TRACER RESEARCH v. NAT. ENVIRON. SERVICES CO

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Docket Number

No. 94-16211.

Attorney(S)

Patrick J. Flinn and Kenneth A. Kuwayti, Morrison Foerster, Palo Alto, CA, for plaintiff-appellant. Philip R. Higdon and Lane D. Oden, Brown Bain, Tucson, AZ, for defendants-appellees.

Judges

Joseph Jerome Farris

Acts

Judiciary And Judicial Procedure — Courts Of Appeals — Jurisdiction And Venue — Interlocutory Decisions
Arbitration — General Provisions — Appeals
Arbitration — General Provisions — Validity, Irrevocability, And Enforcement Of Agreements To Arbitrate

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Smart Summary

Factual and Procedural Background

Tracer Research Corporation developed a chemical tracer process for detecting leaks from storage tanks and pipelines into surrounding soil. Tracer licensed this process to National Environmental Services Company (NESCO) in 1990, accompanied by a confidentiality and nondisclosure agreement. The licensing agreement was terminated in late 1992. Tracer alleged that defendants continued to use its trade secrets and confidential information after termination. Defendants countered that they used an alternative leak detection method called Search and denied that Tracer's method contained protectable trade secrets.

Tracer sued for trademark infringement, false designation of origin, misappropriation of trade secrets, breach of contract, unfair competition, wrongful interference with prospective business relations, and violation of Arizona's racketeering statute. Tracer obtained a preliminary injunction preventing the defendants from pursuing their business using chemical tracers. Defendants moved to compel arbitration pursuant to the licensing agreement. The district court granted the injunction but referred the entire case to arbitration over Tracer's objection.

After arbitration, the panel permanently enjoined defendants from using the "Tracer Tight" mark and found NESCO breached the licensing agreement by using information gained from Tracer to develop the Search method. The arbitrators dismissed Tracer's other claims, including the trade secrets claim. The district court then dissolved the preliminary injunction relying solely on the arbitrators' findings. Tracer appeals that dissolution.

Legal Issues Presented

Whether the district court had jurisdiction to review the order compelling arbitration and dissolving the preliminary injunction.
Whether the arbitration clause in the licensing agreement encompassed the misappropriation of trade secrets claim.
Whether the district court properly dissolved the preliminary injunction based solely on the arbitrators' findings.

Arguments of the Parties

Appellant's Arguments

Tracer argued that the misappropriation of trade secrets claim was not subject to arbitration because it was a tort claim independent of the licensing agreement's interpretation or performance.
Tracer contended that the district court erred by dissolving the preliminary injunction solely on the arbitration panel’s findings without independently assessing the requirements for injunctive relief.

Defendants' Arguments

Defendants argued that after termination of the licensing agreement, they used an alternative leak detection method, Search, which did not infringe on Tracer's trade secrets.
They claimed that no aspect of Tracer’s disclosed method constituted a protectable trade secret.
Defendants relied on case law interpreting arbitration clauses with broader "arising out of or relating to" language to argue that all claims touching the contract were arbitrable.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Miller ex rel. NLRB v. California Pacific Medical Ctr., 19 F.3d 449 (9th Cir. 1994)	Standard of review for district court's dissolution of preliminary injunction: abuse of discretion or erroneous legal standard.	The court applied this standard to review the district court’s order dissolving the injunction.
Leicht v. Bateman Eichler, Hill Richards, Inc., 848 F.2d 130 (9th Cir. 1988)	Review standard for order compelling arbitration is de novo.	The court reviewed the referral to arbitration de novo as challenged by Tracer.
Phoceene Sous-Marine, S.A. v. U.S. Phosmarine, Inc., 682 F.2d 802 (9th Cir. 1982)	Jurisdiction under 28 U.S.C. § 1292(a) extends to all matters inextricably bound with an injunction order.	Supported the court’s jurisdiction to review the arbitration order tied to the injunction dissolution.
Fentron Industries v. National Shopmen Pension Fund, 674 F.2d 1300 (9th Cir. 1982)	Jurisdiction extends to all issues underlying the injunction order.	Reinforced jurisdictional basis for appellate review.
Burlington N.R.R. v. Department of Revenue, 934 F.2d 1064 (9th Cir. 1991)	Order referring case to arbitration is inextricably bound with injunction order.	Supported appellate jurisdiction over arbitration order linked to injunction.
9 U.S.C. § 2 (Federal Arbitration Act)	Arbitration clause is governed by federal law and applies to contracts evidencing transactions involving commerce.	Confirmed the arbitration clause’s applicability and scope governed federally.
Mediterranean Enterprises, Inc. v. Ssangyong Corp., 708 F.2d 1458 (9th Cir. 1983)	Interpretation of arbitration clauses limiting scope to disputes arising under the contract’s interpretation and performance.	Held that "arising out of" language is narrowly construed, excluding tort claims not requiring contract interpretation.
United Steelworkers v. Warrior Gulf Navigation Co., 363 U.S. 574 (1960)	Arbitration is a matter of contract; parties cannot be compelled to arbitrate disputes not agreed upon.	Supported limiting arbitration to claims within the parties’ agreement.
Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1 (1983)	Federal Arbitration Act requires piecemeal resolution to give effect to arbitration agreements.	Emphasized that arbitration scope cannot be expanded beyond agreement.
Strick Corp. v. Cravens Homalloy (Sheffield) Ltd., 352 F. Supp. 844 (E.D. Pa. 1972)	Misappropriation of trade secrets claims do not relate to interpretation or performance of contract.	District court case cited to support non-arbitrability of trade secrets claim.
Armada Coal Export, Inc. v. Interbulk, Ltd., 726 F.2d 1566 (11th Cir. 1984)	Tort claims arising "but for" a contract are independent and not necessarily arbitrable.	Supported that trade secret misappropriation is an independent tort claim outside arbitration scope.
Genesco Inc. v. T. Kakiuchi Co., 815 F.2d 840 (2d Cir. 1987)	Arbitration clauses with "arising out of or relating to" language interpreted broadly.	Defendants’ cited authority, distinguished due to narrower clause here.
Rhone-Poulenc Specialities Chimiques v. SCM Corp., 769 F.2d 1569 (Fed. Cir. 1985)	Broad interpretation of arbitration clauses containing "arising out of or relating to" language.	Defendants’ cited authority, distinguished for same reasons.
McMahon v. RMS Electronics, Inc., 618 F. Supp. 189 (S.D.N.Y. 1985)	Claims requiring contract interpretation are arbitrable; those not requiring it are not.	Supported Tracer’s position that trade secrets claim is non-arbitrable tort claim.
United States v. One 1978 Piper Cherokee Aircraft, 37 F.3d 489 (9th Cir. 1994)	District court may consider alternative grounds for relief on remand.	Instructed that district court should consider other bases for dissolving injunction on remand.

Court's Reasoning and Analysis

The court first confirmed its jurisdiction to review the district court’s order dissolving the preliminary injunction because the order compelling arbitration was inextricably bound with the injunction. It then analyzed the scope of the arbitration clause, governed by federal law under the Federal Arbitration Act, which requires arbitration only of disputes the parties agreed to submit.

The arbitration clause covered controversies "arising out of" the agreement, which the court interpreted narrowly based on precedent. The court distinguished claims "arising out of" the contract from those "relating to" it, noting the absence of broader "relating to" language in the arbitration clause. The misappropriation of trade secrets claim was characterized as a tort claim independent of contract interpretation or performance and thus outside the scope of arbitration.

The court rejected defendants' reliance on broader arbitration clause cases and distinguished the case law they cited. It held that the district court erred in dissolving the preliminary injunction solely on the arbitrators' findings without independently reviewing the injunction requirements. The court instructed that on remand, the district court should reconsider whether any other grounds exist to dissolve the injunction.

Holding and Implications

The court REVERSED the district court's order dissolving the preliminary injunction and REMANDED for further proceedings consistent with its opinion.

The direct effect is that the preliminary injunction should remain in place unless the district court identifies an independent basis for dissolving it. The court’s decision clarifies that misappropriation of trade secrets claims, as tort claims, are not subject to arbitration absent explicit agreement, emphasizing the limited scope of arbitration clauses containing only "arising out of" language. No new precedent beyond the application of existing arbitration and trade secrets law was established.

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TRACER RESEARCH CORP., PLAINTIFF-APPELLANT, v. NATIONAL ENVIRONMENTAL SERVICES COMPANY, DOING BUSINESS AS NESCO; LAB ONE ANALYTICAL, INC.; EDDY PATERSON; ALBERT McCUTCHAN, DEFENDANTS-APPELLEES.

FARRIS, Circuit Judge:

Tracer Research Corporation, appeals the district court's order dissolving a preliminary injunction that had prevented National Environmental Service Company, Lab One Analytical, Eddy Paterson and Albert McCutchan from pursuing their business in tank and pipeline leak detection using chemical tracers. We have jurisdiction to review the district court's order dissolving the preliminary injunction under 28 U.S.C. § 1292(a)(1) and reverse.

BACKGROUND

Tracer Research developed and uses a chemical tracer process that can detect leaks from storage tanks and pipelines into surrounding soil. Tracer markets this process through licensing agreements, like the one it entered into with NESCO in 1990. In addition, NESCO signed a confidentiality and nondisclosure agreement. In late 1992 the parties terminated their licensing agreement. According to Tracer, the defendants nonetheless continued to use trade secrets and confidential information obtained from Tracer under the terms of the parties' licensing agreement. The defendants contend that (1) after NESCO terminated the licensing agreement, they continued in business with an alternative leak detection method (known as Search), and (2) no aspect of Tracer's disclosed method was a protectable trade secret.

Tracer sued, seeking damages and injunctive relief for (1) trademark infringement, (2) false designation of origin, (3) misappropriation of trade secrets (4) breach of contract (5) unfair competition, (6) wrongful interference with prospective business relations, and (7) violation of Arizona's racketeering statute. Tracer then moved for a preliminary injunction, and the defendants, pursuant to a clause in the licensing agreement, moved to compel arbitration. The district court (1) granted the motion for a preliminary injunction, concluding that Tracer was likely to succeed on its Lanham Act and trade secrets claims, and (2) over Tracer's objection, referred the entire case to arbitration.

After conducting a hearing, the arbitrators permanently enjoined the defendants from using plaintiff's mark "Tracer Tight" and found that NESCO had breached its licensing agreement with Tracer by using information gained from Tracer in developing the Search leak detection process. The arbitrators dismissed all of Tracer's other claims, including the trade secrets claim.

The defendants then moved in the district court to dissolve the preliminary injunction. Relying solely on the findings of the arbitration panel, the district court dissolved the injunction. Tracer appeals.

STANDARD OF REVIEW

We will reverse an order dissolving a preliminary injunction "only where the district court abused its discretion or based its decision on an erroneous legal standard or on clearly erroneous findings of fact." See Miller ex rel, NLRB v. California Pacific Medical Ctr., 19 F.3d 449, 455 (9th Cir. 1994) (en banc). Issues of law underlying the district court's order are reviewed de novo. Id. The district court grounded its decision solely on the findings of the arbitration panel. Tracer challenges the referral to arbitration, a decision that we review do novo. Leicht v. Bateman Eichler, Hill Richards, Inc., 848 F.2d 130, 131 (9th Cir. 1988).

DISCUSSION I. Jurisdiction to Review the Order Compelling Arbitration

An order compelling arbitration is interlocutory and not ordinarily appealable. See 9 U.S.C. § 16(b). However, § 1292(a) jurisdiction extends to all matters inextricably bound up with an injunction order. Phoceene Sous-Marine, S.A. v. U.S. Phosmarine, Inc., 682 F.2d 802, 805 (9th Cir. 1982); see also Fentron Industries v. National Shopmen Pension Fund, 674 F.2d 1300, 1304 (9th Cir. 1982) (jurisdiction extends "to all the issues that underlie the order"). The district court relied solely on the arbitrators' findings in dissolving the injunction; the order referring the case to arbitration is therefore "inextricably bound up with the injunction" order. See Burlington N.R.R. v. Department of Revenue, 934 F.2d 1064, 1071 (9th Cir. 1991).

II. Propriety of Compelling Arbitration A. Applicable Law

The parties acknowledge that the arbitration clause is part of a contract "evidencing a transaction involving commerce" under the Federal Arbitration Act. See 9 U.S.C. § 2. Although the contract provides that Arizona law will govern the contract's construction, the scope of the arbitration clause is governed by federal law. Mediterranean Enterprises, Inc. v. Ssangyong Corp., 708 F.2d 1458, 1463 (9th Cir. 1983).

B. Arbitrability of the Trade Secrets Claim

Notwithstanding the federal policy favoring it, "arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." United Steelworkers v. Warrior Gulf Navigation Co., 363 U.S. 574, 582, 80 S.Ct. 1347, 1353, 4 L.Ed.2d 1409 (1960). We cannot expand the parties' agreement to arbitrate to achieve greater efficiency. The Federal Arbitration Act " requires piecemeal resolution when necessary to give effect to an arbitration agreement." Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 20, 103 S.Ct. 927, 939, 74 L.Ed.2d 765 (1983) (emphasis in original).

The arbitration clause in the parties' terminated licensing agreement provides that "[i]n the event any controversy or claim arising out of this Agreement cannot be settled by the parties, such controversy or claim shall be settled by arbitration."

Our decision in Mediterranean Enterprises, Inc. v. Ssangyong Corp., 708 F.2d 1458 (9th Cir. 1983) narrowly circumscribes the interpretation to be given this clause. In Mediterranean Enterprises we found an arbitration clause that covered disputes "arising under" an agreement, but omitted reference to claims "relating to" an agreement, covered only those disputes "relating to the interpretation and performance of the contract itself." Id. at 1464. The "arising out of" language is of the same limited scope as the "arising under" language in Mediterranean Enterprises. See id. (quoting In re Kinoshita Co., 287 F.2d 951, 953 (2d Cir. 1961)); see also Texaco, Inc. v. American Trading Transp. Co., 644 F.2d 1152, 1154 (5th Cir. 1981) (noting "restrictive language" of "arising out of" arbitration clause); Britton v. Coop Banking Group, 4 F.3d 742, 749 (9th Cir. 1993) (Brunetti, J., dissenting) (discussing significance of narrow arising "under" or "out of" arbitration clauses).

The arbitration panel concluded that NESCO voluntarily terminated the licensing agreement at approximately the same time that the defendants began marketing the Search method of leak detection. The defendants contend not that this licensing agreement gave them the right to continue using Tracer's trade secrets, but rather that Tracer does not have any protectable trade secrets in the Tracer Tight process. Faced with a similar cause of action and arbitration clause, at least one district court has agreed with Tracer's contention that a misappropriation of trade secrets claim does not relate to interpretation or performance of the contract. See Strick Corp. v. Cravens Homalloy (Sheffield) Ltd., 352 F. Supp. 844, 848 (E.D.Pa. 1972). We agree.

The misappropriation of trade secrets count of Tracer's complaint is a tort claim. See Uniform Trade Secrets Act, Ariz.Rev. Stat.Ann. §§ 44-401 to -407. The fact that the tort claim would not have arisen "but for" the parties' licensing agreement is not determinative. See Armada Coal Export, Inc. v. Interbulk, Ltd., 726 F.2d 1566, 1568 (11th Cir. 1984). If proven, defendants' continuing use of Tracer's trade secrets would constitute an independent wrong from any breach of the licensing and nondisclosure agreements. See Ariz.Rev.Stat.Ann. § 44-407 (statutory tort remedy does not effect contractual remedies, whether or not based on misappropriation of trade secrets). Therefore, it does not require interpretation of the contract and is not arbitrable under Mediterranean Enterprises. On remand, that claim should be tried in the district court.

The defendants rely primarily on cases interpreting arbitration clauses using "arising out of or relating to" language to argue that all claims touching matters covered by the parties' agreement are arbitrable. See Genesco Inc. v. T. Kakiuchi Co., 815 F.2d 840, 845 (2d Cir. 1987); Rhone-Poulenc Specialities Chimiques v. SCM Corp., 769 F.2d 1569, 1571 (Fed. Cir. 1985). The defendants' reliance on these cases is misplaced. The omission of the "relating to" language is "significant." Mediterranean Enterprises, 708 F.2d at 1464.

Defendants also rely on McMahon v. RMS Electronics, Inc., 618 F. Supp. 189 (S.D.N.Y. 1985). McMahon, however, is consistent with Tracer's position. In McMahon, the court found that two of plaintiff's three defamation claims concerning his termination were arbitrable because they "necessarily turn[ed] on whether he was terminated with or without cause, an issue which involve[d] an interpretation of the contractual relationship between the parties." 618 F. Supp. at 192 (emphasis added). In contrast, the plaintiff's third defamation claim, based on a statement that he was the company drunk, did not require reference to the underlying employment contract and was not arbitrable. Id.

III. Propriety of Dissolving the Preliminary Injunction

The district court grounded its decision to dissolve the preliminary injunction on the findings of the arbitration panel. It did not independently revisit any of the requirements for injunctive relief. Because the district court's reliance on the arbitrators was misplaced, on remand, it should first consider whether there is any other basis for dissolving the injunction. See United States v. One 1978 Piper Cherokee Aircraft, 37 F.3d 489 (9th Cir. 1994) (reversing and remanding to allow district court to consider in the first instance possible alternative ground to support summary judgment). If not, it should leave the injunction in place.

REVERSED and REMANDED.