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Orca Communications Unlimited, LLC v. Noder - 10/17/2013

Arizona Court of Appeals Division One Holds That (1) Confidentiality, Non-Compete, and Customer Non-Solicitation Covenants That Are Overbroad in Scope Are Unenforceable, (2) the Duty of Good Faith and Fair Dealing Prohibits an Employee from Competing with Her Employer While Still Employed, (3) the Arizona Uniform Trade Secrets Act Does Not Preempt Tort Claims Regarding Misuse of Confidential Information That Does Not Rise to the Level of a Trade Secret, and (4) an Agreement to a Sales Price and a Representation That the Seller Would Ask Her Attorney to Draft a Purchase Contract Was Not Sufficient to Sustain a Claim for Promissory Fraud.

From 2002 to 2009, Ann Noder served as president of Orca Communications Unlimited, LLC, a public-relations company.  As part of her employment, Noder signed an agreement that contained confidentiality, non-compete, and customer non-solicitation covenants. Noder did not have a written employment agreement with Orca.  In 2009, Noder negotiated with Orca’s owner to buy the business.  Noder told the owner that she agreed with the proposed sales price and that she would have a lawyer draft a sales agreement.  Instead, Noder presented a counter-proposal, which the owner refused.  Noder left Orca and formed a competing public-relations business.

Orca sued Noder for breach of contract, breach of fiduciary duty and duty of loyalty, breach of the covenant of good faith and fair dealing, fraud, tortious interference with business expectancies, and unfair competition.  Noder moved to dismiss the complaint under Rule 12(b)(6) for failure to state a claim, and the trial court granted the motion with respect to all Orca’s claims.

On appeal, the Court of Appeals affirmed the dismissal of the breach-of-contract and fraud claims, but vacated the dismissal of the other claims.

Orca’s breach-of-contract claim was based on alleged breach of the confidentiality, non-compete, and customer non-solicitation covenants.  The Court of Appeals concluded that each of these covenants was overbroad and, therefore, unenforceable.  The confidentiality covenant was overbroad because it purported to protect more than “truly confidential” information—including publicly available information that required “substantial searching of published literature” or that had to be “pieced together” from various sources.  The covenant was also overbroad because it covered all information Noder learned in the course of her employment.  The impermissible overbreadth of the confidentiality covenant rendered it “nothing more than an unlimited restriction against competition with Orca,” which could be enforceable only if it had reasonable temporal and geographical limitations.  Because there was no geographical limitation in the covenant, it was unenforceable.

Likewise, the non-compete and customer non-solicitation covenants were also overbroad and unenforceable.  The non-compete covenant went beyond protecting Orca’s legitimate business interest in trade secrets and confidential information to prevent Noder from pursuing any type of work in the public-relations field.  The non-solicitation provision was overbroad because it prohibited solicitation not only of Orca’s present customers, which could have been permissible, but also Orca’s former customers and potential customers, in which it has no protectable interest.  The Court of Appeals concluded that because none of the covenants were enforceable, it could not sever any provisions to save them.  Arizona courts will not rewrite agreements to make them enforceable.  Thus, the trial court correctly dismissed Orca’s breach-of-contract claim.

Orca’s claim for breach of the covenant of good faith and fair dealing was based on Noder’s implied employment agreement with Orca, not the written agreement containing the unenforceable covenants.  The fiduciary duty accompanying the employment relationship prohibited Noder from competing with Orca or soliciting co-workers to join her competing business while she was still employed at Orca, which is what Orca alleged.  The trial court thus erred when it dismissed this claim.

The trial court dismissed Orca’s claims for breach of fiduciary duty and duty of loyalty, tortious interference with business expectancies, and unfair competition because it concluded that they were preempted by the Arizona Uniform Trade Secrets Act (“AUTSA”), which “displaces conflicting tort, restitutionary and other laws of this state providing civil remedies for misappropriation of a trade secret.”  A.R.S. § 44-407(A).  The trial court concluded that the AUTSA’s preemption covers confidential information beyond true trade secrets, an issue of first impression in Arizona.  The Court of Appeals decided, however, that the trial court erred in dismissing Orca’s claims for breach of fiduciary duty and duty of loyalty and tortious interference with business expectancies because those claims were not based on the misuse of confidential information, but on Noder’s conduct in competing with Orca while she was still employed there.

With respect to the unfair competition claim, the Court of Appeals noted that courts around the country with identical statutory provisions regarding preemption of tort claims concerning trade secrets were split with respect to whether the preemption covers confidential information that does not rise to the level of a trade secret.  Relying on the plain language of the statute, which states that preemption applies to “civil remedies for misappropriation of trade secrets,” the Court of Appeals adopted the “strong minority” position, concluding that claims regarding confidential information were not covered.  Under the statute, “other civil remedies that are not based on misappropriation of a trade secret” are not affected, and “trade secret” is defined.  Claims based on confidential information not within that definition are not preempted by the AUTSA.  Thus, to the extent Orca’s unfair-competition claim alleged misuse of confidential information not rising to the level of a trade secret, the trial court erred in dismissing the claim.

Finally, the Court of Appeals affirmed the dismissal of Orca’s fraud claim.  Orca alleged that Noder committed fraud when she represented to Orca’s owner that she agreed with the purchase price and would ask her lawyer to draft a sales contract.  This allegation, however, was insufficient to state a claim for promissory fraud, that is, making a promise without the intent to perform.

Judge Howe authored the opinion; Judges Norris and Gould concurred.

Posted by: Kathy Brody

Posted On: 10/31/2013