State 48 Recycling Inc. v. Janes

• Decision Date: 26 May 2022
• Docket Number: CV-22-00767-PHX-GMS
• Parties: State 48 Recycling Incorporated, Plaintiff, v. Michael Ray Janes, et al., Defendants.
• Court: U.S. District Court — District of Arizona

State 48 Recycling Incorporated, Plaintiff,
v.
Michael Ray Janes, et al., Defendants.

No. CV-22-00767-PHX-GMS

United States District Court, D. Arizona

May 26, 2022

ORDER

G. MURRAY SNOW CHIEF UNITED STATES DISTRICT JUDGE

Before the Court is State 48 Recycling, Inc.'s (“Plaintiff”) Application for and Memorandum in Support of Temporary Restraining Order and Preliminary Injunction (Doc. 17-1 at 86.) For the following reasons, the application is granted in part, and a temporary restraining order (“TRO”) is issued.

BACKGROUND

Plaintiff is an Arizona corporation that “specializ[es] in the re-manufacture of used engine antifreeze/coolant and recycling of safety solvents.” (Doc. 17-1 at 9.) It offers a “wide range of products and services” to its customers, who are mainly in the automotive industry. (Doc. 17-1 at 9.) In April 2021, Plaintiff purchased the assets of Industrial Recycling Solutions Inc. (“IRSI”), an Arizona corporation in the same industry. As part of the purchase, Plaintiff acquired ownership of IRSI's trade names, trademarks, and logos, and acquired the right to use the name “IRSI” as a “doing business as” designation.

After Plaintiff acquired IRSI's assets, Plaintiff gradually transitioned its business

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from “IRSI” to “State 48 Recycling.” The transition was deliberately slow. Plaintiff hired former IRSI employees and continued to use the IRSI logo, uniforms, and company trucks until September 2021. That month, Plaintiff began using new gray uniforms with the “State 48 Recycling” logo but continued to use the IRSI mark on its company trucks and on its website. Moreover, even though Plaintiff used the new uniforms, employees could wear the old IRSI uniforms if, for some reason, the new ones were unavailable: for instance, if the new uniforms were taken to be cleaned.

Michael Janes and Angel Alva (“the Individual Defendants”) were employed by IRSI for years before beginning employment with Plaintiff.^[1] The Individual Defendants continued to work for Plaintiff through March 2022. While they were still employed by Plaintiff, the Individual Defendants formed Defendant Antifreeze Architects, LLC. Defendant Antifreeze Architects is a direct competitor of Plaintiff.

Since the Individual Defendants left Plaintiff's employment, they are alleged to have continued to service Plaintiff's customers. According to Plaintiff, the Individual Defendants arrive a week before Plaintiff is scheduled to provide service and charge customers less than Plaintiff's rates. The Individual Defendants wear the old IRSI uniforms, which Plaintiff's customers associate with Plaintiff, even though the Individual Defendants are no longer employed by Plaintiff. Although the Individual Defendants do not contest that they directly solicit Plaintiff's customers, they do contest that they do so while wearing the IRSI mark and by holding themselves out as Plaintiff's employees.

Plaintiff filed suit in Maricopa County Superior Court on April 21, 2022, alleging fourteen causes of action. While the case was pending in state court, Plaintiff filed an application for a TRO. Defendants then removed the case to this Court pursuant to its federal-question jurisdiction over Plaintiff's Lanham Act claim. The Court held an evidentiary hearing on May 12, 2022 and now decides the pending application.^[2]

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DISCUSSION

I. Legal Standard

Rule 65 authorizes courts to issue temporary restraining orders and preliminary injunctions, and the legal standards for issuing both kinds of orders are the same. See Fed.R.Civ.P. 65; Stuhlbarg Int'l Sales Co. v. John D. Brush & Co., 240 F.3d 832, 839 n.7 (9th Cir. 2001); Ariz. Recovery Hous. Ass'n v. Ariz. Dep't of Health Scis., 462 F.Supp.3d 990, 996 (D. Ariz. 2020). However, the two forms of relief serve different purposes: “The purpose of a preliminary injunction is to preserve the status quo and the rights of the parties until a final judgment on the merits can be rendered, while the purpose of a [TRO] is to preserve the status quo before a preliminary injunction hearing may be held.” Ariz. Recovery Hous., 462 F.Supp.3d at 996 (quoting Johnson v. Macy, No. CV 15-7165 FMO (ASx), 2015 WL 9692930, at *3 (C.D. Cal. Oct. 23, 2015)).

Preliminary relief “is an extraordinary remedy never awarded as of right.” Winter v. Nat'l Res. Def. Council, Inc., 555 U.S. 7, 24 (2008). To prevail, the moving party bears the burden of showing that they are (1) “likely to succeed on the merits, ” (2) “likely to suffer irreparable harm in the absence of preliminary relief, ” (3) “that the balance of equities tips in [their] favor, ” and (4) “that an injunction is in the public interest.” Id. at 20. If the moving party fails to demonstrate a likelihood of success on the merits but nevertheless shows “serious questions going to the merits were raised and the balance of hardships tips sharply in [their] favor, ” courts in the Ninth Circuit may issue preliminary relief provided “the other two elements of the Winter test are also met.” All. for the Wild Rockies v. Cottrell, 632 F.3d 1127, 1131 (9th Cir. 2011).

II. Consideration of Evidence

Defendants object to several pieces of evidence. The Federal Rules of Evidence, however, “do not apply strictly to preliminary injunction proceedings.” Trees v. Serv. Employees Int'l Union Local 503, --- F.Supp.3d ----, 2021 WL 5206137, at *2 (D. Or. Nov. 9, 2021) (quoting Herb Reed Enters., LLC v. Fla. Ent. Mgmt., Inc., 736 F.3d 1239, 1250 n.5 (9th Cir. 2013)); Disney Enter., Inc. v. VidAngel, Inc., 224 F.Supp.3d 957, 996 (C.D. Cal. 2016).

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The Court will thus fully consider Defendants' objections as it assesses the credibility of evidence. But the Court will not decline to consider a piece of evidence merely because it violates the technical requirements of the Federal Rules of Evidence, if the evidence is otherwise credible.

III. Analysis

A. Likelihood of Success on the Merits

Plaintiff argues they are likely to succeed on the merits of four of their claims: breach of the duty of loyalty, misappropriation of trade secrets, trademark infringement and counterfeiting, and defamation per se. (Doc. 17-1 at 96-102.) The Court considers each in turn.

1. Duty of Loyalty

An employee owes their employer a fiduciary duty of good faith and loyalty. McCallister Co. v. Kastella, 170 Ariz. 455, 457, 825 P.2d 980, 983 (Ct. App. 1992); Sec. Title Agency, Inc. v. Pope, 219 Ariz. 480, 492, 200 P.3d 977, 989 (Ct. App. 2008); E*Trade Fin. Corp. v. Eaton, 305 F.Supp.3d 1029, 1032 (D. Ariz. 2018). Prior to termination of the employment relationship, the employee may not directly compete with the employer, but is permitted to make “not otherwise wrongful” arrangements to compete. Taser Int'l, Inc. v. Ward, 224 Ariz. 389, 394, 231 P.3d 921, 926 (Ct. App. 2010) (quoting Restatement (Third) of Agency § 8.04 (Am. L. Inst. 2006)).

Plaintiff alleges that the Individual Defendants violated their duty of loyalty by (1) forming Defendant Antifreeze Architects while still employed by Plaintiff, (2) taking Plaintiff's supplies and uniforms, (3) taking Plaintiff's confidential and proprietary “pricing lists, customer lists, and customer routes” for the benefit of Defendant Antifreeze Architects, and (4) using the misappropriated inventory and information to directly compete with Plaintiff. (Doc. 17-1 at 97.)

Plaintiff has failed to show that the Individual Defendants breached their duty of loyalty. First, incorporation alone is insufficient to show direct competition. McCallister Co., 170 Ariz. at 457-58, 825 P.2d at 982-83 (Ct. App. 1992) (noting that it is generally

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permissible for an employee to prepare to compete by “purchas[ing] a rival business” (quoting Restatement (Second) of Agency § 393 cmt. e (Am. L. Inst. 1958))); Powers Steel & Wire Prods., Inc. v. Vinton Steel, LLC, No. 1 CA-CV 20-0652, 2021 WL 5495289, at *6 (Ariz.Ct.App. Nov. 23, 2021) (“An agent who plans to compete is free to make extramural arrangements for setting up a new business, such as incorporating a new firm ....” (emphasis added) (quoting Restatement (Third) of Agency § 8.04 cmt c)). Second, Plaintiff has produced no evidence, save for the bare allegations in Mr. Brian Rich's declaration, ^[3]to show that the Individual Defendants took Plaintiff's property or customer information during their employment. (Doc. 12 at 6.) Mr. Rich admitted that there was no written record of either Individual Defendant ever having printed or otherwise communicated customer information to themselves or others. Even so, the mere access to client files does not sufficiently show that the Individual Defendants actively solicited customers before their employment ended. E*Trade, 305 F.Supp.3d at 1032 (“At the time [the defendant] accessed the [plaintiff's] client files, he had authorization to do so, he was tasked with serving those clients as an employee of [plaintiff], and even if he did so to access the clients' contact information, without more at that point the Court cannot conclude he likely breached his duty of loyalty.”) And, as conceded by Plaintiff, the Individual Defendants occasionally used their IRSI uniforms during their employment with Plaintiff. Plaintiff has presented no evidence it was improper for the Individual Defendants to do so, nor has it established that the Individual Defendants used those uniforms to solicit customers during their employment or that the Individual Defendants were required to return those uniforms when they resigned. At this juncture, Plaintiff has not established it is likely to succeed on the duty of loyalty claim.

2. Misappropriation of Trade Secrets

“To establish a claim for misappropriation of a trade secret, the claimant must first prove a legally protectable trade secret exists.” Calisi v. Unified Fin. Servs., LLC, 232 Ariz. 103, 106, 302 P.3d 628, 631 (Ct. App. 2013). “Arizona has adopted the Uniform

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Trade Secrets Act (‘UTSA'), which...