The United States Court of Appeals for the Seventh Circuit recently decided a case concerning the enforceability of an arbitration clause in a trade secret dispute. In its decision, the Court affirmed the district court's ruling that denied a defendant's motion to enforce an arbitration clause in a software license agreement entered into under false pretenses by one of the defendant's employees using the name of a fake company at the request of the defendant.
The two companies involved in the lawsuit, CCC Intelligent Solutions and Tractable, are competitors that provide estimates for the cost of repairing damaged cars and trucks to their customers, including insurance companies. Both do this by applying algorithms, embedded in their software, to data generated by body shops and other repair centers. CCC is a leader in the industry.
CCC licenses its software to third parties. That license prohibits licensees from disassembling the software code or incorporating it into other software. Further the license, forbids a customer from assigning the license without CCC's consent and requires the licensee to affirmatively represent that he or she is not acting as an agent of any third party. The license includes an arbitration clause.
Tractable allegedly ordered one of its employees to license CCC's software using a false name, address and company. The employee purportedly represented himself as a small, independent appraiser operating under the business name, "JA Appraisal." After obtaining a copy of the software, the employee is alleged to have turned it over to Tractable, who disassembled the software and ultimately incorporated CCC's proprietary algorithms into its own software. CCC's customers allegedly alerted it to Tractable's improper use of its software and CCC filed a lawsuit in the district court.
Tractable moved to dismiss the complaint and compel arbitration under the terms of the software license agreement. Although the license agreement did not list Tractable as a party to the license, or even mention Tractable anywhere in the license, Tractable argued nonetheless that it was a party to the license agreement because JA Appraisal and Tractable were in fact the same entity. The district court rejected the argument and denied Tractable's motion. Tractable appealed.
On appeal, the Court determined that it could only require CCC to arbitrate the dispute if Tractable was a party to the license agreement containing the agreement to arbitrate disputes. The Court first considered whether it was publicly known that Tractable did business under the fictitious name JA Appraisal. The Court concluded that it was not possible for CCC to have determined that JA Appraisal was another name for Tractable, and Tractable's counsel admitted as much at oral arguments.
The Court characterized Tractable's arguments on appeal as attempting to shift the question from "is Tractable a party?" to the question "did Tractable use fraud to induce CCC to sign?" Tractable then answered the second question by arguing that it was for the arbitrator to decide whether there was fraud in the inducement. The Court did not take the bait. Instead, it rejected Tractable's characterization of the disputed issue and explained that the operative question was whether Tractable was a party to the license agreement. It readily determined that it was not.
The Court's full opinion is available here.
Originally published July 28, 2022
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