Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_07-cv-00866/USCOURTS-azd-2_07-cv-00866-0/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1330 Breach of Contract

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WO

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

Inter-Tel (Delaware), )

Incorporated, a Delaware )

corporation, et al., )

)

Plaintiffs, ) No. CIV 07-866 PHX RCB

)

vs. ) O R D E R 

)

Fulton Communications )

Telephone Company, Inc., )

a Georgia corporation, )

)

Defendant. ) )

This matter arises out of a diversity action brought in this

Court by Plaintiffs Inter-Tel (Delaware), Inc., Inter-Tel

Integrated Systems, Inc., and Inter-Tel Technologies, Inc.

(collectively "Inter-Tel") based on allegations of unfair

competition, breach of contract, misappropriation of trade secrets,

and other statutory violations and tortious conduct. Compl. (doc.

# 1). Currently pending before the Court are Plaintiffs' motion

for preliminary injunction (doc. # 2) against Defendant Fulton

Communications Telephone Company, Inc. ("Fulton") and a related

motion for expedited discovery (doc. # 3).

. . .

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1

 Because counsel has appeared on its behalf, the Court has

jurisdiction over Fulton.

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The record reflects that Fulton was served on April 27, 2007,

but did not file an answer to the complaint until May 21, 2007.1

Summons (doc. # 7); Answer (doc. # 8). Fulton has not yet filed a

response in opposition to either of Plaintiffs' pending motions

(doc. ## 2-3), both of which were filed on April 25, 2007, and the

time to serve and file a responsive memorandum has long since

passed. See LRCiv 7.2(c) and App. A ("Time Chart"). Under Local

Rule of Civil Procedure 7.2(i), the Court may deem a party's lack

of opposition-- or untimely opposition-- as consent to the granting

of a motion, and may grant the motion summarily if it is facially

meritorious. LRCiv 7.2(i); Henry v. Gill Indus., Inc., 983 F.2d

943, 950 (9th Cir. 1993). Although Plaintiffs had requested an

evidentiary hearing, the Court finds the matter suitable for

decision without oral argument under these circumstances. See

LRCiv 7.2(f). Having carefully considered the arguments raised,

the Court now rules.

I. BACKGROUND

Inter-Tel is involved in the business of selling and leasing

telecommunications products and services through arrangements with

third party dealers as well as its own direct sales efforts. 

Compl. (doc. # 1), Ex. 1 ¶¶ 4-5. This case concerns a dispute with

one of those dealers, Fulton, which has hired three former InterTel employees who have allegedly divulged confidential lists of

Inter-Tel's customers to Fulton in violation of restrictive

covenants in their employment agreements with Inter-Tel. Fulton,

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for its part, is alleged to have violated its dealer agreement with

Inter-Tel by failing to notify Inter-Tel of the known conversion of

its customer lists. As such, this case revolves around the trade

secrets provision of Fulton's dealer agreement as well as the

restrictive covenants in the employment agreements of former InterTel employees Benjamin Treadway, Brian Hawk, and Brian McPherson.

A. Former Inter-Tel Employees

Treadway is currently Fulton's President and Chief Executive

Officer. Id. ¶ 6. Prior to his work with Fulton, Treadway was

employed by Inter-Tel from January 11, 1993 until his resignation

on March 8, 2006, at which time he served as Inter-Tel's Regional

Vice President of Technologies, Eastern Region. Id.

Hawk is currently Fulton's Sales Manager. Before joining

Fulton, Hawk was employed by Inter-Tel from July 29, 1997 until May

26, 2006, when he resigned from his position as General Manager of

Inter-Tel's Atlanta office. See Mot. (doc. # 2), Ex. C.

McPherson is currently a Fulton Sales Representative. 

Previous to that, McPherson was employed by Inter-Tel from

September 3, 2002 until April 3, 2007, when he resigned from his

position as Sales Manager. See Mot. (doc. # 2), Ex. D.

B. Customer Lists

As sales employees, Treadway, Hawk, and McPherson had access

to Inter-Tel's customer lists. Compl. (doc. # 1), Ex. 1 ¶ 13. 

These lists, maintained on different electronic databases, contain

such information as customers' names, contact persons, maintenance

histories, warranty records, contract prices, and contract

expiration dates. Id. ¶ 15. According to Inter-Tel, this

information, which has been generated over several years of

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operation, is critical to the success of its sales efforts,

allowing its representatives to make timely offers to customers for

the renewal or upgrade of their equipment and service contracts. 

See id. ¶¶ 15-16. As a result, Inter-Tel has limited the

availability of this information to selected individuals within its

organization, has admonished those individuals not to share the

information, has frequently discussed the importance of its

confidentiality at regional and senior-level sales meetings-- many

of which have been attended by Treadway, Hawk, and McPherson-- and,

most importantly, has incorporated restrictive covenants into the

employment agreements of those representatives expected to come

into contact with the confidential customer lists. Id. ¶¶ 18-19.

C. The Employment Agreements

The employment contracts of Treadway, Hawk, and McPherson all

contain a non-disclosure provision operative both during and

subsequent to their employment with Inter-Tel, prohibiting the use

or disclosure of Inter-Tel's "Confidential Information" without

prior written authorization. See Mot. (doc. # 2), Ex. B, C, D. 

The agreements further state that "Confidential Information"

includes, inter alia, "Customer Information," which is defined as

follows:

Customer lists, including the names, addresses

and telephone numbers of the contact persons or

decision makers for any customers or

prospective customers of the Company, as well

as information related to the history of

negotiations, buying history, financial plans

or data provided by the customer in confidence,

billing information, business plans, particular

needs, service history and the terms of any

contracts or proposals made to any customer or

prospective customer of the Company and any

other information provided by the customer in

confidence.

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2

 The Court takes judicial notice of the fact that (1) the

".xls" file extension denotes a computer file accessible by the

Microsoft Excel spreadsheet application, and (2) that the popular

Internet utility, MapQuest, does not transmit driving directions to

users in this file format.

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See, e.g., Mot. (doc. # 2), Ex. B at 3. The agreements further

prohibit the employees from copying or disclosing such information

"except in furtherance of [Inter-Tel's] business." Id.

Other post-employment restrictive covenants in the above

employment agreements include a covenant against unfair

competition, a covenant not to solicit Inter-Tel customers for a

period of one-year following employment with Inter-Tel, a covenant

not to interfere with contracts, and a covenant not to solicit

employees, vendors, suppliers, and contractors. See, e.g., id. at

4-5.

D. Violations of Restrictive Covenants by Former Employees

Inter-Tel alleges that McPherson and the others have breached

these covenants before and after their departures from Inter-Tel. 

In particular, Inter-Tel has presented evidence that McPherson was

in communication with Treadway and Hawk about possible employment

with Fulton as early as February 19, 2007-- one month prior to his

announced resignation from Inter-Tel. See Mot. (doc. # 2), Ex. E.

On March 13, 2007, one week prior to his resignation and

nearly three weeks before his employment with Inter-Tel ended,

McPherson sent an email from his Inter-Tel account to Hawk's email

account at Fulton with an attached document surreptitiously titled

"Mapquest Directions.xls." Mot. (doc. # 2), Ex. H. Inter-Tel

believes that this file actually contains confidential and valuable

customer information.2 See Mot. (doc. # 2) at 9.

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Shortly thereafter, McPherson sent a second email from his

Inter-Tel account to his personal account carrying an attached

document titled "Atlanta Jan 2007 maint.xls." Mot. (doc. # 2), Ex.

G. Inter-Tel believes that the document transferred by McPherson

is a customer list of more than 2,200 active accounts including

details of their installed systems and products, monthly contract

revenue, and remaining contract duration. See Mot. (doc. # 2) at

9; Compl (doc. # 1), Ex. 1 ¶ 20.

McPherson sent a third email from his Inter-Tel account to his

personal account with the subject header "FW: Cust List-All,"

carrying an attached document titled "ATLANTA STANDARD

CONTRACTS.xls." Mot. (doc. # 2), Ex. G.

There is also evidence of email correspondence between

McPherson and Inter-Tel employee Jackie Gorham on April 19, 2007 in

which McPherson attempts to solicit Gorham to leave Inter-Tel to

join Fulton. Compl. (doc. # 1), Ex. 4.

E. The Dealer Agreement

Fulton became an Inter-Tel dealer shortly after Treadway's

departure from Inter-Tel. Compl. (doc. # 1), Ex. 1 ¶ 7. As an

Inter-Tel dealer, Fulton is privy to sensitive information, id. ¶

9, and has covenanted accordingly in its dealer agreement to

protect the confidentiality of that information as follows:

[Fulton] shall use its best efforts to ensure

that neither [Fulton] not any of its employees

will convert to their own use or to the use of

any other party any industrial secrets,

copyrights, trade secrets, patents,

manufacturing or other processes (confidential

information) or the like, owned by Inter-Tel,

that is obtained by [Fulton] by reason of [the

Dealer] Agreement or otherwise.

Mot. (doc. # 2), Ex. A at 14. Fulton further agreed to notify

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Inter-Tel in writing of any suspected act of conversion of such

confidential information. Id. Under the dealer agreement,

Fulton's failure to provide Inter-Tel such notice constitutes a

material breach allowing immediate unilateral termination by InterTel. Id.

F. Violation of the Dealer Agreement

Inter-Tel has recently received notice from some of its larger

direct sales clients that they have been solicited by Fulton, and

has surmised from these contacts and the record of McPherson's

email correspondence that these clients were solicited by its

former employees through the use of the misappropriated customer

lists. See Compl. (doc. # 1), Ex. 1 ¶ 23. Given Treadway's role

as Fulton's current CEO, and the former Inter-Tel employees'

positions in Fulton's sales organization, Inter-Tel believes that

Fulton is aware of the conversion and improper use of its

confidential information, has failed to give notice of the same,

and is therefore in breach of its dealer agreement.

Inter-Tel filed this action and this motion seeking

preliminary injunctive relief on April 25, 2007. It has apparently

also initiated parallel arbitration proceedings against Treadway,

Hawk, and McPherson. See Mot. (doc. # 2) at 3-4, n.3.

II. STANDARD OF REVIEW

The purpose of a preliminary injunction is to preserve the

status quo among the parties pending a final decision on the merits

of the action. See Fed. R. Civ. P. 65; Dep't of Parks & Recreation

v. Bazaar Del Mundo, Inc., 448 F.3d 1118, 1124 (9th Cir. 2006). 

The Court may grant a preliminary injunction if the moving party

demonstrates (1) a probability of success on the merits and the

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3

 That choice of law provisions states that "[the dealer

agreement] shall be governed by and construed in accordance with the

laws of the State of Arizona without giving effect to choice of law

doctrines." Mot. (doc. # 2), Ex. A at 15.

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possibility of irreparable harm, or (2) that the lawsuit raises

serious questions and the balance of hardship tips sharply in the

movant's favor. Save Our Sonoran, Inc. v. Flowers, 408 F.3d 1113,

1120 (9th Cir. 2005). "These two formulations represent two points

on a sliding scale in which the required degree of irreparable harm

increases as the probability of success decreases. They are not

separate tests but outer reaches of a single continuum." Id.

(internal quotation and citation omitted).

III. CHOICE OF LAW

In addition to seeking relief under Arizona's Uniform Trade

Secrets Act, Ariz. Rev. Stat. §§ 44-401 et seq., and the Federal

Computer Fraud and Abuse Act, 18 U.S.C. § 1030, Inter-Tel has

asserted various state law claims for alleged tortious conduct and

breach of contract by Fulton. Compl. (doc. # 1) ¶¶ 59-117. 

Because this is a diversity case arising in part from alleged

misconduct occurring in Georgia, the Court applies federal

procedural law and state substantive law. Erie R.R. v. Tompkins,

304 U.S. 64, 78-79 (1938). Inter-Tel points to two clauses in its

dealer agreement with Fulton providing (1) that Arizona law would

govern the parties' rights and liabilities under the dealer

agreement,3

 and (2) that the parties would waive any defenses

relating to venue for actions brought in the state or federal

courts located in Maricopa County, Arizona. Mot. (doc. # 2) at 3

n.2. The Court will consider first the enforceability of the forum

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selection clause.

For purposes of determining venue, Erie principles require

that federal law apply to both the enforcement and interpretation

of forum selection clauses. Manetti-Farrow, Inc. v. Gucci Am.,

Inc., 858 F.2d 509, 512-13 (9th Cir. 1988). Forum selection

clauses are presumptively valid. See The Bremen v. Zapata OffShore Co., 407 U.S. 1, 10 (1972). Because Defendants have not

challenged its enforceability, the Court will proceed on the basis

that the forum selection clause is enforceable.

Notwithstanding the dealer agreement's choice of law

provision, the Court must apply Arizona choice of law rules. See

Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487 (1941); Orr v.

Bank of Am., 285 F.3d 764, 772 n.4 (9th Cir. 2002). Arizona courts

apply the principles of conflict of laws as expressed in the

Restatement, even in the face of contractual choice of law

provisions, as the one employed here, which purport to preclude the

courts from engaging such analysis. Jackson v. Chandler, 204 Ariz.

135, 61 P.3d 17 (2003); Swanson v. Image Bank, Inc., 206 Ariz. 264,

77 P.3d 439, 441 n.2 (2003) (rejecting parties' attempt to preclude

court from applying conflict of laws principles as "unsound and

contrary to the intent of [the Restatement]"); cf. Magellan Real

Estate Inv. Trust v. Losch, 109 F. Supp. 2d 1144, 1155 (D. Ariz.

2000) (finding choice of law provision inapplicable to tort claims

asserted by one contracting party against another). Because the

dealer agreement's choice of law provision is not dispositive under

Arizona law, the Court will determine what law to apply to InterTel's contract and tort claims according to principles of conflicts

of laws.

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With respect to Inter-Tel's contract claims, Compl. (doc. # 1)

¶¶ 79-94, the Court is satisfied that, for reasons of certainty,

predictability and convenience, Arizona law should govern the

parties' contractual rights and duties as they have agreed in the

dealer agreement. See Restatement (Second) of Conflict of Laws §

187 (1971).

As to Inter-Tel's claims of conversion, tortious interference

with contract, and unfair competition, Compl. (doc. # 1) ¶¶ 73-78,

102-17, the Court will determine the parties' rights and

liabilities according to "the local law of the state which, with

respect to that issue, has the most significant relationship to the

occurrence and the parties under the principles stated in

[Restatement] § 6." See Restatement (Second) of Conflict of Laws §

145(1) (1971). The principles stated in § 6 include the following:

(a) the needs of the interstate and

international systems,

(b) the relevant policies of the forum,

(c) the relevant policies of other

interested states and the relative

interests of those states in the

determination of the particular issue,

(d) the protection of justified

expectations,

(e) the basic policies underlying the

particular field of law,

(f) certainty, predictability and

uniformity of result, and

(g) ease in the determination and

application of the law to be applied.

Id. § 6(2). In applying these principles, the Court will also

consider "(a) the place where the injury occurred, (b) the place

where the conduct causing the injury occurred, (c) the domicil,

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residence, nationality, place of incorporation and place of

business of the parties, and (d) the place where the relationship,

if any, between the parties is centered." Id. § 145(2).

In the present case, the conduct allegedly causing Inter-Tel's

injuries appears to have occurred solely in Georgia. See Compl.

(doc. # 1) ¶¶ 19-58; Mot. (doc. # 2) at 2-11. Likewise, the

injuries of which Inter-Tel complains are primarily those of

economic harm to its business interests in the Georgia market. See

Mot. (doc. # 2), Ex. 1 ¶ 23; Mot. (doc. # 2) at 15-16; Compl. (doc.

# 1), Ex. 4. Although Inter-Tel's principal place of business is

located in Arizona, Fulton is a Georgia corporation with its

principal place of business in Georgia. Compl. (doc. # 1) ¶¶ 1-6. 

Finally, it is clear that the parties' business relationship at the

time of Fulton's alleged misconduct was based in Georgia. Id. ¶¶

8, 19-58. Collectively, these factors strongly favor the

application of Georgia law to the tort issues in this case.

Given the prevalence of the Georgia contacts, the Court finds

that the "further[ance] of harmonious relations between states" and

the "facilitat[ion] [of] commercial intercourse between them"

counsels for the application of Georgia law. See id. § 6, cmt. d

(regarding needs of the interstate system). It may have been a

countervailing, although not determinative, consideration if the

relevant policies of Arizona, as the forum state, differed

significantly from Georgia law on the relevant tort issues. See

id. § 6(2)(b) (relevant policies of the forum). Since there are no

other interested states, the Court concludes that the policies of

the forum and interested states favor the application of Georgia

law. See id. § 6(a), (b), and (c). Moreover, the mere fact that

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4

 Although the issue of choice of law had not been briefed, the

Court finds it necessary to decide these questions in determining the

extent of injunctive relief to which Inter-Tel may be entitled. The

Court does so, however, without prejudice to the right of any party

to revisit questions of choice of law in the future.

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the parties have expressed a preference for Arizona law in the

dealer agreement does not create any "justified expectations" or

interest in "uniformity of result" with regard to their rights and

liabilities for any tortious conduct. See Restatement (Second) of

Conflict of Laws § 6, cmt. g; Id. § 145, cmt. b.

For all of the foregoing reasons, the Court finds that Georgia

is the state with the most significant relationship to the

occurrence and the parties with respect to Inter-Tel's claims of

conversion, tortious interference with contract, and unfair

competition. Therefore, Georgia law will apply to the resolution

of those claims.4

IV. DISCUSSION

Inter-Tel seeks a preliminary injunction to enjoin Fulton from

(1) using or disclosing any of Inter-Tel's confidential information

to anyone, (2) entering into a contract with, soliciting, or

attempting to solicit any Inter-Tel customer that is identified on

any Inter-Tel customer lists in the possession of Fulton or its

agents for the purpose of selling or leasing telecommunications

equipment, and (3) soliciting or encouraging any Inter-Tel employee

based in Georgia from leaving the employ of Inter-Tel. Mot. (doc.

# 2) at 1-2.

A. Probability of Success on the Merits

Inter-Tel's request is based on its breach of contract claim,

Arizona Uniform Trade Secrets Act claim, and unfair competition

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claim. Id. at 11-15. The Court considers each theory in turn.

1. Breach of Contract Claim

Under the dealer agreement, Fulton agreed "to use its best

efforts to ensure that neither it nor any of its employees w[ould]

convert to their own use" any of Inter-Tel's confidential

information." Mot. (doc. # 2), Ex. A at 14. Here, it appears that

Fulton not only failed to use its best efforts to protect InterTel's confidential information, but acted with a deliberate design

to obtain Inter-Tel's client lists and convert them to its own use,

as evidenced by McPherson's emails and Fulton's subsequent

solicitation of Inter-Tel's customers. See Mot. (doc. # 2), Ex. F,

G, H; Compl. (doc. # 1), Ex. 1 ¶ 23. Therefore, Inter-Tel's

unopposed motion for preliminary injunction demonstrates a strong

probability of success on the merits of the breach of contract

claim. See Coml. (doc. # 1) ¶¶ 79-87; Mot. (doc. # 2) at 11-12. 

2. Arizona Uniform Trade Secrets Act

Under Arizona's Uniform Trade Secrets Act, the Court may

enjoin "[a]ctual or threatened misappropriation" of a trade secret,

and may compel other "affirmative acts to protect a trade secret." 

Ariz. Rev. Stat. § 44-402(A), (C) (West 2003). While matters of

public knowledge cannot be protected as such, a trade secret may

consist of a combination of such elements. Enter. Leasing Co. v.

Ehmke, 197 Ariz. 144, 149, 3 P.3d 1064, 1069 (Ct. App. 1999). "A

list of customers, if their trade and patronage have been secured

by years of business effort and advertising and the expenditure of

time and money" has been held to "constitute[] an important part of

a business" that merits protection as a trade secret. Prudential

Ins. Co. v. Pochiro, 153 Ariz. 368, 371, 736 P.2d 1180, 1183 (Ct.

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App. 1987) (quotations and citation omitted).

In the present case, Inter-Tel's customer lists are clearly in

the nature of a trade secret, particularly in light of the

contract, maintenance, and warranty information that is not

generally known outside of Inter-Tel's sales organization, as well

as the affirmative acts taken by Inter-Tel to protect the secrecy

of this information. Moreover, in light of circumstances

indicative of Fulton's wrongful conduct in obtaining and using

Inter-Tel's customer lists, Inter-Tel has demonstrated a

substantial probability of success on the merits of its claim under

the Arizona Uniform Trade Secrets Act.

3. Unfair Competition

Under the principles of unfair competition, a person "who

causes harm to the commercial relations of another by engaging in a

business or trade" may be liable to the other for such harm arising

"from other acts or practices of the actor determined to be

actionable as an unfair method of competition, taking into account

the nature of the conduct and its likely effect on both the person

seeking relief and the public." Restatement (Third) of Unfair

Competition § 1 (1995). While a person is generally not liable for

soliciting a competitor's employees who are not under contract, the

former employer does have a cause of action where the soliciting

competitor "is guilty of some concomitant, unconscionable conduct." 

See, e.g., Reeves v. Hanlon, 33 Cal.4th 1140, 1150, 95 P.3d 513,

518 (2004).

Inter-Tel has not cited any Georgia law in support of its

unfair competition theory. However, based on the above persuasive

authority, and the evidence of McPherson's attempts to solicit an

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Inter-Tel employee to join Fulton in violation of the postemployment non-solicitation clause in his employment contract with

Inter-Tel, see Compl. (doc. # 1), Ex. 4; Mot. (doc. # 2), Ex. D at

6, the Court finds that Inter-Tel has demonstrated a reasonable

probability of success on the merits of its unfair competition

claim.

B. Possibility of Irreparable Harm

Under Arizona law, "once a protectable interest is

established, irreparable injury is presumed to follow if the

interest is not protected." Phoenix Orthopaedic Surgeons, Ltd. v.

Peairs, 164 Ariz. 54, 59, 790 P.2d 752, 757 (Ct. App. 1989). The

possibility of irreparable injury to Inter-Tel from Fulton's

alleged misconduct is palpable. The Court has no reason to

question Inter-Tel's assertion that Fulton's efforts to lure its

employees and largest customers away by the use of its allegedly

misappropriated customer lists would cause lasting and irreparable

damage to Inter-Tel's business interests in the Georgia market. 

See Compl. (doc. # 1), Ex. 1 ¶¶ 22-23. With respect to the alleged

violations of the non-solicitation clauses of the former Inter-Tel

employees' contracts, injunctive relief will provide an effective

enforcement mechanism during the limited duration of those

restrictive covenants. With regard to Fulton's alleged

misappropriation and use of Inter-Tel's confidential customer

lists, injunctive relief may be the only effective avenue of

relief.

For all of the foregoing reasons, Inter-Tel's unopposed motion

for preliminary injunction (doc. # 2) will be granted as facially

meritorious. LRCiv 7.2(i); Henry v. Gill Indus., Inc., 983 F.2d

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943, 950 (9th Cir. 1993). The matter of preliminary injunctive

relief being resolved, Plaintiff's related motion for expedited

discovery (doc. # 3) will be denied as moot.

IT IS THEREFORE ORDERED that Inter-Tel's motion for

preliminary injunction is GRANTED.

IT IS FURTHER ORDERED directing Defendant Fulton, until

further notice from the Court, to refrain from (1) using or

disclosing any of Inter-Tel's confidential information to anyone,

(2) entering into a contract with, soliciting, or attempting to

solicit, for the purpose of selling or leasing telecommunications

equipment, any Inter-Tel customer that is identified on any InterTel customer lists in the possession of Fulton or its agents, and

(3) encouraging, soliciting, or attempting to solicit any Inter-Tel

employee based in Georgia from leaving the employ of Inter-Tel to

join Fulton.

IT IS FURTHER ORDERED that Inter-Tel's motion for expedited

discovery (doc. # 3) is DENIED as moot.

DATED this 12th day of June, 2007.

Copies to counsel of record

Case 2:07-cv-00866-RCB Document 10 Filed 06/13/07 Page 16 of 16