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North American Deer Registry, Inc. v. DNA Solutions, Inc.

United States District Court, E.D. Texas, Sherman Division

June 2, 2017

NORTH AMERICAN DEER REGISTRY, INC.
v.
DNA SOLUTIONS, INC.

          MEMORANDUM OPINION AND ORDER

          AMOS L. MAZZANT UNITED STATES DISTRICT JUDGE

         Pending before the Court is Plaintiff North American Deer Registry, Inc.'s Application for Preliminary Injunction (Dkt. #17). After reviewing the relevant pleading, motions, and evidence received at hearing, the Court finds the motion should be granted.

         BACKGROUND

         The deer breeding industry is a potentially lucrative industry with single straws of buck semen selling for $5, 000 to $20, 000 on average, and ranging all the way up to $1 million to purchase the entire buck. Many deer are sold through auctions. Auction houses require a deer either to be registered, or if it is a fawn, to have a registration pending.

         Breeders belong to several different deer associations nationwide. Before 2007, each association had its own registry. In particular, the Texas Deer Association and North American Deer Farmers Association (the “Associations”) had their own registries. Under this system, information about a deer's lineage was often spread across several registries. If a breeder needed information about a deer from a different state or association, the breeder would have to join that registry. This increased the overhead cost of the breeder, as well as lowered the price of a deer. Deer prices suffered because lineage verification required substantial work and was of questionable reliability.

         In 2007, the Associations joined forces to create the North American Deer Registry, Inc. (“NADR”). NADR is comprised of five board members from each of the Associations plus two board members from a Mexican association. To be a member of the NADR, a breeder only needed to be a member of either the Texas Deer Association or the North American Deer Farmer's Association. This allows breeders to gain access to a larger database to confirm lineage, therefore reducing overhead costs.

         DNA Solutions, Inc. (“DNAS”) began performing DNA lineage verification in 2000 when both Associations employed DNAS. DNAS hosted a registry for each Association that performed DNA testing and confirmed lineage for the deer profiles therein. Each registry restricted DNAS's ability to compare lineages only to those deer within the respective registry.

         DNAS's service can be broken down in two steps. First, DNAS performs a DNA analysis wherein DNAS creates a genetic profile of the deer. This profile is comprised of various DNA markers known to the public. The second step uses DNAS's proprietary system to interpret DNA markers and compare them to other deer related in the first-degree. From DNAS's proprietary system, they are able to create or verify the lineage of each deer sample.

         In 2007, NADR hired DNAS to host its registry (the “Registry”). The contract required DNAS to process deer genetic information, perform matching services, and host a database for NADR's information, which would be accessible online. As part of the agreement, DNAS agreed to preserve the confidentiality of NADR's information and to return such information upon termination of DNAS's services. Also under this agreement, DNAS performed most of the client outreach for NADR and DNAS accepted samples directly at its office in Oklahoma City.

         In 2013, NADR reduced DNAS's role in their relationship. The 2013 contract eliminated DNAS's role in administration and client outreach. Under this agreement, clients sent samples to NADR in Edmond, Oklahoma, rather than to DNAS. As part of NADR's new client outreach role, clients were directed to call NADR directly with questions or concerns. NADR forwarded the question to DNAS, who answered NADR, and finally NADR would inform the client. Debra Lyon (“Lyon”) and Dr. Brandt Cassidy (“Cassidy”) testified for DNAS that the switch in 2013 caused some confusion with customers who did not understand the evolving relationship between NADR and DNAS.

         The parties further revised their agreement in 2014 (the “Contract”). The Contract terminated by its terms on January 1, 2017.

         Under the Contract, NADR retained ownership of all biological materials, genetic information, genotype analysis data, membership directory, and any other information provided by NADR. DNAS, on the other hand, retained ownership of any code it created because of running the registry. DNAS agreed to keep confidential the content of the registry or any other information it received from NADR in the performance of the Contract or in its prior dealings with NADR. DNAS further agreed that, upon termination of the Contract, it would return all information provided by NADR.

         On January 27, 2017, NADR filed a complaint, alleging unfair competition under the Lanham Act, misappropriation of trade secrets, constructive trust, unjust enrichment, and requesting injunctive relief (Dkt. #1). The same day, NADR made a demand for arbitration seeking relief for breach of contract, temporary and permanent injunctions, declaratory judgment, and attorneys' fees (Dkt. #21, Exhibit 2). On February 27, 2017, NADR filed its Application for Preliminary Injunction (Dkt. #17). On March 14, 2017, DNAS filed a response (Dkt. #21). On March 21, 2017, NADR filed a reply (Dkt. #23). On March 28, 2017, DNAS filed a sur-reply (Dkt. #26). On May 17 and 18, the Court held an evidentiary hearing on NADR's application.

         LEGAL STANDARD

         A party seeking a preliminary injunction must establish the following elements: (1) a substantial likelihood of success on the merits; (2) a substantial threat plaintiffs will suffer irreparable harm if the injunction is not granted; (3) the threatened injury outweighs any damage the injunction might cause the defendant; and (4) the injunction will not disserve the public interest. Nichols v. Alcatel USA, Inc., 532 F.3d 364, 372 (5th Cir. 2008). “A preliminary injunction is an extraordinary remedy and should only be granted if the plaintiffs have clearly carried the burden of persuasion on all four requirements.” Id. Nevertheless, a movant ‘“is not required to prove its case in full at a preliminary injunction hearing.'” Fed. Sav. & Loan Ins. Corp. v. Dixon, 835 F.2d 554, 558 (5th Cir. 1985) (quoting Univ. of Tex. v. Comenisch, 451 U.S. 390, 395 (1981)). The decision whether to grant a preliminary injunction lies within the sound discretion of the district court. Weinberger v. Romero-Barcelo, 456 U.S. 305, 320 (1982).

         ANALYSIS

         Before addressing the merits, the Court must assess its jurisdiction to grant injunctive relief. DNAS continues to argue the Court does not have jurisdiction to grant injunctive relief. DNAS argues that injunctive relief is proper for the arbitrator because: (1) the arbitration clause is broad and encompasses injunctive relief; (2) NADR requested injunctive relief in its demand for arbitration; and (3) any determination by the Court will necessarily interfere with the arbitration proceedings.

         NADR claims that the Court does have jurisdiction. NADR argues: (1) the arbitration provision is narrow and does not prefer either the Court or arbitrator to order injunctive relief; (2) the arbitrator could not even order injunctive relief; and (3) the Court may enter injunctive relief in order to preserve the status quo pending arbitration. During closing arguments of the hearing, NADR went even further to argue the Court can order injunctive relief over even the breach of contract claim, which is undisputedly in front of the arbitrator.[1]

         NADR did not request relief over its breach of contract claim in its application. Therefore, the Court will only address the claims argued in the application: Lanham Act, trade secrets, unjust enrichment, and constructive trust (the “non-contract claims”). Based on the foregoing analysis, the Court finds it has jurisdiction to order injunctive relief over the non-contract claims.

         First, the non-contract claims are properly before this Court and are not subject to arbitration. The Court has already entered an order regarding the arbitrability of NADR's claims (Dkt. #43). The Court found NADR's claims under the Lanham Act were not subject to arbitration (Dkt. #43 at p. 10). The Court denied DNAS's motion as to NADR's trade secret claims, but left open the question of whether the basis for NADR's claim was so related to the contract that it should be ultimately sent to arbitration (Dkt. #43 at p. 10).

         After a hearing, the Court finds NADR's trade secret claims are not subject to arbitration. NADR developed its trade secret deer profiles, lineages, and member list over several years predating the Contract. NADR is composed of two other associations that have been in existence for many years. The other associations had their own contracts with DNAS beginning in 2000. Since 2000, they have developed deer profiles, lineages, and member lists independently from the Contract. While the Contract will be evidence of protection of the trade secrets and NADR's entrustment of information to DNAS, it is not dispositive of the entire trade secret history. Therefore, the trade secret claims are not subject to arbitration under the narrow arbitration provision in the Contract.

         Further, the Court has jurisdiction to order injunctive relief to preserve the status quo. The Fifth Circuit recognizes the general authority of a district court to enter injunctive relief to maintain the status quo. Janvey v. Alguire, 647 F.3d 585, 595 (5th Cir. 2011). In Janvey, the Fifth Circuit recognized a circuit split over the question of whether a district court has power to enter an injunction while arbitration is pending. Id. at 592. However, the Fifth Circuit held that the circuit-split cases were not applicable because it had not yet decided whether the case was arbitrable. Id. at 594. Similar to Janvey, the circuit-split cases are not applicable to the non-contract claims because the court has determined those claims are not subject to arbitration at all.

         Without Fifth Circuit precedent on the issue, the parties cite opposing district court opinions from districts in Texas to support their positions.

         DNAS cites Grasso to argue that the Court should not enter injunctive relief because it would “necessarily would inject the court into the merits of issues more appropriately left to the arbitrator.” Grasso, 143 F.Supp.3d at 543 (quoting Merrill, Lynch, Pierce, Fenner & Smith, Inc. v. Hovey, 726 F.2d 1286, 1292 (8th Cir. 1984)). In its sur-reply, DNAS also cites East El Paso Physicians' Medical Center, LLC v. Aetna Health Inc., to argue that the Court cannot order injunctive relief when it is inextricably linked with the agreement. No. EP-16-CV-44-KC, 2017 WL 876313, at *15 (W.D. Tex. Mar. 2, 2017).

         NADR cites Amegy Bank National Association v. Monarch Flight II, LLC to argue that most circuits that have addressed this issue have held that a district court may enter injunctive relief to preserve the status quo pending arbitration. 870 F.Supp.2d 441 (S.D. Tex. 2012). In Amegy, the court entered an injunction before ruling on the motion to compel arbitration. Id. at 451. The court then decided the motion to compel arbitration and determined all claims should be tried in arbitration. Id. at 450-51. Having gone a step further than Janvey by deciding the arbitrability of disputes, the court dealt with the circuit split Janvey avoided. Id. at 451-52. In recounting the circuit split, the court recognized that only the Eighth Circuit reached the result that a district court cannot order injunctive relief when all claims are sent to arbitration. Id. at 452. The court also recognized that most district courts in the Fifth Circuit follow the majority position. Id. The court went on to hold that a court should be able to order injunctive relief pending arbitration so that the parties are not able to “continue maneuvering to the disadvantage of each other outside the arbitration model.” Id. (citation omitted).

         The Court agrees with the majority of circuits that a district court has discretion to grant injunctive relief to preserve the status quo pending arbitration. First, DNAS's cases are distinguishable simply because they involved broad arbitration clauses. Broad arbitration clauses embrace “all disputes between the parties having a significant relationship to the contract.” E. El Paso, 2017 WL 876313, at *13. Here, the arbitration clause is narrow. It only encompasses disputes that fall within the scope of the clause. Injunctive relief does not fall within the scope of the arbitration clause. The Fifth Circuit has held that when an arbitration provision is limited to “interpretation” of the contract, then the parties intend that their dispute be governed by the four corners of the agreement. United Offshore Co. v. S. Deepwater Pipeline Co., 899 F.2d 405, 410 (5th Cir. 1990). In United Offshore, the court found that the contract did not provide a means by which the arbitrator could resolve the dispute because there was not remedy within the four corners of the contract. Id. Similarly here, the Contract does not provide any means by which the arbitrator could resolve a dispute as to the non-contract claims. Therefore, the non-contract claims do not fall within the arbitration clause.

         Further, as the Amegy court recognized, Hovey and Grasso are parts of an extremely small minority. The majority of courts in the circuit split considered Hovey and refused to follow it. See, e.g., Blumenthal v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 910 F.2d 1049 (2d Cir. 1990); Ortho Pharm. Corp. v. Amgen, Inc., 882 F.2d 806 (3d Cir. 1989); Teradyne, Inc. v. Mostek Corp., 797 F.2d 43 (1st Cir. 1986); Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Bradley, 756 F.2d 1048 (4th Cir. 1985).

         Finally, the Court does not interpret Hovey to foreclose this result. Hovey held “where the Arbitration Act is applicable and no qualifying contractual language has been alleged, the district court errs in granting injunctive relief.” Hovey, 726 F.2d at 1292. Here, neither prong is satisfied. The Court found the Federal Arbitration Act (“FAA”) does not apply because the non-contract claims are not subject to arbitration. There is also qualifying language in the Contract. The parties did not agree to arbitrate injunctions. The parties agreed to arbitrate disputes concerning interpretation of the Contract. Injunctive relief does not fall within the scope of the arbitration clause. See United Offshore Co., 899 F.2d at 410.

         As the majority of circuits have found, this position is more consistent with, and necessary to enforce, the federal policy on arbitration. Amegy, 870 F.Supp.2d at 452. The First Circuit explained, “the congressional desire to enforce arbitration agreements would frequently be frustrated if the courts were precluded from issuing preliminary injunctive relief to preserve the status quo pending arbitration.” Teradyne, 797 F.2d at 51. “A district court must ensure that the parties get what they bargained for-a meaningful arbitration of the dispute.” Blumenthal, ...


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