Diazteca v. Palenque

NOTICE: NOT FOR OFFICIAL PUBLICATION.
UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL
AND MAY BE CITED ONLY AS AUTHORIZED BY RULE.

IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE

DIAZTECA COMPANY,
Plaintiff/Appellee,

v.

PALENQUE FOODS INTERNATIONAL LLC,
Defendant/Appellant.

No. 1 CA-CV 17-0156
FILED 5-3-2018

Appeal from the Superior Court in Pima County
No. C20163070
The Honorable Leslie Miller, Judge

AFFIRMED

COUNSEL

Rusing, Lopez & Lizardi, PLLC, Tucson
By Mark D. Lammers, Patricia V. Waterkotte
Counsel for Plaintiff/Appellee

Burris & MacOmber, PLLC, Tucson
By D. Rob Burris, Karl E. MacOmber, Jennifer Maldonado
Counsel for Defendant/Appellant
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MEMORANDUM DECISION

Presiding Judge Diane M. Johnsen delivered the decision of the Court, in
which Judge Kent E. Cattani and Judge Jennifer M. Perkins joined.

J O H N S E N, Judge:

¶1 Palenque Foods International, LLC appeals the superior
court's grant of a preliminary injunction against it in favor of Diazteca
Company. For the following reasons, we affirm.

FACTS AND PROCEDURAL BACKGROUND

¶2 Palenque and Diazteca are businesses that import and
distribute fresh food. On July 1, 2016, Diazteca filed a complaint and
petition seeking a preliminary injunction and other relief against Palenque
and three former Diazteca employees, Manuel Higuera Aguirre
("Higuera"), Jose Echeagaray Armenta ("Echeagaray"), and Ada Suheid
Peraza Rubio ("Rubio") (collectively "the Employees"). Diazteca alleged in
its verified complaint that the Employees had violated non-compete
agreements in working for Palenque. According to Diazteca, Higuera,
while still working at Diazteca, co-founded Palenque to take advantage of
his access to Diazteca's confidential business information and successfully
recruited Echeagaray, then employed by Diazteca, to work at Palenque.
According to the complaint, around the time Higuera left Diazteca in June
2016, he and Echeagaray successfully recruited Rubio, also a Diazteca
employee, to join Palenque. The Employees then allegedly used Diazteca's
confidential information and contacts to solicit Diazteca's customers and
suppliers for Palenque.

¶3 On August 18, 2016, before any of the defendants appeared in
the case, the superior court issued an ex parte temporary restraining order
against Palenque and the Employees and set a preliminary injunction
hearing for August 30.

¶4 Palenque appeared through counsel at the preliminary
injunction hearing. At the outset, Palenque's counsel stated that he'd "only
been in this case a couple of days," but when the court suggested a
continuance, he declined, saying his client was ready to go forward. The
hearing proceeded, and Diazteca called its vice president and marketing

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director to testify and offered several exhibits, including employment
agreements signed by each of the Employees. Palenque presented no
witnesses or evidence. After the close of evidence, Palenque argued that (1)
Diazteca was not the proper plaintiff because the Employees had worked
not for Diazteca but for a related Mexican company; (2) the court was an
improper forum under the doctrine of forum non conveniens because the
Employees lived and worked in Mexico; (3) the employment agreements
were unenforceable because the Employees were not Diazteca employees;
and (4) Diazteca's customer lists and pricing information were not
protectable trade secrets. Two weeks after the hearing, Palenque filed a
memorandum opposing Diazteca's request for preliminary injunction,
supported by a declaration from one of Palenque's owners, Raul Arcos
Dominguez ("Arcos Declaration"), stating that the Employees worked for a
Mexican company owned by Palenque's owners and had never been
employees of Palenque.

¶5 The court granted Diazteca's motion to strike Palenque's
memorandum and declaration as untimely, noting that Palenque had stated
it was prepared to proceed at the hearing and did not request a continuance
or opportunity to submit written briefing. The court then granted the
injunction. It found, among other things, that the Employees had been
employees of Diazteca; Higuera, along with others, had created Palenque;
Palenque knew of the Employees' employment agreements; and Palenque
was using Diazteca's confidential information to unfairly compete with
Diazteca. The injunction required Palenque to return any of Diazteca's
documents or confidential information in its possession or control and
prohibited Palenque from, inter alia, (1) soliciting current Diazteca
employees through the individual defendants; (2) "contacting or soliciting"
Diazteca suppliers, clients (or certain prospective clients) for the purpose of
doing business with them, (3) "directing or accepting business" from any
Diazteca clients (or certain prospective clients) whom the Employees
served while working there, or (4) revealing or disclosing Diazteca's
confidential information, including client lists, records, software, formulas,
competitive pricing information and marketing strategies.

¶6 Palenque moved for new trial, arguing the Arcos Declaration
was "not available based on the notice available to" Palenque and its counsel
at the time of the hearing. See Ariz. R. Civ. P. 59(a)(1)(D).1 Palenque also
argued the preliminary injunction was not supported by the evidence
because Diazteca did not establish any protectable trade secrets. See Ariz.

1 Absent material revision after the relevant date, we cite the current
version of a statute or rule.

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R. Civ. P. 59(a)(1)(H). Palenque resubmitted the Arcos Declaration with its
motion for new trial, and attached an excerpt from an industry publication
known as the "Blue Book" to its reply in support of the motion.

¶7 After hearing oral argument, the court denied the motion for
new trial, reasoning that Palenque had chosen to go forward without
offering evidence at the preliminary injunction hearing and that, because
Palenque had offered its evidence too late to be considered in opposition to
the preliminary injunction, it would have to wait for trial to submit it. But
the court granted Palenque's request to modify the preliminary injunction
so that it would apply to prospective clients or suppliers only if the
Employees had worked to develop a business plan for the client or supplier
while at Diazteca. The court further stated that nothing in the modification
order precluded Palenque from "pursuing business with clients or
suppliers that were not developed" by the Employees while employed by
Diazteca.

¶8 Palenque timely appealed the preliminary injunction and
denial of its motion for new trial. We have jurisdiction pursuant to Article
6, Section 9, of the Arizona Constitution, and Arizona Revised Statutes
("A.R.S.") sections 12-120.21(A)(1) (2018) and -2101(A)(5)(a), (b) (2018).

DISCUSSION

A. Preliminary Injunction.

¶9 A company seeking preliminary injunctive relief must
establish (1) it is likely to succeed on the merits; (2) it is likely to suffer
irreparable harm not remediable by damages in the absence of preliminary
relief; (3) the balance of hardship favors it; and (4) an injunction is in the
public interest. Shoen v. Shoen, 167 Ariz. 58, 63 (App. 1990). "To meet this
burden, the moving party may establish either 1) probable success on the
merits and the possibility of irreparable injury; or 2) the presence of serious
questions and the balance of hardships tip sharply in his favor." Id.
(quotation omitted).

¶10 We review a grant of a preliminary injunction for abuse of
discretion. McCarthy W. Constructors, Inc. v. Phoenix Resort Corp., 169 Ariz.
520, 523 (App. 1991). A court abuses its discretion if it applies the incorrect
preliminary injunction standard, applies the incorrect substantive law to
the underlying issues or bases its decision on a clearly erroneous and
material finding of fact. See id. (citing Zepeda v. United States Immigration &
Naturalization Serv., 753 F.2d 719, 724 (9th Cir. 1983)).

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1. The Employees' employment by Diazteca and Palenque.

¶11 Palenque contends the superior court erred by finding that
Diazteca employed the Employees. Palenque cites language in the
employment agreements stating that "this agreement does not create a
contract of employment, express or implied, between employee and
Diazteca." According to Palenque, this demonstrates the absence of an
employee-employer relationship, meaning the agreements were not
supported by consideration and are unenforceable.

¶12 The written agreements, however, show that Diazteca
employed the Employees. Each of the Employees signed a copy of the
agreement, which is entitled "Employment, Nonsolicitation &
Confidentiality Agreement" and refers to the signing party as "Employee"
throughout. Each agreement states that "Employee is employed in a
position at Diazteca." The language Palenque quotes to support its
contention that no employee-employer relationship existed is within a
paragraph that goes on to state that the "employee hereby acknowledges
that her employment is 'at-will,' which means the company or the employee
may terminate the employment relationship, at any time." The referenced
language does not prove that the Employees did not work for Diazteca,
only that they were at-will employees of the company.

¶13 Palenque next argues that the superior court erred in finding
that the Employees worked for Palenque. But the court had before it a
record from the United States Department of Agriculture showing that
Higuera had signed as a principal of Palenque while still working at
Diazteca. This evidence would adequately support the injunction against
Palenque on this issue even absent findings as to the other employees. And
as to the other employees, Diazteca's vice president and marketing director,
Rod Diaz, testified without objection, that he had learned Echeagaray and
Rubio also worked for Palenque. Moreover, under the preliminary
injunction standard applied by the court, Diazteca needed only to present
evidence showing it was likely to prevail on the merits. See Shoen, 167 Ariz.
at 63.

2. In rem jurisdiction.

¶14 Palenque argues the superior court lacked in rem jurisdiction
over the business cards or other confidential materials the court ordered
returned because they are property of a Mexican company in Mexico. The
basis of the superior court's order to return documents and confidential
information in Palenque's control, however, was its personal jurisdiction

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over Palenque, which Palenque does not dispute. See State v. W. Union Fin.
Servs., Inc., 220 Ariz. 567, 574, ¶ 33 (2009) ("If those with interests in the
property are subject to in personam jurisdiction in the forum state, a court
in that state undoubtedly has jurisdiction consistent with the Due Process
Clause to enter orders relating to the property.").

3. Trade secrets.

¶15 Palenque next argues that Diazteca's customer lists are not
protectable trade secrets because its customers were widely known in the
industry. This argument presupposes that a company cannot contract to
protect confidential information that is not a trade secret – a questionable
assumption that the parties do not address. See A.R.S. § 44-407(B)(1)
(Arizona's Uniform Trade Secrets Act "does not affect . . . [c]ontractual
remedies, whether or not based on misappropriation of a trade secret");
Calisi v. Unified Fin. Servs., LLC, 232 Ariz. 103, 109, ¶ 26 (App. 2013)
("Although there may be substantial overlap between confidential
information and trade secrets, they are not synonymous."). Regardless,
Diazteca presented sufficient evidence of protectable trade secrets to
support the injunction.

¶16 Generally, a former employee's use of basic customer
information is lawful when the customer does business with multiple
sources and the customer information is known to the competition. Amex
Distrib. Co. v. Mascari, 150 Ariz. 510, 517 (App. 1986). But "a particular use
of specific customer information may constitute a violation of a former
employer's protectable interest." Id. "A customer list may be entitled to
trade secret protection when it represents a selective accumulation of
detailed, valuable information about customers – such as their particular
needs, preferences, or characteristics – that naturally 'would not occur to
persons in the trade or business.'" Calisi, 232 Ariz. at 106, ¶ 16 (quoting
Enter. Leasing Co. of Phoenix v. Ehmke, 197 Ariz. 144, 149, ¶¶ 15-16 (App.
1999)). Customer lists also may be protectable trade secrets when a business
"compiled the list by expending substantial efforts to identify and cultivate
its customer base such that it would be difficult for a competitor to acquire
or duplicate the same information." Id. at 107, ¶ 17. Courts also consider
whether a customer list gives its owner "a demonstrable competitive
advantage over others in the industry" and whether a business has
divulged its customer list only to employees or has shared it with outsiders.
Id. at ¶ 18-19.

¶17 Diaz testified that Diazteca maintains non-public customer
information, including the commodities, sizes and varieties that a customer

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purchases and the direct phone number of the particular contact at a
business – information not found in the industry "Blue Book." According
to Diaz, the Employees all had access to that confidential information,
which was kept on business cards. After the Employees left, more than a
dozen confused customers telephoned Diaz to report that Higuera and
Rubio were contacting them representing Palenque, not Diazteca, and
Diazteca found that the business cards were gone. From Diaz's testimony,
the court reasonably could have found a strong likelihood that Diazteca's
customer information took sufficient effort to compile or was of a kind that
would be entitled to protection, and Palenque had obtained that
information and was using it.

¶18 Palenque also argues that Diazteca's pricing information is
not a protectable trade secret because, according to Palenque, Diazteca
acknowledged at the preliminary injunction hearing that pricing
information varied from week to week. But Diaz also testified that his
company determined pricing based on a confidential formula. Pricing
information may have particular value when coupled with a confidential
customer list. See Calisi, 232 Ariz. at 106-07, ¶ 16 (citing, inter alia, Allen v.
Johar, Inc., 823 S.W.2d 824, 827 (Ark. 1992), and Morlife, Inc. v. Perry, 66
Cal.Rptr.2d 731, 735 (App. 1997) (customer lists containing pricing
information were trade secrets)). Accordingly, the court did not abuse its
discretion in concluding that Diazteca's "formulas" or "competitive pricing"
information may be protected by a preliminary injunction.

4. Reasonableness of the injunction.

¶19 Palenque argues that the preliminary injunction is overbroad
because it orders Palenque to return materials without evidence that
Palenque possesses the materials. But Diazteca did present circumstantial
evidence that Palenque possessed the materials, including the coincidence
in timing between Higuera's departure, the disappearance of the business
cards, and the reports from customers that Palenque was contacting them.
Moreover, the preliminary injunction merely requires Palenque to return
Diazteca's confidential materials "in its possession or control"; Palenque is not
required to return materials it does not possess or control.

¶20 Palenque also argues that even after the court amended the
preliminary injunction to extend only to contacts with prospective clients
for which the Employees had developed a "business plan" while at
Diazteca, the injunction remains overbroad because it "is impossible for
Palenque to know which clients may be covered by any Diazteca 'business
plan' 'developed' by the individual defendants," because the plans are

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"secret." But as the court made clear to Palenque, it can simply ask the
Employees to identify the clients or prospective clients for which they
developed business plans while working at Diazteca. Further, by limiting
the scope of the injunction to prospective customers for which Diazteca had
developed business plans, the injunction protects Diazteca's legitimate
interest in the time and effort spent in developing those plans.

¶21 Likewise, we cannot agree with Palenque's contention that
the preliminary injunction is overbroad because it prohibits Palenque from
merely accepting business from certain clients. To the extent that the
preliminary injunction prohibits Palenque from accepting business from
certain companies the Employees "served" while at Diazteca, it is not
unreasonable given Diazteca's strong business interest in "prevent[ing]
former employees from using information learned during their
employment to divert or to 'steal' customers." Olliver/Pilcher Ins., Inc. v.
Daniels, 148 Ariz. 530, 531 (1986) (citing with approval James S. Kemper & Co.
v. Cox & Assocs., 434 So.2d 1380, 1384 (Ala. 1983) (upholding injunction
prohibiting former employee from accepting business from certain of
employer's clients; restriction was reasonable because it only applied to a
"narrow, identifiable group of clients and potential clients, where [the
employer] ha[d] a work product investment in those clients with which [the
former employee] was involved.")); Mascari, 150 Ariz. at 517-18
(recognizing "protectable interest [in] those customers to whom the
employee represented the employer's goodwill").

B. Motion for New Trial.

¶22 Palenque argues the superior court erred in denying its
motion for new trial. Palenque contends that the Arcos Declaration
attached to the motion showed that neither Palenque nor Diazteca are the
proper parties in the lawsuit. The motion also attached excerpts from the
"Blue Book," which Palenque contends showed that the client information
at issue is not a protectable trade secret. Palenque contends the superior
court erred in denying its motion because the motion was based on
evidence it was unable to produce at the preliminary injunction hearing due
to insufficient notice of the hearing.

¶23 We review the superior court's denial of a motion for new trial
for abuse of discretion. Esplendido Apartments v. Metro. Condo. Ass'n of Ariz.
II, 161 Ariz. 325, 329-30 (1989). "[W]e generally will not consider an
argument raised for the first time in a motion for a new trial." Zuluaga v.
Bashas', Inc., 242 Ariz. 205, 211, ¶ 19, n.6 (App. 2017).

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¶24 A court may grant a new trial based on one of the grounds in
Rule 59(a), including "newly discovered material evidence that could not
have been discovered and produced at the trial with reasonable diligence."
Rule 59(a)(1)(D). The hearing transcript shows, however, that Palenque
essentially disclaimed reliance on so-called newly discovered evidence; in
any event, Palenque never explained why it could not have called Arcos to
testify or offered the "Blue Book" excerpts in evidence at the injunction
hearing.

¶25 Further, even if the short notice of the hearing might have
impaired Palenque's ability to produce evidence, it cannot support the
motion for a new trial under Rule 59(a)(1)(D) because Palenque elected to
go forward with the hearing after the court invited it to ask for a
continuance if it was not ready. Nothing in Rule 59(a) allows a party to
decide to proceed without evidence and then obtain a do-over when the
outcome does not turn out as hoped. See Allied Van Lines v. Parsons, 80 Ariz.
88, 98 (1956) ("Belated objections which might have been met if timely made
during the trial may not be raised for the first time in a motion for new
trial.").

¶26 Palenque also argues the superior court should have granted
it a new trial because the preliminary injunction is not justified by the
evidence or law. See Ariz. R. Civ. P. 59(a)(1)(H) (court may grant new trial
if the "decision, findings of fact, or judgment is not supported by the
evidence or is contrary to law"). For the reasons set forth above, however,
under the applicable law, adequate evidence supported the injunction.

CONCLUSION

¶27 We affirm the preliminary injunction.

AMY M. WOOD • Clerk of the Court
FILED: AA

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