectly,” any customer or supplier. These words are not defined.

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Does taking away a customer include increasing that customer’s purchases of the new

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employer’s products and simultaneously decreasing its purchases of Defendant’s

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products? Or does it mean that the customer must be lured away entirely from

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Defendant? And what does it mean to take away indirectly?

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Because the non-compete provision contains no geographical limit, no limitation

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to customers or suppliers with whom Plaintiff had contact while employed at Defendant,

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and ambiguous language that could be read to prohibit a wide range of activities that may

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or may not be damaging to Defendant, the Court concludes that it probably is “greater

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than necessary to protect the employer’s legitimate interest.” Valley Med. Specialists,

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982 P.2d at 1283. Under Arizona law, the provision likely is unenforceable.

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Arizona law does not permit the Court to rewrite the non-solicitation provision to

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make it enforceable. As the Arizona Supreme Court has explained, “[a]lthough we will

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tolerate ignoring severable portions of a covenant to make it more reasonable, we will not

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permit courts to add terms or rewrite provisions.” Id. at 1286.

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B.

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Defendant presented evidence that Plaintiff acquired knowledge and experience

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while employed with Defendant that could be damaging to Defendant’s business if shared

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with a competitor. Defendant presented this evidence primarily with respect to the

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fertility line of business and the need to develop new relationships in that business,

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asserting that two years is needed to make up for the loss of Plaintiff’s expertise.

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Portions of the Non-compete Clause are Likely Invalid and Severable.

Plaintiff presented evidence that Defendant previously claimed to have eliminated
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his position because it had other employees who could handle the fertility business

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effectively. Plaintiff also testified that the information needed to compete in the fertility

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field is not confidential. The Court concludes that Defendant is more likely to prevail on

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this factual dispute. The Court reaches this conclusion in part because Plaintiff willingly

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signed the non-compete provision with the advice of counsel, accepted a $250,000

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payment from Defendant in exchange, and even discussed with Defendant’s CEO the

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ways in which Plaintiff could earn a living if he left Defendant’s employment and

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complied with the non-compete clause.

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accepted the provision as a valid recognition of Defendant’s protectable interest in the

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These facts suggest that Plaintiff himself

event Plaintiff departed.

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Defendant also presented evidence that Plaintiff developed valuable expertise in

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the mail-order business that could be used to Defendant’s detriment by a competitor.

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Plaintiff rebutted portions of this evidence, such as claims that constructing a mail-order

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facility required special expertise, but did not effectively refute Defendant’s assertion that

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even a mail-order operation requires supplier and referring physician relationships –

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relationships for which Plaintiff does possess unique knowledge developed during his

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years at Defendant.

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Under Arizona law, an employer has “a protectable interest in maintaining

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customer relationships when an employee leaves.” Peairs, 790 P.2d at 758 (citation

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omitted). This is because an employer’s clientele constitute “an asset of value which has

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been acquired by virtue of effort and expenditures over a period of time, and which

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should be protected as a form of property.” Farber, 982 P.2d at 1284 (citation omitted).

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The law will protect this legitimate interest through a covenant not to compete “for as

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long as may be necessary to replace the employee and give the replacement a chance to

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show he can do the job.” Peairs, 790 P.2d at 758 (citation omitted).

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In light of the evidence presented by Defendant, the Court concludes that the 18-

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month period included in the non-compete provision is likely to be found reasonable at

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trial. The Court does not reach the same conclusion, however, with respect to the
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nationwide scope of the provision. For reasons discussed above with respect to the non-

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solicitation provision, the Court finds it likely that such a non-compete provision will be

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deemed unreasonable. The same is true for the alternative provision that limits the non-

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compete clause to all states where Defendant has customers – given the scope of

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Defendant’s mail-order business, this provision is also nationwide.

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accordingly concludes that the these broad geographical provision are likely to be

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declared invalid and struck from the contract, leaving in place a geographical limit of all

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states in which Defendant and its affiliates have physical locations. Doc. 1-4 at 7.

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Because such locations likely would feel the effects of direct competition from a

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company employing Plaintiff, the Court finds that this narrower geographical scope is

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likely to be found reasonable. And because the broader scope sentences clearly are

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intended to be severable (id.), enforcing the narrower scope will not constitute improper

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rewriting of the contract. Valley Med. Specialists, 982 P.2d at 1286.

The Court

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Nor does the Court conclude that enforcing this narrower scope will cause undue

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hardship to Plaintiff or be contrary to the public interest. Plaintiff left Defendant’s

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employment some 14 months ago, and the Court cannot conclude that another four

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months of not working for a competitor will impose undue hardship, particularly given

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the $250,000 Plaintiff accepted in payment for signing the agreement.

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II.

Remaining Preliminary Injunction Factors.

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The Court has found that Plaintiff is likely to prevail on the merits of his claim that

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the non-solicitation provision is unenforceable, and that Defendant is likely to prevail on

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the merits of its claim that the non-compete provision, with the narrower geographical

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scope, is enforceable.

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The Court finds that Plaintiff has shown a likelihood of irreparable harm if

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application of the 30-month non-solicitation provision is not enjoined. Plaintiff has

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presented evidence in his verified complaint that he faces financial hardship and possible

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loss of his home if he is unable to find work soon. Docs. 1-2 at 20-12, 1-3 at 3.

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The Court also finds that Defendant has shown a likelihood of irreparable harm if
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Plaintiff is allowed to compete directly within 18 months under the narrower geographic

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scope. “Under Arizona law, ‘once a protectable interest is established, irreparable injury

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is presumed to follow if the interest is not protected.’” Compass Bank v. Hartley, 430

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F.Supp.2d 973, 983 (D. Ariz. 2006) (quoting Peairs, 790 P.2d at 757).

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Because each party is likely to experience irreparable harm, as explained above,

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the Court concludes that the balance of equities favors an injunction against Defendant’s

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enforcement of the non-solicitation agreement and the broader scope of the non-compete

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provision, and against Plaintiff’s violation of the non-compete agreement with the

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narrower geographic scope.

The Court also concludes that public policy favors

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provisions that protect legally protectable interests, like the non-compete provision with

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the narrower geographic scope, and favors not enforcing overly broad non-solicitation or

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non-compete provisions.

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IT IS ORDERED:

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1.

Plaintiff's motion for a preliminary injunction (Doc. 1-6) is granted in the

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following respects:

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solicitation provision in paragraph 7(c) of the parties’ contract and from enforcing the

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second and third sentences of the geographical scope of the non-compete provision

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contained in paragraph 7(e) of the contract. Plaintiff’s motion is otherwise denied.

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2.

Defendant is preliminarily enjoined from enforcing the non-

Defendant’s cross-motion for preliminary injunction (Doc. 11) is granted

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in part as follows: Plaintiff is enjoined from violating the non-compete provision for a

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period of 18 months following the termination of his employment in any state where

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Defendant or its affiliates have physical facilities. The cross-motion is otherwise denied.

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Dated this 30th day of September, 2013.

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