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

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Thomas A. Maraz (Bar No. 010993) Maureen A. Welsh (Bar No. 020954) GALLAGHER & KENNEDY, P.A. 2575 East Camelback Road Phoenix, Arizona 85016-9225 (602) 530-8000 Attorneys for Defendants UNITED STATES DISTRICT COURT DISTRICT OF ARIZONA Physical Excellence, Inc., an Arizona corporation; Body-Of-Change, Inc., an Arizona corporation; Body Of Change International, L.L.C., a Delaware limited liability company, Plaintiffs, vs. Stephen Dow and Linda Dow, husband and wife; Dan Fahey and Jane Doe Fahey, husband and wife; Stephen Dow d/b/a Achieve Fitness; Beyond Fitness, L.L.C., a North Carolina limited liability company; John Does 1-V; Jane Does 1-V; Black And White Corporations 1-V, Defendants. No. CIV 03-0150-PHX-EHC REPLY IN SUPPORT OF DEFENDANTS' FIRST MOTION FOR PARTIAL SUMMARY JUDGMENT (Oral Argument Requested)

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Plaintiffs' Response1 [DKT 225] spends little time on the merits of Defendants' First Motion for Partial Summary Judgment regarding the Non-Compete Agreements/Breach of Contract Claims ("First Motion"), demonstrating the nonmeritorious nature of their position. Plaintiffs fail to controvert the essential facts that support Defendants' First Motion. Plaintiffs instead address several, random issues, or concoct their own "facts," in an attempt to distract the Court's focus from the matters established by Defendants ­ i.e., that the Covenant Not to Compete and Confidentiality Agreements, attached as Exhibits D and F to Defendants' Statement of Facts in Support of First Motion (hereafter "Non-Compete Agreement(s)"), do not inure to the benefit of BOC, Inc. or BOC, Int'l and the Plaintiffs' attempt to apply the Non-Compete Agreements to areas outside of Arizona is unreasonable. For example, Plaintiffs--having failed in the past to separate out the specific Plaintiffs and their particular claims-- continue this tack by alleging for the very first time that BOC, Int'l is a successor-ininterest to Physical Excellence. Moreover, Plaintiffs revert again to misstating inconsequential factual matters and procedural histories to avoid having to address the merits.2

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 a response thereto [DKT 225]. In the motion to enlarge, Plaintiffs' conceded that without leave of the Court their Response to the First Motion for Partial Summary Judgment would be due on or before August 8, 2005. See Response [DKT 2 p. 2, ll. 15-16. Despite their concession, Plaintiffs filed their Response on August 10, 2005. Defendants will not respond here to each unsupportable accusation; such an exercise would serve only to confuse the issues. Instead, Defendants will attempt in these pages to provide focus on those matters that are germane to the instant issues. Defendants, however, have attached as Exhibit A to this Reply a discussion of the non-germane or incorrect allegations in Plaintiffs' Response.
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I.

NEITHER BOC, INC. NOR BOC, INT'L. IS A PARTY TO THE NONCOMPETE AGREEMENT A. BOC, Inc. Is Not A Successor-In-Interest That May Benefit From any Restrictions in the Non-Compete Agreement.

Taking all of Body of Change, Inc.'s ("BOC, Inc.") factual statements as true [for purposes of this Motion only], Plaintiffs do not provide any evidence that BOC, Inc. was a legally-cognizable successor to Physical Excellence to whom any covenants in the NonCompete Agreement would run. Rather, the undisputed facts in Defendants' First Motion sufficiently establish the opposite: · At all times relevant to the litigation, Physical Excellence remained a separate, ongoing, operating corporation. See Statement of Facts in Support of First Motion ("SOF") [DKT 208], SOF at ¶ 10. Neither Dow nor Fahey entered into a Non-Compete Agreement with BOC, Inc. See SOF at ¶¶ 38, 58 and 67. BOC, Inc. has never purchased Physical Excellence, or any of its assets. See SOF at ¶ 15. There was no contract of merger between BOC, Inc. and Physical Excellence. See SOF at ¶ 14. See also Plaintiffs' Responsive Statement of Facts ("PRSOF") [DKT 220] at ¶ 14, p 3.3 There has never been a written agreement or written assignment by Physical Excellence of its licensing agreements to BOC, Inc. See SOF at ¶¶ 16 and 71. See also PRSOF at ¶ 16, p. 3. The Physical Excellence licensing agreements terminated and BOC, Inc. had new licensing agreements with the clubs. See SOF at ¶ 73.

· · ·

·

·

Further, even facts contained in Mr. Gregg's Declaration do not provide sufficient evidence that BOC, Inc. was a successor that would obligate Defendants Dow and Fahey to BOC, Inc. under the Non-Compete Agreement.4
3

While Plaintiffs dispute the use of the term "merger" they do not and cannot dispute there was no written contract concerning a "corporate organizational transaction" between Physical Excellence and BOC, Inc. See PRSOF at ¶ 16, p. 3.

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Plaintiffs unsuccessfully try to distinguish the cases cited in support of Defendants' First Motion and fail to support their positions with any controlling case law. For example, Plaintiffs do not even come within the definitions they pull from Miller and BLACKS LAW DICTIONARY in support of successorship. Both definitions require that there must be a continuity of character or ownership of the company. See Response, p. 8. But Defendants' uncontroverted facts, as set forth above, establish there was no such continuity ­ BOC, Inc. and Physical Excellence were and are separate companies. After Physical Excellence terminated its license agreements it operated as a separate, viable, ongoing corporation; and BOC, Inc., also a separate, viable, ongoing corporation, entered into all new license agreements with the clubs formerly operating with Physical Excellence. The uncontroverted facts establish the absence of any continuing character or ownership by Physical Excellence through BOC, Inc. Plaintiffs also allege that BOC, Inc., was a third-party beneficiary, citing Supplies for Industry, Inc. v. Christensen, 135 Ariz. 107, 659 P. 2d 660 (App. 1983). Christensen does not at all avail Plaintiffs. Mr. Christensen was the founder and owner of Supplies for Industry, Inc. (SFI). After years of operation, Mr. Christensen sold his stock to another company (IMC). Under a contract with IMC, which included a non-compete covenant, he agreed to stay on to run SFI as president and general manager. Mr. Christensen's employment contract, although with IMC, specifically stated he would not compete with SFI. Here, the circumstances are strikingly different and BOC, Inc. cannot be deemed to be a third-party beneficiary of the Non-Compete Agreement. For example, neither Dow nor Fahey signed an agreement with BOC, Inc. [as Christensen had done with

Legal conclusions contained in Mr. Gregg's deposition testimony and Declaration, that BOC, Inc. is the successor to Physical Excellence, do not and cannot support Plaintiffs' defense. See Defendants' Motion to Strike filed concurrently herewith. The Court, for purposes of summary judgment, should only consider those "facts" presented by that evidence, not the blanket legal conclusions imparted by Mr. Gregg's testimony and self-serving Declaration.

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IMC]. Also, the Non-Compete Agreements did not specifically name BOC, Inc. [as was the case in Christensen]. Further, BOC, Inc. never purchased the assets/stock of Physical Excellence [as IMC had purchased SFI]. SOF ¶ 18. Contrary to Plaintiffs' position, the conclusion that BOC, Inc. is not an entity [a legally-cognizable successor] which could benefit from the terms of the Non-Compete Agreement would in no way render meaningless the term of the Non-Compete Agreement relating to successors-in-interest. It merely prevents Plaintiffs from fabricating a "successorship" relationship in order to unreasonably constrain Defendants. Plaintiffs have provided no facts or law showing there is a genuine issue for trial regarding the lack of BOC, Inc.'s successorship. Because Plaintiffs have the burden-- and failed to meet this burden--this Court should find that BOC, Inc. is not a successor to Physical Excellence. See Rule 56(e), Fed. R. Civ. P. B. BOC, Int'l Is Not A Successor-In-Interest. All of the arguments set forth above in Section IA with regard to BOC, Inc are applicable to BOC, Int'l. In addition, however, any allegations or "facts" presented in Plaintiffs' Response [including Plaintiffs' Statement of Facts or Ben Gregg's Declaration] that BOC, Int'l was a successor to Physical Excellence should be rejected out of hand by this Court. Prior to Plaintiffs' Response, Plaintiffs have never alleged that BOC, Int'l was a successor-in-interest to Physical Excellence. Although Plaintiffs' Complaint, their Amended Complaint, and even their proposed Third-Amended Complaint [lodged with the Court at DKT 190] allege that BOC, Inc. is a successor-ininterest to Physical Excellence, they do not make this allegation with regard to BOC, Int'l. See Defendants' Motion to Strike filed concurrently with this Reply and incorporated herein by reference. In addition, none of Plaintiffs' disclosure statements contain this position. Id. Consequently--and as more fully set forth in Defendants' Motion to Strike--the Court should disregard any alleged "facts" concerning BOC, Int'l's successorship to Physical Excellence.

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Notwithstanding, there is absolutely no evidence in the record that BOC, Int'l was ever a legally-cognizable successor to Physical Excellence [i.e., an entity that could benefit from the provisions of the Non-Compete Agreement]: · · Neither Dow nor Fahey ever entered into a Non-Compete Agreement with BOC, Int'l. See SOF ¶¶ 39 and 59. There was no purchase by BOC, Int'l of Physical Excellence or its assets. See Statement of Facts in Support of Defendants' Reply filed concurrently herewith ("DRSOF") ¶ 2. There was no contract of merger between BOC, Int'l and Physical Excellence. See DRSOF, ¶ 3. Physical Excellence terminated its licensing agreements with the L.A. Fitness Clubs in September of 2001. See SOF ¶ 7. BOC, Int'l was not formed until 2002. See SOF ¶ 18. BOC, Int'l had absolutely no relationship with any clubs (e.g., L.A. Fitness clubs) with which Physical Excellence had prior contractual relationships. See DRSOF, ¶ 1. The only relationship between Physical Excellence and BOC, Int'l is that after BOC, Int'l was formed, Physical Excellence [as an entirely separate company] provided temporary management services to BOC, Int'l until a new management company took over those services. See DRSOF, ¶ 4. Even that relationship was never memorialized in writing. See DRSOF, ¶ 5.

· · · ·

·

The facts demonstrate that there was no successor-in-interest relationship between BOC, Int'l and Physical Excellence. From the facts and belated disclosure, it may be presumed that Plaintiffs raise this issue now only in a desperate attempt to defeat Defendants' First Motion. The belated disclosure, coupled with the undisputed facts showing no continuity of character or ownership, demonstrates that at no time--until their Response needed to be filed--did Plaintiffs contemplate that BOC, Int'l was ever a successor to Physical Excellence.

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II.

PLAINTIFFS' APPLICATION OF THE NON-COMPETE AGREEMENT IS UNREASONABLE Even if the Court determined that BOC, Inc. and/or BOC, Int'l are successors-in-

interest to Physical Excellence under the Non-Compete Agreement, the geographical scope which Plaintiffs argue applies is unreasonable and unwarranted. A. The Geographical Scope Is Unreasonable.5 In essence, Plaintiffs argued that regardless of the fact that the Non-Compete Agreements were signed in Arizona, while Dow and Fahey were working in Arizona, and regardless of the fact that Physical Excellence had only two clubs in Arizona and one in Florida at the time of signing [DRSOF ¶ 6], those Agreements apply to Dow and Fahey in every state to which Physical Excellence, BOC, Inc. and/or BOC, Int'l expanded. Plaintiffs cite no case in support of such an expansive, nationwide application. Instead, Plaintiffs simply allege that: · Defendants knew the owners of Physical Excellence planned to expand and, therefore, knew that the geographical scope of the agreements would expand [Response, p. 10, ll. 18-19]; and The Defendants were integral participants in the expansion of Physical Excellence, BOC, Inc. and BOC, Int'l [Response, p. 10, ll. 18-19].

·

First, Plaintiffs do not cite to any portion of the record in support of these allegations. Because this is a Motion for Summary Judgment, Plaintiffs must cite to the record in support of facts used in defense of its position. See Rule 56(e), Fed. R. Civ. P. Consequently, the Court should disregard these allegations. Second, even taking Plaintiffs' allegations as true, they do not establish that Defendants conceded to contractual restraint beyond their employment with Physical

Plaintiffs spend much of their Response arguing that the one-year limitations period and 10-mile geographical restriction are reasonable. The reasonableness of those provisions is not addressed in Plaintiffs' First Motion and, therefore, is not discussed in the Reply. Defendants are not waiving any right to present this defense at trial; they merely restricted the issues pending in its First Motion to the unreasonableness of the larger geographical scope alleged by Plaintiffs.

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Excellence in Arizona. This concession cannot and should not be presumed, especially given the fact the Non-Compete Agreements were executed well before BOC, Inc. and BOC, Int'l were formed and well before any of the Plaintiff entities "expanded." There is absolutely no evidence that Defendants acquiesced to such a broad interpretation. Tellingly, there are no provisions in the Non-Compete Agreement which state that the restrictions contained therein would apply outside the State of Arizona [the state of execution]. Third, the scope argued by Plaintiffs is too broad to be reasonable. Again, Defendants entered into the Agreements while they were employed by Physical Excellence in Arizona. Expanding the scope of the Agreements outside Arizona to California, Pennsylvania, Florida, Georgia, Ohio, Kentucky, New Jersey, or any other state to which the Plaintiff entities chose to expand is too broad an application to be reasonable. See Bryceland v. Northey, 160 Ariz. 213, 216, 772 P.2d 36, 39 (App. 1989) (Restrictive covenants "are disfavored" and narrowly construed against the employer.) See also Snelling and Snelling, Inc. v. Dupay Enterprises, Inc., 125 Ariz. 362, 609 P.2d 1062 (App. 1980). B. The Scope Unreasonably Restricts Defendants Dow's and Fahey's Rights.

Similar to Amex Distributing Co. v. Mascari, 150 Ariz. 510, 519, 724 P.2d 596, 600 (App. 1986) [cited in Response as Mascari], Plaintiffs wish to impose a geographical area "as large as the known and unknown universe." See Response, p. 14, ll. 1-2. Plaintiffs allege that the Non-Compete Agreement not only restricts Defendants Dow and Fahey in Arizona (where the Agreement was signed and where Defendants were employed at the time of signing), but in California, Pennsylvania, Florida, Georgia, Ohio, Kentucky and New Jersey, and any other state that Physical Excellence, BOC, Inc. and/or BOC, Int'l procured licenses. Plaintiffs take this position even though Defendants Dow and Fahey have never even lived in a majority of those states. According to Plaintiffs, Defendants would have been constrained in all fifty states, had any of the Plaintiff 7 Document 236

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entities had licensing agreements in all of the states. Such a broad application clearly is an unreasonable restriction on Defendants Dow's and Fahey's rights to employment. Contrary to Plaintiffs' position, Defendants need not go so far as to prove they have no other means of support in order to demonstrate an unreasonable restriction on their rights. Rather, Defendants need only show that the Non-Compete Agreement unreasonably restricts their use of the "skill and intelligence" acquired in that "particular field". See Lessner Dental Laboratories v. Kidney, 16 Ariz. App. 159, 162, 492 P.2d 39, 42 (1971). Defendants have provided ample evidence, uncontroverted by Plaintiffs, that Defendants' livelihood and skills are focused in the health club field. To allow the restrictions contemplated by Plaintiffs under the Non-Compete Agreement would create the very "undue restrictions upon an employee's liberty of action in his trade or calling" specifically denounced by the courts. Id. at 162, 492 P.2d at 42. In addition, the fact that Plaintiffs allege that Defendants "occupied positions of trust and had access to unique and valuable information" does not distinguish this matter from those cases cited by Defendants6; nor does it preclude Defendants from the protection of unreasonable restraint. Plaintiffs cite no case law suggesting that employees in positions of trust entitle employers to any more protection or employees to any less. C. The Agreement Violates Public Policy That Favors Free Enterprise. It is disingenuous for Plaintiffs to allege that "Defendants were free to utilize the general skills and training they obtained working for the Plaintiffs" yet then restrict the Defendants' employment activities in California, Pennsylvania, Florida, Ohio, Kentucky, New Jersey, and Georgia [the state in which they now reside] based on an Agreement entered into in Arizona. As stated above, Plaintiffs' unreasonably-broad application of the Non-Compete Agreement violates public policy as a restriction on Defendants' right
Again, Plaintiffs make this factual allegation without support or citation to the record. Therefore, in considering of Defendants' First Motion, this Court may disregard this allegation.
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to continue their employment from which they have in the past 10 years acquired their skill and knowledge. III. INCIDENTAL ISSUES HAVE NO BEARING ON DEFENDANTS' FIRST MOTION A. Defendants Did Not Stipulate That The Non-Compete Agreement Was Reasonable.

Plaintiffs ask this Court to conclude that the Defendants' stipulation at the preliminary injunction hearing was somehow a concession as to the enforceability and reasonableness of the Non-Compete Agreement. However, this conclusion is entirely unsupportable. Defendants' First Motion addresses the limited issues of (1) the reasonableness of the Non-Compete Agreement as to geographical scope [i.e., that it applies to Arizona only]; and (2) the entity that can attempt to enforce the Non-Compete Agreement [i.e., only Physical Excellence, and not BOC, Inc. nor BOC, Int'l, can enforce it]. At no time in the preliminary junction hearing were either of these two issues addressed. The only stipulation by the Defendants related to their solicitation of employees; Defendants merely stipulated that "Mr. Dow and Mr. Fahey won't solicit employees." [DKT 64, Hearing Transcript, p. 8, ll. 12-14, attached hereto as Exhibit B.] Making this stipulation, the Defendants emphatically informed the Court that at no time did they believe the Non-Compete Agreement was enforceable--stating on the record "[a]nd we don't believe that the covenants and confidentiality agreements that were signed are valid." Id., p. 9, ll. 5-6. The stipulation was merely to come to an agreement at that time for purposes of the preliminary injunction hearing only. In other words, Defendants Dow and Fahey never stipulated that the Non-Compete Agreement was even valid; they certainly never stipulated it constrained them outside of Arizona nor that it inured to the benefit of BOC, Inc. or BOC, Int'l.

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B.

Defendants' First Motion For Summary Judgment Never Raised or Waived Lack Of Consideration Defense.

While Defendants certainly are not waiving any defenses to be presented at trial, lack of consideration is not an issue currently pending in Defendants' First Motion. In a classic bait-and-switch tactic, Plaintiffs manufacture the consideration argument stating: The defense is that there was no consideration for the Defendants' promises to refrain from competition with BOC, Inc. and BOC, Int'l. See Response, p. 5. Defendants do not and did not need to go that far in its First Motion. As was already addressed earlier, because BOC, Inc. and BOC, Int'l were never parties to the contract, the issue surrounding basic elements of contract formation, i.e., consideration, need not be addressed with those two Plaintiffs. Moreover, despite Plaintiffs' allegation, this is not a newly-raised defense. This defense was first briefed in Defendants' Reply in Support of its Motion to Dismiss more than two years ago. [DKT 21, Reply, pp. 9-10]. That Motion to Dismiss was filed in response to Plaintiff's Complaint in lieu of filing an answer. The defense was again raised at the preliminary injunction hearing: We think that ­ well, there's an integration clause that says that what's in the covenant is the total agreement of the parties. And the second or third sentences of the covenants say that they are already employed by the corporation. And there's no consideration in the agreement. The covenants are not valid. So we think there is a problem with the covenants. [See Exhibit B, p. 9, ll. 23-25; p. 10, ll. 1-6]. Therefore, Plaintiffs allegation that "despite two and one-half years of litigation" Defendants first raise this defense of lack of consideration is simply not true. Consequently, although this is not an issue currently pending before this Court, it certainly is a defense available to Defendants at trial. IV. CONCLUSION Stripped of the irrelevant issues, unsupported facts and improper legal conclusions, Plaintiffs' Response provides no facts or law that defeat Defendants' First Motion. Defendants' uncontroverted facts--as well as the Plaintiffs' facts that are 10 Filed 08/29/2005 Document 236
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supported by the record--demonstrate that there is no cognizable successor-in-interest relationship between BOC, Inc., or BOC, Int'l, and Physical Excellence which would allow BOC, Inc. or BOC, Int'l to benefit from the terms of the Non-Compete Agreement. Even if they are deemed to be legally-cognizable successors, application of the NonCompete Agreement outside of Arizona would be unreasonable. Defendants, therefore, respectfully request the Court grant Defendants' First Motion for Partial Summary Judgment Regarding the Non-Compete Agreement/Breach of Contract Claims. RESPECTFULLY SUBMITTED this 29th day of August, 2005. GALLAGHER & KENNEDY, P.A. By: /s/ Maureen A. Welsh Thomas A. Maraz Maureen A. Welsh 2575 East Camelback Road Phoenix, Arizona 85016-9225 Attorneys for Defendants ORIGINAL of the foregoing electronically filed via the CM/ECF system this 29th day of August, 2005, with: Clerk of Court United States District Court Sandra Day O'Connor U.S. Courthouse 401 West Washington Street Phoenix, Arizona 85003 COPY of the foregoing hand-delivered this 29th day of August, 2005, to: The Honorable Earl H. Carroll United States District Court Sandra Day O'Connor U.S. Courthouse 401 West Washington Street Phoenix, Arizona 85003

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COPY of the foregoing electronically mailed via the CM/ECF system this 29th day of August, 2005, to: Russell A. Kolsrud, Esq. Ryan J. Lorenz, Esq. Norling, Kolsrud, Sifferman & Davis, P.L.C. 16427 N. Scottsdale Road, Suite 210 Scottsdale, Arizona 85254 Attorneys for Plaintiffs /s/ Jenifer L. Mills

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