Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_05-cv-02438/USCOURTS-azd-2_05-cv-02438-0/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1441 Petition for Removal

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WO

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

Hilb Rogal & Hobbs Company, 

Plaintiff, 

vs.

Driver Alliant Insurance Services, Inc.,

and Scott Cleinman, 

Defendants. 

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No. CV05-2438-PHX-MHM

ORDER

Currently before the Court is Defendants' Motion to Dismiss or Stay Under the

Colorado River Abstention Doctrine. (Dkt.#36). After reviewing the pleadings and holding

oral argument on August 7, 2006, the Court issues the following Order.

I. Background

The Complaint asserted by Plaintiff Hilb Rogal & Hobbs Company ("Plaintiff" or

"HRH") was originally filed in the Circuit Court for the County of Henrico Virginia on June

10, 2005 and was then removed to the Eastern District of Virginia by Defendants Driver

Alliant Insurance Services, Inc. and Scott Cleinman ("Defendants"). On August 12, 2005

this case was transferred from the Eastern District Court of Virginia after the Honorable

Richard L. Williams granted Defendants' Motion to transfer venue. (Dkt.#26). The

Complaint against Defendants alleges Trade Secret Misappropriation, Conspiracy, Business

Conspiracy, Breach of Contract, and Tortious Interference with Contract. 

Case 2:05-cv-02438-MHM Document 66 Filed 08/17/06 Page 1 of 11
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HRH is a Virginia corporation operating in the industry of insurance brokerage.

(Defendants' Motion to Dismiss, Exhibit 1, Bill of Complaint ("Compl.") ¶2). In Arizona,

HRH operates through its wholly owned subsidiary Hilb Rogal & Hobbs of Arizona ("HRH

Arizona"). (Id., ¶3). Defendant Driver Alliant Insurance Services, Inc. ("Defendant Driver"),

is a Delaware Company engaged in the brokerage industry and competes with HRH. (Id. ¶4-

5). Defendant Scott Cleinman ("Defendant Cleinman") was employed with HRH Arizona

and during his employment allegedly entered into several employment and confidentiality

agreements with HRH Arizona and HRH, which possess certain post-employment

restrictions (Id. ¶18-42). HRH alleges that on September 1, 1994, Mr. Cleinman executed

a Phoenix Producer's Agreement ("Employment Agreement") with HRH Arizona which

provided for a one-year automatically renewable employment term with a provision requiring

30-days notice of non-renewal including continued faithful service during this period. (Id.

¶20). The Employment Contract also possessed a non-piracy covenant which prohibited Mr.

Cleinman's solicitation of current or prospective clients for a two-year period after

termination (Id. ¶23). This provision was further reflected in a Non-Piracy Agreement

which Mr. Cleinman allegedly agreed to with HRH Arizona. (Id. ¶27-33). Mr. Cleinman

was also allegedly bound by a Confidentiality Agreement ("The Confidentiality Agreement")

that he entered into with HRH on September 1, 1994. (Id. ¶34). Lastly, Mr. Cleinman was

also allegedly bound by the restrictive provisions of Restricted Stock Option Agreement

entered into with HRH ("2001 Option Agreement") which required him to forfeit certain

compensation upon breach of any of his obligations with HRH. (Id. ¶'s 40-41). 

 In August of 2004, Defendant Cleinman allegedly was solicited by Defendant Driver

to leave his employment at HRH Arizona. (Id. ¶45). Defendant Cleinman accepted the offer

and allegedly brought in other HRH Arizona employees to assist him in "steal[ing]" HRH's

clients. (Id. ¶47). Specifically, Defendant Cleinman invoked the services of Jody Munson

who was part of Defendant Cleinman's service team. (Id.¶47). HRH alleges that Defendant

Cleinman's conduct is in breach of the Confidentiality Agreement and the 2001 Option

Agreement as well as that such conduct by the Defendants supports its other claims of

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misappropriation of trade secrets; common law and statutory conspiracy and tortious

interference with contract. HRH seeks injunctive as well as monetary relief against

Defendants Cleinman and Driver.

Prior to the instant lawsuit being filed, on February 24, 2005, HRH Arizona instituted

an action against Judith ("Jody") Munson and fictional defendants in the Maricopa County

Superior Court of Arizona, CV2005-003413 (Motion to Dismiss, Exhibit 4, "Arizona

Complaint" or "Arizona Action"). The Arizona Complaint asserts breach of contract, breach

of good faith and fair dealing, conversion and unfair competition arising out her postemployment activities after submitting her resignation with HRH Arizona. Specifically, Ms.

Munson is alleged to have breached several employment contracts with HRH Arizona by

misappropriating certain trade secrets of HRH Arizona and assisting a competing entity,

Defendant Driver. (Id. ¶'s 6-18). Subsequent to the filing of the Arizona Complaint,

Defendants Cleinman and Driver filed a declaratory judgment action against HRH Arizona

and the matter was consolidated with the Arizona Action. Defendants Cleinman and Driver

filed an application for TRO against HRH Arizona, and in turn, HRH Arizona filed a crossapplication for TRO and Preliminary Injunction to enforce the provisions of the Employment

Contract that Defendant Cleinman entered with HRH Arizona. (Motion to Dismiss, Exhibit

5). On March 11, 2005, Arizona Superior Court Judge Barry Schneider denied both parties'

application for TRO. (Motion to Dismiss, Exhibit 8). The court did find; however, that the

two-year restrictive term of the Non-Piracy Agreement between Defendant Cleinman and

HRH Arizona to be unenforceable. (Id.). On July 1, 2005 HRH Arizona filed it Answer to

Defendants Cleinman and Driver's Declaratory Complaint. (Motion to Dismiss, Exhibit 9).

On August 16, 2005, Defendants Cleinman and Driver filed an Amended Complaint for

declaratory judgment against HRH Arizona and HRH seeking a declaratory judgment of nonenforceability of the restrictive provisions of the contracts, including the Confidentiality

Agreement and Stock Option Agreement as well as a declaratory judgment of nonmisappropriation of trade secrets, non-conspiracy and non-interference. (Motion to Dismiss,

Exhibit 7, Amended Complaint ¶’s 35-48). On September 7, 2005, HRH and HRH of

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Arizona Answered the Amended Complaint filed by Defendants Cleinman and Driver and

HRH Arizona asserted counterclaims asserting breach of loyalty and breach of fiduciary

duty against Defendant Cleinman based upon his alleged breaches of the Employment

Contract, the Non-Piracy Agreement and the Confidentiality Agreement. (Motion to

Dismiss, Exhibit 10, Counterclaim ¶10). HRH Arizona sought damages and the imposition

of a constructive trust against Defendant Cleinman. (Id.). 

On June 8, 2006, Defendants informed this Court that the Arizona court had issued

its ruling upon summary judgment in favor of Defendants. Specifically, the Arizona court

ruled in favor of Defendants in holding that: (1) the restrictive covenant contained in

Defendant Cleinman's employment agreement to be unenforceable because the restriction of

two years is longer than necessary to protect HRH's legitimate interest; (2) Defendant

Cleinman did not breach his fiduciary duty owed to HRH Arizona; (3) Defendants did not

misappropriate trade secrets; and (4) Defendants were not obligated to pay liquidated

damages because of the absence of any breach of an enforceable restrictive covenant.

(Notice of State Court Decision, Dkt.#61).

Based upon the alleged duplication of proceedings between the Arizona Action and

the instant action, Defendants Cleinman and Driver move to dismiss the instant Complaint

in this Court or in the alternative to stay the proceedings pending the resolution of the

Arizona Action pursuant to the Colorado River Doctrine.

II. Analysis

A. Colorado River Doctrine

The Colorado River doctrine provides a district court with the discretion to abstain

from exercising jurisdiction "for reasons of wise judicial administration" when it determines

(1) a parallel proceeding exists in a state court, and (2) exceptional circumstances exist that

warrant abstention. Colorado River Water Conservation Dist. v. U.S., 424 U.S. 800, 819

(1976). Abstention from jurisdiction is in stark contrast to the general presumption that a

federal court must exercise its subject matter jurisdiction, regardless of pending state court

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actions. Colorado River,424 U.S. at 817; see also Hawaii Housing Authority v. Midkiff,467

U.S. 229, 238 (1984).

 The Colorado River doctrine is concerned with the contemporaneous exercise of

concurrent jurisdiction by state and federal Courts. Gilbertson v. Albright, 381 F.3d 965, 982

n.17 (9th Cir. 2004)(en banc). Abstention to state court proceedings rests upon

considerations of "(w)ise judicial administration, giving regard to conservation of judicial

resources and comprehensive disposition of litigation." Colorado River, 424 U.S. at 817

(quoting Kerotest Mfg. Co. v. C-O-Two Fire Equip. Co., 342 U.S. 180, 183). The abstention

announced in Colorado River is only meant to be invoked in exceedingly rare circumstances.

If a substantial doubt exists as to whether the state proceedings will resolve the federal

action, then granting a stay would be inappropriate. Intel Corp. v. Advanced Micro Devices,

Inc., 12 F.3d 908, 913 (9th Cir. 1993). 

B. Substantially Parallel Proceedings

The Ninth Circuit has determined that "exact parallelism" is not required when

determining whether the Colorado River doctrine is applicable. Nakash v. Marciano, 882

F.2d 1411, 1416 (9th Cir. 1989). The Fourth Circuit clarified finding that parallel

proceedings occur when "substantially the same parties litigate substantially the same issues

in different forums." New Beckley Mining Corp. v. Int’l Union, UMWA, 946 F.2d 1072,

1073 (4th Cir. 1991). 

The first step to determining whether the instant litigation and the Arizona Action are

substantially parallel is to analyze the parties involved. In the Arizona Action, the parties

are HRH Arizona, HRH, Ms. Munson, Mr. Cleinman, and Driver. In the case at bar, the

parties are HRH, the parent of HRH Arizona, Mr. Cleinman and Driver. Thus, all parties that

are involved in the instant litigation are also involved in the Arizona Action. HRH makes

note that before Defendants Cleinman and Driver amended their declaratory complaint in the

Arizona Action, HRH was not a party to the Arizona Action. However, this point is not

persuasive. HRH is now named as a party in the Arizona Action. Also, HRH Arizona, the

original plaintiff in the Arizona Action is the wholly owned subsidiary of HRH. Finally, the

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abstention inquiry does not necessitate completely parallel proceedings, but "substantially

parallel," which existed with the participation of Defendant Cleinman, Driver and Plaintiff

HRH Arizona. 

Second, the substantially parallel analysis requires an analysis of the asserted claims

as well. Here, the claims are substantially similar and arise out of the same set of operative

facts. The Arizona Complaint filed on February 24, 2005, alleges that Ms. Munson breached

several post-employment agreements she entered into while employed by HRH Arizona

when leaving HRH Arizona on February 15, 2005 and taking a position with a competing

entity, Defendant Driver. Ms. Munson allegedly breached the non-piracy agreement and

confidentiality agreement with HRH Arizona. (Motion to Dismiss, Exhibit 4, ¶14). In

addition, the Arizona Action also involves counterclaims against Defendant Cleinman for his

alleged breach of his duty of loyalty and breach of fiduciary duty arising out of his breach

of certain employment agreements he had entered into while employed with HRH Arizona.

Such contracts include the Employment Contract, the Non-Piracy Agreement and the

Confidentiality Agreement. (Motion to Dismiss, Exhibit 10, p.6). Defendants Cleinman and

Driver also sought a declaratory judgment that these contracts in addition to the Stock Option

Agreement be deemed unenforceable under Arizona law as well as a declaration of nonmisappropriation of trade secrets, non-conspiracy and non-interference. (Motion to Dismiss,

Exhibit 7, p.9). 

The claims of the Arizona Action are virtually identical to the claims asserted in the

Complaint before this Court. Like the Arizona Action, the Complaint before this Court

involves a determination of whether Mr. Cleinman breached the Confidentiality Agreement

and 2001 Stock Option Agreement he entered into with HRH. (Motion to Dismiss, Exhibit

1, Bill of Complaint ¶'s 111-113; Exhibit 7, ¶'s 40-44). In addition, both actions involve a

determination of whether Defendants misappropriated trade secrets, interfered with HRH's

business and engaged in conspiratorial activities. Thus, there is little doubt that the claims

at issue in this case are substantially parallel to the claims and issues in the Arizona Action.

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Despite the similarity of the proceedings, HRH argues that it is not clear that the

pending issues in this Action can be resolved by the Arizona court. For instance, HRH

asserts that if the Arizona court were to rule against Defendant Cleinman and determine he

violated the agreements at issue and engaged in conspiracy, this Court would still be left to

determine an appropriate amount of damages as HRH has no damage claim against him.

However, due to the Arizona court's recent ruling on June 7, 2006, it appears that this

possibility is eliminated. 

Contrary to Plaintiff's argument, the present case is unlike the situation presented in

Smith v. Central Ariz. Water Conservation Dist., 418 F.3d 1028, 1033-34 (9th Cir. 2005)

where the Ninth Circuit held that because of the existence of a substantial doubt as to

whether the state court proceedings would address and resolve the issues pending in the

district court it was proper not to exercise abstention. In Smith; however, the substantial

doubt was generated because of the fact that the subcontracts at issue in the district court

were only referenced in the plaintiff landowners' complaint before the state court and it was

unclear as to whether the state court would address the plaintiffs' rights under those

subcontracts. Id. Conversely, in the instant case, the same contracts and issues that are

before this Court are at issue in the Arizona Action. Further, the Arizona court appears to

have addressed these issues with its June 7, 2006 ruling upon summary judgment. (Notice

of State Court Decision, Dkt.#61). Thus, unlike Smith, there is not a substantial doubt as to

whether the state court will address the issues before this Court. 

Thus, seeing that the Arizona Action involves the same parties and the same claims

and issues, such duplication supports abstention. 

C. Exceptional Case Justifying Abstention

In addition to looking to see if the proceedings are substantially parallel the Court

must look to relevant factors in determining if this case qualifies as an exceptional case

supporting abstention. The exceptional circumstances test is composed of several factors

such as: (1) jurisdiction over property; (2) inconvenience of forum; (3) order in which

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jurisdiction was obtained; (4) avoidance of piecemeal litigation; (5) presence of federal

question; (6) adequacy of state court proceedings to protect the parties’ rights and (7)

existence of forum shopping. Colorado River, 424 U.S. at 818; Moses H. Cone Memorial

Hosp. v. Mercury Const. Corp., 460 U.S. 1, 23, 103 S.Ct. 927 (1983); Travelers Indem. Co.

v. Madonna, 914 F.2d 1364 (9th Cir. 1990). No one factor as determinative; rather, all factors

should be considered in rendering a decision. Id. at 818-819.

(1) Jurisdiction Over Property

"It has long been held ... that the court first assuming jurisdiction over property may

exercise that jurisdiction to the exclusion of other courts." Id. (citing Donovan v. City of

Dallas, 377 U.S. 408, 412, 84 S.Ct. 1579 (1964). In the present case, Defendants note that

the Arizona court, prior to this litigation being commenced, issued an order addressing the

property at issue, HRH Arizona's alleged trade secrets. On March 11, 2005 the Arizona court

ordered Defendants Cleinman and Driver not to misappropriate any trade secrets of HRH

Arizona. (Motion to Dismiss, Exhibit 8). As such, the Arizona court first exercised

jurisdiction over property in Arizona. HRH contends that the Arizona court's ruling does not

impact the instant litigation, because HRH was not party to Arizona Action at that time.

However, HRH's argument is without merit given that HRH's wholly owned subsidiary was

actively participating in the Arizona Action during the Arizona court's ruling. In addition,

the trade secrets at issue in the case and the Arizona Action appear to be identical. Because

the Arizona court first exercised jurisdiction over disputed property at issue this factor

supports abstention.

(2) Inconvenience of Forum 

Here, neither party offers argument expressing concern regarding the inconvenience

of the forums at issue. This is likely due to the fact that the two forums are both in Arizona.

As such, this factor is neutral and does not favor or disfavor abstention.

(3) Order in Which Jurisdiction was Obtained

The Court is obligated to evaluate the order in which jurisdiction was obtained. The

Arizona court was the first to obtain jurisdiction over the pending dispute between these

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parties. HRH states; however, that it was not brought into the Arizona Action until after

Defendants Cleinman and Driver amended their declaratory counterclaim on August 15,

2005, which is subsequent to HRH Arizona's Complaint before this Court filed in Virginia

State Court on June 10, 2005. HRH's argument is not persuasive as it focuses on the

technicality that it was not actually brought into the Arizona Action until August 15, 2005.

In substance; however, HRH Arizona is the wholly owned subsidiary of HRH and HRH was

certainly aware of and involved in the Arizona Action before being formally named in the

Arizona Action. Because the Arizona Action commenced prior to the instant action, this

factor favors abstention by this Court.

(4) Avoidance of Piecemeal Litigation

As discussed above, the issues involved in the Arizona Action and instant action

appear to be virtually identical. As such, if this Court were to exercise concurrent

jurisdiction with the Arizona Superior Court there would an unnecessary use of judicial

resources. This factor favors abstention.

(5) Presence of Federal Question

Another factor to be considered by the Court is the presence or absence of a federal

question. Moses H. Cone Memorial Hosp. v. Mercury Const. Corp., 460 U.S. 1, 23, 103

S.Ct. 927 (1983). The case before this Court is based upon diversity and involves state law

claims. As such, this factor favors abstention.

(6) Adequacy of State Court Proceedings

The Court must also evaluate whether the state court proceedings provide an adequate

forum. Id. at 26. HRH relies upon the Ninth Circuit's holding in Travelers Indem., Co. v.

Madonna, 914 F.2d 1364, (9th Cir. 1990) which reversed the district court's ruling staying

an action by an insurer to recover unpaid premiums pending resolution state court

proceedings. Notably, the Ninth Circuit found the district court's determination to be error

where at the time of the stay the state court had made no rulings whatsoever and the district

court was quite capable of resolving the issues in the case. Id. at 1369-70

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Conversely; in this case the Arizona court has already addressed and ruled upon

crucial issues that are also before this Court. The Arizona court issued its ruling on June 7,

2006 upon motions for summary judgment from the parties in favor of Defendants regarding

what appear to be identical issues before this Court. Because the Arizona court has taken

substantial action in the case, there is no doubt that the Arizona court provides a sufficient

forum for the parties. 

(7) Forum Shopping

Both parties accuse each other of forum shopping. Defendants accuse Plaintiff of

filing the instant suit as a reactionary measure given the progress of the proceedings in the

Arizona Action at the time. Conversely, Plaintiff notes that Defendants are the parties that

removed this action to this Court placing Plaintiff at some sort of disadvantage. The Court

finds neither argument particularly persuasive. The Court does find puzzling Plaintiff’s

argument that it is somehow disadvantaged by litigating the instant dispute in Arizona.

Plaintiff clearly engages in significant business activities in this forum given that its wholly

owned subsidiary is located in Arizona and entered into several agreements with HRH

Arizona employees, such as Defendant Cleinman. Nonetheless, the Court does not find this

factor to either favor or disfavor abstention.

D. Summary

Upon performing the relevant inquiry regarding abstention, it is clear that the Arizona

Action and the instant case are substantially parallel as they involve the same parties and

substantially identical claims. In addition, multiple factors suggest that this is one of the rare

circumstances suggesting abstention is appropriate pending the resolution of the Arizona

Action. As such, this Court will stay the pending litigation in this Court pending a final

judgment in the Arizona Action. See Attwood v. Mendocino Coast District Hospital, 886

F.2d 241, 243 (9th Cir. 1989) (finding that district court should generally stay rather than

dismiss the federal proceedings). The duration of this stay; however, may be minimal given

that the Arizona court appears to have resolved the pending claims between the parties upon

summary judgment in favor of Defendants. Thus, once the Arizona court issues judgment

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the doctrines of res judicata and collateral estoppel may apply and bar the claims in the

instant suit. See Tahoe-Sierra Preservation Council, Inc. v. Tahoe Regional Planning Agency,

322 F.3d 1064, 1077 (9th Cir.2003) (stating that res judicata applies when there is (1) an

identity of claims, (2) a final judgment on the merits, and (3) privity between the parties);

Arizona v. California, 530 U.S. at 414, 120 S.Ct. 2304 (2000) (stating that collateral estoppel

applies when "an issue of fact or law is actually litigated and determined by a valid and final

judgment, and the determination is essential to the judgment."); Murphy v. Board of Medical

Examiners of State of Arizona, 190 Ariz. 441, 449 949 P.2d 530 (Ariz. App. 1997) (stating

that in Arizona, judgment is final when entered, even if appealed). 

Accordingly,

IT IS HEREBY ORDERED granting Defendants' Motion to Dismiss or Stay Under

the Colorado River Abstention Doctrine. (Dkt.#36). The Court, in the exercise of its

discretion, will stay all further proceedings pending a final result of the related action in

Maricopa County Superior Court, CV2005-003413. 

IT IS FURTHER ORDERED that upon the conclusion of the proceedings in the

Arizona Action, the parties will file notice with the Court no later than ten days subsequent

to a final judgment. In addition, Plaintiff shall disclose to the Court its position on its

remaining viable claims. Defendants shall also disclose to the Court its position regarding

the viability of Plaintiff's claims. 

DATED this 16th day of August, 2006.

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