Free Reply to Response to Motion - District Court of Arizona - Arizona

1 Thomas A. Maraz (Bar No. 010993) Maureen A. Welsh (Bar No. 020954) 2 GALLAGHER & KENNEDY, P.A. 2575 East Camelback Road Phoenix, Arizona 85016-9225 3 (602) 530-8000 4 Attorneys for Defendants 5 6 7 UNITED STATES DISTRICT COURT DISTRICT OF ARIZONA No. CIV 03-0150-PHX-EHC REPLY IN SUPPORT OF DEFENDANTS' SECOND MOTION FOR PARTIAL SUMMARY JUDGMENT REGARDING INTENTIONAL INTERFERENCE WITH PROSPECTIVE GLOBAL FITNESS CONTRACT (Oral Argument Requested)

8 Physical Excellence, Inc., an Arizona corporation; Body-Of-Change, Inc., an Arizona corporation; Body Of Change International, 9 L.L.C., a Delaware limited liability company, 10 Plaintiffs, 11 vs. 12 Stephen Dow and Linda Dow, husband and 13 wife; Dan Fahey and Jane Doe Fahey, husband and wife; Stephen Dow d/b/a Achieve Fitness; 14 Beyond Fitness, L.L.C., a North Carolina limited liability company; John Does 1-V; Jane 15 Does 1-V; Black And White Corporations 1-V, 16 17 Defendants.

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Defendants, through undersigned counsel, hereby submit their Reply in Support of

18 Defendants' Second Motion for Partial Summary Judgment Re: Intentional Interference 19 [hereafter "Defendants' Second Motion"] [DKT 209]. 20 21 22
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PLAINTIFFS CANNOT PREVAIL ON DEFENDANTS' SECOND MOTION. Plaintiffs' Response1 [DKT 225] contains no fact or law that should prevent this

Court from granting Defendants' Second Motion for Partial Summary Judgment. Plaintiffs either admit, or fail to contradict, the crux of Defendants' arguments. For example, Plaintiffs do not dispute that while employed with BOC, Inc., Mr. Dow's involvement in the BOC, Int'l- Global discussions consisted only of one lunch and one telephonic conference very early on in those discussions. Plaintiffs also do not, and cannot, dispute that during Mr. Dow's minimal involvement in the Triangle-Global negotiations, the only two allegedly-improper comments made by Mr. Dow to Mr. Pulliam [of Global] regarding BOC Int'l were that he had heard they were "halting all growth" and that, in response to a question from Mr. Pulliam, he responded "they were not going bankrupt." Further, nothing in Plaintiffs' Response, apart from sheer speculation, refutes the fact that any "concerns" engendered by these two comments were entirely assuaged in discussions between Mr. Pulliam and BOC, Int'l/John Gaston prior to Mr. Pulliam's decision to select Triangle over BOC, Int'l. Indeed, Plaintiffs have provided no evidence to refute Mr. Pulliam's testimony that, in his capacity as President of Global, he made the

Plaintiffs' Response was untimely. Plaintiffs filed a Motion for Enlargement of Time to Respond to the Motions for Partial Summary Judgment [DKT 216] and Defendants' filed 20 a response thereto [DKT 225]. In the motion to enlarge, Plaintiffs' conceded that without leave of the Court their Response to the Second Motion for Partial Summary Judgment 21 would be due on or before August 9, 2005. See Response [DKT 216 p. 2, l. 14-16]. Despite their concession, Plaintiffs filed their Response on August 15, 2005. 22
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1 decision to contract with Triangle solely on his opinion that it was the prudent course of 2 action for his company. 3 Moreover, Plaintiffs do not dispute that their burden of proof for a claim for

4 tortious interference is a high one ­ it is a preponderance of the evidence standard. 5 Further, although Defendants' Second Motion was filed on behalf of all Defendants, it is 6 evident that the issues at hand only involve Mr. Dow. There have never been any 7 allegations that Beyond Fitness-North Carolina has engaged in any conduct giving rise to
2 8 liability for tortious interference. Further, Plaintiffs have previously conceded that Mr.

9 Fahey had no involvement in the negotiations between Global and either Triangle or 10 BOC Int'l. [SOF ¶ 110]. Nevertheless, Plaintiffs fail to concede this in their Response 11 and, in fact, continue to include Mr. Fahey in their allegations. This failure to concede 12 the obvious is illustrative of the futility underscoring Plaintiffs' arguments. 13 These relevant, undisputed facts, and the applicable law, are dispositive of

14 Plaintiffs' cause of action. Defendants' Second Motion is well taken. However, 15 Defendants are compelled to respond, infra, to the non-dispositive, and often irrelevant, 16 arguments set forth in Plaintiffs' Response. 17 II. 18 19 20 21 22
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PLAINTIFFS DID NOT HAVE A REASONABLY VALID EXPECTANCY THAT THEY WOULD RECEIVE THE GLOBAL CONTRACT. Plaintiffs claim that BOC Int'l and Global "were within a hair's breadth of signing

the contract." Plaintiffs' Response, pg. 8. However, Royce Pulliam, President of Global,

In fact, Defendants have filed a Motion to Dismiss Beyond-Fitness North Carolina which is still pending before this Court. [DKT 189].
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1 an unbiased non-party, clearly stated that BOC Int'l did not receive the Global contract 2 because of a multitude of issues unrelated to Defendants. Defendants' Separate 3 Statement of Facts, ¶¶ 98-100 [hereafter, "SOF ¶ __"]. 4 As illustrated in Defendants' Second Motion, and uncontroverted by anything in

5 Plaintiffs' Response, a showing of a valid business expectancy, a requisite for an 6 intentional interference claim, requires a reasonably certain expectation that Plaintiffs 7 would have received the Global contract. Marmis v. Solot Co., 117 Ariz. 499, 502, 573 8 P.2d 899, 902 (App. 1978). More specifically, the court noted that: 9 10 11 12 13 14 15 16 17 18 19 20 21 22
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"Before recovery can be had for interference with prospective business relations or for preventing a contract, it must appear that a relationship or contract would otherwise have been entered into. It is not necessary that it be absolutely certain that contracts would have been made were it not for the interference. Reasonable assurance thereof in view of all the circumstances is sufficient. However, substantial damages cannot be recovered from one who interferes to prevent another from securing a contract for which he has bid, where the person receiving the bids has the right to reject any bid, so that there is nothing to show that the contract would have been secured in the absence of interference." Id. (quoting 45 Am. Jur.2d, Interference §12 (1969)) (emphasis in original). Global had the absolute right to reject the proposals by BOC Int'l - in fact, that's precisely what Global chose to do. Due to the numerous reasons set forth in Defendants' Second Motion, Mr. Pulliam voluntarily opted to take his business elsewhere. In its Response, even Plaintiffs concede that Global had concerns over contracting with them, a fact indicating that it was not the "smooth-sailing" Plaintiffs' now declare it was. See Plaintiffs' Response at pgs. 4-5 ("BOC Int'l. advised and reassured Global ­ to Global's 4
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1 satisfaction" that BOC Int'l. was not having financial difficulties... .") ("BOC Int'l. laid 2 all those concerns [regarding Fitworks and the timing issues] to rest."). Defendants 3 should not be punished for Global's discretionary business decision to contract with a 4 competing bidder for their business. Simply put, it is speculative that BOC Int'l would 5 have secured the Global contract. 6 III. 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
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DEFENDANTS HAVE NOT WAIVED THEIR "BUSINESS COMPETITOR PRIVILEGE." Contrary to the assertions by Plaintiffs, Defendants' have not waived their

arguments regarding Plaintiffs' cause of action. Plaintiffs' rely on Ulan v. Vend-a-Coin, Inc., 27 Ariz. App. 713, 717, 558 P.2d 741, 745 (1976) for the proposition that the "competitor privilege" must be affirmatively pled. Plaintiffs' Response at pg. 9. However, nothing in Ulan even remotely supports this allegation. Ulan solely stands for the general proposition that the privilege to compete exists, but it does not address the issue of whether it is an affirmative defense. Proving that a defendant did not have justification to compete with the plaintiff for a contract with a third-party [i.e., the "competitor's privilege"] is an essential element of the plaintiff's cause of action for tortious interference; it is not something which must be pled by defendants as an affirmative defense. Moreover, law on point directly contradicts Plaintiffs' position. See, e.g., Pulsecard, Inc. v. Discover Card Services, Inc., 917 F. Supp. 1488, 1500-01 (D. Kan. 1996). The plaintiffs in Pulsecard asserted a claim for tortious interference, and in response to defendants' motion for summary judgment, claimed that defendants' 5
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1 arguments were waived because they had not been affirmatively pled. The court 2 dismissed this argument as "without merit." Id. The court ruled that "establishing an 3 absence of justification is an essential element of [plaintiff's] tortious interference 4 claims." Id. The court concluded by holding that "plaintiff is not relieved of its burden 5 of proving an essential element of its claim simply because that element was not pled as 6 an affirmative defense." Id. at 1501 (emphasis added). These facts are closely on point 7 to those at bar and, as such, illustrate that the competitor's privilege/justification is an 8 element of Plaintiffs' claim, not an affirmative defense that must be pled. 9 This principle is echoed in Wagenseller v. Scottsdale Memorial Hospital, 147

10 Ariz. 370, 388, 710 P.2d 1025, 1043 (1985) which noted that "unlike other intentional 11 torts such as intentional injury to person or property, or defamation, this branch of tort 12 law has not developed a crystallized set of definite rules as to the existence or 13 nonexistence of a privilege to act... . Because of this fact, this [Restatement] Section is 14 expressed in terms of whether the interference is improper or not, rather than in terms of 15 whether there was a specific privilege to act in the manner specified." 16 In the alternative, even if it is assumed, arguendo, that it is an affirmative defense,

17 Defendants are still entitled to raise the issue. It is well-worn law that failure to plead an 18 affirmative defense does not provide appropriate grounds for waiving the defense if the 19 Plaintiffs are not unfairly surprised by the claim. See, e.g., Southwest Soil Remediation, 20 Inc. v. City of Tucson, 201 Ariz. 438, 445, 36 P.3d 1208, 1215 (App. 2001); Giles v. GE, 21 245 F.3d 474 (5th Cir. 2001) ( lthough failure to raise affirmative defense under Rule s 22 8(c) in party' first responsive pleading generally results in waiver, where matter was
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1 raised in trial court in manner that did not result in unfair surprise, technical failure to 2 comply precisely with rule was not fatal); Trinity Carton Co. v. Falstaff Brewing Corp., 3 767 P.2d 184 (5th Cir. 1985) (requirement that affirmative defenses be pleaded or waived liberal pleading and amendment policy, goal 4 must be applied in context of Federal Rules' 5 of which is to do substantial justice). Here, Plaintiffs cannot reasonably claim that they 6 were unfairly surprised by Defendants' argument. Indeed, Defendants' Second 7 Supplemental Rule 26.1 Disclosure Statement, dated December 17, 2004, expressly set 8 forth this argument, including citation to RESTATEMENT (SECOND) TORTS § 768. 9 See Exhibit A, attached hereto. 10 IV. 11 TRIANGLE WAS A COMPETITOR OF BOC INT'L. After arguing, on the one hand, that Defendants had waived any "privilege"

12 argument, Plaintiffs then, on the other hand, forward the incredible argument that BOC 13 Int'l and Triangle were not business competitors, so that no "privilege" to compete would 14 apply. It strains credibility, and is entirely improper, for Plaintiffs to base a substantial 15 portion of this voluminous litigation on the allegation that Defendants Dow and Fahey 16 violated their non-compete agreements, but to now argue that Triangle, Defendants Dow 17 and Fahey's employer, was not actually a competitor. 18 Moreover, the Defendants, as well as Triangle, were under the control of Ted

19 Sampson, a Gold's Gym franchisee. Well before the alleged interference, Triangle was 20 in the health club business, precisely the business Plaintiffs are engaged in. Triangle was 21 formed in November 2000 by Mr. Sampson for the purpose of engaging in the health club 22
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1 business. SOF, ¶ 78. The alleged interference in this case occurred in late 2002, two 2 years after Triangle was formed. 3 Plaintiffs rely on Chanay v. Chittenden, 115 Ariz. 32, 563 P.2d 287 (1977) in

4 support of their theory. However, the law in Chanay is inapplicable to the facts at bar. 5 The allegations in Chanay involved interference with an existing contract between 6 plaintiff and a third party, a fact which creates wholly separate questions than those here 7 because "an existing contract, if not terminable at will, involves established interests that 8 are not subject to interference on the basis of competition alone." RESTATEMENT 9 (SECOND) TORTS § 768, cmt. a (1979). 10 V. 11 12 13 14 15 16 17 18 19 20 21 22
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DEFENDANTS DID NOT ACT IMPROPERLY IN SECURING THE GLOBAL CONTRACT AND, THEREFORE, PLAINTIFFS CANNOT SATISFY THE NECESSARY ELEMENTS OF AN INTERFERENCE CLAIM. Plaintiffs argue that Defendants engaged in improper conduct. Plaintiffs'

Response at pgs. 11-16. Plaintiffs dedicate much of their discussion on this issue establishing that improper conduct, if present, can create liability. Defendants do not dispute this. However, none of the cases discussed by Plaintiffs lead to the conclusion that Defendants' [Mr. Dow's] conduct here was improper. For example, Plaintiffs rely on Wells Fargo Bank v. Arizona Laborers, Teamsters and Cement Masons Local No. 395 Pension Trust Fund, 201 Ariz. 474, 38 P.3d 12 (2002) for the proposition that improper conduct can include a "violation of statutory provisions," an act "contrary to public policy," or knowing statements or omissions to a government agency. Plaintiffs' Response at pg. 13. However, none of these situations 8
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1 are applicable here. If anything, Defendants acts were in line with the clearly-announced 2 public policy that "competition is a necessary or desirable incident of free enterprise." 3 See RESTATEMENT (SECOND) TORTS, § 768, cmt. e (1979). 4 Plaintiffs also claim that Fillmore v. Maricopa Water Processing Systems, Inc.,

5 ___ Ariz. ___, 116 P.3d 613 (App. 2005) supports their assertion that "false statements 6 made by a competitor constitute improper conduct." Plaintiffs' Response at pg. 13. 7 Fillmore does not at all support that statement. In Fillmore, the Court was merely trying 8 to decide whether the plaintiff's complaint, in the face of a motion to dismiss, stated a 9 valid cause of action. Moreover, Plaintiffs' have misstated the Fillmore court's ruling. 10 The court did not hold that pleading "false statements" is sufficient to state a cause of 11 action for tortious interference, but rather that "fraudulent misrepresentations" can rise to 12 the level of the improper conduct necessary for the cause of action. Id. These two 13 concepts are very different. The term "false statements" does not infer any knowledge of 14 the falsity on the part of the speaker. However, as the Fillmore court noted, a 15 "fraudulent misrepresentation" is a statement made "when, to the knowledge or belief of 16 its utterer, it is false in the sense in which it is intended to be understood by its recipient." 17 Id. In Fillmore, the court noted that the plaintiff had sufficiently pled that the defendant 18 made fraudulent misrepresentations and that, therefore, a motion to dismiss was not 19 warranted. 20 Here, Plaintiffs have not, and cannot, introduce any evidence that shows Mr. Dow,

21 or anyone else, fraudulently misrepresented any information to Global. Mr. Dow had 22 simply reiterated what he had heard from a reliable former employee that BOC Int'l was
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1 "halting all growth" [perhaps a "false" statement, but definitely not a "fraudulent" one] 2 and that BOC Int'l was not going bankrupt [neither a false, nor a fraudulent, statement]. 3 These statements are clearly insufficient to impose liability on Defendants. 4 Moreover, even assuming Mr. Dow's statements gave Mr. Pulliam some concern,

5 Plaintiffs concede that such concern was alleviated before Global signed any contract. 6 Plaintiffs' Response at pg. 4 ("BOC Int'l advised and reassured Global ­ to Global's 7 satisfaction ­ that BOC Int'l was not having financial difficulties and that it was prepared 8 to meet the needs and timing of the proposed Global licensing agreement" (emphasis 9 added)). 10 Defendants agree with Plaintiffs that the seven part test announced in Wagenseller

11 is an appropriate manner with which to judge the impropriety of Defendants' actions, 12 including the necessity for improper motive and improper conduct. Plaintiffs' Response 13 at pg. 12. Again, as discussed in the Second Motion, and supra, Defendants' conduct 14 [Mr. Dow's two statements] was not improper. Tacitly confirming this, plaintiffs go far 15 afield, arguing "the means utilized by the Defendants to interfere were to use the 16 knowledge gained by Defendants Dow and Fahey in their previous employment to seize 17 and usurp an opportunity for themselves and their new employer." Plaintiffs' Response 18 at pg. 14. This is stated as if it was some type of protectable secret that BOC Int'l was in 19 discussions with Global, but nothing is further from the truth. First, Mr. Dow did not 20 know the status of the BOC Int'l-Global discussions when he contacted Global in 21 November 2002 [the last participation he had in the BOC, Int'l-Global negotiations was 22 in September, 2002]. SOF at ¶¶ 86, 87, 91. Second, Mr. Sampson, a Gold's Gym
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1 franchisee, was the individual who had given BOC Int'l the "lead" on Global, another 2 Gold's Gym franchisee, in the first place. Third, Plaintiffs have forwarded no evidence 3 that the BOC Int'l-Global discussions were intended to be "secret" and/or that BOC Int'l 4 had taken steps to keep those discussions secret. 5 With regard to improper motive, Plaintiffs claim "[t]he only possible purpose or

6 motive furthered by contacting Global was to subvert existing negotiations and get the 7 Global deal for Triangle." Id. at pg. 15 (emphasis added). Defendants do not disagree 8 that Triangle entered into negotiations with Global to secure the Global contract and do 9 not disagree that Mr. Dow's motives for his involvement, even though minimal, in the 10 discussions between Triangle and Global were to promote the financial well-being of 11 Triangle, a competitor of BOC, Int'l. However, these motives are, without a doubt, 12 legitimate and proper. Ulan, 27 Ariz. App. at 717, 558 P.2d at 745. 13 Plaintiffs then claim that the motive may have been a "financial incentive to injure

14 BOC Int'l." Plaintiffs' Response at pg. 15. Even if this is correct, which Defendants do 15 not concede, such a motive is insufficient to create liability. Ulan, supra; Hill v. 16 Peterson, 201 Ariz. 363, 366, 35 P.3d 417, 420 (App. 2001) ("someone who interferes 17 with the prospective contractual rights of another `for a legitimate competitive reason 18 does not become a tort-feasor simply because he may also bear ill will toward his 19 competitor'"). 20 Plaintiffs, also in a completely irrelevant aside, contend they "deserved" the

21 Global contract, arguing that "Triangle's relative interest in the Global deal was 22 substantially less than that of BOC Int'l." Id. at pg. 15. As competitors, BOC, Int'l and
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1 Triangle's interest in the Global contract was equal to one another and both were entitled 2 to put their best foot forward to win the day. Plaintiffs, again citing no authority for this 3 statement's relevance, also allege that "Triangle was a new market participant and had no 4 vested stake in the personal training market." Id. An equally persuasive [although 5 equally irrelevant to the instant issue] argument could be forwarded that a newer 6 participant to a market greatly values any business as it risks failure if it is unable to 7 secure some footing in the market. 8 Finally, Plaintiffs argue that granting the motion will "have the certain

9 consequence of reinforcing corporate espionage and unfair competitive practices." Id. at 10 pg. 16. Aside from noting there is no evidence of corporate espionage, it is clear that 11 Defendants' actions in this case are in complete conformity with the public policy of 12 maintaining and promoting free competition in a free market system. 13 Plaintiffs have not and cannot prove that Mr. Dow's [nor Triangle's (even if

14 Triangle was a party to this suit)] motive and conduct was improper. "It is difficult to see 15 anything defensible, in a free society, in a rule that would impose liability on one who 16 honestly persuades another to alter a contractual relationship." Wagenseller, 147 Ariz. at 17 388, 710 P.2d at 1043. 18 VI. 19 CONCLUSION. In sum, two business competitors vied for the same contract. BOC Int'l lost to

20 Triangle. Global voluntarily chose Triangle because Global's president believed a 21 contract with Triangle was the prudent course, no more no less. Defendants' actions 22 were proper and justified. Plaintiffs have no evidence to the contrary, outside of selfCase 2:03-cv-00150-EHC Document 240

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1 serving speculation, and, therefore, Plaintiffs' claim for tortious interference cannot 2 withstand scrutiny. Defendants' respectfully request, therefore, that the Court grant 3 Defendants' Second Motion for Partial Summary Judgment. 4 5 6 7 8 9 10 ORIGINAL of the foregoing filed via the CM/ECF system this 2nd day 11 of September, 2005, with: Clerk of Court United States District Court Sandra Day O'Connor U.S. Courthouse 13 401 West Washington Street Phoenix, Arizona 85003 14 12 15 16 COPY of the foregoing hand-delivered this 2nd day of September, 2005, to: RESPECTFULLY SUBMITTED this 2nd day of September, 2005. GALLAGHER & KENNEDY, P.A. By: /s Thomas A. Maraz Thomas A. Maraz Maureen A. Welsh 2575 East Camelback Road Phoenix, Arizona 85016-9225 Attorneys for Defendants

Honorable Earl H. Carroll United States District Court 17 Sandra Day O'Connor U.S. Courthouse 401 West Washington Street 18 Phoenix, Arizona 85003 19 20 21 22
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1 COPY of the foregoing electronically transmitted via the CM/ECF system or mailed nd 2 this 2 day of September, 2005, to: 3 Russell A. Kolsrud, Esq. Ryan J. Lorenz, Esq. 4 Norling, Kolsrud, Sifferman & Davis, P.L.C. 16427 N. Scottsdale Road, Suite 210 Scottsdale, Arizona 85254 5 Attorneys for Plaintiffs 6 /s Mercedes Paz Hoffmon 7 1294511/17186-0001 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
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