Injunction Carve-Out Provision Preserves Status Quo Pending Arbitration

March 8, 2011
By Lauren Moak on March 8, 2011 11:39 AM |

While we are all familiar with the use of preliminary injunctions in aid of litigation, they also have a place in alternative dispute resolution. In Chartis Warranty Guard, Inc. v. National Electronics Warranty, LLC, the Delaware Court of Chancery issued a preliminary injunction pending the outcome of contractually mandated arbitration. The inclusion of a clause allowing issuance of a preliminary injunction prior to binding arbitration is a wise move if a contract includes non-competition or confidentiality provisions, the violation of which would lead to irreparable harm.

In Chartis Warranty, the plaintiff was a joint venture formed between the defendant, National Electronics Warranty, LLC (“NEW”) and Chartis Insurance. The purpose of the joint venture was to provide retailers with consumer warranty programs. Pursuant to the contracts governing the parties’ responsibilities, NEW received a designated fee for administering the retailer warrant programs, and Chartis received all profits earned above the fee owed to NEW.

In the course of its administration, NEW gathered a variety of data relating to the consumer warranty programs. Some of this information was publicly available, and some was sensitive. Among the move sensitive information was loss ratios, profitability, and earnings curves, which would be valuable to Chartis’s competitors. In the process of reorganizing certain programs, NEW provided this sensitive information to some of plaintiff’s competitors, leading to a dispute about whether the data was subject to various confidentiality provisions contained in the contracts governing the parties’ relationship. NEW maintained that it owned the data, and was permitted to disclose it—Chartis disagreed, asserting that it maintained exclusive ownership over the relevant information.

Both parties agreed that any dispute regarding the terms of the contract were subject to binding arbitration. However, the contract also permitted the parties to seek a preliminary injunction pending arbitration. Consequently, the plaintiff filed suit seeking an injunction to protect its interests in the allegedly confidential information that it claimed the defendant was disclosing to its competitors.

Under Delaware law, a preliminary injunction is appropriate it the moving party can demonstrate (1) a reasonable probability of success on the merits; (2) that they will suffer irreparable injury if the injunction does not issue; and (3) that the balance of the equities favors issuance of an injunction. In this case the Court, applying New York law as required by the contract, found that the plaintiff was likely to succeed on its arbitration claims because the terms of the confidentiality provision, indicating that the plaintiff owned “all books and records,” was broad enough to include the disputed data. In so finding, the Court rejected NEW’s argument that, at most, the plaintiff had a non-exclusive ownership interest. In the absence of any information limiting the plaintiff’s ownership right, the Court declined to find such a limit. The Court also concluded that the disputed data might constitute trade secrets.

Regarding irreparable harm, the Court reached two conclusions. First, it determined that the harm done to the plaintiff by NEW’s previous disclosure of the disputed data could be reduced to monetary damages, and therefore was likely reparable. However, the Court noted that NEW had expressed an intent to continue disclosing the disputed data. This on-going disclosure, the Court concluded, was irreparable because continuing harm to the plaintiff’s competitive position is much more difficult to quantify. Consequently, the Court found that the plaintiff had demonstrated a likelihood of irreparable injury.

Finally the Court concluded that the balance of the equities favored the plaintiff, considering the difficulty in quantifying the damage to plaintiff, and the short-term nature of the injunctive relief, which will terminate upon completion of the arbitration proceedings.

Delaware law clearly recognizes a business’s interest in the protection of its client contacts, confidential information, and good will. Consequently, where these types of information are at issue in a contract with an arbitration provision, including a clause allowing for a preliminary injunction is a good way to protect your interests.

Chartis Warranty Guard, Inc. v. National Electronics Warranty, LLC, No. 5764-VCP (Del. Ch. Jan. 28, 2011).