Zalkow et al v. Taymor Industries USA Incorporated et al

Filing 57

ORDER re: 36 MOTION to Dismiss Case. This order does NOT decide the motion at docket 36. Rather, this order is intended to assist counsel in preparing for oral argument. It sets forth the court's preliminary views. It does not authorize the filing of any additional motion papers. Following oral argument, the court may adopt the order in whole or in part in its disposition of the motion. Signed by Judge John W Sedwick on 5/5/15. (JWS)

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1 2 3 4 5 6 7 8 9 10 11 UNITED STATES DISTRICT COURT DISTRICT OF ARIZONA 12 13 14 15 16 17 18 19 20 21 22 ANDREW E. ZALKOW; and ZALKOW ) DISCOUNT SOURCING, an Arizona ) limited liability company, ) ) Plaintiffs, ) ) vs. ) ) TAYMOR INDUSTRIES U.S.A., INC., a ) California corporation; TAYMOR ) INDUSTRIES LTD., a Canadian ) corporation, ) ) Defendants. ) ) 2:14-cv-00243 JWS PRELIMINARY ORDER AND OPINION [Re: Motion at Docket 36] 23 24 25 I. PRELIMINARY NATURE OF THIS ORDER This order does NOT decide the motion at docket 36. Rather, this order is 26 27 28 intended to assist counsel in preparing for oral argument. It sets forth the court’s preliminary views. It does not authorize the filing of any additional motion papers. 1 2 Following oral argument, the court may adopt the order in whole or in part in its disposition of the motion. 3 II. MOTION PRESENTED 4 5 6 7 8 At docket 36, pursuant to Federal Rule of Civil Procedure 12(b)(6), defendant Taymor Industries Ltd. (“Taymor Canada”) moves for dismissal of Counts One and Three of the First Amended Complaint and for dismissal of the request for injunctive and declaratory relief in Count Two of the First Amended Complaint. Defendant 9 10 Taymor Industries U.S.A., Inc. (“Taymor USA”) moves for dismissal of Count Three of 11 the First Amended Complaint. Plaintiffs Andrew E. Zalkow (“Zalkow”) and Zalkow 12 Discount Sourcing (“ZDS”) respond at docket 46. Defendants reply at docket 49. Oral 13 argument is scheduled for May 22, 2015. 14 III. BACKGROUND 15 16 17 18 Taymor USA is a California corporation that imports and sells hardware items, including towel racks, toilet paper holders, faucets, and lock sets. It is wholly owned by Taymor Canada. Zalkow was formerly employed as the president of Taymor USA, 19 20 where his compensation included an annual bonus that was based on a percentage of 21 the profits of both Taymor Canada and Taymor USA. In 2013 Taymor USA tendered 22 Zalkow an annual bonus of $489,608. Zalkow rejected the bonus as insufficient “due to 23 a variety of factors, including but not limited to, decisions made by Taymor Canada 24 related to the operations of Taymor [USA] that substantially reduced its 2012–2013 25 26 profits.”1 27 28 1 Doc. 34 at p. 3. -2- 1 2 After Zalkow resigned from Taymor USA, he established ZDS, a company that sells products that do not compete with Taymor USA, including tile, manufactured 3 4 stone, doors, and patio furniture. Zalkow tried to recruit three independent marketing 5 representatives who have business relationships with Taymor USA. All three were 6 initially interested in working with Zalkow, but were dissuaded from doing so when 7 Taymor Canada told them it would be a conflict of interest. Taymor Canada also is 8 alleged to have misrepresented the scope of the Zalkow’s non-compete and non- 9 10 11 12 13 solicitation provisions to at least one of the representatives. Plaintiffs brought the present action against defendants, originally alleging a claim for breach of contract and a claim for intentional interference with prospective contractual relations. Pursuant to defendants’ first motion to dismiss at docket 6, the 14 15 court dismissed the breach-of-contract claim as to Taymor Canada and the contract 16 interference claim as to Taymor USA. Plaintiffs then amended their complaint.2 Count 17 One of the First Amended Complaint alleges a breach of contract by both Taymor USA 18 and Taymor Canada. Count Two alleges that Taymor Canada intentionally interfered 19 with plaintiffs’ prospective contractual relations. Count Three alleges a breach of the 20 21 covenant of good faith and fair dealing by both defendant companies. Defendants 22 subsequently filed the motion to dismiss at issue, requesting that Count One be 23 dismissed as to Taymor Canada, that Count Two be dismissed to the extent it requests 24 injunctive and declaratory relief, and that Count Three be dismissed in its entirety. 25 26 27 28 2 Doc. 34. -3- 1 2 IV. STANDARD OF REVIEW Rule 12(b)(6) tests the legal sufficiency of a plaintiff’s claims. In reviewing such 3 4 a motion, “[a]ll allegations of material fact in the complaint are taken as true and 5 construed in the light most favorable to the nonmoving party.”3 To be assumed true, 6 the allegations “may not simply recite the elements of a cause of action, but must 7 8 contain sufficient allegations of underlying facts to give fair notice and to enable the opposing party to defend itself effectively.”4 Dismissal for failure to state a claim can be 9 10 based on either “the lack of a cognizable legal theory or the absence of sufficient facts 11 alleged under a cognizable legal theory.”5 “Conclusory allegations of law . . . are 12 insufficient to defeat a motion to dismiss.”6 13 To avoid dismissal, a plaintiff must plead facts sufficient to “‘state a claim to relief 14 15 that is plausible on its face.’”7 “A claim has facial plausibility when the plaintiff pleads 16 factual content that allows the court to draw the reasonable inference that the 17 defendant is liable for the misconduct alleged.”8 “The plausibility standard is not akin to 18 a ‘probability requirement,’ but it asks for more than a sheer possibility that a defendant 19 20 21 22 3 23 4 24 5 25 6 26 27 28 Vignolo v. Miller, 120 F.3d 1075, 1077 (9th Cir. 1997). Starr v. Baca, 652 F.3d 1202, 1216 (9th Cir. 2011). Balistreri v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir. 1990). Lee v. City of Los Angeles, 250 F.3d 668, 679 (9th Cir. 2001). 7 Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). 8 Id. -4- 1 2 has acted unlawfully.”9 “Where a complaint pleads facts that are ‘merely consistent with’ a defendant’s liability, it ‘stops short of the line between possibility and plausibility 3 4 of entitlement to relief.’”10 “In sum, for a complaint to survive a motion to dismiss, the 5 non-conclusory ‘factual content,’ and reasonable inferences from that content, must be 6 plausibly suggestive of a claim entitling the plaintiff to relief.”11 7 V. DISCUSSION 8 9 10 A. Applicable Law The parties agree that Canadian law should govern the court’s analysis of Count 11 One and Count Three given plaintiffs’ amended complaint, which makes clear that the 12 breach-of-contract claim against Taymor Canada is based on an alleged breach of a 13 December 2012 settlement/purchase and sale agreement between plaintiffs and 14 15 Taymor Canada, referred to by the parties as the “Mason Agreement.”12 The Mason 16 Agreement requires application of the law of British Columbia and the law of Canada as 17 to any dispute concerning the Mason Agreement or its construction. 13 However, the 18 19 20 21 22 23 9 Id. (citing Twombly, 550 U.S. at 556). 10 Id. (quoting Twombly, 550 U.S. at 557). 11 Moss v. U.S. Secret Serv., 572 F.3d 962, 969 (9th Cir. 2009); see also Starr, 652 F.3d at 1216. 12 24 Doc. 36-1. 13 25 26 27 28 It remains unclear in the complaint whether the breach-of-contract claim against Taymor USA is premised on an employment contract or on the Mason Agreement. Plaintiffs concede, however, that Taymor USA is not a party to the Mason Agreement so presumably any breach-of-contract allegation on the part of Taymor USA is based on a separate agreement not explicitly mentioned in the complaint. It is not clear what law would need to be applied to that unspecified agreement; regardless, the motion to dismiss does not challenge Count One as to Taymor USA. -5- 1 2 parties agree that Arizona law, not Canadian law, should govern plaintiffs’ interferenceof-contract claim. 3 4 B. Breach of Contract Against Taymor Canada 5 Plaintiffs acknowledge that “breach of contract claims are pled similarly in both 6 Canada and Arizona.”14 In order to state a claim in contract, a plaintiff must establish 7 that there was an agreement and a breach by the defendant.15 At docket 15, the court 8 dismissed plaintiffs’ breach-of-contract claim as to Taymor Canada. The breach-of- 9 10 contract claim is based on a dispute about Zalkow’s annual bonus, and the court 11 concluded that the complaint did not allege that Taymor Canada had failed to perform a 12 contractual duty related to the bonus, even assuming that Taymor Canada was a party 13 to Zalkow’s employment agreement.16 The amended complaint has not fixed this 14 15 16 17 18 19 20 21 22 deficiency. As with the original complaint, the amended complaint makes clear that Taymor USA was Zalkow’s employer. It asserts that Zalkow worked for Taymor USA, that Taymor USA paid Zalkow annual bonuses, and that Taymor USA failed to pay him “his fully earned bonus.” 17 Plaintiffs’ new allegations linking Taymor Canada to the bonus— that Taymor USA acted “pursuant to the direction of Taymor Canada” and that “decisions made by Taymor Canada” caused the bonus to be lower than 23 14 24 25 26 Doc. 46 at p. 5. 15 Coast Dryland Services Ltd. v. Canada (Ministry of Fisheries & Oceans), 2007 FC 16 (Can. (“In terms of breach of contract, the essential elements of the cause of action are the existence of a contract and its wrongful breach.”). 27 16 28 17 Doc. 15 at p. 4. Doc. 34 at p. 3. -6- 1 2 expected18—do not change the fact that the complaint fails to allege that Taymor Canada had any contractual obligation to pay Zalkow’s bonus. 3 Plaintiffs argue that while Taymor Canada is not a party to any employment 4 5 agreement with Zalkow, Taymor Canada can still be liable for a breach of contract in 6 relation to the bonus under the Mason Agreement. The language in the Mason 7 Agreement that Zalkow relies upon states as follows: 8 [Zalkow] agrees to resign as an officer and employee of Taymor [USA] effective March 31, 3013 and until that date he will continue working full time for Taymor [USA] in his present position at his present compensation and benefit arrangements (including bonus) and will assist Taymor USA in any transition matters that are required to be dealt with as a result of his resignation.19 9 10 11 12 13 Such language does not impose a direct contractual obligation on Taymor Canada to 14 pay Zalkow. The complaint does not otherwise allege that Taymor Canada expressly 15 assumed any duty to do so as part of the Mason Agreement. Plaintiffs’ new allegations 16 that Taymor Canada directed and otherwise caused Taymor USA to underpay Zalkow 17 18 19 20 21 does not fix the deficiency. C. Intentional Interference with Prospective Contractual Relations Plaintiffs’ second cause of action alleges that Taymor Canada intentionally interfered with their prospective contractual relations based on Taymor Canada’s 22 23 24 statements to three independent representatives that Zalkow was trying to recruit.20 In addition to seeking damages for Taymor Canada’s conduct, plaintiffs are also seeking 25 26 18 27 19 28 20 Doc. 34 at p. 3. Doc. 36-1 at p. 7. Doc. 34 at pp. 5-6. -7- 1 2 injunctive and declaratory relief. Taymor Canada moves to have the second cause of action dismissed to the extent that it seeks such relief, arguing that injunctive and 3 4 declaratory relief is now moot given that the non-solicitation agreement expired as of 5 December 31, 2014. “[T]o the extent that Taymor Canada is alleged to have 6 misrepresented the scope of this agreement in the past, it is a type of tortious 7 interference that is not susceptible to being repeated in the future.”21 Plaintiffs concede 8 that the court should dismiss the claims for injunctive and declaratory relief given the 9 10 11 12 13 expiration of the non-solicitation agreement.22 D. Good Faith and Fair Dealing The basis for plaintiffs’ bad faith claim is the Mason Agreement.23 However, Taymor USA is not a party to the Mason Agreement. Indeed, plaintiffs acknowledge in 14 15 their response brief that the Mason Agreement was between plaintiffs and Taymor 16 Canada.24 Taymor USA cannot be held liable for bad faith performance of a contract to 17 which it was not a party, and there is no allegation that plaintiffs’ bad faith claim stems 18 from the employment agreement between Zalkow and Taymor USA. 19 20 21 22 Moreover, plaintiffs have not sufficiently pled a good faith claim under Canadian law. The Supreme Court of Canada recently discussed whether Canadian common law imposes a general duty of good faith on contracting parties in all contracts. It noted that 23 21 24 25 26 27 28 Doc. 36 at p. 6. 22 Doc. 46 at p. 12. 23 Doc. 34 at p.39 (“In breach of the implied covenant of good faith and fair dealing, Taymor Canada and Taymor [USA], at the direction of Taymor Canada, have taken actions to deprive Zalkow of the benefits of the [Mason Agreement] . . .”). 24 Doc. 46 p. 5. -8- 1 2 “Anglo-Canadian law has resisted acknowledging any generalized and independent doctrine of good faith performance of contracts.”25 The court recognized that good faith 3 4 has been required under existing Canadian case law, but generally only with regard to 5 particular types of contracts, contractual provisions, or contractual relationships. It 6 noted that the source of such good faith obligations has been unclear; that is, it is not 7 clear whether the good faith obligation is being imposed in such cases as a matter of 8 law, a matter of implication, or a matter of interpretation.26 The court went on to 9 10 recognize that there is an “overarching organizing principle” of good faith present in the 11 existing case law applicable to certain situations and noted that dev elopment of this 12 general principal should stem from existing law, but it declined to apply a broad good 13 faith duty in all contractual situations. 27 Instead, it adopted a narrower “duty of honesty 14 15 in contractual performance” for all contracts, meaning that the “parties must not lie or 16 otherwise knowingly mislead each other about matters directly linked to the 17 performance of the contract.”28 That is, the parties must be honest with each other in 18 relation to the performance of their contractual obligations.29 19 Plaintiffs’ complaint does not set forth sufficient facts to support a good faith 20 21 22 claim under this newly articulated duty to act honestly in the performance of contractual obligations. There are no allegations that Taymor Canada or Taymor USA actively lied 23 25 24 25 Bhasin v. Hrynew, 2014 SCC 71, Para. 32 (Can.). 26 Id. at Para. 48. 26 27 27 28 28 29 Id. at Para. 69. Id. at Para. 73. Id. at Para. 93. -9- 1 2 about matters directly linked to their obligations under the contract. Indeed, as noted above, the Mason Agreement was primarily a purchase and sale agreement. There is 3 4 no allegation that Zalkow did not receive the required payments or that Taymor Canada 5 otherwise failed to honestly perform any of its obligations under the agreement. The 6 specific allegations set forth in paragraphs 40 - 46 of the amended complaint do not 7 allege active dishonesty as to matters directly linked to the Mason Agreement. 8 Plaintiffs argue that other Canadian cases have recognized a more expansive 9 10 duty of good faith, but the court in Bhasin specifically declined to adopt a broad duty of 11 good faith for every contract.30 The court recognized that in some particular 12 circumstances good faith might require more than just honesty on the part of a 13 contracting party—such as in cases where one party has discretionary power, when the 14 15 parties must engage in some level of cooperation under the contract, when one party 16 uses its contractual power to evade its obligations under the contract, or in employment, 17 insurance, or tendering contexts—but it emphasized that existing case law delineates 18 when and how to give good faith effect in such particular circumstances.31 For 19 20 example, the court specifically discussed the case Dynamic Transport Ltd. v. O.K. 21 Detailing Ltd.32 and stated that, because the contract there inv olved a condition 22 precedent to a sale of property, good faith required something more than just honesty; it 23 required that the responsible party take reasonable steps to achieve the condition 24 25 26 30 27 31 28 32 Id. at Para. 89. Id. at Paras. 47-56, 93. [1978] 2 S.C.R. 1072 (Can.). -10- 1 2 precedent.33 However, the circumstances present in Dynamic Transport are not alleged in plaintiffs’ complaint. Indeed, plaintiffs do not allege the Mason Agreement involved 3 4 any of the particular circumstances discussed in Bhasin that would justify the 5 application of a more expansive duty of good faith. 6 E. 7 Amendment Throughout their response plaintiffs ask for leave to amend the complaint further 8 9 to fix any deficiencies. However, they have not attached a proposed amendment for 10 the court’s consideration. 34 Thus, the court cannot determine whether granting leave to 11 amend would be futile. Moreover, the time for filing motions to amend has passed. 12 13 VI. TENTATIVE CONCLUSION Based on the preceding discussion, defendants’ motion at docket 36 should 14 15 likely be GRANTED as follows: Count One of plaintiffs’ complaint should be dismissed 16 as to Taymor Canada. Count Two of plaintiffs’ complaint should be dismissed to the 17 extent it seeks injunctive and declaratory relief. Count Three should be dismissed in its 18 19 20 entirety. DATED this 5th day of May 2015. 21 22 /s/ JOHN W. SEDWICK SENIOR UNITED STATES DISTRICT JUDGE 23 24 25 26 27 33 28 34 Bhasin, 2014 SCC 71, Para. 89. L.R. Civ. 15.1(a). -11-

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