BMO Harris Bank NA v. Corley

1 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA 8 9 BMO Harris Bank NA, No. CV-22-00547-PHX-DWL 10 Plaintiff, ORDER 11 v. 12 Duncan Corley, et al., 13 Defendants. 14 15 In this action, Plaintiff BMO Harris Bank NA, d/b/a BMO Private Bank (“BMO”) 16 asserts tort and contract claims against four of its former employees, Defendants Duncan 17 Corley, Jason Miller, Louise Goudy Willmering, and Kris Yamano (collectively, 18 “Defendants”), who resigned in coordinated fashion from BMO’s Wealth Management 19 group, joined a competitor, and then allegedly used misappropriated trade secrets to solicit 20 BMO’s customers. 21 Now pending before the Court is Defendants’ motion to dismiss. (Doc. 15.) The 22 motion is fully briefed (Docs. 21, 22) and neither side requested oral argument. For the 23 following reasons, the motion is granted in part and denied in part. 24 BACKGROUND 25 The following facts, taken as true, are derived from the complaint. 26 Defendants are former employees of BMO’s Wealth Management group. (Doc. 1 27 ¶ 19.) Defendants worked in and around Scottsdale, Arizona, which “is one of BMO’s 28 largest markets in its Private Bank sector.” (Id. ¶¶ 19, 27.) 1 In 2010, Miller started working at BMO as a Senior Associate of Financial Planning. 2 (Id. ¶ 20.) In 2019, Miller was promoted to the position of Managing Director for BMO’s 3 Arizona Private Bank, with an annual salary of $225,000. (Id. ¶¶ 21, 23.) In that position, 4 Miller “[led] a team of wealth management professionals” and “manag[ed] the overall 5 operations within his assigned area.” (Id. ¶ 22.) During his tenure at BMO, Miller signed 6 the Omnibus Restricted Share Unit Plan (“RSU Plan”) (id. ¶¶ 52, 53), the Offer Letter 7 Agreement (id. ¶¶ 36, 41), and the Resignation From Employment-Notice Period form 8 (“Notice Period Agreement”) (id. ¶¶ 43, 46). 9 In 2016, Yamano started working at BMO as a Regional Director of Wealth 10 Planning. (Id. ¶ 24.) Yamano was eventually promoted to Market Manager, where she 11 was “second in command for the Arizona Market.” (Id. ¶¶ 25-26.) As Market Manager, 12 Yamano “focused on high net worth and ultra-high net worth client segments,” meaning 13 that she “support[ed] the growth and retention of client assets by providing wealth planning 14 advice and guidance to investment advisors within the region.” (Id. ¶ 28.) Yamano’s 15 annual salary was $175,000, plus a $30,000 signing bonus and some company equity. (Id. 16 ¶ 29.) During her tenure at BMO, Yamano signed both the RSU Plan (id. ¶¶ 52, 53) and 17 the Offer Letter Agreement (id. ¶¶ 36, 42). 18 In 2015, Corley started working at BMO as a Wealth Advisor. (Id. ¶ 30.) Corley’s 19 annual salary was $175,000, and he received a signing bonus of $75,000 and had additional 20 bonus opportunities. (Id. ¶ 31.) Corley’s job required that he “attract, retain and grow a 21 portfolio of prospect and client relationships and deliver exceptional client experiences.” 22 (Id. ¶ 32.) During his tenure at BMO, Corley signed the RSU Plan (id. ¶¶ 52, 53), the Offer 23 Letter Agreement (id. ¶¶ 36, 40), and the Notice Period Agreement (id. ¶¶ 43, 47). 24 In 1995, Willmering started working at BMO as a portfolio manager. (Id. ¶ 33.) 25 “At the time of her resignation, [she] was working as a Senior Portfolio Manager” under 26 Yamano. (Id. ¶ 34.) During her tenure at BMO, Willmering signed both the RSU Plan (id. 27 ¶¶ 52, 53) and the Notice Period Agreement (id. ¶¶ 43, 48). 28 On July 6, 2021, Defendants simultaneously tendered their resignations. (Id. ¶¶ 56- 1 58.) On September 4, 2021 (i.e., after the 60-day notice period specified in their respective 2 Notice Period Agreements had expired), Defendants began working at Crewe Advisors, 3 Inc. (“Crewe”), a competitor of BMO. (Id. ¶¶ 6, 58.) 4 Since Defendants resigned from BMO and began working at Crewe, various former 5 BMO clients have transferred their accounts to Crewe, resulting in the loss (from BMO’s 6 perspective) of $60 million in assets under management and $450,000 in annual revenue. 7 (Id. ¶ 82.) Additionally, another $21.5 million in assets were transferred from BMO to 8 other competitors, resulting in the loss of an additional $255,000 in revenue. (Id. ¶ 83.) 9 To convince BMO’s clients to transfer their accounts to Crewe, Defendants “use[d] 10 their knowledge of BMO’s business to compare BMO’s business offerings to Crewe, 11 including comparing BMO and Crewe’s fees, experience of wealth management team, and 12 other categories of information.” (Id. ¶ 74.) BMO contends this endeavor was successful 13 because Defendants misappropriated BMO’s trade secrets and leveraged confidential 14 information in violation of various contractual agreements. (Id. ¶¶ 71-85.) The key terms 15 of those agreements are as follows: 16 ▪ RSU Plan: Under the RSU Plan, Defendants could not (1) “solicit for employment 17 or offer employment to any Person or Persons who are employed by” BMO for 12 months 18 following the termination of employment; (2) “solicit, contact, accept business with, [or] 19 enter into a commercial arrangement with any Customer or Supplier for any purpose which 20 competes . . . with the Business” for 12 months following the termination of employment; 21 (3) “take advantage of or derive a benefit or otherwise profit from any business 22 opportunities” the employee learned about during the course of employment; or 23 (4) “directly or indirectly, use, disclose, or otherwise distribute any Confidential 24 Information.” (Id. ¶¶ 53-55.) This provision is applicable in “areas where [BMO] does 25 business, including Arizona.” (Id. ¶ 54.) 26 ▪ Offer Letter Agreement: Similarly, the Offer Letter Agreement, which was signed 27 by Miller, Yamano, and Corley, provided as follows: “During your employment and for 28 twelve months following the end of your employment . . . you must not, directly or 1 indirectly solicit: (i) a person who you know is an employee of [BMO] to leave his or her 2 employment; and (ii) any client of [BMO] you serviced during your last twelve months 3 with [BMO] to offer any product or service that is the same as or similar to any product or 4 service that you provided to that client previously.” (Id. ¶ 37.) The Offer Letter Agreement 5 also included a confidentiality clause to “protect the confidential and proprietary 6 information of the Company, our clients, suppliers, and employees.” (Id. ¶ 38.) Signatories 7 were also required to “return all Company and client information” upon termination. (Id. 8 ¶ 39; Doc. 1-2 at 4 [actual Offer Letter Agreement].)1 9 ▪ Notice Period Agreement: Under this contract, Defendants had to “provide BMO 10 with no less than 60-days written notice” before resigning and “cooperate in any 11 transition.” (Doc. 1 ¶ 44.) The Notice Period Agreement also prohibited the solicitation 12 of “orders, assets or business of any kind relating to the products and/or services sold by, 13 or that are substantially similar to those sold by the Company,” during that 60-day notice 14 period. (Id. ¶ 45; Doc. 1-2 at 17 [actual Notice Period Agreement].) 15 LEGAL STANDARD 16 “[T]o survive a motion to dismiss under Rule 12(b)(6), a party must allege 17 ‘sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its 18 face.’” In re Fitness Holdings Int’l, Inc., 714 F.3d 1141, 1144 (9th Cir. 2013) (quoting 19 Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)). “A claim has facial plausibility when the 20 plaintiff pleads factual content that allows the court to draw the reasonable inference that 21 the defendant is liable for the misconduct alleged.” Id. (quoting Iqbal, 556 U.S. at 678). 22 “[A]ll well-pleaded allegations of material fact in the complaint are accepted as true and 23 are construed in the light most favorable to the non-moving party.” Id. at 1444-45 (citation 24 omitted). However, the court need not accept legal conclusions couched as factual 25 allegations. Iqbal, 556 U.S. at 679-80. Moreover, “[t]hreadbare recitals of the elements of 26 1 Documents attached to the complaint may be considered without converting the motion to dismiss into a motion for summary judgment if the documents’ “authenticity 27 . . . is not contested” and “the plaintiff’s complaint necessarily relies on them.” Lee v. City of Los Angeles, 250 F.3d 668, 688 (9th Circ. 2001) (quoting Parrino v. FHP, Inc., 146 F.3d 28 699, 705-06 (9th Cir. 1998)). BMO’s complaint hinges on these agreements and Defendants have not contested their authenticity. 1 a cause of action, supported by mere conclusory statements, do not suffice.” Id. at 679. 2 The court also may dismiss due to “a lack of a cognizable theory.” Mollett v. Netflix, Inc., 3 795 F.3d 1062, 1065 (9th Cir. 2015) (citation omitted). 4 DISCUSSION 5 Defendants move to dismiss all seven claims in the complaint. (Doc. 15.) For 6 convenience and analytical clarity, some of those claims are grouped together below. 7 I. Misappropriation Of Trade Secrets 8 In Count I, BMO asserts that Defendants violated the Defend Trade Secrets Act 9 (“DTSA”). (Doc. 1 ¶¶ 86-96.) DTSA defines a “trade secret” as “all forms and types of 10 financial, business, scientific, technical, economic, or engineering information” that “(A) 11 the owner thereof has taken reasonable measures to keep. . . secret”; and (B) “derives 12 independent economic value, actual or potential, from not being generally known to, and 13 not being readily ascertainable through proper means by, another person who can obtain 14 economic value from the disclosure or use of the information.” 18 U.S.C. § 1839(3). “To 15 succeed on a claim for misappropriation of trade secrets under the DTSA, a plaintiff must 16 prove: (1) that the plaintiff possessed a trade secret, (2) that the defendant misappropriated 17 the trade secret; and (3) that the misappropriation caused or threatened damage to the 18 plaintiff.” InteliClear, LLC v. ETC Global Holdings, Inc., 978 F.3d 653, 657-58 (9th Cir. 19 2020). 20 In Count II, BMO asserts that Defendants violated the Arizona Uniform Trade 21 Secrets Act (“AUTSA”). (Doc. 1 ¶¶ 97-107.) Under AUTSA, a trade secret is defined as 22 “information, including a formula, pattern, compilation, program, device, method, 23 technique or process, that both: (a) Derives independent economic value, actual or 24 potential, from not being generally known to, and not being readily ascertainable by proper 25 means by, other persons who can obtain economic value from its disclosure or use”; and 26 “(b) Is the subject of efforts that are reasonable under the circumstances to maintain its 27 secrecy.” Orca Commc’ns Unlimited, LLC v. Noder, 337 P.3d 545, 547 (Ariz. 2014) 28 (quoting A.R.S. § 44-401(4)). “Under Arizona law, misappropriation of a trade secret 1 includes the ‘[d]isclosure or use of a trade secret of another without express or implied 2 consent by a person’ who ‘[a]t the time of the disclosure or use,’ ‘knew or had reason to 3 know that his knowledge of the trade secret was . . . acquired under circumstances giving 4 rise to a duty to maintain its secrecy or limit its use . . . .’” HTS, Inc. v. Boley, 954 F. Supp. 5 2d 927, 945 (D. Ariz. 2013) (quoting A.R.S. § 44-401). 6 Because the claims are substantially similar, the Court will analyze them together. 7 InteliClear, 978 F.3d at 657. 8 Defendants seek dismissal of the misappropriation claims on three overarching 9 grounds. First, Defendants contend that “the complaint lacks sufficient detail to make 10 Defendants aware of specifically what information was allegedly misappropriated.” (Doc. 11 15 at 5-6.) Second, Defendants contend that, assuming BMO’s customer lists are the 12 alleged trade secrets at issue, such lists do not qualify as trade secrets because “the 13 complaint does not allege facts indicating what, beyond a listing of names that could be 14 gathered from any public source, was contained in the set of information that Defendants 15 allegedly retained after their employment with BMO had ended.” (Id. at 6-7.) Third, 16 Defendants argue that BMO “has not explained how it kept its client lists from being 17 accessed by non-employees.” (Id. at 7.) 18 A. Trade Secrets—Specificity 19 “A plaintiff seeking relief for misappropriation of trade secrets must identify the 20 trade secrets and carry the burden of showing that they exist.” Imax Corp. v. Cinema 21 Techs., Inc., 152 F.3d 1161, 1164 (9th Cir. 1998) (citation and internal quotation marks 22 omitted). However, at the pleading stage, “a plaintiff need not spell out the details of the 23 trade secret.” Arthur J. Gallagher & Co. v. Tarantino, 498 F. Supp. 3d 1155, 1171 (N.D. 24 Cal. 2020) (citation omitted). Instead, “the basic test is (1) whether something beyond 25 general knowledge [in the profession] is being claimed and (2) whether there is enough 26 specificity to put the defendant on notice of what the theft is about.” Id. 27 The complaint alleges that “BMO developed, maintained, and possessed 28 Confidential Information and Trade Secrets that include, without limitation, BMO client 1 names and client lists with which BMO conducts business on an ongoing basis.” (Doc. 1 2 ¶ 88.) Elsewhere, the complaint reiterates that the information at issue includes “BMO 3 client names[] and lists.” (Id. ¶ 99.) These allegations are sufficiently specific to put 4 Defendants on notice of what the theft is about. InteliClear, 978 F.3d at 658.2 5 B. Trade Secrets—Sufficiency 6 Defendants next argue that the complaint fails to establish that BMO’s client names 7 and client lists actually qualify as trade secrets. (Doc. 15 at 6-7.) Defendants elaborate: 8 “The complaint does not allege facts indicating what, beyond a listing of names that could 9 be gathered from any public source, was contained in the set of information that Defendants 10 allegedly retained after their employment with BMO had ended.” (Id.) 11 This argument is unavailing. As the Arizona Court of Appeals has explained, “[i]n 12 the context of customer lists, trade secret protection does not depend on whether the ‘list’ 13 misappropriated is in written form or memorized. Rather, courts have identified several 14 factors to determine whether a customer list qualifies as a trade secret.” Calisi v. Unified 15 Fin. Servs., 302 P.3d 628, 631 (Ariz. Ct. App. 2013). Those factors include whether the 16 list (1) “represents a selective accumulation of detailed, valuable information about 17 customers—such as their particular needs, preferences, or characteristics—that naturally 18 would not occur to persons in the trade or business”; (2) was “compiled . . . by expending 19 substantial efforts to identify and cultivate [a] customer base such that it would be difficult 20 for a competitor to acquire or duplicate the same information”; (3) “derives independent 21 economic value from its secrecy, and gives the holder of the list a demonstrable competitive 22 advantage over others in the industry”; and (4) was “divulged . . . externally and internally, 23 i.e., to people outside of [the holder’s] business as well as to its own employees.” Id. at 24 2 The one caveat is the allegation in paragraph 99 that Count II may be based in part on Defendants’ misappropriation of “information with which [BMO] conducts business on 25 an ongoing basis.” To the extent this “information” somehow differs from BMO’s client names and client lists (which are separately enumerated in paragraph 99 as objects of the 26 misappropriation claim), it is too vague and general to suffice. InteliClear, 978 F.3d at 658 (“Plaintiffs may not simply rely upon ‘catchall’ phrases or identify categories of trade 27 secrets they intend to pursue at trial.”). But because BMO elsewhere provides a sufficiently clear identification of the trade secrets giving rise to its misappropriation claims, this one 28 instance of overbreadth does not require dismissal. 1 631-32 (citations and internal quotation marks omitted). 2 Here, although the complaint does not contain express factual allegations regarding 3 some of these considerations (and, as Defendants correctly note, it would be inappropriate 4 to allow BMO to effectively supplement its complaint by advancing such factual 5 allegations for the first time in its response to the motion to dismiss), the factual allegations 6 that are contained within the complaint are sufficient to plausibly establish that BMO’s 7 customer lists do, in fact, qualify as trade secrets. In addition to alleging that the customer 8 lists are composed of “information [that] is proprietary and not readily ascertainable by the 9 public or competing companies, such as Crewe,” the complaint specifically alleges that at 10 least one Defendant (Yamano) focused her work on clients in the “high net worth and ultra- 11 high net worth client segments.” (Doc. 1 ¶¶ 28, 89.) The Court has little trouble concluding 12 that a list of such clients could plausibly qualify as a trade secret—common sense suggests 13 that a bank would need to expend substantial efforts to identify the narrow universe of 14 ultra-wealthy customers who might be interested in private banking and wealth 15 management services and that such a list would be quite valuable from the bank’s 16 perspective and provide an advantage over competitors in the industry. See generally 17 Iqbal, 556 U.S. at 679 (“Determining whether a complaint states a plausible claim for relief 18 [is] a context-specific task that requires the reviewing court to draw on its judicial 19 experience and common sense.”). If a bank did not have such a list, and thus had to resort 20 to cold-calling numbers in the phone book in the hope the recipient might be interested in 21 high-end wealth management services, the inefficiencies would be obvious. Cf. MAI Sys. 22 Corp. v. Peak Comput., Inc., 991 F.2d 511, 521 (9th Cir. 1993) (“We agree that the 23 Customer Database qualifies as a trade secret. The Customer Database has potential 24 economic value because it allows a competitor like Peak to direct its sales efforts to those 25 potential customers that are already using the MAI computer system.”). 26 C. Measures To Maintain Secrecy 27 Defendants argue that “simply using confidentiality clauses in employment 28 agreements, or limiting former employees’ access to client information, is not enough to 1 transform basic confidential information into a trade secret.” (Doc. 15 at 7.) Defendants 2 further argue that, “[b]eyond a conclusory assertion that it has ‘undertaken reasonable 3 efforts to preserve the confidentiality of its trade secrets,’ BMO has not explained how it 4 kept its client lists from being accessed by non-employees, including through public access 5 to BMO employee social media profiles and connections.” (Id.) 6 These arguments are unpersuasive. “Just as the trade secret’s owner is obliged to 7 establish that the matter is secret, it must also show that it exercised reasonable care to 8 safeguard the secret.” Enter. Leasing Co. of Phx. v. Ehmke, 3 P.3d 1064, 1070 (Ariz. Ct. 9 App. 1999). “Indeed, the most important factor in gaining trade-secret protection is 10 demonstrating that the owner has taken such precautions as are reasonable under the 11 circumstances to preserve the secrecy of the information.” Id. 12 Here, BMO alleges that it sought to maintain the secrecy of its customer lists by 13 having Defendants sign the RSU Plan, which forbade the disclosure of client lists (Doc. 1 14 ¶ 55); by having Defendants sign the Offer Letter Agreement, which required Defendants 15 to protect confidential information and return all company property and confidential 16 information after employment ends (id. ¶¶ 38-39); and by sending letters to Defendants 17 soon after receiving their resignation notices that reminded Defendants of their obligations 18 to honor these agreements (id. ¶¶ 60-69). Courts have found that similar allegations are 19 sufficient to satisfy the reasonable-precaution requirement in a trade-secrets case. See, e.g., 20 W.L. Gore & Associates, Inc. v. GI Dynamics, Inc., 2010 WL 5184254, *8 (D. Ariz. 2010) 21 (“GID has also alleged with sufficient particularity its efforts to protect and maintain the 22 secrecy of its trade secrets, including two confidential disclosure agreements with Gore, 23 and expressly marking all of its presentations as ‘confidential.’”); Enter. Leasing, 3 P.3d 24 at 1071 (“Not only did Enterprise make reasonable efforts to ensure the confidentiality of 25 the information, such as limited disclosure to those employees in need of the information 26 to perform their duties and general directives regarding confidentiality, but it specifically 27 included a confidentiality provision in its employment agreement for high-level managers 28 such as Ehmke, as well as in the employee policy handbook that all employees had to 1 acknowledge and sign. These measures demonstrate adequate safeguards to protect the 2 financial documents and the Worksheet.”); InteliClear, 978 F.3d at 660-61 (upholding 3 confidentiality agreements as “reasonable steps to maintain secrecy”). 4 II. Fiduciary Duty/Duty of Loyalty 5 In Count III, BMO alleges that the Defendants breached their fiduciary duties and 6 duties of loyalty to BMO by “(a) failing to act solely for BMO’s benefit in all matters 7 connected to their employment; (b) using and disclosing BMO’s confidential information 8 to Crewe; and (c) soliciting BMO customers to transfer to Crewe.” (Doc. 1 ¶ 112.) 9 Under Arizona law, an employee has a fiduciary duty not to “‘compete with his 10 employer concerning the subject matter of the employment’ during the period of 11 employment.” HTS, Inc., 954 F. Supp. 2d at 946 (quoting Sec. Title Agency, Inc. v. Pope, 12 200 P.3d 977, 989 (Ariz. Ct. App. 2008)). Although an employee may make arrangements 13 to compete “[b]efore termination,” the employee “cannot properly use confidential 14 information peculiar to his employer’s business and acquired therein” or “solicit customers 15 for such rival business before the end of his employment.” Id. (quoting McCallister Co. v. 16 Kastella, 825 P.2d 980, 982 (Ariz. Ct. App. 1992)). 17 Defendants argue that Count III fails to state a claim because the complaint “does 18 not allege that Defendants competed with BMO during their employment” and instead 19 “expressly states that it was not until after Defendants had left BMO’s employment that 20 they allegedly began to solicit BMO clients.” (Doc. 15 at 10, capitalization omitted.) In 21 response, BMO argues that the complaint does, in fact, allege that Defendants “beg[a]n 22 using BMO’s confidential information against it while Defendants were still employed at 23 BMO.” (Doc. 21 at 12.) In support of this contention, BMO cites paragraph 56 of the 24 complaint. (Id.) In reply, Defendants accuse BMO of relying “on phantom allegations that 25 cannot be found anywhere within the four corners of its Complaint.” (Doc. 22 at 9-10.) 26 Defendants contend that paragraph 56 is “woefully insufficient” to establish that any 27 misconduct occurred during their term of employment because it simply references 28 meetings that occurred before they resigned, without any specifics as to what was discussed 1 during those meetings. (Id.) Defendants contend that BMO’s theory is also contradicted 2 by paragraph 72 of the complaint, which specifically alleges that the solicitation efforts did 3 not begin until after they resigned. (Id.) 4 Defendants have the better of this argument. Although paragraph 112 of the 5 complaint asserts in conclusory fashion that Defendants breached their duties “during their 6 employment and notice period,” the only factual allegation offered to support this assertion 7 is paragraph 56, which reads, in its entirety, as follows: “In the weeks leading up to their 8 coordinated resignations, Defendants had private closed-door meetings regarding their 9 move from BMO to Crewe.” This allegation is insufficient because the act of planning to 10 move to a competitor does not, in itself, constitute a breach of loyalty or breach of fiduciary 11 duty. HTS, Inc., 954 F. Supp. 2d at 946. See also Firetrace USA, LLC v. Jesclard, 800 F. 12 Supp. 2d 1042, 1053 (D. Ariz. 2010) (“Defendants are correct that preparation to compete 13 is not enough to support a breach of fiduciary duty claim.”). 14 If BMO had alleged more details concerning these pre-resignation meetings, such 15 as that Defendants agreed to begin copying client lists before the resignation date, the 16 analysis might be different. After all, “[t]he line separating mere preparation from active 17 competition may be difficult to discern in some cases” and ultimately presents “a question 18 of fact to be decided by the trier of fact based on a consideration of all the circumstances 19 of the case.” Firetrace USA, 800 F. Supp. 2d at 1053 (citations and internal quotation 20 marks omitted). However, such details are wholly lacking here. Additionally, in paragraph 21 72, BMO alleges that it was only “[f]ollowing their official departures” that Defendants 22 “began soliciting BMO clients.” BMO makes no effort to reconcile this allegation with its 23 theory that the misconduct actually started earlier, during the employment and notice 24 period. 25 III. Breach Of Contract 26 The complaint includes two breach-of-contract claims: one for breach of the RSU 27 Plan against all Defendants (Count V) and one for breach of the Offer Letter Agreement 28 against Miller, Corley, and Yamano (Count IV). Neither claim alleges violations of the 1 Notice Period Agreement. (Doc. 15 at 7 n.1.) 2 BMO alleges that Defendants breached the non-solicitation and confidentiality 3 portions of these agreements by “soliciting BMO clients and using BMO Confidential and 4 Trade Secret Information.” (Doc. 1 ¶¶ 120, 128.) Defendants, in turn, move to dismiss on 5 the ground that both sets of covenants are overbroad and unenforceable. (Doc. 15 at 7-9.) 6 The parties’ more specific arguments are summarized in additional detail below. 7 Under Arizona law, restrictive covenants in the employee-employer context are, in 8 general, unenforceable if they are “(1) beyond that reasonably necessary for the protection 9 of the employer’s business; (2) unreasonably restrictive upon the rights of the employee; 10 [or] (3) in contravention of public policy.” Lessner Dental Labs., Inc. v. Kindey, 492 P.2d 11 39, 40-41 (Ariz. Ct. App. 1971). “Reasonableness is a fact-intensive inquiry that depends 12 on the totality of the circumstances.” Valley Med. Specialists v. Farber, 982 P.2d 1277, 13 1283 (Ariz. 1999). 14 Because the legal requirements for non-solicitation agreements and confidentiality 15 agreements differ, the Court will discuss them separately even though the counts are broken 16 up by agreement. 17 A. Non-Solicitation 18 “Because [a non-solicitation agreement] is less restrictive on the employee (and thus 19 on free market forces) than a covenant not to compete, [such an] agreement ordinarily is 20 not deemed unreasonable or oppressive.” Hilb, Rogal & Hamilton Co. of Ariz. v. 21 McKinney, 946 P.2d 464, 467 (Ariz. Ct. App. 1997).3 “Nevertheless, [such an] agreement 22 may be so restrictive in its scope and result that it is unenforceable. . . . A restrictive 23 covenant—whether a covenant not to compete or [a non-solicitation] agreement—is 24 enforceable as long as it is no broader than necessary to protect the employer’s legitimate 25 business interest. The burden is on the employer to prove the extent of its protectable 26 interest.” Id. (citations omitted). 27 3 Non-solicitation agreements must be ancillary to an otherwise legally enforceable 28 contract. Compass Bank v. Hartley, 430 F. Supp. 2d 973, 979-80 (D. Ariz. 2006). Defendants do not contest the underlying validity of the contracts here. 1 “In the commercial context, it is clear that employers have a legitimate interest in 2 retaining their customer base.” Valley Med. Specialists, 982 P.2d at 1284. Accordingly, 3 Arizona courts frequently uphold agreements that prohibit solicitation for a one-year period 4 following employment. See, e.g., Compass Bank, 430 F. Supp. 2d at 980-81 (upholding 5 one-year non-solicitation agreement and collecting cases). However, businesses have “no 6 protectable interest in persons or entities or customers when the employer has no business 7 ties to them.” Orca Commc’ns Unlimited LLC v. Noder, 314 P.3d 89, 96 (Ariz. Ct. App. 8 2013) (striking down a non-solicitation agreement that applied to actual, potential, and 9 former customers as broader than necessary to protect the business’s legitimate interests), 10 overruled and ordered partially depublished on other grounds, 337 P.3d 545 (Ariz. 2014). 11 As for the geographic scope of non-solicitation agreements, courts have suggested 12 that it would be inappropriate to find overbreadth and unenforceability on this basis. 13 GlobalTranz Enters. Inc. v. Shipper’s Choice Glob. LLC, 2017 WL 11609546, *8 (D. Ariz. 14 2017) (“It is undisputed that a non-compete provision must have a reasonable geographic 15 scope . . . [but] it is not clear how geographic limitations would even work in the context 16 of non-solicitation provisions. It is undisputed that GlobalTranz can lawfully prohibit its 17 former employees from soliciting at least some of its current customers and those 18 customers may be located across the country. Given that, geographic limitations would 19 make no sense.”) (citations omitted). At any rate, the Arizona Supreme Court has 20 suggested that statewide enforcement of a non-solicitation agreement would be appropriate 21 if its scope were limited to the company’s current clients. Olliver/Pilcher Ins., Inc. v. 22 Daniels, 715 P.2d 1218, 1219-20 (Ariz. 1986). 23 The RSU Plan’s non-solicitation provision provides in relevant part as follows: 24 The Participating Employee shall not during the Restricted Period . . . solicit, contact, accept business with, enter into a commercial arrangement with any 25 Customer or Supplier for any purpose which competes, in whole or in part, with the Business, or attempt to do so, or persuade or attempt to persuade any 26 Customer or Supplier to discontinue or adversely alter the Customer’s or Supplier’s relationship with the Bank or its Affiliates . . . . 27 28 (Doc. 1 ¶ 53.) The Restricted Period means “12 months from the date of the termination 1 of their employment.” (Id. ¶ 54.) “Territory” means “areas where the Private Bank does 2 business, including Arizona.” (Id.) 3 The Offer Letter Agreement’s non-solicitation provision provides: 4 During your employment and for twelve months following the end of your employment with the Company, you must not, directly or indirectly 5 solicit . . . any client of the Company that you serviced during your last twelve months with the Company to offer any product or service that is the 6 same as or similar to any product or service that you provided to that client previously. 7 8 (Doc. 1 ¶ 37; Doc. 1-2 at 4.) 9 Defendants contend that both non-solicitation provisions are unenforceable because 10 their geographic scope and customer reach are “unreasonably broad” and because the 11 complaint lacks factual allegations to demonstrate “the restrictions are reasonable and no 12 broader than necessary to protect BMO’s legitimate interests.” (Doc. 15 at 8-9.) BMO 13 responds that the non-solicitation provisions are sufficiently narrow for four related 14 reasons: (1) 12-month restrictions are routinely upheld in Arizona; (2) the term 15 “Customers” is defined for the purposes of the non-solicitation provisions as “clients with 16 whom they actually worked or interacted,” which is sufficiently narrow; (3) non- 17 solicitation provisions do not require a geographic scope, given that “customers may be 18 located across the country”; and (4) the provisions do not include non-competition clauses, 19 but merely restrict the solicitation of current clients, and thus Defendants “can continue in 20 the exact same career path, in the same positions, in the same industry, in the same 21 geographic region. They are simply prohibited during the restricted period, from soliciting 22 current BMO clients with whom they previously dealt.” (Doc. 21 at 7-12.) In reply, 23 Defendants argue that restrictive covenants are disfavored in the employee-employer 24 context; that the non-solicitation provisions are not limited to current BMO clients, but 25 would also encompass a former BMO client that was not “still a client of BMO when the 26 Defendants left”; and that BMO has not established that its proffered definition of the term 27 “customer” applies to the RSU Plan. (Doc. 22 at 7-8.) Defendants conclude: “BMO . . . 28 fails to allege any facts concerning what legitimate business interest it has in preventing 1 Defendants from contacting any client with whom they had contact in their last 12 months 2 of employment, for another year following the end of employment, regardless of where in 3 the country that client is located or whether that client still receives services from BMO.” 4 (Id.) 5 The Court agrees, in the main, with BMO’s arguments on these points and concludes 6 that the non-solicitation provisions are not so overly broad as to preclude enforcement, at 7 least at the motion-to-dismiss stage. First, a 12-month time frame to not solicit customers 8 has routinely been upheld as reasonable to protect an employer’s legitimate interest in 9 customer retention. Compass Bank, 430 F. Supp. 2d at 980-81. Nor is there any merit to 10 Defendants’ contention that the “complaint is devoid of any plausible facts suggesting that 11 the temporal . . . restrictions are reasonable and no broader than necessary.” (Doc. 15 at 8- 12 9.) BMO alleges that the loss in client relationships has already cost it “$450,000 in annual 13 revenue” and that “significantly more” assets remain at BMO that are threatened by 14 Defendants’ conduct. (Doc. 1 ¶¶ 82-84.) These factual allegations support the conclusion 15 that BMO has an interest in customer retention and Arizona law supports a 12-month 16 restriction to protect that interest. 17 Second, even accepting that the anti-solicitation provisions might be unenforceable 18 under Orca Communications if construed to prohibit the solicitation of BMO’s former 19 clients, there is, at a minimum, ambiguity over whether the provisions extend in this 20 fashion. For example, under the RSU Plan, Defendants are prohibited “during the 21 Restricted Period”—that is, during the 12-month period following their departure—from 22 soliciting the business of any “Customer.” (Doc. 1 ¶ 53.) Although there is no indication 23 in the present record as to whether the term “Customer” is expressly defined elsewhere in 24 the RSU Plan, contextual clues within the non-solicitation provision itself suggest that the 25 term applies only to customers who remained customers of BMO during the 12-month 26 post-employment period. Specifically, the second clause of subsection (ii) prohibits 27 “attempt[ing] to persuade any Customer . . . to discontinue or adversely alter the 28 Customer’s . . . relationship with the Bank.” (Id.) This verbiage would make little sense 1 if the term “Customer” included former BMO clients or potential future BMO clients, 2 because in those instances there would be no existing “relationship with the Bank” for 3 Defendants to attempt to “discontinue or adversely alter.” At a minimum, the meaning of 4 the term “Customer” under the RSU Plan is too ambiguous to support a conclusive ruling 5 in Defendants’ favor at this stage of the case. See generally Hicks v. PGA Tour, Inc., 897 6 F.3d 1109, 1118 (9th Cir. 2018) (“If a contract is ambiguous, it presents a question of fact 7 inappropriate for resolution on a motion to dismiss.”). Similarly, under the Offer Letter 8 Agreement, the covered Defendants are precluded from soliciting, during the 12-month 9 period following their departure, “any client of the Company that you serviced during your 10 last twelve months with the Company.” (Id. ¶ 37.) Once again, one common-sense reading 11 of this language is that it is limited to entities that remained BMO clients following 12 Defendants’ departure, and at a minimum there is ambiguity that precludes dismissal. 13 Finally, the anti-solicitation provisions are not unenforceable due to geographic 14 overbreadth. Defendants do not cite any case holding that a 12-month non-solicitation 15 agreement limited to the employer’s current clients could be deemed unenforceable based 16 on the fortuity of where those clients happen to be located and the Court agrees with the 17 analysis in GlobalTranz Enterprises that it would not make sense to invalidate a non- 18 solicitation agreement on that basis. 19 B. Confidentiality 20 Enforcement of confidentiality agreements requires striking a careful balance 21 between protecting truly confidential business information, like trade secrets, and 22 protecting the employee’s right to keep and use the valuable skills acquired while working. 23 Amex Distributing Co. v. Mascari, 724 P.2d 596, 602-03 (Ariz. Ct. App. 1986). “[A] true 24 trade secret is entitled to protection of indefinite duration, [but] the same is not true of 25 customer information, especially in a field where customers are known and generally 26 accessible to competitors.” Id. at 603 (internal citations omitted). Thus, confidentiality 27 covenants will not be upheld when they are overbroad, such as when they include “all 28 information . . . acquired” by an employee. Orca Commc’ns, 314 P.3d at 94-95. Extreme 1 overbreadth in a confidentiality agreement can be tantamount to a covenant not to compete. 2 Id. at 95. 3 The RSU Plan’s confidentiality clause provides that Plan participants “may not 4 ‘directly or indirectly, use, disclose, or otherwise distribute any Confidential Information,’” 5 which “includes, but is not limited to, names and lists of customers and employees.” (Doc. 6 1 ¶ 55.) 7 The Offer Letter Agreement’s confidentiality provision provides: “You must protect 8 the confidential and proprietary information of the Company, our clients, suppliers and 9 employees. You must comply with all laws and Company policies that restrict the use, 10 disclosure, collection and access of confidential and proprietary information.” (Doc. 1 11 ¶ 38; Doc. 1-2 at 4.) 12 Defendants argue these confidentiality provisions are overbroad and unenforceable 13 because they encompass public information and lack temporal and geographic restrictions. 14 (Doc. 15 at 9.) BMO, unfortunately, says almost nothing in response. Nearly all of BMO’s 15 responsive briefing concerns the enforceability of the non-solicitation provisions. (Doc. 16 21 at 7-12.) The only discussion of the confidentiality provisions appears in footnote 3, 17 which simply asserts that “BMO’s confidentiality provisions are valid contractual 18 provisions that seek to enforce BMO’s confidential information” and cites one case, Farm 19 Bureau Prop. & Cas. Ins. Co. v. McEldowney, 2015 WL 12941880 (D. Ariz. 2015), in 20 support of this assertion. In reply, Defendants focus on the non-solicitation provisions and 21 do not separately address the enforceability of the confidentiality provisions. 22 The record regarding the enforceability of the confidentiality provisions is 23 underdeveloped. BMO’s reliance on Farm Bureau is misplaced because the contract in 24 that case specifically defined the term “Confidential Information” to exclude “information 25 which Agent has confirmed is publicly known.” 2015 WL 12941880 at *1. But here, the 26 record does not reveal whether either contract provided a definition of the term 27 “Confidential Information,” let alone whether that definition clarified that publicly known 28 information was excluded. In Orca Communications, the Arizona Court of Appeals held 1 that a confidentiality provision was unenforceable because its “definition of ‘confidential 2 information’” included “any information [the defendant] learn[ed] of, possess[ed] as a 3 result of, or access[ed] through employment’ with Orca” and thus “extend[ed] far beyond 4 the ‘truly confidential.’” 314 P.3d at 416-17. It is possible that the confidentiality 5 provisions here may run afoul of this principle, but because the parties have not provided 6 them and BMO has not provided much in the way of responsive briefing, it is difficult to 7 provide any meaningful analysis. 8 Even if the confidentiality provisions were independently unenforceable, Counts IV 9 and V would not be subject to dismissal because those claims are also based on alleged 10 breaches of the non-solicitation provisions. Thus, the Court declines at this time to reach 11 any definitive conclusions about the enforceability of the confidentiality provisions. 12 IV. Tortious Interference 13 In Count VI, BMO alleges that Defendants “intentionally and improperly interfered 14 with BMO’s contractual relations it had established with its clients” by “using BMO’s 15 Confidential Information and soliciting BMO’s clients.” (Doc. 1 ¶¶ 131, 135.) As relief, 16 BMO seeks “actual and consequential damages,” “costs,” and “interest.” (Id. ¶ 136.) 17 Under Arizona law, “[t]o establish a prima facie case of intentional interference 18 with contractual relations, a plaintiff must prove: the existence of a valid contractual 19 relationship or business expectancy; the interferer’s knowledge of the relationship or 20 expectancy; intentional interference inducing or causing a breach or termination of the 21 relationship or expectancy; and resultant damage to the party whose relationship or 22 expectancy has been disrupted. In addition, the interference must be ‘improper as to motive 23 or means’ before liability will attach.” Wallace v. Casa Grande Union High Sch. Dist. No. 24 82 Bd. of Governors, 909 P.2d 486, 494 (Ariz. Ct. App. 1995) (citation omitted). 25 Defendants argue Count VI is barred by the economic loss rule or preempted by 26 AUTSA. (Doc. 15 at 11-12.) Defendants also argue the non-solicitation provision is 27 unenforceable and therefore cannot serve as the foundation for the tortious interference 28 claim. (Doc. 22 at 11.) 1 The economic loss rule (“ELR”) limits “a contracting party to contractual remedies 2 for the recovery of economic losses unaccompanied by physical injury to persons or other 3 property.” Flagstaff Affordable Hous. Ltd. P’ship v. Design All., Inc., 223 P.3d 664, 667 4 (Ariz. 2010). The doctrine is not applied mechanically, and instead requires the court to 5 consider the “relevant policy concerns” presented by the individual factual situation. Id. 6 at 673. One such policy consideration is the different purposes that contractual and tort 7 remedies serve: “Generally, contract law enforces the expectancy interests between 8 contracting parties and provides redress for parties who fail to receive the benefit of their 9 bargain . . . . Tort law, in contrast, seeks to protect the public from harm to person or 10 property.” QC Constr. Prods., LLC v. Cohill’s Bldg. Specialties, Inc., 423 F. Supp. 2d 11 1008, 1015 (D. Ariz. 2006) (quoting Carstens v. City of Phx., 75 P.3d 1081, 1083 (Ariz. 12 Ct. App. 2003)). 13 Defendants argue that the “tortious interference claim relies on Defendants’ alleged 14 failure to abide by the terms of contracts between BMO and each Defendant” and therefore 15 “BMO is limited to its contractual remedies.” (Doc. 15 at 11.) BMO counters that, because 16 Arizona law is unsettled on whether the ELR applies outside the context of products 17 liability and construction defect cases, the Court cannot bar Count VI at this stage. (Doc. 18 21 at 13-14.) In reply, Defendants argue that the ELR is not so limited, as courts have 19 applied it to bar fraud, misrepresentation, and tortious interference claims. (Doc. 22 at 10.) 20 A federal court adjudicating state-law claims should “approximate state law as 21 closely as possible in order to make sure that the vindication of the state right is without 22 discrimination because of the federal forum.” Ticknor v. Choice Hotels Int’l., Inc., 265 23 F.3d 931, 939 (9th Cir. 2001) (quoting Gee v. Tenneco, 615 F.2d 857, 861 (9th Cir. 1980)). 24 Therefore, the Court declines BMO’s seeming invitation to let the claim proceed without 25 predicting how Arizona’s highest court would decide the issue. Finepoint Innovations, 26 Inc. v. A.T. Cross Co., 2006 WL 3313688, *3 (D. Ariz. 2006). 27 On the merits, and acknowledging that “[t]he borders of the rule are hazy because 28 courts are struggling to determine precisely which tort claims are barred,” Firetrace USA, 1 800 F. Supp. 2d at 1050, the Court concludes it is likely the Arizona Supreme Court would 2 apply the ELR to bar BMO’s claim in Count VI. The conduct giving rise to Count VI is 3 the exact same conduct giving rise to BMO’s contract claims in Counts IV and V—i.e., the 4 improper solicitation of clients while using confidential information. BMO articulates no 5 policy rationale why tort remedies should be available for the same conduct covered by the 6 relevant contracts.4 7 The reasoning of Flagstaff Affordable Housing supports this conclusion. There, the 8 Arizona Supreme Court focused on the types of negotiations that gave rise to the formation 9 of the contract. 223 P.3d at 669. Construction contracts “often are negotiated between the 10 parties on a project-specific basis and have detailed provisions allocating risks of loss and 11 specifying remedies.” Id. Because the parties had ordered their affairs in this manner, the 12 Court concluded that “allowing tort claims pose[d] a greater danger of undermining the 13 policy concerns of contract law,” namely “encourag[ing] parties to order their prospective 14 relationships.” Id. The Court emphasized that “there are no strong policy reasons to 15 impose common law tort liability in addition to contractual remedies” when the pecuniary 16 losses “related to the building that is the subject of the parties’ contract.” Id. 17 Here, the parties have similarly ordered their affairs in the employment context. 18 Defendants held high-level positions within BMO and were being compensated 19 accordingly. In exchange for providing generous compensation and access to information, 20 BMO sought to protect itself from harm in the event of Defendants’ departure. The harm 21 was anticipated and described in detail in the various contracts—BMO feared, and sought 22 to protect itself against, the solicitation of its clients and the misuse of its confidential 23 information. The alleged harm that now provides the basis for BMO’s tortious inference 24 claim in Count VI is identical to the anticipated harm to BMO arising from Defendants’ 25 alleged breach of those contracts. Under these circumstances, BMO’s appropriate remedy 26 4 To the extent BMO’s argument is that, under Firetrace USA, the ELR can never apply to tort claims outside the product liability and construction defect contexts (Doc. 21 27 at 13), this argument lacks merit. In opinions issued after Firetrace USA was decided, Arizona courts have clarified that the ELR may be applied outside those contexts. Cook v. 28 Orkin Exterminating Co., 258 P.3d 149, 152-54 & n.6 (Ariz. Ct. App. 2011) (applying ELR to negligence, misrepresentation, and fraud claims). 1 is in contract. Cf. QC Construction Prods., 423 F. Supp. 2d at 1015-16 (“[C]ount two of 2 the complaint alleges that Cohill’s interfered with QC’s business relationships by 3 representing that it was marketing QC’s products to Arizona customers while it was 4 actually marketing a competitor’s product. . . . This purely economic harm resulting from 5 actions that were breaches of the parties’ contract falls squarely under the economic loss 6 rule.”). 7 The Court acknowledges that there are reasons to be cautious about an overbroad 8 application of the ELR. In KD & KD Enters. v. Touch Automation LLC, 2006 WL 3808257 9 (D. Ariz. 2006), the court refused to apply the ELR to a fraudulent misrepresentation claim. 10 It reasoned that the “key rationale underlying the economic loss doctrine presupposes that 11 there has been a fair and equitable negotiation of the allocation of risk between the parties.” 12 Id. at *2. The court explained that “[f]raudulent misrepresentation, however, undermines 13 the ability of parties to negotiate freely, and therefore negates the presumption that an 14 equitable negotiation has occurred. It is unreasonable to restrict a party to contractual 15 limitations of liability when fraudulent representations resulted in an unequal, unfair 16 bargaining process. In such a situation the traditional concern of tort law prevails— 17 protecting society from an unreasonable risk of harm.” Id. The Court agrees with this 18 analysis, but potential fraud related to the formation of the underlying contracts is not 19 alleged here. 20 In sum, because the harm giving rise to BMO’s claim in Count VI was expressly 21 addressed by its employment agreements with Defendants, and there are no additional 22 policy reasons that would necessitate tort liability, Count VI is barred under the ELR. This 23 conclusion makes it unnecessary to address Defendants’ alternative argument that Count 24 Six is preempted under AUTSA. 25 V. Civil Conspiracy 26 In Count VII, BMO alleges that Defendants engaged in a civil conspiracy by using 27 “BMO Confidential Information against BMO,” coordinating their resignations, and 28 soliciting “BMO clients in breach of Defendants’ contractual agreements with BMO.” 1 (Doc. 1 ¶¶ 138-39.) 2 Defendants argue that “[b]ecause BMO has failed to state a tort claim . . . its civil 3 conspiracy claim likewise fails and must be dismissed.” (Doc. 15 at 12.) In response, 4 BMO does not dispute that Count VII must be premised on a valid, underlying tort claim 5 but contends that Count VII should survive dismissal because it “has pleaded the 6 underlying tort to civil conspiracy through its claim for tortious interference.” (Doc. 21 at 7 14 n.4.) 8 Because the Court has now dismissed the tortious interference claim in Count VI, it 9 follows that the civil conspiracy claim in Count VII is also subject to dismissal. As 10 acknowledged by BMO, “[u]nder Arizona law, a claim of civil conspiracy must be based 11 on an underlying tort.” Cervantes v. Countrywide Home Loans, Inc., 656 F.3d 1034, 1041 12 (9th Cir. 2011). See also Wells Fargo Bank v. Ariz. Laborers, Teamsters and Cement 13 Masons Local No. 395 Pension Trust Fund, 38 P.3d 12, 36 (Ariz. 2002). 14 VI. Leave To Amend 15 Although BMO does not request leave to amend in the event of dismissal, the Ninth 16 Circuit has suggested that, in certain circumstances, “a district court should grant leave to 17 amend even if no request to amend the pleading was made.” Ebner v. Fresh, Inc., 838 F.3d 18 958, 963 (9th Cir. 2016) (citation omitted). 19 Rule 15(a) of the Federal Rules of Civil Procedure “advises the court that ‘leave [to 20 amend] shall be freely given when justice so requires.’” Eminence Cap., LLC v. Aspeon, 21 Inc., 316 F.3d 1048, 1051 (9th Cir. 2003). “This policy is ‘to be applied with extreme 22 liberality.’” Id. (citation omitted). Thus, leave to amend should be granted unless “the 23 amendment: (1) prejudices the opposing party; (2) is sought in bad faith; (3) produces an 24 undue delay in litigation; or (4) is futile.” AmerisourceBergen Corp. v. Dialysist W., Inc., 25 465 F.3d 946, 951 (9th Cir. 2006). 26 Here, although the Court is skeptical that BMO would be able to plead additional 27 facts that could cure the deficiencies identified above, it will, in an abundance of caution, 28 grant BMO leave to amend with respect to the dismissed claims in Counts III, VI, and VII. 1 Accordingly, 2 IT IS ORDERED that: 3 1. Defendants’ motion to dismiss (Doc. 15) is granted in part and denied in 4|| part. Counts III, VI, and VII are dismissed. 5 2. BMO may file a First Amended Complaint (“FAC”) within 21 days of the 6 || issuance of this order, with the scope of amendment limited as discussed above. If BMO || files a FAC, it shall, consistent with LRCiv 15.1(a), attach a redlined version of the 8 || pleading as an exhibit. 9 Dated this 3rd day of October, 2022. 10 11 fm ee” 12 f : _o—— Dominic W. Lanza 13 United States District Judge 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -23-