Dkc Group v. Fortiline

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UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL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

DKC GROUP HOLDINGS, LLC, et al., Plaintiffs/Appellants,

v.

FORTILINE, INC., et al., Defendants/Appellees.

No. 1 CA-CV 25-0043
FILED 09-25-2025

Appeal from the Superior Court in Maricopa County
No. CV2024-026305
The Honorable Erik Thorson, Judge

AFFIRMED IN PART, VACATED IN PART,
AND REMANDED FOR FURTHER PROCEEDINGS

COUNSEL

Quarles & Brady LLP, Phoenix
By Eric B. Johnson, Daniel J. F. Peabody, and Christopher Thomas Shanley
Counsel for Plaintiffs/Appellants

DLA Piper LLP, Phoenix
By Cameron A. Fine, Kyle T. Orne, Haley R. Augur, Daniel Fazio, and
Aurora Temple Barnes
Counsel for Defendants/Appellees

DKC GROUP, et al. v. FORTILINE, et al.
Decision of the Court

MEMORANDUM DECISION

Judge Veronika Fabian delivered the decision of the Court, in which
Presiding Judge James B. Morse Jr. and Judge Anni Hill Foster joined.

F A B I A N, Judge:

¶1 William Reno and Todd Flick (“Employees”) were employees
of Dana Kepner Company, LLC, a subsidiary of DKC Group Holdings, LLC
(“DKC”). In connection with their employment, Employees signed identical
non-compete, non-solicitation, and confidentiality agreements, which
contained arbitration clauses. After leaving DKC, Employees went to work
for DKC’s competitor, Fortiline, Inc. (“Fortiline”). Alleging violations of the
parties’ agreements and related claims against Fortiline, DKC filed a
complaint and sought a preliminary injunction in superior court. After
Employees moved to compel arbitration, the court denied DKC’s request
for a preliminary injunction, compelled arbitration, and stayed the case
against Employees. The court also stayed the case against Fortiline, which
was not a party to the arbitration agreement, finding the claims against it
could not be severed from the arbitrable claims.

¶2 This Court affirms the denial of the preliminary injunction
with respect to Employees because DKC did not show such an injunction
was necessary to preserve the status quo pending arbitration. However,
with respect to Fortiline, the superior court should have considered DKC’s
request for a preliminary injunction before staying DKC’s claims against it.
Thus, this Court vacates the stay as to Fortiline and remands for
consideration of DKC’s preliminary injunction request.

FACTS AND PROCEDURAL HISTORY

¶3 Employees, as branch managers for DKC, signed agreements
with DKC under which they received restricted profits interests in
exchange for signing non-compete, non-solicitation, and confidentiality
provisions.

¶4 The agreements contained arbitration provisions, which
provided:

[A]ny controversy or claim arising with respect
to the Units shall be settled by arbitration

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administered by the American Arbitration
Association under its National Rules for the
Resolution of Employment Disputes . . . . The
arbitration shall be held in New York, New
York, and the arbitrator shall apply the
substantive law of the State of Delaware, except
that the interpretation and enforcement of this
arbitration provision shall be governed by the
United States Arbitration Act. . . . The award of
the arbitrator shall be the sole and exclusive
remedy of the parties.

¶5 Employees subsequently resigned from DKC and began
working for Fortiline, a wholly-owned indirect subsidiary of Reece, Inc. and
a competitor of DKC.

¶6 The same month, DKC filed an application for temporary
restraining order and preliminary injunction along with a lawsuit against
Employees and Fortiline, alleging Employees violated the restrictive
covenants in their agreements for the benefit, and with the assistance, of
Fortiline. The lawsuit alleged breach of contract, breach of covenant of good
faith and fair dealing, and breach of loyalty against Employees; aiding and
abetting breach of loyalty and tortious interference against Fortiline; and
tortious interference with business relationships and unfair competition
against all defendants. DKC sought only a preliminary injunction with
respect to Employees because of the arbitration clause.

¶7 Around the same time DKC filed the complaint here, DKC
filed similar cases against Reece in New York (based in large part on the
actions of Employees) and against Fortiline in Nevada (based in large part
on the actions of a different employee).

¶8 After an evidentiary hearing, the New York court expressly
enjoined Reece and its affiliates, including Fortiline, from directly soliciting
DKC’s employees or using its confidential information. However, it did not
enjoin Reece and Fortiline from soliciting DKC clients, in part because it
found DKC’s loss may be “compensable with money damages.”

¶9 In the present case, Employees filed a motion to compel
arbitration under the Federal Arbitration Act (“FAA”) and opposed DKC’s
request for a preliminary injunction. In response to the motion to compel,
DKC argued the court should grant interim injunctive relief to preserve the
status quo pending arbitration.

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DKC GROUP, et al. v. FORTILINE, et al.
Decision of the Court

¶10 The superior court denied the request for a preliminary
injunction against Employees, granted the motion to compel, and stayed
the proceedings pending arbitration. With respect to Fortiline, the court
stayed all claims pending arbitration, finding the claims against Fortiline
were not severable from the claims against Employees. Given the stay, the
court also vacated as moot a scheduled evidentiary hearing on the
preliminary injunction request.

¶11 In December 2024, DKC timely appealed the court’s order and
concurrently filed a petition for special action. This Court declined
jurisdiction over the special action.

DISCUSSION

I. The FAA Does Not Preclude this Court From Reviewing the
Denial of the Preliminary Injunction Against Employees.

¶12 In connection with granting Employees’ motion to compel,
the court stayed the claims against Employees “pending the outcome of the
arbitration ordered.” DKC argues the court erred by staying its claims
against Employees without first considering its request for a preliminary
injunction.

¶13 However, the court considered and denied DKC’s request for
a preliminary injunction against Employees, explaining:

Given the preliminary injunction entered in
tandem litigation in New York, there is no need
for this Court to enter any injunction to preserve
the status quo pending arbitration. . . . The New
York litigation’s preliminary injunction order
also notes that the claims against [Employees]
are before this Court and that [DKC]’s remedy
may be money damages. . . . Those claims and
that remedy must first proceed in arbitration
per those Parties’ agreement and as all have
acknowledged.

¶14 Employees argue the FAA precludes this Court from
reviewing the superior court’s decision, including its denial of the
preliminary injunction. The FAA, which DKC and Employees contractually
agreed governs their arbitration clause, provides that an appeal may be
taken from:

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Decision of the Court

(1) an order--

(A) refusing a stay of any action
under section 3 of this title,

(B) denying a petition under section 4 of this
title to order arbitration to proceed,

(C) denying an application under section
206 of this title to compel arbitration,

(D) confirming or denying confirmation of
an award or partial award, or

(E) modifying, correcting, or vacating an
award;

(2) an interlocutory order granting, continuing,
or modifying an injunction against an
arbitration that is subject to this title; or

(3) a final decision with respect to an arbitration
that is subject to this title.

9 U.S.C. § 16(a).

¶15 At the same time, the FAA precludes an appeal from an
interlocutory order:

(1) granting a stay of any action under section
3 of this title;

(2) directing arbitration to proceed
under section 4 of this title;

(3) compelling arbitration under section 206 of
this title; or

(4) refusing to enjoin an arbitration that is
subject to this title.

9 U.S.C. § 16(b).

¶16 Congress enacted the FAA in response to widespread judicial
hostility to arbitration. Am. Express Co. v. Italian Colors Rest., 570 U.S. 228,

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232 (2013). The “‘principal purpose’ of the FAA is to ensure ‘private
arbitration agreements are enforced according to their terms.’” AT&T
Mobility LLC v. Concepcion, 563 U.S. 333, 344 (2011) (quoting Volt Info. Scis.,
Inc. v. Bd. of Trs. of the Leland Stanford Junior Univ., 489 U.S. 468, 478 (1989)).
To that end, the FAA “generally permits immediate appeal of orders hostile
to arbitration, whether the orders are final or interlocutory, but bars appeal
of interlocutory orders favorable to arbitration” unless the appeal is for a
final decision pursuant to § 16(a)(3). Green Tree Fin. Corp.-Ala. v. Randolph, 531 U.S. 79, 86 (2000).

¶17 The plain language of the FAA bars this Court from reviewing
the superior court’s order compelling arbitration and staying the matter
with respect to Employees pending arbitration. 9 U.S.C. §§ 16(b). However,
nothing in the FAA precludes this Court’s review of the superior court’s
denial of the preliminary injunction. 9 U.S.C. § 16(b). Nor does the denial of
the preliminary injunction disfavor arbitration or frustrate the purposes of
the FAA. To the contrary, a preliminary injunction is sometimes necessary
to accomplish the purposes of the FAA and arbitration. See Toyo Tire
Holdings of Ams. Inc. v. Cont’l Tire N. Am., Inc., 609 F.3d 975, 981 (9th Cir.
2010). Consequently, this Court has authority to review the superior court’s
denial of the preliminary injunction against Employees on appeal.

¶18 Employees rely on Preferred Care of Delaware, Inc. v. Est. of
Hopkins, 845 F.3d 765 (6th Cir. 2017), to support their argument that the FAA
precludes this Court’s review of the denial of the preliminary injunction.
However, in that case the injunction enjoined arbitrable claims from
proceeding in state court and instead compelled arbitration. Id. at 770. The
Sixth Circuit held that because an injunction against state court litigation
was in effect an order “[d]irecting arbitration to proceed according to the
terms of the arbitration agreement,” the FAA precluded its review. Id. at
768. Here, in contrast, the denial of the preliminary injunction cannot be
construed to fall within the meaning of any of the FAA’s express
prohibitions on review of interlocutory orders.

¶19 Finally, the Arizona Supreme Court has explained that
“[e]ach state is free to apply its own procedural requirements so long as
those procedures do not defeat the purposes of the act.” S. Cal. Edison Co. v.
Peabody W. Coal Co., 194 Ariz. 47, 51-52 ¶ 13 (1999). Under Arizona law, the
superior court’s denial of the preliminary injunction was clearly appealable.
A.R.S. § 12-2101(A)(5)(b). As discussed above, this Court’s review of that
denial does not defeat the purposes of the FAA. Thus, the FAA does not
preclude this Court’s review of the denial of the preliminary injunction.

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Decision of the Court

II. The Superior Court Did Not Abuse Its Discretion When It Denied
the Request for a Preliminary Injunction Against Employees.

¶20 This Court reviews the superior court’s denial of injunctive
relief for abuse of discretion. TP Racing, L.L.L.P. v. Simms, 232 Ariz. 489, 492
¶ 8 (App. 2013). An abuse of discretion occurs when “the court applied the
incorrect substantive law or preliminary injunction standard, based its
decision on an erroneous material finding of fact, or applied the appropriate
preliminary injunction standard in a manner resulting in an abuse of
discretion.” Id. This Court may affirm the superior court’s decision “if it was
correct for any reason.” Washburn v. Pima Cnty., 206 Ariz. 571, 575 ¶ 7 (App.
2003).

¶21 DKC argues the court abused its discretion in denying DKC’s
request for a preliminary injunction because it did not consider and did not
make findings regarding the four factors (“the Shoen factors”) set forth in
Shoen v. Shoen, 167 Ariz. 58, 63 (App. 1990). Usually, in determining whether
to issue a preliminary injunction, the court must consider:

(1) whether the requesting party has a strong
likelihood of success on the merits, (2) whether
the party will suffer irreparable harm if the
injunction is not granted, (3) whether the harm
to the requesting party outweighs the harm to
the opposing party, and (4) whether public
policy favors granting the injunction.

Jurju v. Ile, 255 Ariz. 558, 563 (App. 2023) (citing Shoen, 167 Ariz. at 63).

¶22 Here, however, the court found DKC had not met the
threshold requirement to grant injunctive relief in the arbitration context.
See Toyo Tire, 609 F.3d at 981. In the arbitration context, a court has
discretion to grant an injunction when “interim relief is necessary to
preserve the status quo and the meaningfulness of the arbitration process.”
Id. Because the court here determined interim relief was not necessary to
preserve the status quo, it did not need to consider the Shoen factors.

¶23 Toyo Tire supports this Court’s finding that the superior court
did not abuse its discretion. There, the district court denied a motion for
preliminary injunction solely based on the legal premise that it “may not
grant a preliminary injunction when the parties have agreed to arbitrate
and the arbitrator has the power to grant interim injunctive relief.” Id. at
978. Finding this was the incorrect standard, the Ninth Circuit reversed for
an abuse of discretion. Id. at 979. Here, in contrast, the superior court

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Decision of the Court

applied the correct rule of law and found interim relief was unnecessary to
preserve the status quo pending arbitration. And the record does not reflect
that DKC has shown otherwise.

¶24 Generally, where an arbitrator is authorized under the
governing rules of arbitration to grant the interim relief sought, it is not
appropriate for a court to grant preliminary injunctive relief. See Simula, Inc.
v. Autoliv, Inc., 175 F.3d 716, 725-26 (9th Cir. 1999). However, a court has
discretion to grant an injunction if there is some reason interim relief is
necessary to preserve the status quo pending arbitration. For example, in
Toyo Tire, plaintiff sought preliminary injunctive relief both in arbitration
and court. 609 F.3d at 978. The Ninth Circuit upheld a preliminary
injunction finding interim relief was necessary “while the parties [were]
waiting for the arbitration panel to be formed and for the arbitration panel
to consider whether to grant interim relief.” Id. at 979.

¶25 Here, the record indicates preliminary injunctive relief was
available through arbitration. Under the American Arbitration Association
Employment Rule 32, “[a]t the request of any party, the arbitrator may
grant any remedy or relief that would have been available to the parties had
the matter been heard in court.” DKC made no showing that the injunctive
relief available through arbitration would be inadequate. In fact, nothing in
the record indicates DKC initiated arbitration, much less sought
preliminary injunctive relief through arbitration.

¶26 DKC argues the court abused its discretion because
preliminary injunctive relief was necessary to protect it from Employees’
violations of the restrictive covenants in their agreements. In support of its
argument, DKC relies in large part on Merrill Lynch, Pierce, Fenner & Smith,
Inc. v. Bradley, 756 F.2d 1048 (4th Cir. 1048). That case, like the present one,
involved a former employee subject to post-employment restrictive
covenants who resigned from his employment and began working for a
competitor. Id. at 1050-51. The Fourth Circuit affirmed the district court’s
grant of a preliminary injunction, finding it was not an abuse of discretion.
Id. at 1055.

¶27 However, the Fourth Circuit did not hold that the district
court was required to grant relief under these circumstances. See id. In fact,
with the exception of Toyo Tire, DKC cited to no caselaw where an appellate
court found an abuse of discretion in denying preliminary injunctive relief
in the arbitration context. Instead, the cases DKC relies on stand only for
the proposition that interim relief is available at the court’s discretion in the
arbitration context.

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Decision of the Court

¶28 Here, the New York injunction provided DKC most of its
requested relief from Reece and its subsidiary Fortiline. The only exception
was the non-solicitation of customers provision because the New York
court found monetary damages could adequately compensate for any
violation. Under these circumstances, this Court cannot find the superior
court abused its discretion. See TP Racing, 232 Ariz. at 492 ¶ 8.

III. The Court Abused Its Discretion By Granting a Stay Without
Ruling on the Preliminary Injunction Request Against Fortiline.

¶29 With respect to Fortiline, the court found that under
A.R.S. § 12-1502(D), “this action must be stayed in its entirety, as the Court
does not find the claims against [Appellees] to be severable.” DKC argues
the court abused its discretion by failing to consider its request for a
preliminary injunction against Fortiline before granting a stay.

¶30 Again, Fortiline argues this Court lacks jurisdiction to review
the stay of the claims against it because “[t]he FAA plainly bars such
review” under 9 U.S.C. § 16(b). However, as discussed supra ¶ 17, the FAA
only bars review of stays granted under the FAA. See 9 USC § 16(b)(1)
(precluding review of stay where it is granted “under section 3 of this title”).
Here, the stay was granted under A.R.S. § 12-1502(D). Thus, the FAA does
not bar this Court’s review of the superior court’s decision to stay the
proceedings.

¶31 This Court has jurisdiction over an appeal from an order
“refusing to grant . . . an injunction.” A.R.S. § 12-2101(A)(5)(b). Under
Arizona law, a court’s issuance of a stay that effectively denies a
preliminary injunction is appealable. See Apache Produce Imps., LLC v.
Malena Produce, Inc., 247 Ariz. 160, 162, 164 (App. 2019) (“We therefore
conclude jurisdiction exists under § 12-2101(A)(5)(b) to review [a] stay
order as an effective denial of [a] preliminary injunction request.”).

¶32 The effective denial of a preliminary injunction is reviewed
for abuse of discretion. Id. at 164 ¶ 9; see also Fann v. State, 251 Ariz. 425, 432
¶ 15 (2021). A court abuses its discretion when it “effectively denie[s a]
preliminary injunction request without considering it under the proper
legal standard.” Apache Produce, 247 Ariz. at 162 ¶ 1.

¶33 Here, it appears the court issued a stay without considering
DKC’s request for injunctive relief against Fortiline under the proper
standard. It denied preliminary injunctive relief with respect to Employees
because it found such relief was not necessary to preserve the status quo
pending arbitration. It then stayed DKC’s claims against Fortiline, finding

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Decision of the Court

them non-severable from DKC’s claims against Employees. Thus, the court
either did not consider DKC’s preliminary injunction request against
Fortiline or considered it under the wrong standard.

¶34 Despite the New York injunction, the court should have
considered DKC’s preliminary injunction request under the Shoen factors
and set forth its findings and conclusions supporting the grant or denial.
See Ariz. R. Civ. P. 52(a)(2) (“In granting or refusing an interlocutory
injunction, the court must state the findings and conclusions that support
its action.”). Because the superior court did not do so, it erred.

CONCLUSION

¶35 This Court remands this case for consideration of DKC’s
preliminary injunction request with respect to Fortiline. This Court
expresses no opinion as to whether a preliminary injunction or a new stay
with respect to Fortiline is appropriate.

ATTORNEYS’ FEES ON APPEAL

¶36 DKC requests attorneys’ fees and costs incurred on appeal
pursuant to ARCAP 21(a) and A.R.S. §§ 12-341.01(A) and 12-341.
Employees and Fortiline request attorneys’ fees and costs pursuant to
A.R.S. § 12-341.01. This Court, in its discretion, determines that DKC is the
successful party on appeal. Accordingly, this Court awards DKC its taxable
costs incurred on appeal only against Fortiline, A.R.S. § 12-341, contingent
upon its compliance with ARCAP 21. In this Court’s discretion, both
requests for attorneys’ fees are denied. See A.R.S. § 12-341.01.

MATTHEW J. MARTIN • Clerk of the Court
FILED: JR

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