The Ninth Circuit has issued a recent reminder of the care which must be taken in drafting arbitration clauses in technology (and other) agreements. The parties had made the agreement that: "in the event any controversy or claim arising out of this Agreement cannot be settled by the parties, such controversy or claim shall be settle by arbitration." However, this recitation failed to achieve its purpose and the parties ended up in a lawsuit. If the agreement recited instead: "controversy or claim arising out of or relating to this Agreement," the court would have had to order arbitration.
The Case
The case is Tracer Research Corp. v. National Environmental Services, reported at 33 USPQ2d 1221 (9th Cir. 1994), and has an interesting procedural background. The agreement involved a license from Tracer to National for use of Tracer's technology for tank pipeline leak detection using chemical tracers. After the agreement was terminated, National continued to provide leak detection. Tracer then filed a lawsuit, making multiple claims of trademark infringement, misappropriation of trade secrets, wrongful interference with business relations and violation of Arizona's racketeering laws, etc., and also moved for preliminary injunction. On the basis of the finding that Tracer was likely to succeed on its trade secret claim, the district court granted the preliminary injunction as to that claim. It then referred the entire case to arbitration, over Tracer's objection. The arbitration panel ultimately entered a permanent injunction but only as to Tracer's trademark claims, while dismissing all other claims, including the trade secret claims.
On National's subsequent motion, the district court then vacated the preliminary (trade secret) injunction, relying on the arbitration findings which had dismissed those claims. Tracer appealed that order as well as the entire order of reference of the dispute to arbitration. On Tracer's appeal, the Ninth Circuit reversed, holding that the district court's original order that the dispute was subject to arbitration was improper. Although orders compelling arbitration are not ordinarily appealable, 28 U.S.C. § 16(b), here the reference to arbitration was "inextricably bound up with the injunction" and was therefore appealable under 28 U.S.C. § 1292(a).
The Rationale
The reasoning of the Ninth Circuit was that despite the public policy favoring arbitration a party cannot be forced into arbitration if it has not specifically agreed to do so. While the continuing use of Tracer's trade secrets by National after termination may have "related to" the agreement, that use did not "arise out of" the agreement. Prior decisions from the Second, Third, Fifth, Eleventh and Federal circuits are cited in support of the reasoning that there is a "significant" difference between the phrases "relating to" and "arising out of" in the arbitration clause. Even though the basis for the tort claim of trade secret misappropriation resided in the relationship which arose from the licensing agreement, Tracer was able to prevent reference of this post-termination dispute to arbitration because of the absence from the arbitration clause of the required words: "relating to."
The case was remanded to the district court for the purpose of determining whether there was any other basis for dissolving the original preliminary injunction.