Free Response in Opposition to Motion - District Court of Arizona - Arizona

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Ira M. Schwartz (I.D. No. 010448) Michael A. Cordier (I.D. No. 014378) DeCONCINI McDONALD YETWIN & LACY, P.C. 7310 N. 16th St., Suite 330 Phoenix, Arizona 85020 Telephone (602) 282-0500 (602) 282-0520 (Facsimile)
Attorneys for Plaintiff

IN THE UNITED STATES DISTRICT COURT IN AND FOR THE DISTRICT OF ARIZONA

DECONCINI MCDONALD YETWIN & LACY, P.C.

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Suite 330 Phoenix, Arizona 85020

Erchonia Medical Inc., et al Plaintiff, v. Miki Smith, et al Defendants.

Case No.:CIV 02-2036-PHX-MHM Consolidated with CIV 02-2048-PHX-MHM and CIV 02-2353-PHX-MHM ERCHONIA MEDICAL INC.'S RESPONSE TO ROBERT E. MORONEY LLC'S CONSOLIDATED MOTION FOR PARTIAL SUMMARY JUDGMENT REGARDING ERCHONIA MEDICAL, INC'S TORTIOUS INTERFERENCE WITH CONTRACT CLAIM

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7310 N. 16th Street,

Erchonia Medical Inc., et al Plaintiff, v. Miki Smith, et al Defendants. Robert E. Moroney, LLC Plaintiff,

Jrs/240631/noticedismissal

Case 2:02-cv-02036-MHM

Document 287

Filed 08/22/2005

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v. Erchonia Medical, Inc., et al Defendants. Plaintiff Erchonia Medical, Inc. ("Erchonia") opposes Robert E. Moroney LLC's Consolidated Motion for Partial Summary Judgment Regarding Erchonia Medical Inc.'s Tortious Interference with Contract Claim ("REM's Motion" or REM's Motion for Summary Judgment") because there is substantial evidence demonstrating that (i) Miki Smith had an employment relationship with Erchonia, (ii) this relationship was known to the principal of Robert E. Moroney, LLC ("REM"), and (iii) REM knowingly and improperly interfered with this relationship to its own benefit and at Erchonia's expense. Therefore summary judgment on this count must be denied. This response motion is supported by the arguments set forth below and by Erchonia's Supplemental Statement of Facts submitted concurrently with this response. I. Standard for Summary Judgment. The existence of a genuine issue of material fact precludes entry of summary judgment. If the evidence is such that a reasonable jury could return a verdict for nonmoving party summary judgment cannot be entered. San Carlos Apache Tribe v . U.S., 272 F. Supp. 2d 860 (D. Ariz. 2003). On a motion for summary judgment, the Court must determine whether evidence reveals factual disagreement requiring submission to the jury. U.S. v. Mastrovito, 830 F. Supp. 1281 affirmed 46 F. 3d. 1147 (D. Ariz. 1993). When considering a motion for summary judgment, all facts and inferences must be drawn in favor of non-moving party. See generally, City of Phoenix, Ariz v. Garbage Services Co., 816 F. 2
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Supp. 564 (D. Ariz. 1993); Draney v. Wilson, Morton, Assaf & McElligott, 597 F. Supp. 528 (D. Ariz. 1983). A cause of action for tortious interference with contract is established by showing: (i) the existence of a contract, (ii) knowledge of the contract by the interferor, (iii) intentional actions by the interferor causing a breach, which (iv) cause harm or damage to the contracting party. Miller v. Hehlen, 209 Ariz. 462, 472, 104 P.3d 193, 203 (App. 2005); Wallace v. Casa Grande Union High Sch. Dist. No. 82 Bd. Of Governers, 184 Ariz. 419, 427, 909 P.2d 486, (App. 1995). Additionally, the interference must be improper. Miller, 209 Ariz. at 472; Safeway Ins. Co. v. Guerrero, 210 Ariz. 5, 10, 106 P.3d 1020, 1025 (2005). The employment relationship is contractual in nature. A.R.S. §23-1501. As shown below there is substantial fact support for Erchonia's claims and therefore summary judgment on this claim is not appropriate. II. Facts Supporting Erchonia's Claim A. Knowledge of Employment

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Miki Smith was an employee of Majes-Tec Innovations, Inc. ("Majes-Tec"), the predecessor to Erchonia. He was employed as the Vice-President of Sales and Marketing until his departure from Erchonia on July 22, 2002. Erchonia Medical Inc.'s Supplemental Statement of Facts in Response to Robert E. Moroney LLC's Consolidated Motion for Partial Summary Judgment Regarding Erchonia Medical Inc.'s Tortious Interference with Contract Claim ("SSOF") at ¶1-2.

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It is further undisputed that Robert Moroney, the president and owner of REM knew about Smith's employment with Erchonia. Mr. Moroney had a discussion with Steve Shanks where he asked Mr. Shanks, as the President of Erchonia, for his permission to have Miki Smith help him work for him during the period approximately October 2001, to January 2002. During this period Smith worked for REM selling BioCleanse units. SSOF ¶3-4 . This testimony by Mr. Moroney demonstrates not only that he knew Mr. Smith was an employee of Erchonia, but also that he needed Erchonia's permission to have Mr. Smith work outside of his employment with Erchonia. B. Sale of Laser to Jeanne Winner

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Miki Smith was involved in the sale of a laser to Jeanne Winner. Jeanne Winner is the administrator of a chiropractic practice located in Atlanta, Georgia. SSOF at ¶5. This practice is co-owned by Jeanne Winner and her husband, Dr. Jack Winner. SSOF at ¶6. Jeanne Winner attended a seminar offered by Dr. Brimhall in Atlanta in June 2002. SSOF at ¶7. She attended the seminar to learn about using lasers in a chiropractic practice. SSOF at ¶8. Prior to attending the seminar she made the decision to purchase a laser. SSOF at ¶9. However, she held off purchasing an Erchonia laser at this seminar because she heard from John Taft, a salesman who sold products for Bob Moroney and others, that a less expensive laser was going to be offered shortly. SSOF at ¶10. There is also conflicting testimony that she spoke to Miki Smith about purchasing a laser at this seminar. SSOF at ¶12. She learned that this less expensive laser was offered by Bob Moroney's company. SSOF at ¶13. It was at this seminar the she met Bob Moroney. SSOF at ¶14.

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Shortly after this seminar Mrs. Winner's husband was in an accident and broke his clavicle. SSOF at ¶15. Because of the accident, it was important to Mrs. Winner to obtain a laser to help treat her husband. SSOF at ¶1. She contacted Mr. Moroney to purchase one of his lasers. SSOF at ¶17. Mr. Moroney indicated that he could not immediately supply one of his lasers because it was not then available. He then put her in touch with Miki Smith to obtain a "loaner" until he could supply his laser to her. SSOF at ¶18. She then contacted Miki, who supplied her with a loaner. SSOF at ¶19. Specifically, Jeanne Winner called Miki Smith at the telephone number Bob Moroney provided to her. SSOF at ¶18-19. There is no question that Miki Smith did this in concert with REM. SSOF at ¶20. In fact, in a related lawsuit in Georgia, REM is suing Erchonia for the value of this loaner laser, thereby claiming this loan was made for its benefit. SOF at ¶21. Although there is some dispute about when this occurred, there is substantial evidence that this occurred while Smith was working for Erchonia. The timing of the telephone call to Miki Smith establishes this. Jeanne Winner made these calls to Miki Smith's cellular telephone that was provided to him while he worked for Erchonia and which Erchonia repossessed upon Smith's termination. SSOF at ¶22. Erchonia learned of Smith's activities for Moroney when Jeanne Winner called Miki Smith's cellular telephone to discuss a problem with the loaner laser and instead reached Steve Shanks at Erchonia. She reached Steve Shanks because by that time he had retaken possession of Smith's cellular phone. SSOF at ¶23.

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C.

Other Activities

There is substantial, additional information supporting the fact that Smith and Moroney were coordinating their activities prior to Smith's termination by Erchonia. It is undisputed that Smith was talking about his future departure from Erchonia with Moroney at least as early as April 2002, months before his termination. SSOF at ¶24. Both Smith and Moroney admit that these discussions included the potential of Smith working for REM. SSOF at ¶25. In June 2002, Moroney had obtained a laser product and provided it to Miki Smith. SSOF at ¶26. Miki Smith took that laser to a seminar in New Orleans in June 2002, and showed it to two doctors, Jeff Ulrey and Brett Brimhall. SSOF at ¶27-28. The facts demonstrate that Miki was doing this to generate interest in a competing product while he was still working for Erchonia. Additionally, there is conflicting information from which it can be inferred that Miki Smith was involved in diverting sales to REM prior to his departure from Erchonia. While he testified that he did not have lasers to sell prior to August 2002, Smith later admitted that he had prototypes with him at least as early as June 2002. SSOF at ¶27, 29. Further, he stated that he was not selling any lasers at the June 2002, Brimhall seminar, but John Taft stated that he referred at least Jeanne Winner and Bonnie Phillips to him to discuss lasers during this show. SSOF at ¶30. Mr. Taft further testified that there were others who

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inquired of him about purchasing lasers at this seminar. SSOF at ¶30.

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Additionally, we know that there were a great deal of telephone calls between Miki Smith and REM in the few months prior to his departure from Erchonia. SOF at ¶31. Both Smith and Moroney admit that at least some of these telephone calls involved planning for Smith's departure and the potential for him working for REM when he left. SSOF at ¶25. We also know that during this time period he had an REM prototype laser and that he was showing this to others, including doctors who could purchase these or assist in their sale. SSOF at ¶ 27. These facts further support that Smith violated his duty of loyalty to Erchonia prior to termination of his employment. D. Damages

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Finally, there is evidence that Erchonia lost sales due to Mr. Smith's breach of his duties to Erchonia. At a minimum, Jeanne Winner testified that she did not buy a laser at the Brimhall Seminar due to her conversations at the seminar that she could later purchase a similar laser at a lower price and the activities of Bob Moroney and Miki Smith to sell her a laser while Miki Smith was still employed by Erchonia. SSOF at ¶9-13. There is additional information that Bonnie Phillips also failed to purchase a laser at the same seminar due to these activities. SSOF at ¶11, 30 These two lost sales alone show Erchonia suffered damages due to Miki Smith's breach of his obligations to ERchonia. Additionally, Mr. Shanks testified that he estimated there were 5 to 20 lost lasers sales at the seminars during the time period that Miki Smith was promoting REM's products while he was still employed by Erchonia. SSOF at ¶32. This is based on lost sales at three seminars sponsored by Erchonia during the relevant time period. SSOF at ¶32.

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III.

Argument The facts listed above demonstrate that Miki Smith had an employment relationship

with Erchonia and that Mr. Moroney, the president of REM, was aware of this relationship. SSOF 1-3. Arizona law is clear that an employment relationship is a contractual

relationship. Taylor, 201 Ariz. at 192; Roberson, 202 Ariz. at 286. The facts further show that REM actively induced Smith to breach his obligations of loyalty by promoting and selling competing products while employed by Erchonia, and by diverting or withholding sales of Erchonia's laser products from Jeanne Winner, Bonnie Phillips and others resulting in lost sales to Erchonia. SOF at ¶9-13, 30. These facts strongly support Erchonia's claim of tortious interference with contract.1 It is well settled law that an employee owes an employer a fiduciary duty during the term of his employment. This duty includes a duty of loyalty during the term of his employment. McCallister Co. v. Kastella, 170 Ariz. 455, 458, 825 P.2d 980, 983(App. 1992); Evans v. Valley Radiologists, Inc., 127 Ariz. 177, 181, 619 P.2d 5, 9 (1980). Specifically, this duty of loyalty prevents an employee from competing with his employer during the term of his employment. McCallister Co., 170 Ariz. At 457. The facts demonstrate that Miki Smith breached his employment obligations to Erchonia by selling and promoting competing products while still employed by Erchonia.

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Erchonia notes that these actions described further demonstrate that REM's actions were improper. However, for the sake of completeness, Erchonia also notes that all the facts and circumstances involved in the other counts further show REM's activities as being improper, e.g. their knowing and willful infringement of Erchonia's patent and the other claims asserted in this action.

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Further, the facts show that he took these steps with the knowledge and support of REM and for REM's benefit. McCallister Co., 170 Ariz. At 457 REM argues that based upon its interpretation of one of Erchonia's discovery responses, that Erchonia has somehow given up all claims for tortious interference with contract except only that claim based upon Smith's breach of his confidentiality agreement. This is simply not the case. Any fair review of the discovery response quoted by REM demonstrates that Erchonia is pursuing a claim that Smith breached his employment agreement with Erchonia and that REM tortiously induced Smith into breaching his employment relationship. Specifically, the language quoted by REM states [in Erchonia's response to REM's interrogatory], ".... REM was aware of Miki Smith's employment with Erchonia and his obligations of confidentiality at the time it induced Mr. Smith to breach his duties and obligations to Erchonia, by encouraging Mr. Smith to sell REM's products, and request potential Erchonia customers withhold their purchases of Erchonia products until Mr. Smith left his employment with Erchonia and started his business relationship with REM." Robert E. Moroney LLC and Robert Moroney's Statement of Facts in Support of (1) Robert E. Moroney LLC's Consolidated Motions for Summary Judgment Regarding (1) Breach of Implied Warranty of Merchantabilitiy; (2) Breach of Implied Warranty of Fitness for a Particular Purpose; and (3) Violation of the Arizona Consumer Fraud Act And (2) Robert E. Moroney LLC's Consolidated Motion for Partial Summary Judgment Regarding Erchonia Medical Inc.'s Tortious Interference with Contract Claim. The facts above show, at a minimum, Smith did exactly what the interrogatory response states. He asked Jeanne Winner to withhold purchasing an Erchonia laser and provided her with a loaner, all with REM's active participation, until he could assist REM in

DECONCINI MCDONALD YETWIN & LACY, P.C.

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selling a laser to Jeanne Winner. These actions are directly in contradiction of the obligation of loyalty implied by law in each employment agreement. McCallister Co., 170 Ariz. at 457; Evans, 127 Ariz. at 181. There is substantial evidence to support his violation of his obligations with regard to Jeanne Winner, Bonnie Phillips and substantial additional information from which it can be shown, or at least inferred, that he did this in other situations. While it is clear that Miki Smith breached his employment obligations, it is equally clear that he did so with the knowing and active participation of REM, and that he did so for the benefit of himself and REM jointly. Accordingly, REM has committed tortious

DECONCINI MCDONALD YETWIN & LACY, P.C.

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interference with Miki Smith's employment contract with Erchonia. Miller, 209 Ariz. 462, 104 P.3d 193; Wallace 184 Ariz. 419, 909 P.2d 486; Safeway, 210 Ariz. 5, 106 P.3d 1020. IV. Conclusion There are substantial facts demonstrating that Miki Smith violated the terms of his employment with Erchonia, that he did so with the knowledge and active participation of REM, that REM's activities were improper and that these actions caused damages to *** *** *** ***

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Erchonia. Accordingly, as there are facts to support each element of Erchonia's claim, summary judgment dismissing this claim cannot be granted. DATED this 22nd day of August, 2005. DeCONCINI McDONALD YETWIN & LACY, P.C. By /s/Ira M. Schwartz Ira M. Schwartz Michael A. Cordier 7310 North 16rd Street, Suite 330 Phoenix, Arizona 85020 Attorneys for Plaintiff Erchonia Medical Inc.

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Certificate of Service I certify that on August 22, 2005, I electronically transmitted the attached document to the Clerk's Office using the CM/ECF System for filing and transmittal of a Notice of Electronic Filing to those attorneys registered with CM/ECF: Michael Warzynski, Esq. JARDINE BAKER HICKMAN & HOUSTON PLLC 3300 N. Central Ave., Suite 2600 Phoenix, AZ 85012 Co-Counsel for Erchonia Medical Inc. Benjamin B. Lieb, Esq. Robert Brunelli, Esq. SHERIDAN ROSS PC 1560 Broadway, Suite 1200 Denver, CO 80202 Attorneys for Robert E. Moroney, LLC, Robert E. Moroney, and A Major Difference Inc. David Bray, Esq. MARISCAL WEEKS MCINTYRE & FRIEDLANDER PA 2901 N. Central Ave., Suite 200 Phoenix, AZ 85012 Attorneys for Robert E. Moroney, LLC, Robert E. Moroney, and A Major Difference Inc. Gregory L. Miles, Esq. Lori A. Curtis, Esq. DAVIS MILES PLLC 1550 E. McKellips Road, Suite 101 Mesa, AZ 85203 Attorneys for John and Claudette Brimhall Dominic L. Verstagen, Esq. KUNZ PLITT HYLAND DEMLONG & KLEIFIELD 3838 N. Central Ave. Suite 1500 Phoenix, AZ 85012 Attorneys for John and Claudette Brimhall Scott A. Salmon, Esq. THE CAVANAGH LAW FIRM 1850 N. Central Avenue, Suite 2400 Phoenix, AZ 85004 Attorneys for George Gonzalez and Lorena Guzman

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Gordon S. Bueler, Esq. BUELER JONES, LLP 1300 N. McClintock Drive, Suite B-4 Chandler, AZ 85226 Attorneys for Miki Smith and KMS Marketing, Inc. /s/ Ira M. Schwartz

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