Free Motion for Summary Judgment - District Court of Arizona - Arizona

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Dan W. Goldfine (#018788) Adam Lang (#022545) SNELL & WILMER L.L.P. One Arizona Center 400 East Van Buren Street Phoenix, AZ 85004-2202 Telephone: (602) 382-6000 Facsimile: (602) 382-6070 [email protected] [email protected] Attorneys for Plaintiffs and Counterdefendants and Third Party Defendants and

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Snell & Wilmer L.L.P.

Grant Woods, Esq. (#006106) GRANT WOODS, P.C. 1726 North Seventh Street Phoenix, Arizona 85006 Telephone: (602) 258-2599 Facsimile: (602) 258-5070 [email protected] Attorneys for Plaintiffs and Counterdefendants and Third Party Defendants

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA Meritage Homes Corporation, a Maryland Corporation, formerly d/b/a Meritage Corporation, Case No. CV-04-0384-PHX-ROS Hancock-MTH Builders, Inc., an Arizona corporation, Hancock-MTH Communities, Inc., an (1) PLAINTIFFS' MOTION FOR Arizona corporation, and currently d/b/a Meritage PARTIAL SUMMARY Homes Construction, Inc., an Arizona corporation, JUDGMENT, AND and Meritage Homes of Arizona, Inc., an Arizona (2) COUNTERDEFENDANTS' AND corporation, THIRD-PARTY DEFENDANTS' MOTION FOR SUMMARY Plaintiffs, JUDGMENT ON RICK AND BRENDA HANCOCKS' v. COUNTER-CLAIMS AND THIRDPARTY CLAIMS Ricky Lee Hancock and Brenda Hancock, husband and wife; Gregory S. Hancock and (Assigned to the Linda Hancock, husband and wife, Rick Honorable Roslyn O. Silver) Hancock Homes L.L.C., an Arizona limited liability company; RLH Development, L.L.C., an Arizona limited liability company; and J2H2, L.L.C., an Arizona limited liability company, Defendants. Rick and Brenda Hancock,

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Defendants, Counter-Claimants, and Third Party Plaintiffs, v. Meritage Homes Corporation, a Maryland Corporation, formerly d/b/a Meritage Corporation, Hancock-MTH Builders, Inc., an Arizona Corporation, Hancock-MTH Communities, Inc., an Arizona Corporation, an Arizona Corporation; and currently d/b/a Meritage Homes Construction, Inc., an Arizona Corporation, and Meritage Homes of Arizona, Inc., an Arizona Corporation; Steven J. Hilton and Suzanne Hilton, husband and wife; John R. Landon and Debi Landon, husband and wife; Scott Keeffe and Vicky Keeffe, husband and wife; Roger Zetah and Jane Doe Zetah, husband and wife; and James Arneson and Zane Arneson, husband and wife, Third Party Defendants. This is a combined motion for summary judgment ("Motion") by plaintiffs, counterdefendants, and third-party defendants (collectively, "Meritage").1 moves for partial summary judgment with respect to the following issues: · · The doctrine of collateral estoppel bars all of the defendants' defenses based on their claims that Meritage breached contractual duties to Greg Hancock. Assuming that the doctrine of collateral estoppel does not apply: o o The terms "derogate" and "detract" mean a defaming use and not the mere reduction in use as a matter of law. Even assuming that the terms "derogate" and "detract" were to relate to a reduction in use, it is undisputed that Meritage sold more than $110 million of homes under the name "Hancock," and such use is not "derogatory" or "detracting" as a matter of law. Meritage could not have breached the License Agreement after Greg Hancock terminated the License Agreement by letter on February 13, 2004. Even assuming that Meritage could have breached the License Agreement after Greg Hancock's February 13, 2004 termination letter, Meritage could not have breached the License Agreement after Rick Hancock commenced using the name "Rick Hancock Homes." Meritage

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The Rick and Brenda Hancock described all the defendants to their claims as Third-Party Defendants. It appears that Meritage Homes Corporation, Hancock-MTH Builders, Inc, Hancock-MTH Communities, Inc., Meritage Homes Construction, Inc., and Meritage Homes of Arizona, Inc. are counterdefendants.
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o o · · · ·

Greg Hancock's own expert concedes that Meritage complied with the earn-out provisions of the Master Transaction Agreement. Greg Hancock's affirmative defense of constructive discharge fails as a matter of law.

The License Agreement does not require Meritage to obtain Greg Hancock's permission before changing how it uses the "Hancock" name. The use of one's surname is not immune from scrutiny under the Lanham Act. The use of disclaimers is not a defense to a Lanham Act violation or a violation under Arizona law. Meritage did not abandon the "Hancock" name as a matter of law.

In addition, Meritage moves for summary judgment on the entirety of Rick and Brenda Hancock's counterclaims and third-party claims on the following theories: · · Meritage's legal arguments set forth in its Motion to Dismiss, dated September 28, 2006, despite the change in legal standard. It is undisputed that the Hancocks acknowledged in writing that the Madrid contract existed and Meritage had cancelled it, making reliance on any false statement or omission immaterial impossible as a matter of law. It is undisputed that Meritage's employee handbook expressly did not provide the Hancocks any rights with respect to the Madrid home and expressly permitted Meritage to change its policies without any notice.

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·

Finally, Arizona law does not permit Rick and Brenda Hancock to claim damages for increased value of the Madrid home because they failed to mitigate by purchasing the home without the employee discount. This Motion is supported by a Statement of Facts ("SOF") filed

contemporaneously herewith, Exhibits attached thereto, and a proposed Order attached hereto.

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I.

LEGAL ARGUMENT A. Partial Summary Judgment Motions With Respect To Meritage's Claims 1. The Doctrine of Collateral Estoppel Bars All of the Defendants' Defenses Based on Their Claims that Meritage Breached Contractual Duties to Greg Hancock

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At the heart of each and every one of the defendants' affirmative defenses is their assertion that Meritage was the first to breach the License Agreement (Exhibit 1 to Statement of Facts in Support of Motion ("SOF)), the Master Transaction Agreement (Exhibit 2 to the SOF), and Greg Hancock's Employment Agreement (Exhibit 3 to the SOF) (collectively, "Agreements"). (SOF at ¶ 1.) The Court does not have to address the merits of these defenses because this Court has already dismissed with prejudice Greg Hancock's claims that Meritage breached each of these Agreements. Accordingly, under the doctrine of collateral estoppel, each one of the defendants' affirmative defenses based on Meritage's purported breaches is barred. Collateral estoppel, unlike res judicata, generally forecloses re-litigation of issues of fact or law that were decided between the parties whether on a same or a different claim. Segal v. Am. Tel. & Tel. Co., 606 F.2d 842, 845 (9th Cir. 1979). The test for collateral estoppel is: (1) actual litigation of the issue; (2) a full and fair opportunity to litigate the issue; (3) that resolution of the issue was necessary or essential to the decision; (4) a valid and final decision; and (5) common identity of the parties. See, e.g., DiSimone v. Browner, 121 F.3d 1262, 1268 (9th Cir. 1997); O'Malley Lumber Co. v. Lockard (In re Lockard), 884 F.2d 1171, 1174-75 (9th Cir. 1989); RESTATEMENT (SECOND) JUDGMENTS § 27 (1982). Here, all the elements of collateral estoppel have been met: · The issue of whether Meritage breached the Agreements was raised by Greg Hancock's counterclaims, actually litigated, and dismissed with prejudice. See Greg Hancock's Answer to Plaintiff's Second Amended Complaint and Counterclaim and Third-Party Complaint of Greg Hancock at ¶¶ 32-48, 5556, and 58-64 (May 11, 2005) ("Greg Hancock's Counterclaim"); Order at 5 (Mar. 31, 2006); Greg Hancock's Motion to Stay Entering of Judgment at 2:7 to 4:10, 5:19-26, and 8:23 to 9:3 (Apr. 27, 2006); Order at 10 (Aug. 22,
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2006). · · All parties had a full and fair opportunity to litigate whether Meritage breached the Agreements. Under Ninth Circuit law, the fact that this Court dismissed the claims that Meritage breached the Agreements with prejudice means that the necessary or essential prong was met. See, e.g., DiSimone, 121 F.3d at 1268; Order at 5 (Mar. 31, 2006). It is Black Letter law that when pleadings raise a claim and that claim is dismissed with prejudice "based on a failure of pleading," that dismissal meets the both the "actual" and "necessary or essential" prongs. Steen v. John Hancock Mut. Life Ins. Co., 106 F.3d 904, 912 (9th Cir. 1997); In re Lockard, 884 F.2d at 1175; RESTATEMENT (SECOND) JUDGMENTS § 27 Comment d. This Court's Order dismissing the claim is a valid and final decision and subsequent Order rejecting the motion for reconsideration confirms that conclusion. See In re Lockard, 884 F.2d at 1175 (the finality requirement is relaxed for collateral estoppel); Order at 5 (Mar. 31, 2006); Order at 10 (Aug. 22, 2006). Likewise, defendant Greg Hancock's request for partial judgment amounts to a concession that this Court's March 31, 2006 is, for practical purposes except the timing of an appeal, a final judgment. All parties are absolutely identical.

·

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Therefore, the Court's earlier ruling dismissing Greg Hancock's counterclaims with prejudice that Meritage breached any of its agreements with him is binding on the defendants, including those that were parties to the lawsuit at the time and sat by silently as Meritage and Greg Hancock litigated the counterclaims to fruition. Accordingly, the doctrine of collateral estoppel bars all affirmative defenses arising from Meritage's alleged breach of the Agreements. 2. The Hancocks' Defenses Based on Meritage's Purported Breaches of the Agreements Also Fail as a Matter of Law for Other Reasons

The Court needs to address the following arguments only if the Court declines to apply the doctrine of collateral estoppel. a. The Terms "Derogate" and "Detract" Mean a Defaming Use and Not the Mere Reduction or Change in Use as a Matter of Law

The Hancocks repeatedly assert that the terms "derogate" and "detract" in the License Agreement operate as a bar, preventing Meritage from reducing or changing its
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use of the name "Hancock" under the License Agreement. See, e.g., Hancock's Motion to Stay Entering of Judgment at 2:7 to 4:10, 5:19-26, and 8:23 to 9:3 (Apr. 27, 2006). The Hancocks' interpretation belies the plain meaning of the two terms, case law, and common sense. The License Agreement provides: "Licensee undertakes and agrees not to use the Licensed Marks in any manner whatsoever which, directly or indirectly, would derogate or detract from the Licensed Mark's repute, value, marketability, degree of public recognition or popularity." (SOF at ¶ 2.) First, the License Agreement could have required ­ but does not do so ­ Meritage to use the Hancock names. (SOF at ¶¶ 1-2, 6.) The License Agreement could have required ­ but does not do so ­ Meritage to use the Hancock names with specific frequency or sales targets, such as 50% of homes offered for sale, or with respect to specific homes, such as all homes sold in Buckeye, Arizona. (Id.) See, e.g., Burma-Bibas, Inc. v. Excelled Sheepskin and Leather Coat Co., 1986 U.S. Dist. LEXIS 17650, *41-43 (S.D.N.Y. 1986) (the absence of sales targets means that general language should not be interpreted as imposing sales targets). Agreement is silent. (SOF at ¶ 1.) In the trademark context, courts treat the two terms "derogate" and "detract" interchangeably. See, e.g., Burma-Bibas, 1986 U.S. Dist. LEXIS 17650 at *41-43 On these issues, the

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(interpreting the "derogate or detract" language, identical to the instant language, as interchangeable and related to the level of quality of the mark's use). The terms

"derogate" and "detract," in the trademark context, involve the sale of inferior or different goods impugning the reputation of the mark or conflicting with the mark ­ not the sale of fewer goods than a mark holder might desire the licensee to sell. See, e.g., Societe Des Produits Nestle, S.A. v. Casa Helvetia, Inc., 982 F.2d 633, 636 (1st Cir. 1992); Susser v. Carvel Corp., 332 F.2d 505, 519-20 (2d Cir. 1964); GE v. Alumpa Coal Co., 1979 U.S. Dist. LEXIS 9197, *3-4 (D. Mass. 1979) and cases cited therein. This use of "derogate" and "detract" is also consistent with their general use in tort law. See, e.g., Nat'l Bd. for

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Certification of Occupational Therapy v. Amer. Occupational Therapy Ass'n, 24 F. Supp. 2d 494, 511 (D. Md. 1998). The Hancocks' argument that "derogation" creates affirmative requirements of trademark use is also thoroughly inconsistent with the purposes underlying trademark law. The leading treatise on trademark law defines "[t]he four [trademark] functions that are deserving of protection in the courts: 1. 2. To identify one seller's goods and distinguish them from goods sold by others; To signify that all goods bearing the trademark come from or are controlled by a single, albeit anonymous, source; To signify that all goods bearing the trademark are of an equal level of quality; and As a prime instrument in advertising and selling the goods."

3. 4.

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1 MCCARTHY ON TRADEMARKS AND UNFAIR COMPETITION at § 3:2 (4th ed. 2006). None 14 of these functions support Hancock's interpretation of "derogate" or "detract." At best, 15 the subject clause serves as a prohibition against active disparagement or belittlement that 16 would undermine the significance of the trademark, and in no way serves as an "uber-best 17 efforts" clause requiring the licensee to fulfill the licensor's financial expectations or 18 perceived entitlement to force Meritage to structure its company in such a manner so as to 19 increase the sales of licensed products above some imaginary threshold. 20 21 22 23 24 under the name "Hancock" throughout metropolitan Phoenix during the License 25 Agreement period. (SOF at ¶ 3.) Such use exceeds the Hancocks' sales of homes under 26 the name "Hancock" during the years before their sale of the Hancock Communities' 27 business to Meritage, and the Hancock Communities only sold homes in the Buckeye 28
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b.

Even Assuming that the Terms "Derogate" and "Detract" Were to Relate to a Reduction in Use, It Is Undisputed that Meritage Sold More than $110 Million of Homes under the Name "Hancock," and Such Use Is Not "Derogatory" or "Detracting" as a Matter of Law.

It is undisputed that Meritage has sold more that more than $117 million homes

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area. In this light, even assuming the Hancocks' interpretation of the License Agreement required some form of "uber-best efforts," Meritage met that standard as a matter of law. c. Meritage Could Not Have Breached the License Agreement after Greg Hancock Terminated It by Letter on February 13, 2004.

The Hancocks repeatedly assert in this lawsuit that Meritage's decision implemented in July 2004 to rebrand the Hancock Communities business to Meritage and rebrand its most popular home to the name "Hancock series" violated the License Agreement. See, e.g., Greg Hancock Counterclaim at ¶¶ 43, 46, 48, and 61-63. Such a violation is simply impossible as a matter of law because five months earlier on February 13, 2004, Greg Hancock wrote Meritage terminating the License Agreement and instructing Meritage to remove the "Hancock" name from all of Meritage's advertising. (SOF at ¶ 24.) Greg Hancock cannot instruct Meritage to stop using the "Hancock" name and then later complain when Meritage stops using the "Hancock" name. d. Even Assuming that Meritage Could Have Breached the License Agreement after Greg Hancock's February 13, 2004 Termination Letter, Meritage Could Not Have Breached the Agreement after Rick Hancock Commenced Using the Name "Rick Hancock Homes."

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On several occasions in March 2004, the Hancocks promised this Court that they would maintain the "status quo" and not use the name "Hancock" in a homebuilding business that competed against Meritage, and, in reliance on the Hancocks' promise, this Court entered an Order denying Meritage's Application for a Temporary Restraining Order. (SOF at ¶ 4.) In June 2004, defendants opened Rick Hancock Homes and its homebuilding business right in the same subdivision as Meritage's Hancock Communities, thereby deliberately violating this Court's Order and breaching the promise the Hancocks made to this Court. (SOF at ¶ 25.) It also created confusion, forcing Meritage to modify its use of the Hancock Communities name. (SOF at ¶¶ 8-19.) See Green v. Higgins, 217 Kan, 217, 221, 535 P.2d 446, 449 (1975) ("It should also be emphasized that in applying the clean hands maxim, courts are concerned primarily with their own integrity. The doctrine of unclean hands is derived from the unwillingness of a
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court to give its peculiar relief to a suitor who in the very controversy has so conducted himself as to shock the moral sensibilities of the judge. It has nothing to do with the rights or liabilities of the parties.") e. Greg Hancock's Own Expert Concedes that Meritage Complied with the Earn-Out Provisions of the Master Transaction Agreement

Greg Hancock repeatedly asserts that Meritage failed to pay him the earn-outs for which he was entitled. See, e.g. Greg Hancock Counterclaim at ¶ 63(a). His own expert, however, concedes that during the period of time that Greg Hancock worked for the company, Meritage fully paid the earn-outs owed. (SOF at ¶ 5.) Consequently, as a matter of law, Meritage did not breach any of the Agreements by failing to pay Greg Hancock his earn-outs. f. Greg Hancock's Affirmative Defense of Constructive Discharge Fails as a Matter of Law

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Greg Hancock claims, and now affirmatively asserts as a defense, that Meritage constructively discharged him. See, e.g., Greg Hancock Counterclaim at ¶¶ 41 and 42. A 15 claim of constructive discharge requires proof that the plaintiff's working conditions were 16 so intolerable that a reasonable person would have been compelled to resign. See, e.g., 17 Maclean v. Dep't of Educ, 195 Ariz. 235, 245, 986 P.2d 903, 913 (App. 1999). Here, 18 while acknowledging that work was stressful, Greg Hancock testified under oath that his 19 then-wife's conduct was so intolerable that it caused him to quit. (SOF at ¶ 27.) He also 20 testified that he quit because Meritage was not paying him enough, which is not a working 21 condition. (SOF at ¶ 28.) Accordingly, Greg Hancock cannot change his story and now 22 claim that it was "intolerable working conditions" that compelled him to leave, and the 23 defense of constructive discharge fails as a matter of law. See, e.g., Maclean, 195 Ariz. at 24 245, 986 P.2d at 913. 25 26 27 28
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3.

The License Agreement Does Not Require Meritage to Obtain Greg Hancock's Permission before Changing How It Uses the "Hancock" Name

The Hancocks have accused Meritage of violating the License Agreement by

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failing to obtain Greg Hancock's permission before either considering or, in fact, changing how it uses the "Hancock" name. This accusation fails as a matter of law because the License Agreement, Exhibit 1 to the SOF, simply does not require Meritage to seek out Greg Hancock's permission to do anything with respect to its use of the name "Hancock." Quite to the contrary, Greg Hancock gave Meritage an exclusive license and all rights of use belonging to it: "Licensor hereby grants Licensee a personal, exclusive, nontransferable, nonassignable license to use the Licensed Marks during term of this Agreement." (SOF at ¶ 6.) There is simply no language in the License Agreement that subjected Meritage's use of the Hancock name to Greg Hancock's discretion. (SOF at ¶ 1-2, 6.). 4. The Use of One's Surname Is Not Immune from Scrutiny under the Lanham Act or under Arizona law

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Ninth Circuit law bars the use of a person's name when that person seeks to use it on similar products or dissimilar products in the same chain of commerce. See E. & J. 14 Gallo Winery v. Gallo Cattle Co., 967 F.2d 1280, 1288-89 (9th Cir. 1992) (barring 15 Joseph Gallo from using the "Gallo" mark on retail cheese or in audible advertisements); 16 see also Avery Dennison Corp. v. Sumpton, 189 F.3d 868, 877 (9th Cir. 1999) (offering 17 18 man has no absolute right to use his own name, even honestly, as the name of his 19 20 1966) (emphasis added). "One must use his own name honestly and not as a means of 21 pirating the goodwill and reputation of a business rival; and where he cannot use his own 22 name without inevitably representing his goods as those of another he may be enjoined 23 from using his name in connection with his business." Hoyt Heater Co. v. Hoyt, 68 Cal. 24 App. 2d 523, 527 (1945). 25 26 27 28 Furthermore, Defendant Rick Hancock admitted that he needed to obtain his brother's permission to use "Rick Hancock Homes," which effectively means that his right to use his surname is not absolute. (SOF at ¶ 7.) If the law permitted Rick Hancock to use his name, why did Greg Hancock have to assign his rights to "Hancock Communities" and "Hancock Homes" to his brother?
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special protections to only "non-competing" uses unlike the Defendants' use here).2 "[A]

merchandise or his business." John R. Thompson Co. v. Holloway, 366 F.2d 108 (5th Cir.

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Where the Ninth Circuit has found that there has been an attempt to confuse the public or bad faith, it has enjoined the infringing user regardless of who the user is. See, e.g, E. & J. Gallo, 967 F.2d at 1288; Robi v. Five Platters, Inc., 918 F.2d 1439, 1445 (9th Cir. 1990); Friend v. H. A. Friend & Co., 416 F.2d 526, 531 (9th Cir. 1969), cert. denied, 397 U.S. 914 (1970). Here, both an attempt to confuse the public and bad faith are present. First, Rick Hancock testified that his goal is to usurp the goodwill that Meritage purchased as part of its $88 million acquisition of the "Hancock Communities" and "Hancock Homes" business and trademarks. (SOF at ¶ 8.) That goal is only achieved if consumers confuse "Rick Hancock Homes" with "Hancock Communities" or "Hancock Homes" and the Defendants free-ride on goodwill now owned by Meritage. Second, as set forth above, the deliberate violation of this Court's status quo Order, by registering an even more confusingly similar name, Rick Hancock Homes, and conducting business under that name, demonstrates the Hancocks' bad faith. 5. The Use of Disclaimers Is Not a Defense to a Lanham Act Violation

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The use of a disclaimer is only meaningful when the junior user's products ("Rick Hancock Homes") are unrelated to the senior user's products ("Hancock Communities" 17 Homes or "Hancock Homes"), which could not be further from the case in this instance. 18 E. & J. Gallo, 967 F.2d at 1289. In E. & J. Gallo, the junior user's wholesale cheese 19 market differed greatly from the senior user's retail wine market. As such, the junior user 20 (Joseph Gallo) could only use his name/mark on wholesale packages of cheese, and he 21 was prohibited from using the words "Gallo" or "Joseph Gallo" as a trademark for retail 22 cheese or in audible advertisements ­ despite the presence of disclaimers. Id. 23 Here, the defendants employ a confusingly similar name, Rick Hancock Homes, in 24 the same market for the same product in which Meritage employed the marks "Hancock 25 Homes" and "Hancock Communities." 26 confusingly similar name in the same ways in which Meritage advertises its marks. (SOF 27 at ¶ 10.) In other words, Defendant Hancock and Meritage are both marketing the same 28
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(SOF ¶ at 9.)

Defendants advertise its

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type of goods and services--namely single family homes, to the same consumers--single family homebuyers. (Id.) Finally, Meritage's employees used email addresses (i.e., [employee name]@hancockcommunities.com) to communicate with subcontractors, lenders, and potential consumers. (SOF at ¶ 11.) Defendants use the [employee

name]@hancockhomesaz.com domain address and cause confusion. (Id.)3 6. Meritage Did Not Abandon the "Hancock" Name as a Matter of Law

Meritage has not abandoned the Hancock mark as a matter of law. Abandonment, as defined by the Lanham Act, occurs when "use has been discontinued with intent not to 9 resume such use." 15 U.S.C. § 112. 10 The Hancocks concede that Meritage is and has been using the name "Hancock" in 11 association with its product lines ­ the Hancock series homes in Buckeye and elsewhere in
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12 the Phoenix metropolitan area, and "Hancock Communities" new homes built at the 13 Sundance community in Buckeye and elsewhere in the Phoenix metropolitan area. (SOF 14 at ¶¶ 16-19.) It is undisputed that Meritage has extensively advertised and conducted 15 sales of homes operating under the Hancock Communities mark. (SOF at ¶ 17.) It is 16 undisputed that since July 2005, Meritage has sold hundreds of homes under the Hancock 17 name for more than $117 million dollars in sales. (SOF at ¶ 3.) All of the subdivision18 related paperwork for these sales bears the Hancock name. (SOF at ¶ 18.) Lastly, the 19 Hancocks concede that Meritage had signs for its "Hancock Communities" all around the 20 Sundance Community and in the near vicinity of the land that the defendants have used 21
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Even if meaningful under the law, defendants' use of disclaimers would not be sufficient to cure the potential for confusion from their use. Rick Hancock concedes that defendants' employees do not use the disclaimer on all uses of the "Hancock" mark with respect to marketing new homes in the Sundance community. (SOF at ¶ 12.) Moreover, defendants do not use disclaimers when the entity Rick Hancock Homes answers its main phone number. (SOF at ¶ 13.) The so-called `disclaimer' only disclaims an affiliation with "Meritage Homes/Hancock Communities;" it is silent as to any affiliation with "Hancock Homes," a mark for which Meritage is also an exclusive licensee. (SOF at ¶ 15.) In fact, by failing to disclaim the association with Hancock Homes, the nature of the disclaimer misleads the reader into believing that Hancock Homes is the same as Rick Hancock Homes ­ a tactic and a strategy that are plainly intentional on defendants' part. (See SOF at ¶¶ 8, 26 (goal is to capitalize on the goodwill associated with the "Hancock" mark with respect to new homes in the Phoenix market).)
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the "Hancock" mark to sell tens of millions of dollars of similar homes and earn $4.4 millions in net income profits through July 2006. (SOF at ¶ 19.) In light of this undisputed evidence, Meritage has not abandoned the use of the Hancock names. B. Summary Judgment On Rick And Brenda Hancocks' Counterclaims And Third-Party Claims 1. Summary Judgment on the Entirety of Rick and Brenda Hancocks' Counterclaims and Third-Party Claims Should be Entered a. Meritage's Legal Arguments Set Forth in Its Motion to Dismiss Memoranda Are Incorporated Here

Meritage incorporates its arguments in its Motion to Dismss memorandum dated September 28, 2006, and reply memorandum, filed with leave on November 20, 2006. 10 Despite the change in procedural posture from assuming the truth of Rick and Brenda 11 Hancock's allegations to viewing the evidence in the light most favorable to them, each of
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12 the arguments set forth in these memoranda apply in equal force to this motion for 13 summary judgment. Because this Court has not yet issued its order with respect to the 14 Motion to Dismiss, the arguments are again reasserted here. 15 16 17 18 19 20 21 22 23 24 25 26 27 28 b. It Is Undisputed that the Hancocks Acknowledged in Writing that the Madrid Contract Existed and Meritage Had Cancelled It, Making Reliance on Any False Statement or Omission Impossible as a Matter of Law

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Rick and Brenda Hancock assert that they were fraudulently induced into agreeing to release all of their claims in return for $160,000 because third-party defendant Steve Hilton purportedly failed to disclose that the Madrid contract had been "executed" and because an internal Meritage document was filled out in a manner that indicated that the Hancocks had cancelled the Madrid contract. It is undisputed, however, that during the finalization of the release and severance on January 13, 2004, Rick Hancock expressly stated in writing that the Madrid contract had been cancelled. (SOF at ¶ 20.) On January 13, 2004, Rick Hancock wrote: "My release dated December 22, 2003 covers my proposed purchase contract on the home in the Madrid project. To be more specific, I agree that the contract has been cancelled and my deposit returned, and that neither of us have any further liability to the other in respect of this contract." (Id.) Necessarily
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implicit in Rick Hancock's statement that the Madrid contract had been cancelled is the acknowledgement that the contract had been "executed." Thus, there can be no dispute that Rick Hancock subjectively believed that the Madrid contract had been "executed"4 and cancelled, and there can therefore be no dispute that Hancocks did not rely on third-party defendant Hilton's purported failure to disclose that the Madrid contract had been "executed" or on an internal Meritage document indicating that the Hancocks had cancelled the Madrid contract. Actual and justifiable reliance are elements of fraudulent inducement under Arizona law. See, e.g., Lundy v. Airtouch Comm., Inc., 81 F. Supp. 2d 962, 968 (D. Ariz. 1999); Staheli v. Kauffman, 122 Ariz. 380, 383, 595 P.2d 172, 175 (1979). Accordingly, the Hancocks' fraudulent inducement claim fails as a matter of law. c. It Is Undisputed that Meritage's Employee Handbook Expressly Did Not Grant the Hancocks Any Rights with Respect to the Madrid Home and Expressly Permitted Meritage to Change Its Policies without Any Notice

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The basic premise of Rick and Brenda Hancock's claims is that Meritage's employee handbook gave Rick Hancock a contract right to a 10% discount and that 16 Meritage had no right to change that discount. It is undisputed, however, that Meritage's 17 employee handbook did not create contract rights for its employees and expressly 18 permitted Meritage to change its discounting policy without any notice. (SOF at ¶ 21.) 19 The employee handbook provided: 20 21 22 23 24 25 26 27 28 Meritage continues to assert, as it did in the Motion to Dismiss, that the Madrid contract was never "executed" as a matter of law because acceptance was not delivered and because Rick Hancock was not entitled to any discount after his termination. Motion to Dismiss at 4:24 to 7:10 (Sep. 28, 2006).
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4

No existing or past practice or procedure, and no representation, written or oral, express or implied including, without limitation those contained in this employee handbook are intended to create a contract between you and Meritage so as to alter the at will character of your employment. The provisions of the handbook have been developed at the discretion of management and except for its policy of employment "at will", may be amended or canceled at any time at Meritage's sole discretion. * * *

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The guidelines set forth in this handbook are for informational purposes only. Since our employment policies, procedures, and benefits are subject to change by Meritage Corporation from time to time, with or without notice, due to economic or other consideration, they cannot be considered or otherwise relied upon as an employment contract. (Id.) In this light, the Hancocks' assertion that Meritage was obligated to sell Rick Hancock the Madrid home at a 10% discount fails as a matter of law. 2. Meritage Is Also Entitled to Partial Summary Judgment on the Amount of the Hancocks' Damages

Assuming that this Court either does not dismiss or grant summary judgment with respect to Rick and Brenda Hancock's counterclaims and third-party claims in their entirety, the Hancocks are not entitled as a matter of law to seek the increase in value of the Madrid home because they did not seek to avoid or mitigate their damages as required by Arizona law. A basic principle of the law of damages is that one who claims to have been injured by a breach of contract must use reasonable means to avoid or minimize the damages resulting from the breach. McCormick, Damages at 127 (1935); see also Coury Bros. Ranches, Inc. v. Ellsworth, 103 Ariz. 515, 446 P.2d 458 (1968); Barnes v. Lopez, 25 Ariz. App. 477, 544 P.2d 694 (1976); Fulton v. Woodford, 17 Ariz. App. 490, 498 P.2d 564 (1972). The RESTATEMENT (SECOND) OF CONTRACTS § 350 (1981) provides as follows: § 350 Avoidability as a Limitation on Damages (1) Except as stated in Subsection (2), damages are not recoverable for loss that the injured party could have avoided without undue risk, burden or humiliation. (2) The injured party is not precluded from recovery by the rule stated in Subsection (1) to the extent that he has made reasonable but unsuccessful efforts to avoid loss. Although the injured party is often spoken of as having a "duty" to mitigate damages, the term is misleading because there is no liability for failing to take such steps; the party is merely precluded from recovering for avoidable damages. RESTATEMENT (SECOND) OF CONTRACTS § 350, comment (b); see also Barnes v. Lopez, supra; Fulton v. Woodford, supra; McCormick, supra, at 128.

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West Pinal Family Health Ctr. v. McBryde, 162 Ariz. 546, 548-49, 785 P.2d 66, 68 (App. 1989). RESTATEMENT (SECOND) CONTRACTS § 350, comment (b) and illustration (c) clearly illustrate this point: b. Effect of failure to make efforts to mitigate damages. As a general rule, a party cannot recover damages for loss that he could have avoided by reasonable efforts. Once a party has reason to know that performance by the other party will not be forthcoming, he is ordinarily expected to stop his own performance to avoid further expenditure. See Illustrations 1, 2, 3 and 4. Furthermore, he is expected to take such affirmative steps as are appropriate in the circumstances to avoid loss by making substitute arrangements or otherwise. It is sometimes said that it is the "duty" of the aggrieved party to mitigate damages, but this is misleading because he incurs no liability for his failure to act. The amount of loss that he could reasonably have avoided by stopping performance, making substitute arrangements or otherwise is simply subtracted from the amount that would otherwise have been recoverable as damages. * * *

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c. Substitute transactions. . . . In such cases as these, the injured party is expected to make appropriate efforts to avoid loss by arranging a substitute transaction. If he does not do so, the amount of loss that he could have avoided by doing so is subtracted in calculating his damages. In the case of the sale of goods, this principle has inspired the standard formulas under which a buyer's or seller's damages are based on the difference between the contract price and the market price on that market where the injured party could have arranged a substitute transaction for the purchase or sale of similar goods. See Uniform Commercial Code §§ 2-708, 2-713. Similar rules are applied to other contracts, such as contracts for the sale of securities, where there is a well-established market for the type of performance involved, but the principle extends to other situations in which a substitute transaction can be arranged, even if there is no well-established market for the type of performance[.] (Emphasis added.)

24 Here, it is undisputed that the Madrid home remained publicly available for three 25 months after Meritage terminated Rick Hancock's employment. (SOF at ¶ 22.) The 26 Hancocks concede that they took no steps to acquire the Madrid home after learning that 27 Meritage would not abide by the 10% discount they believed they were entitled. (SOF at 28
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¶ 23.) Not allowing such recovery makes common sense since the Hancocks would otherwise be doublecounting because their home in the Grayhawk neighborhood of North Scottsdale that they remained in has appreciated hundreds of thousands of dollars since deciding not to pursue a home in the Madrid subdivision. (Id.) According to Arizona law, the Hancocks' measure of damages cannot include the increased appreciation in the Madrid home. See, e.g., West Pinal Family Health Ctr., 162 Ariz. at 548-49, 785 P.2d at 68. II. CONCLUSION For the reasons set forth above, Meritage respectfully requests that the Court enter the attached proposed Order. DATED this 15th day of December, 2006. SNELL & WILMER L.L.P.

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By s/ Dan W. Goldfine Dan W. Goldfine Adam Lang One Arizona Center Phoenix, AZ 85004-2202 Attorneys for Plaintiffs and Third Party Defendants and

By s/ Grant Woods Grant Woods GRANT WOODS, P.C. 1726 North Seventh Street Phoenix, AZ 85006 Attorneys for Plaintiffs and Third Party Defendants CERTIFICATE OF SERVICE I hereby certify that on December 15, 2006, I electronically transmitted the foregoing document to the Clerk's Office using the CM/ECF System for filing and transmittal of a Notice of Electronic Filing to the following CM/ECF registrants:

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LAW OFFICES One Arizona Center, 400 E. Van Buren Phoenix, Arizona 85004-2202 (602) 382-6000

Ivan K. Mathew Mathew & Mathew, P.C. 3000 N. Central Avenue, Suite 1730 Phoenix, Arizona 85004 Attorneys for Defendant Rick Hancock Robert M. Frisbee Frisbee & Bostock, PLC 1747 East Morton Avenue Suite 108 Phoenix AZ 85020 Attorneys for Defendant Greg Hancock Kenneth J. Sherk Timothy J. Burke Fennemore Craig, P.C. 3003 N. Central Ave. Suite 2600 Phoenix, AZ 85012-2913 Attorneys for Defendant Snell & Wilmer, L.L.P. in State Court Action

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Snell & Wilmer L.L.P.

s/ Adam E. Lang
1924823