American Express Company v. Rui

• Court: District Court, D. Arizona
• Decided: May 12, 2020
• Docket: 2:18-cv-01281
• Status: Unknown

Opinion

1 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA

9 American Express Company, No. CV-18-01281-PHX-DWL

10 Plaintiff, ORDER

11 v.

12 Xiongwen Rui and Jin Wu,

13 Defendants. 14 15 Pending before the Court is Defendants Xiongwen Rui and Jin Wu’s (collectively, 16 “Defendants”) motion for leave to file a second amended answer (“SAA”). (Doc. 53.) 17 Plaintiff American Express Company (“American Express”) opposes the motion. (Docs. 18 56, 60.) For the following reasons, the motion will be granted. 19 BACKGROUND 20 Rui is a former American Express executive who resigned in February 2017 to work 21 for Ant Financial Services Group (“Ant Financial”), a China-based financial services 22 company. (Doc. 10 ¶¶ 19-20.) In this breach-of-contract action, American Express is 23 seeking to claw back over $1 million of Rui’s pre-resignation compensation. (Id. ¶ 23.) 24 American Express’s theory is that Rui breached the “Detrimental Conduct” provision in a 25 contract (the “Agreement”) he signed in June 2004, which prohibited him from working 26 for “any Competitor” for “a one year period after [his] last day of active employment.” (Id. 27 ¶¶ 13, 17. See also Doc. 10-1 at 3-4 ¶ 2.) 28 On April 25, 2018—more than a year after Rui’s resignation—American Express 1 initiated this action by filing a complaint. (Doc. 1.) 2 On August 27, 2018, American Express filed a first amended complaint (“FAC”), 3 that added Rui’s wife, Wu, as a defendant. (Doc. 10.) 4 On November 15, 2019, Defendants filed an answer to the FAC. (Doc. 43.) 5 On December 6, 2019, Defendants filed an amended answer to the FAC. (Doc. 46.) 6 On December 18, 2019, the Court entered a Rule 16 scheduling order that 7 established January 16, 2020 as the deadline for amending the pleadings. (Doc. 52 ¶ 2.) 8 On January 16, 2020, Defendants filed the pending motion for leave to file an SAA. 9 (Doc. 53.) The proposed SAA seeks to raise various additional affirmative defenses. (Id. 10 at 9-10.) 11 On January 30, 2020, American Express filed a response. (Doc. 56.) 12 On February 6, 2020, Defendants filed a reply. (Doc. 57.) 13 On February 19, 2020, American Express filed a motion for leave to file a sur-reply 14 (Doc. 58), which the Court granted (Doc. 59). 15 On February 25, 2020, American Express filed its sur-reply. (Doc. 60.) 16 DISCUSSION 17 I. Legal Standard 18 Because Defendants’ motion for leave to amend was filed before the expiration of 19 the amendment deadline set forth in the scheduling order, it is governed by Rule 15(a)(2) 20 of the Federal Rules of Civil Procedure. “Rule 15 advises the court that ‘leave [to amend] 21 shall be freely given when justice so requires.’” Eminence Capital, LLC v. Aspeon, Inc., 22 316 F.3d 1048, 1051 (9th Cir. 2003). “This policy is ‘to be applied with extreme 23 liberality.’” Id. Nevertheless, “a district court need not grant leave to amend where the 24 amendment: (1) prejudices the opposing party; (2) is sought in bad faith; (3) produces an 25 undue delay in litigation; or (4) is futile.” AmerisourceBergen Corp. v. Dialysist W., Inc., 26 465 F.3d 946, 951 (9th Cir. 2006). Of these factors, “it is the consideration of prejudice to 27 the opposing party that carries the greatest weight.” Eminence Capital, 316 F.3d at 1052. 28 Put differently, “[p]rejudice is the touchstone of the inquiry under rule 15(a).” Id. (internal 1 quotation omitted). 2 American Express opposes Defendants’ amendment request solely on futility 3 grounds. (Doc. 56 at 15.) A proposed “amendment is futile when no set of facts can be 4 proved . . . that would constitute a valid and sufficient claim.” Missouri ex rel. Koster v. 5 Harris, 847 F.3d 646, 656 (9th Cir. 2017) (quotation omitted). When assessing futility, 6 “the court must remain guided by the underlying purpose of Rule 15 . . . to facilitate 7 decision on the merits, rather than on the pleadings or technicalities.” Lopez v. Smith, 203 8 F.3d 1122, 1127 (9th Cir. 2000) (en banc) (quotation omitted). The party opposing 9 amendment bears the burden of proving futility. Rodriguez v. City of Phoenix, 2014 WL 10 1053602, *3 (D. Ariz. 2014). 11 II. Paragraph 10 (Statute of Limitations) 12 In paragraph 10 of the proposed SAA, Defendants seek to add a statute-of- 13 limitations defense—specifically, that A.R.S § 12-541(3), which provides a one-year 14 limitation period, bars American Express’s claim. (Doc. 53 at 10.) American Express 15 argues this amendment would be futile because (1) the parties’ contract contains a choice- 16 of-law provision requiring the application of New York law, which provides for a six-year 17 statute of limitations for breach-of-contract claims, and (2) alternatively, even if Arizona 18 law applies, the statute of limitations isn’t supplied by A.R.S. § 12-541(3), which governs 19 actions for breach of an employment contract, but A.R.S. § 12-548, which governs actions 20 for breach of a contractual debt obligation (and which, like New York law, provides for a 21 six-year limitations period). (Doc. 56 at 3-9.) 22 American Express’s futility arguments are unavailing. First, although American 23 Express argues at great length why the Restatement (Second) of Conflict of Laws requires 24 the Court to follow the choice-of-law provision in the parties’ contract, which calls for the 25 application of New York law (Doc. 56 at 4-9; Doc. 60 at 1-3), this outcome would not 26 inexorably lead to the conclusion that New York’s six-year statute of limitations applies. 27 This is because the choice-of-law provision in the parties’ contract is silent as to whether 28 it encompasses the statute of limitations. (Doc. 10-1 at 8 ¶ 7 [“This Agreement shall be 1 governed by and construed and enforced in accordance with the laws of the State of New 2 York without reference to principles of conflicts of laws.”].) Such silence might be 3 irrelevant under the laws of some states. Cf. Maricopa County v. Office Depot Inc., 2020 4 WL 134862, *10 (D. Ariz. 2020) (concluding that general California choice-of-law 5 provision required application of California’s statute of limitations because “the rule in 6 California is that ‘a standard choice-of-law provision (which states that a contract shall be 7 governed by the ‘laws’ of a particular jurisdiction) incorporates the statutes of limitations 8 of the chosen state’”) (citation omitted). However, “New York law . . . does not consider 9 the election of New York law to include an election of New York’s statutes of limitations 10 unless the parties explicitly indicate such a choice.” Myers Indus., Inc. v. Schoeller Arca 11 Sys., Inc., 171 F. Supp. 3d 107, 115 (S.D.N.Y. 2016). See also Mortgage Resolution 12 Servicing, LLC v. JPMorgan Chase Bank, N.A., 2019 WL 4735387, *6 (S.D.N.Y. 2019) 13 (“[T]he election of New York law in the [contract] does not include an election of New 14 York’s statutes of limitations unless the parties explicitly indicate such a choice.”) 15 (citations and internal quotation marks omitted); 2138747 Ontario, Inc. v. Samsung C & T 16 Corp., 103 N.E.3d 774, 777 (N.Y. 2018) (“Contractual choice of law provisions typically 17 apply to only substantive issues . . . and statutes of limitations are considered procedural 18 because they are deemed as pertaining to the remedy rather than the right.”) (citations, 19 brackets, and internal quotation marks omitted). Thus, American Express has not met its 20 burden of establishing that Defendants’ proposed statute-of-limitations defense is futile due 21 to the choice-of-law provision within the Agreement.1 22 Second, American Express also has not shown that, to the extent Arizona law 23 provides the statute of limitations, the six-year limitation period prescribed by A.R.S. § 12- 24 548 would necessarily apply. Rui’s position is that the applicable Arizona statute is A.R.S. 25 § 12-541(3), which provides that an action for “breach of an oral or written employment

26 1 To be clear, this ruling does not foreclose American Express from raising other statute-of-limitations arguments during future stages of this case. The Court’s holding is a 27 narrow one—because American Express’s motion was predicated on the assumption that the New York choice-of-law provision in the Agreement necessarily incorporates New 28 York’s statutes of limitations, and that assumption is inaccurate, American Express has not met its burden under Rule 15(a)(2) of proving futility. 1 contract” “shall be commenced . . . within one year after the cause of action accrues.” 2 A.R.S. § 12-541(3). Although the term “employment contract” is not defined by § 12- 3 541(3), the Arizona Court of Appeals has instructed courts to give that term its ordinary 4 meaning—a “contract between an employer and employee in which the terms and 5 conditions of employment are stated.” Redhair v. Kinerk, Beal, Schmidt, Dyer & Sethi, 6 P.C., 183 P.3d 544, 546 (Ariz. Ct. App. 2008) (citation omitted). This encompasses “all 7 contracts defining specific responsibilities of the employer to the employee,” meaning any 8 agreement related to “the nature, conditions, or duration” of employment. Id. at 548-49. 9 American Express contends that A.R.S. § 12-541(3) is inapplicable here because it 10 only governs claims brought by an employee against an employer, but not vice versa. (Doc. 11 56 at 4.) This argument lacks merit. Although it is true that most of the cases construing 12 § 12-541(3) happened to involve claims asserted by employees, the plain language of the 13 statute doesn’t support the one-sided interpretation proposed by American Express—it 14 applies to any “actions” for “breach of an oral or written employment contract,” 15 irrespective of the identity of the plaintiff. 16 Alternatively, American Express contends that, even if there is some “question” or 17 “doubt” as to the applicability of A.R.S. § 12-541(3), the six-year limitation period 18 prescribed by A.R.S. § 12-548 will ultimately be deemed applicable because Arizona 19 courts follow a “general” rule of applying the statute with the longer limitation period when 20 faced with such a conflict. (Doc. 56 at 4.) The difficulty with this argument is that it is not 21 apparent why this lawsuit should be categorized as a debt-collection action instead of a 22 breach-of-employment-contract action. Although the Agreement does authorize American 23 Express to recover certain incentives it paid to Rui, the existence of this “debt” is contingent 24 upon a showing that Rui breached the responsibilities he owed to American Express under 25 the Agreement. American Express has not identified any case holding that A.R.S. § 12- 26 548, rather than A.R.S. § 12-541(3), applies in this scenario. Accordingly, American 27 Express has not met its burden of showing that Defendants’ affirmative defense based on 28 1 A.R.S. § 12-541(3) is futile.2 2 III. Paragraph 5 (Lack of Consideration And Statute Of Frauds) 3 As noted, American Express accuses Rui of breaching a provision within the 4 Agreement that prohibited him from working for “any Competitor” for one year. (Doc. 5 10-1 at 3 ¶ 2(a) [“For a one year period after your last day of active employment . . . you 6 shall not be employed by, provide advice or act as a consultant for any Competitor.”].) 7 Included as an attachment to the Agreement was a “Competitor List” that identified, by 8 name, various companies at which future employment was forbidden. (Id. [“The Company 9 has defined Competitor . . . by name as set forth in the attached Competitor List.”].) 10 Notably, the Agreement also granted American Express the unilateral right to modify the 11 “Competitor List” in the future. (Id. [“The Company can revise the Competitor List at its 12 discretion at any time and from time to time and as revised will become part of this 13 Agreement; a copy of the current Competitor List will be available through the Corporate 14 Secretary’s Office.”].) 15 In the current version of the answer, Defendants assert that Ant Financial wasn’t 16 identified on the Competitor List at the time Rui signed the Agreement and that American 17 Express subsequently added Ant Financial to the list without Rui’s knowledge. (Doc. 46 18 at 4-5 ¶¶ 3-5.) Based on these allegations, the current version of the answer asserts, inter 19 alia, that the presence of the unilateral-modification clause rendered the Agreement an 20 “unenforceable, illusory contract,” that “there was no . . . meeting of the minds, as required 21 for an enforceable contract,” and that American Express’s decision to subsequently add 22 Ant Financial to the Competitor List violated the covenant of good faith and fair dealing. 23 (Id.) 24 In paragraph 5 of the proposed SAA, Defendants seek to assert two additional 25 reasons why the addition of Ant Financial to the Competitor List was invalid: (1) “[t]here 26 was no consideration to support American Express’ purported unilateral amendment to the 27 2 Once again, this limited ruling does not foreclose American Express from further 28 developing and presenting arguments concerning A.R.S. § 12-548 during future stages of this case. 1 [Agreement] by adding Ant Financial to the Competitor List”; and (2) “[s]uch a unilateral 2 amendment, unsigned by Rui, would also violate the statute of frauds as the obligations 3 under the [Agreement] cannot be completed within a year.” (Doc. 53 at 9 ¶ 5.) American 4 Express opposes this request, arguing that both theories are futile. (Doc. 56 at 9-12.) 5 A. Lack Of Consideration 6 American Express first contends that, because Rui expressly agreed in the 7 Agreement that it could revise the Competitor List, its subsequent addition of Ant Financial 8 to the list didn’t constitute a contract modification and didn’t require any additional 9 consideration. (Doc. 56 at 10.) Defendants do not meaningfully address this argument in 10 their response—their conclusory assertion that “there was no . . . consideration to support 11 modifying a material term of the alleged agreement” (Doc. 57 at 8) begs the question of 12 whether this was, in fact, a contract modification. Additionally, Defendants’ reliance on 13 May v. Wilcox, 182 A.D.2d 939 (N.Y. App. 1992), is misplaced because the contract in 14 that case did not include a clause expressly granting one party the right to make future 15 revisions. 16 Although American Express’s argument has some force, it has not cited any Arizona 17 or New York cases holding that consideration isn’t required in this scenario. Given Rule 18 15(a)(2)’s liberal policy in favor of amendment, coupled with the fact that the current 19 version of Defendants’ answer already identifies several reasons why American Express’s 20 addition of Ant Financial to the Competitor List should be deemed legally invalid (meaning 21 the proposed amendment would simply add another legal theory in support of an existing 22 defense), the Court concludes that American Express hasn’t met its burden of proving 23 futility as to its argument that the addition of Ant Financial wasn’t a modification. 24 American Express next argues that, even if the addition of Ant Financial to the 25 Competitor List could be considered a contract modification, the modification was 26 supported by adequate consideration because “Rui received consideration not only at the 27 time of signing, but also through the rest of his employment, in the form of substantial 28 compensation.” (Doc. 56 at 10.) However, American Express again does not cite any 1 Arizona or New York cases holding that such consideration would be adequate to support 2 a contract modification and the Court’s limited research suggests that, at least under 3 Arizona law, it may be insufficient. Demasse v. ITT Corp., 984 P.2d 1138, 1145 (Ariz. 4 1999) (“Separate consideration, beyond continued employment, is necessary to effect a 5 modification.”). American Express may, at a future stage of this case, be able to present 6 additional argument and citations supporting its position, but on this record it has not 7 established futility based on the adequacy of the consideration it allegedly provided for the 8 modification. 9 American Express’s final argument is that, because New York courts routinely 10 uphold “broader forward-looking” non-compete agreements that don’t specifically identify 11 a list of covered competitors, “American Express’s more narrow (and specific) Competitor 12 List, which was readily available to Rui to view at any time,” must be enforceable, too. 13 (Doc. 56 at 11.) This argument fails to establish futility for Rule 15(a)(2) purposes because 14 it conflates the ultimate issue of enforceability with the narrow defense raised by 15 Defendants’ proposed amendment—whether there was sufficient consideration to support 16 a contract modification. 17 B. Statute Of Frauds 18 American Express only touches upon Defendants’ proposed statute-of-frauds 19 defense in passing—it contends that “neither the New York nor Arizona statute of frauds 20 applies for the simple reason that the parties’ contract was in writing.” (Doc. 56 at 10.) 21 Additionally, in a footnote, it contends that “[t]he statute of frauds is also inapplicable 22 because the Agreement could have been performed within a year.” (Id. at 10 n.6.) 23 These arguments fail to establish futility. “Under Arizona law, contracts which are 24 not to be performed within one year from the making of the contract must be in writing.” 25 Western Chance No. 2, Inc. v. KFC Corp., 957 F.2d 1538, 1541 (9th Cir. 1992). 26 Additionally, the writing must be “signed by the party to be charged.” A.R.S. § 44-101. 27 New York law similarly provides that agreements “not to be performed within one year 28 from the making thereof” must “be in writing, and subscribed by the party to be charged 1 therewith.” N.Y. Gen. Oblig. Law § 5-701(a)(1). 2 Here, the Agreement restricts the companies for which Rui may work for “a one 3 year period after [his] last day of active employment.” (Doc. 10-1 at 3.) This is not, as 4 American Express suggests, an obligation Rui could have fulfilled in less than a year—had 5 Rui started working for a Competitor on the 364th day after his resignation, he would have 6 been in violation. Accordingly, the statute of frauds is potentially applicable. Best v. 7 Edwards, 176 P.3d 695, 698 (Ariz. Ct. App. 2008) (“[T]he modification of a material term 8 of an agreement, which was required by the statute of frauds to be in writing, must also be 9 in writing.”). 10 IV. Paragraph 6 (Arbitrariness, No Meeting Of The Minds, And Lack Of Damages) 11 The final paragraph of the SAA in which Defendants seek to add new affirmative 12 defenses is paragraph 6, which states: “On information and belief, American Express did 13 not include Ant Financial in other, more recent versions of the Competitor List. American 14 Express’ removal of Ant Financial from other versions of the Competitor List confirms 15 that American Express’ inclusion of Ant Financial on the Competitor List was arbitrary, 16 there was no meeting of the minds between the parties, and American Express has not been 17 damaged by Rui’s alleged violations of the Clawback Agreement.” (Doc. 53 at 9.) 18 American Express does not, in its response, parse the three different theories (i.e., 19 ambiguity, no meeting of minds, no damages) that appear in paragraph 6 or attempt to 20 explain why each is individually futile. (Doc. 56 at 11-12.) Instead, American Express 21 broadly dismisses as “irrelevant” whether it has now removed Ant Financial from the 22 Competitor List—in its view, all that matters is that Ant Financial was on the list when Rui 23 started working there. (Id.) Further complicating matters, Defendants do not focus on 24 paragraph 6 at all in their reply. 25 This is an unsatisfying record on which to make any judgments about the futility of 26 paragraph 6. Ultimately, American Express bears the burden of proving futility, and on 27 this record it has not met that burden as to paragraph 6. Defendants’ claims about 28 ambiguity, no meeting of the minds, and a lack of damages may very well end up proving unmeritorious, but they will not be stricken at the pleading stage.? 2\| V. Paragraph 8 (Waiver, Estoppel, And Laches) 3 In the final portion of its response, American Express argues that Defendants should 4|| be precluded from asserting the affirmative defenses of waiver, estoppel, and laches, which 5 || appear in paragraph 8 of the SAA. (Doc. 56 at 12-15.) This argument fails for the simple reason that Defendants are not seeking leave to add these defenses for the first time—they || already appear in the current version of the answer. (Doc. 46 at 5 ¥ 6.) 8 Accordingly, IT IS ORDERED that Defendants’ motion for leave to file a second || amended answer (Doc. 53) is granted. Defendants must, within 14 days of this Order, file || and serve the SAA. 11 Dated this 12th day of May, 2020. 12 fT-L 4 "Dominic W. Lanza 15 United States District Judge 16 17 18 19 20 21 22 23 24 25 26 27 3 Also, Defendants’ no-meeting-of-the-minds allegation is not new—it also appears in the current version of the answer. (Doc. 46 at 5 § 4.) Thus, it would remain part of the 28 || case even if the motion to amend were denied.

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