Court Opinion

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Date Created: 2015-10-13 23:22:02.350985+00
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Opinions of the United
2009 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit

1-15-2009

ACE Amer Ins Co v. Wachovia Ins Agency
Precedential or Non-Precedential: Non-Precedential

Docket No. 08-4236

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                                                          NOT PRECEDENTIAL

                    UNITED STATES COURT OF APPEALS
                         FOR THE THIRD CIRCUIT
                              _____________

                                  No. 08-4236
                                 _____________

   ACE AMERICAN INSURANCE COMPANY; ILLINOIS UNION INSURANCE
    COMPANY; WESTCHESTER SURPLUS LINES INSURANCE COMPANY;
             WESTCHESTER FIRE INSURANCE COMPANY,
                                           Appellants

                                         v.

      WACHOVIA INSURANCE AGENCY INC., D/B/A E-RISK SERVICES;
                SCOTTSDALE INSURANCE COMPANY,

                                 _____________

                  On Appeal from the United States District Court
                          for the District of New Jersey
                             (D.C. No. 08-cv-04369)

                     District Judge: Honorable Jose L. Linares
                                  ____________

                   Submitted Under Third Circuit L.A.R. 34.1(a)
                              on January 8, 2009
                                ____________

            Before: FUENTES, FISHER and ALDISERT, Circuit Judges
                          (Filed: January 15, 2009)

                           OPINION OF THE COURT

ALDISERT, Circuit Judge.
       Appellants ACE American Insurance Company, Illinois Union Insurance

Company, Westchester Surplus Lines Insurance Company and Westchester Fire

Insurances Company (collectively “ACE”) appeal from an October 17, 2008, Order of the

United States District Court for the District of New Jersey granting in part and denying in

part ACE’s motion for a preliminary injunction against appellees Wachovia Insurance

Company d/b/a “E-Risk Services” (“WIA”) and Scottsdale Insurance Company

(“Scottsdale”). We are satisfied that the District Court did not exceed the bounds of its

discretion in (1) refusing to enjoin WIA from consummating a sale of E-Risk assets to

Newco because ACE failed to prove irreparable harm, and (2) refusing to order

Scottsdale to return previously disclosed information, because ACE did not prove a

substantial likelihood of success on the merits. We will therefore affirm the District

Court’s order.

                                             I.

       Because we write solely for the parties, because the briefing is rather elaborate and

governing legal precepts rather clear, and because the parties are extremely conversant

with the facts and the proceedings in the District Court, we will truncate our discussion.

       On January 20, 2002, ACE entered into an exclusive agency agreement with E-

Risk Services, an independent agency, whereby ACE became the sole insurer for the

Exclusive Program Business. Shortly thereafter, Wachovia Corporation purchased E-Risk

Services, which became part of a direct subsidiary of Wachovia, known as WIA. WIA

                                             2
succeeded to E-Risk Services’ rights and obligations under the agency agreement.

       On January 1, 2006, ACE and WIA entered into an amended and restated agency

agreement for the E-Risk Program. This contract, by its own terms, was to continue in

force at least until December 31, 2010. The terms of this agency agreement provided that

WIA could not enter into an agency agreement for E-Risk business with an entity other

than ACE during the term of the agreement. It also provided that, while WIA had

exclusive right to its own renewal business, both companies would compete in the market

for new business. The terms of this new agreement also created a conflict between the

interests of ACE and WIA. Specifically, under the new agreement, WIA was to receive

no share of the underwriting profits, but instead earn a strict 30% commission on net

premiums. ACE’s interest, therefore, was to increase profitability, and WIA’s interest was

to maintain and increase premium volume. As such, their business relationship began to

deteriorate.

       In 2007, ACE announced that it was consolidating some of its insurance programs

under the name “Diversified Risk” or “D-Risk.” Some of the insurance products offered

by ACE’s D-Risk competed with WIA’s E-Risk. Although competing for new business

was permitted by the agency agreement, ACE used its leverage as E-Risk’s exclusive

carrier to decrease E-Risk’s market share by refusing to make coverage enhancements

available to WIA that ACE offered through D-Risk. Faced with this changing business

environment for the agency agreement, WIA contacted Scottsdale in late 2007 to

                                            3
investigate the possibility of changing carriers for the E-Risk program. In conducting

negotiations with Scottsdale, WIA provided Scottsdale with information concerning paid

claims and information concerning large losses. Although conducting such due diligence

is standard industry practice when considering changing carriers, this information was not

publicly available in this aggregated format.

       In early 2008, WIA became interested in selling the E-Risk business assets. In

May of 2008, ACE offered to purchase E-Risk from WIA. WIA declined the offer. At

approximately the same time, the E-Risk management group at WIA expressed interest in

acquiring the assets of E-Risk themselves, and made an offer through a new corporate

entity created for that purpose – Newco. WIA provisionally accepted the offer by Newco

to purchase substantially all the E-Risk assets from WIA. The transaction, however, did

not include an assignment of the agency agreement to Newco. As Newco, an independent

business entity, was not a party to the agency agreement between WIA and ACE, it was

not bound by its exclusivity provision. Newco planned to use Scottsdale as the issuing

insurer for E-Risk after the asset sale was complete. As such, the asset sale would have

the effect of removing ACE as E-Risk’s exclusive insurer.

       During this period of preparation, WIA and Scottsdale worked together on a

proposed agency agreement, mandatory filings with state insurance departments and

marketing and technology issues. On August 14, 2008, Wachovia advised ACE that it had

entered into a Letter of Intent to sell WIA’s assets, not including the exclusive agency

                                                4
agreement or ACE’s proprietary materials, to the management-led group – Newco.

Wachovia also advised ACE that the current executive management would no longer be

employed by WIA following the proposed transaction. Although WIA planned to sell

most of its E-Risk assets to Newco, WIA intended to satisfy its contractual obligations to

ACE by servicing and writing renewal business and by not placing business with any

other carrier for the duration of the amended agency agreement.

       ACE filed its complaint and Motion for a temporary restraining order and a

preliminary injunction in the District Court on September 2, 2008. ACE requested

injunctive relief against WIA pending arbitration, alleging that WIA breached the agency

agreement, violated its fiduciary duty to ACE and disclosed trade secrets to Scottsdale.

ACE requested injunctive relief against Scottsdale based on theories of tortious

interference with contract, misappropriation of trade secrets and false advertising. The

District Court denied ACE’s request to enjoin WIA’s sale of assets to Newco pending

arbitration, but did enjoin WIA from making any additional disclosures of confidential

and proprietary information to Scottsdale. The District Court also denied ACE’s request

to mandatorily enjoin Scottsdale by ordering it to return all confidential and proprietary

information received from WIA during the due diligence process.

       We are to decide whether the District Court exceeded the permissible bounds of its

discretion by denying ACE’s motion to enjoin WIA from consummating the sale of E-

Risk assets to Newco, and whether the District Court similarly exceeded its discretion by

                                             5
denying ACE’s motion to enjoin Scottsdale, ordering them to return previously received

confidential information.1

                                               II.

       A preliminary injunction is an extraordinary remedy that should be granted only if

a party shows: (1) a substantial likelihood of success on the merits; (2) that it will suffer

irreparable harm if the injunction is denied; (3) that granting preliminary relief will not

result in even greater harm to the nonmoving party; and (4) that the public interest favors

such relief. Kos Pharms. Inc. v. Andrx Corp., 369 F.3d 700, 708 (3d Cir. 2004). A party’s

failure to establish any element in its favor renders a preliminary injunction inappropriate.

Nutrasweet Co. v. Vit-Mar Enters., Inc., 176 F.3d 151, 153 (3d Cir. 1999). We are

satisfied that the District Court correctly held that ACE failed to demonstrate all the

appropriate preliminary injunction factors.

       ACE asserts that it is entitled to a preliminary injunction preventing WIA from

selling substantially all of its E-Risk assets to Newco during the pendency of their

arbitration based on breaches of the agency agreement and violations of fiduciary duty.

Specifically, ACE asserts that WIA breached the agency agreement by assisting

Scottsdale in conducting the E-Risk business; disclosing confidential documents,

confidential information and trade secrets to Scottsdale; preventing ACE from accessing

       1
         The District Court had jurisdiction under 28 U.S.C. § 1332. This Court has jurisdiction
pursuant to 28 U.S.C. § 1292(a)(1). We review a denial of a preliminary injunction for an “abuse
of discretion, a clear error of law, or a clear mistake on the facts.” Allegheny Energy, Inc. v.
DQE, Inc., 171 F.3d 153, 158 (3d Cir. 1999).

                                               6
required information on policies; and arranging to transfer the E-Risk business and

associated confidential data and trade secrets to a new entity. ACE alleges that these

actions also violated WIA’s fiduciary duty.

       The District Court held that ACE demonstrated the requisite “reasonable

probability” of success on the merits sufficient to support injunctive relief with respect to

the breach of the confidentiality portions of the agency agreement but not to the

exclusivity portions. The District Court also found a “reasonable probability” of success

with respect to breach of fiduciary duty for disclosing to Scottsdale certain aggregated

financial information. The District Court, however, held that regardless of its reasonable

probability for success on the merits, ACE was not entitled to relief because it did not

prove irreparable harm absent an injunction, and the other factors did not decisively fall

in its favor. We agree.

       In order to demonstrate irreparable harm, ACE must demonstrate potential harm

which cannot be redressed by a legal or an equitable remedy following a trial. Instant Air

Freight Co. v. C.F. Air Freight, Inc., 882 F.2d 797, 801 (3d Cir. 1989). In other words, a

preliminary injunction must be the only way of protecting the plaintiff from harm and

may not be granted to relieve purely economic harm. Id.; Frank’s GMC Truck Ctr., Inc. v.

Gen. Motors Corp., 847 F.2d 100, 102 (3d Cir. 1988). “Grounds for irreparable injury

include loss of control of reputation, loss of trade, and loss of good will.” Kos Pharms.,

369 F.3d at 726 (quoting Pappan Enters., Inc. v. Hardee’s Food Sys., Inc., 143 F.3d 800,

                                              7
805 (3d Cir. 1998)).

       ACE asserts that the proposed asset sale will irreparably harm it by causing a loss

of its goodwill and reputation as a result of losing its status as the exclusive underwriter

of the E-Risk business. Although in certain situations a loss of goodwill may be

irreparable, that is not the case here. ACE and WIA have been doing business together

under an agency agreement since 2002. Where there exists a lengthy history of company

relations, loss of goodwill and reputation in the industry can be ascertained. See Instant

Air Freight Co., 882 F.2d at 798-802 (holding that money damages for breach of contract,

including loss of goodwill, would be provable because of lengthy relationship of the two

companies and previous performance under the contract). Here, the parties have been

operating under an exclusive agency agreement since 2002. Given this history, any loss in

business, market share or goodwill should be reducible to a monetary figure.

       Nor does the balance of the hardships or public policy fall in ACE’s favor. First,

the agency agreement specifically provides for a possible asset sale, and specifies that

such a sale will be a terminating event for the agreement. Second, if WIA is enjoined

from selling the E-Risk assets pending the arbitration, this will restrain the asset sale

transaction for weeks, if not months, while ACE uses its leverage as E-Risk’s exclusive

carrier to decrease E-Risk’s market share. This will result in a reduction of the possible

purchase price, and may deny WIA the opportunity to complete the sale altogether. As

such, the balance of the hardships and public policy do not favor ACE.

                                               8
       A failure to demonstrate irreparable injury must necessarily result in the denial of a

preliminary injunction. Instant Air Freight, 882 F.2d at 800 (quoting In re Arthur

Treacher’s Franchisee Litig., 689 F.2d 1137, 1143 (3d Cir. 1982)). Accordingly, the

District Court did not exceed the bounds of its discretion in refusing to enjoin WIA’s sale

of the E-Risk assets to Newco.

                                              III.

       ACE also asserts that it is entitled to an injunction ordering Scottsdale to return all

information that WIA provided to it in violation of the agency agreement, based on trade

secret misappropriation, tortious interference with contract and false advertising. ACE

argues that the District Court erroneously believed that it lacked the authority to order the

return and non-use of confidential information and trade secrets.

       ACE’s arguments are unavailing. The District Court held that ACE did not meet its

burden in demonstrating a likelihood of success on the merits and did not reach the

remainder of the factors for preliminary injunctive relief. First, ACE does not challenge

the District Court’s findings that it failed to establish a likelihood of success on the merits

of any of its three claims for relief against Scottsdale. Nevertheless, even if ACE could

prove substantial likelihood of success on the merits, we are satisfied that future

irreparable harm would not occur absent an injunction because the information provided

to Scottsdale has already been used for its intended purpose and Scottsdale is

contractually forbidden from using that information for any other purpose or from

                                               9
disclosing that information to any other party. Although disclosure of confidential

information or trade secrets may constitute irreparable harm, the loss of the secret or

confidential information must not have already occurred: once a secret is revealed, there

is nothing for an injunction to protect. Campbell Soup Co. v. ConAgra, Inc., 977 F.2d 86,

92 (3d Cir. 1992). Although Campbell Soup concerned the disclosure of trade secrets in a

publicly-filed patent application, rather than as here, where the trade secrets have not

been publicly disseminated, Scottsdale has already used the information for its desired

purpose, to make the business decision based upon that information. Now that the

information has been used, and Scottsdale is contractually forbidden from further using or

disclosing the information, there is nothing to enjoin.

       Because ACE failed to show that it had a substantial likelihood of success on the

merits and that it would suffer irreparable harm, the District Court did not exceed the

bounds of its discretion in refusing to order Scottsdale to return the information received

from WIA.

                                          ******

       We have considered all contentions raised by the parties and conclude that no

further discussion is necessary.

       The judgment of the District Court will be affirmed.

                                             10