Smiles Services LLC v. Frye

[7] UNITED STATES DISTRICT COURT [8] WESTERN DISTRICT OF WASHINGTON AT TACOMA [10] SMILES SERVICES LLC et al., CASE NO. 3:23-cv-05392-DGE [11] Plaintiffs, ORDER ON MOTIONS TO STAY 12 v. (DKT. NOS. 33, 35) 13 RAYMOND L. FRYE et al., 14 Defendants. [16] 17 I. INTRODUCTION 18 This matter comes before the Court on Plaintiffs’ Motion to Compel Arbitration and to 19 Stay Adjudication of Claims Against Frye Pending Completion of Arbitration (Dkt. No. 33) and 20 Motion to Stay Motion to Dismiss for Failure to State a Claim (Partial) (Dkt. No. 35). [24] 1 II. BACKGROUND 2 A. Claims Against Defendants 3 Smiles Services (“Smiles”) is a dental service organization that provides administrative 4 support to Smiles Dental, an entity operating twenty individual dental practices in Washington 5 and Oregon. (Dkt. No. 25 at 4.) In March 2018, Smiles Services (“Smiles”) hired Defendant 6 Raymond L. Frye as Chief Executive Officer (“CEO”). (Id.) Smiles and Defendant Frye signed 7 an employment agreement. (Dkt. No. 25-1 at 13.) The employment agreement contained an 8 arbitration clause, which the parties acknowledge is valid and enforceable. (Dkt. Nos. 33 at 3, 37 9 at 1.) The arbitration clause stipulated the parties were to arbitrate any claims for damages 10 arising under the employment agreement. (Dkt. No. 25-1 at 11.) Smiles terminated Defendant 11 Frye’s employment in January 2023. (Dkt. No. 25 at 4.) 12 Plaintiffs allege that prior to his termination, Defendant Frye “began directly soliciting 13 the opportunity to purchase some of Plaintiffs’ practices[.]” (Id. at 14.) After his termination, 14 Plaintiffs claim Defendant Frye “formed at least three entities to operate in direct competition 15 with Plaintiffs.” (Id. at 15.) They contend he also “solicited Plaintiffs’ employees, including 16 Smiles Services Chief Operations Officer (“COO”), Jena Ewald [and] Smiles Services Chief 17 Financial Officer (“CFO”) Brian Daltoso.” (Id. at 14.) Plaintiffs allege “Frye and other agents 18 of his new entities (including Ewald), are directly contacting, soliciting, and interfering with 19 Smiles Services’ business and employee relationships and agreements with employees, 20 independent contractors, customers and clients[.]” (Id. at 16.) 21 Plaintiffs also allege “Frye and/or other Defendants improperly retain possession of 22 and/or have disclosed and used Plaintiffs’ highly confidential, proprietary and trade secret 23 information,” including various financial and strategic documents. (Id. at 19.) Plaintiffs believe [24] 1 Defendant Frye “used the confidential, proprietary and trade secret information that he took from 2 Plaintiffs to benefit himself[.]” (Id.) 3 Plaintiffs allege all Defendants are liable for (1) misappropriation of trade secrets under 4 the Defend Trade Secrets Act ( 18 U.S.C. §1836 , et seq.) and the Washington Uniform Trade 5 Secrets Act (Wash. Rev. Code. §19.108), (2) tortious interference with contract and business 6 relationships, (3) conversion, (4) unjust enrichment, and (5) civil conspiracy. (Dkt. No. 25 at 7 22–29, 33–35, 38–42). They further allege Defendants Frye, Daltoso, and Ewald are liable for 8 (1) breach of contract and (2) breach of fiduciary and duty of loyalty. (Id. at 29–33.) 9 B. Procedural History 10 On May 1, 2023, Plaintiffs filed a complaint against Defendants Raymond Frye, 11 Raymond Frye PLLC, and Dentist-Owned Clinics LLC. (Dkt. No. 1.) Concurrent with the 12 Complaint, Plaintiffs filed a motion for a temporary restraining order (“TRO”), seeking to 13 preclude Defendants from using allegedly confidential business files and operating competitive 14 businesses. (Dkt. No. 2.) That day, Plaintiffs also filed an arbitration demand with the American 15 Arbitration Association against Defendant Frye. (Dkt. No. 25-7.) On May 17, 2023, the parties 16 filed a stipulated motion for a preliminary injunction agreeing to the terms of the TRO motion 17 (Dkt. No. 22), which the Court entered (Dkt. No. 23), striking the prior TRO motion as moot 18 (Dkt. No. 24). 19 The Plaintiffs filed an amended complaint on May 25, 2023, adding as defendants former 20 Smiles employees Brian Daltoso and Jena Ewald, and Defendant Frye’s new venture Frye & 21 Correll PLLC. (Dkt. No. 25.) On June 16, 2023, Defendants filed a partial motion to dismiss. 22 (Dkt. No. 32.) Plaintiffs then filed the instant motion to compel arbitration and to stay 23 adjudication of claims against Defendant Frye pending completion of arbitration. (Dkt. No. 33.) [24] 1 On June 30, 2023, King County Superior Court found Defendant Frye and Plaintiffs’ 2 employment agreement contains a valid and enforceable mandatory and binding arbitration 3 agreement. (Dkt. No. 35-1 at 3.) The state court compelled Defendant Frye to arbitrate pursuant 4 to the agreement. (Id.) Plaintiffs request this Court, in accordance with the state court’s order 5 compelling arbitration, “find the same and abstain from the adjudication of the claims against 6 Frye[,]” including a “stay [of] all briefing and adjudication of Frye’s Partial Motion to Dismiss.” 7 (Dkt. No. 35 at 2.) 8 Defendant Frye “acknowledge[d] the [state court] ruling . . . that the arbitration provision 9 in the contract . . . can be enforced against Dr. Frye.” (Dkt. No. 37 at 1.) He “does not oppose 10 the relief requested in Plaintiff’s Motion to Compel Arbitration.” (Id.) 11 In response to this Court’s show cause order (Dkt. No. 39), the parties submitted briefing 12 as to whether a stay order should apply to all Defendants rather than just Defendant Frye. (Dkt. 13 Nos. 40, 41.) 14 III. DISCUSSION 15 A. Legal Standard 16 The decision whether to stay the non-arbitrable issues pending arbitration rests with the 17 sound discretion of the district court. United Communications Hub, Inc. v. Qwest 18 Communications, Inc., 46 Fed.Appx. 412, 415 (citing Moses H. Cone Mem'l Hosp. v. Mercury 19 Constr. Corp., 460 U.S. 1 , 20–21 (1983)). 20 There is a preference to “proceed[] with the non-arbitrable claims when feasible[.]” Id. 21 (citing Dean Witter v. Byrd, 470 U.S. 213, 225 (1985) (J. White, concurring) (stating that “the 22 heavy presumption should be that the arbitration and the lawsuit will each proceed in its normal 23 course”)). “Expanding the stay, so as to encompass all of the nonarbitrable claims in the case, is [24] 1 [only] appropriate where the arbitrable claims predominate, or where the outcome of the 2 nonarbitrable claims will depend upon the arbitrator's decision.” Id. (internal quotations and 3 citations omitted)). If the four corners of the complaint make clear that the non-arbitrable claims 4 “depend[] upon the same facts [as] and [are] inherently inseparable from” the remainder of the 5 arbitrable claims, a stay of all claims is appropriate. Maguire Ins. Agency, Inc. v. Amynta 6 Agency, Inc., No., 2023 WL 372381 , at *11 (W.D. Wash. Jan. 24, 2023) (quoting Ballard v. 7 Corinthian Colleges, Inc., 2006 WL 2380668 , at *2 (W.D. Wash. Aug. 16, 2006)). Conversely, 8 courts must consider whether permitting the non-arbitrable claims to go forward might “impair 9 [the] arbitrator's consideration” of the arbitrable claims. Id. (citing Ballard, 2006 WL 2380668 ). 10 The Federal Arbitration Act (“FAA”) mandates a court stay an action “where [it] is 11 brought by a signatory to an arbitration agreement against another signatory to that agreement, 12 on claims subject to that agreement.” Id. at *10 (quoting Ballard, 2006 WL 2380668 , at *2). 13 Courts generally grant stays as to non-signatory defendants, when “the plaintiff's claims against a 14 non-signatory defendant are intertwined with their arbitrable claims against another defendant.” 15 Kater v. Churchill Downs Incorporated, 2019 WL 3944323 , at *2 (W.D. Wash. Aug. 21, 2009)). 16 B. Stay of Non-arbitrable Claims 17 Defendants urge the Court to stay “all remaining claims against all other Defendants 18 pending the outcome of the arbitration of Smiles’ claims against Dr. Frye.” (Dkt. No. 41 at 2.) 19 Except for Defendant Frye, none of the other defendants are signatories to the employment 20 agreement that requires arbitration of claims for damages. (Dkt. No. 25-1 at 13.) Plaintiffs 21 contend a wholesale stay is inappropriate as it would “unduly prejudice Plaintiffs, needlessly 22 delay the swift adjudication of this matter, result in unwarranted duplicate litigation, redundant 23 discovery and potentially create inconsistent results.” (Dkt. No. 40 at 1.) Plaintiffs instead ask [24] 1 the Court “stay the proceedings with the exception of allowing Plaintiffs and non-arbitrating 2 Defendants to engage in discovery with the Court’s oversight to avoid costly redundant paper 3 discovery, repetitive deposition testimony, and inconsistent results.” (Id. at 2.) 4 Count I of the Amended Complaint requests a preliminary injunction and TRO (Dkt. No. 5 25 at 20), which the parties later stipulated to (Dkt. No. 22). 6 Counts II and III allege all Defendants are liable for trade secret misappropriation. (Dkt. 7 No. 25 at 22–29.) As noted above, the Court considers whether any non-arbitrable claims 8 depend on the arbitrator’s resolution of the arbitrable claim. U.S. for Use & Benefit of Newton v. 9 Neumann Caribbean Int’l, Ltd., 750 F.2d 1422, 1427 (9th Cir. 1985). Here, the crux of 10 Plaintiff’s case is that Defendant Frye misappropriated trade secrets to the benefit of his new, 11 competing companies. The arbitrator’s decision as to Defendant Frye will have necessary and 12 far-reaching impacts upon his co-Defendants. As head of the LLC Defendants and superior to 13 individual Defendants Daltoso and Ewald, Defendant Frye’s actions as an individual are 14 intertwined with the companies and employees he leads. Whether the non-arbitrating 15 Defendants misappropriated trade secrets depends directly on whether Defendant Frye is found 16 to have misappropriated them. Thus, Counts II and III should be stayed as to the other 17 defendants. 18 Counts V and VII allege breach of contract and breach of fiduciary and duty of loyalty as 19 to Defendants Daltoso and Ewald.1 Plaintiffs argue the Court should allow discovery to go 20 forward with the non-arbitrating Defendants because “coordination in discovery between all [22] 1 Count IV alleges breach of contract against Defendant Frye. (Dkt. No. 25 at 29.) Count VII also alleges breach of fiduciary and duty of loyalty against Defendant Frye, in addition to Defendants [23] Daltoso and Ewald. (Dkt. No. 25 at 36.) These claims against Defendant Frye are for damages and will be decided in arbitration. [24] 1 parties will streamline the proceedings and provide the added benefit of a clean record without 2 duplication and avoid inconsistent results in the pending matters.” (Dkt. No. 40 at 12–13.) The 3 Court disagrees and instead anticipates the adjudication of these claims would amount to 4 significant overlap in discovery with Defendant Frye’s pending arbitration. Allowing the non- 5 arbitrating Defendants to proceed with discovery while Defendant Frye, who is at the center of 6 the controversy, proceeds separate and apart would not be a streamlined approach. Instead, 7 Defendants Ewald and Daltoso, whose actions are invariably linked to Defendant Frye’s in 8 overlapping company documents, would have to provide duplicative discovery for the 9 intertwined claims: once in the arbitration action and again in this action. Whether information 10 used is considered “confidential” is a question the arbitrator will answer, and this Court is loathe 11 to allow conflicting decisions to apply to different defendants. Thus, Counts V and VII should 12 be stayed as to all Defendants. 13 Counts VI, VIII, IX, and X claim all Defendants are liable for tortious interference with 14 contract and business relationships, conversion, unjust enrichment, and civil conspiracy. (Dkt. 15 No. 25 at 33, 39, 39, 41.) All of these claims hinge on whether the purportedly stolen 16 information was in fact privileged and confidential. As to the LLC Defendants, the Amended 17 Complaint alleges no separate facts indicating they can or should be judged separately from 18 Defendant Frye, the head of all LLC defendants. And as to the individual Defendants, as stated 19 above, these claims depend on the arbitrator’s decision as to privilege and confidentiality of the 20 information. 21 The more efficient approach is to allow arbitration to proceed with Defendant Frye, who 22 will then be bound by the arbitrator’s decision in his actions as an individual and as leader of his 23 co-defendants. That decision will inform how this Court moves forward with the non-arbitrating [24] 1 Defendants, so as not to create conflicting results. Thus, Counts VI, VIII, IX, and X should be 2 stayed as to all Defendants. 3 C. Dismissal or Consolidation of Second Arbitration Action 4 In their responsive briefing to the show cause order, Plaintiffs requested the Court 5 dismiss a second arbitration proceeding filed by Defendant Frye, or else consolidate it with the 6 first, pending arbitration proceeding. (Dkt. No. 40 at 2.) The Court’s jurisdiction as to 7 Defendant Frye is limited to injunctive matters. (Dkt. No. 25-1 at 11.) The claims in the second 8 arbitration proceedings are for damages. (Dkt. No. 40 at 4–5.) Moreover, Plaintiffs have 9 submitted a duplicate motion for dismissal or consolidation with the arbitrator in the first 10 pending arbitration proceeding. (Dkt. No. 42 at 2.) As such, the Court declines to make a ruling 11 on the second arbitration proceeding; these rulings may come from the arbitrators themselves. 12 IV. CONCLUSION 13 Accordingly, having reviewed the Motions, the briefing of the parties, and the remainder 14 of the record, the Court hereby GRANTS both motions to stay. The Court ORDERS the 15 following: 16 1. Plaintiff Smiles Services, LLC and Defendant Raymond L. Frye are compelled2 to 17 arbitrate the claims between them. 18 2. Except for the Stipulated Preliminary Injunction Order issued on May 18, 2023 (Dkt. 19 No. 23), all matters in this litigation pertaining to the claims between Plaintiffs and all 20 Defendants are stayed pending completion of the arbitration. [22] 2 The Court does not currently make a finding that the employment agreement has a valid and enforceable arbitration agreement. Instead, the Court compels arbitration on the basis that both [23] parties acknowledge the state court’s ruling compelling arbitration, and that Defendant Frye does not oppose the motion to compel. [24] 1 3. Defendants’ Motion for Partial Dismissal Pursuant to Federal Rule of Civil Procedure 2 12(b)(6) (Dkt. No. 32), and any other pending motions, are STRICKEN but may be 3 refiled once the stay is lifted. 4 4. The parties will address dismissal or consolidation of Defendant Raymond L. Frye’s 5 second pending arbitration proceeding with their arbitrator. 6 5. The parties SHALL file a joint status report no later than 180 days from the date of 7 this order, informing the Court of the status of the arbitration between Plaintiffs and 8 Defendant Raymond L. Frye. 9 Dated this 18th day of September 2023. [10] A [11] David G. Estudillo 12 United States District Judge