52 F.3d 1373 (6th Cir. 1995), 94-6271, Performance Unlimited, Inc. v. Questar Publishers, Inc.

Docket Nº:94-6271.
Citation:52 F.3d 1373
Party Name:PERFORMANCE UNLIMITED, INC., Plaintiff-Appellant, v. QUESTAR PUBLISHERS, INC., Defendant-Appellee.
Case Date:May 01, 1995
Court:United States Courts of Appeals, Court of Appeals for the Sixth Circuit
 
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Page 1373

52 F.3d 1373 (6th Cir. 1995)

PERFORMANCE UNLIMITED, INC., Plaintiff-Appellant,

v.

QUESTAR PUBLISHERS, INC., Defendant-Appellee.

No. 94-6271.

United States Court of Appeals, Sixth Circuit

May 1, 1995

Argued March 27, 1995.

Rehearing and Suggestion for Rehearing En Banc Denied Aug. 7, 1995.

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[Copyrighted Material Omitted]

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Louis A. Colombo (argued and briefed), Kathryn Young Connors (briefed), Baker & Hostetler, Cleveland, OH, H. Naill Falls, Jr., Farris, Warfield & Kanaday, Nashville, TN, for plaintiff-appellant.

Peter A. Smit (argued), Kevin A. Rynbrandt (briefed), Varnum, Riddering, Schmidt & Howlett, Grand Rapids, MI, Robert G. McDowell, Baker, Donelson, Bearman & Caldwell, Nashville, TN, for defendant-appellee.

Before: MILBURN, RYAN, and GODBOLD [*], Circuit Judges.

MILBURN, Circuit Judge.

This is a case of first impression in this circuit involving the question of whether a district court can issue a preliminary injunction under Sec. 3 of the Federal Arbitration Act, 9 U.S.C. Sec. 3 (1982), when the parties to this action have agreed that arbitration "shall be the sole and exclusive remedy for resolving any disputes between the parties arising out of or involving [the] Agreement" sued upon. Plaintiff Performance Unlimited, Inc. ("Performance") appeals the district court's order denying its motion for a preliminary injunction, filed pursuant to 28 U.S.C. Secs. 1332(a)(1), 2201, and 2202, which would have required defendant Questar Publishers, Inc. ("Questar") to pay royalties to Performance while their contract dispute was resolved in arbitration. On appeal, the issues are (1) whether the district court erred in finding that it was precluded from issuing a preliminary injunction because of the mandatory arbitration provision in the parties' licensing agreement and (2) whether the district court erred in finding that Performance did not satisfy the four factors considered in its decision to grant or deny a preliminary injunction. For the reasons that follow, we reverse and remand.

I.

A.

This is an action for breach of contract, for a declaration of the parties' contractual rights, and for a preliminary injunction arising from the nonpayment of royalties pursuant to a licensing agreement between Performance and Questar. The royalties which are at the core of the parties dispute stem from the publication of The Beginner's Bible, a compilation of children's bible stories.

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Don Wise, the president of Performance, developed the idea of publishing a series of children's bible stories, illustrated with drawings that would appeal to small children and aimed toward beginning readers. This concept was developed into a series of bible story books which were written by Karyn Henley and were sold under the name Dovetales. James R. Leininger invested in Performance in order to develop and promote the Dovetales books.

Eventually, however, Wise and Leininger agreed to separate their activities. As a result, Leininger received ownership of the copyrights and trademarks in the Dovetales product. Leininger licensed the rights to publish the Dovetales stories to Performance. In turn, Wise entered into a license agreement, a sublicense, with Questar to publish a book containing all of the original Dovetales stories along with some additional stories written by Karyn Henley, titled The Beginner's Bible. The license agreement between Performance and Questar is dated June 22, 1989, and is the subject of this action.

Pursuant to the license agreement, Questar published and began to sell The Beginner's Bible. Further, the license agreement obligated Questar to make semi-annual royalty payments to Performance based upon the sales of The Beginner's Bible. Questar regularly made the royalty payments to Performance until July of 1994. However, in a letter, dated July 28, 1994, Questar informed Performance that Performance had breached the license agreement. Furthermore, Questar refused to pay the accrued royalties to Performance, indicating in its letter that it wished to initiate a "mediation/arbitration process pursuant to paragraph 11 of the [license] agreement." J.A. 20. Instead, on July 29, 1994, Questar opened an account, the "Beginner's Bible Royalty Escrow Account," at the United States National Bank of Oregon in Sisters, Oregon, and deposited $184,484.94, the accrued royalties, into that account. J.A. 65.

The license agreement between Questar and Performance includes a provision for resolution of disputes. Paragraph 11 of the agreement provides in relevant part:

The Licensor [Performance] and the Publisher [Questar] agree that God, In His Word, forbids Christians to bring lawsuits against other Christians in secular courts of law ... and that God desires Christians to be reconciled to one another when disputes of any nature arise between them....

[I]n their resolution of any disputes that may arise under this Agreement, each party agrees that the provisions for mediation and arbitration set forth below shall be the sole and exclusive remedy for resolving any disputes between the parties arising out of or involving this Agreement.

It is further agreed that the Licensor and the Publisher hereby waive whatever right they might otherwise have to maintain a lawsuit-against the other in a secular court of law, on any disputes arising out of or involving this Agreement.

In the event of such a dispute, the Licensor and the Publisher agree to take the following steps, in the order indicated, until such a dispute is resolved:

(1) the Licensor and the Publisher shall meet together, pray together, and purpose to be reconciled....

(2) The Licensor and the Publisher shall invite other witnesses, who may have knowledge of the actual facts of the dispute or whose knowledge would be helpful in resolving the dispute, to meet together with both parties, to pray together, and to purpose to be reconciled....

(3) Both the Licensor and the Publisher shall each appoint one person as a Mediator; these two persons chosen shall then appoint a third Mediator. The three Mediators shall together determine the process of mediation, to which the Licensor and the Publisher agree to comply, and shall be free to act as Arbitrators, to whose authority the Licensor and the Publisher agree to submit. The three Mediators shall also determine to what degree the Licensor and the Publisher shall be liable for all costs related to the mediation process.

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J.A. 18. 1

B.

On August 10, 1994, Performance filed a complaint in district court, asserting a claim of breach of contract based upon Questar's refusal to pay accrued royalties due and owing to Performance pursuant to the licensing agreement between the parties and seeking a declaration of the parties' rights under the agreement. At the same time that it filed its complaint, Performance filed a motion for a preliminary injunction, seeking to enjoin Questar from refusing to pay the royalties due and owing to Performance under the license agreement and directing that Questar pay the royalties to Performance as provided in the agreement. Questar filed a brief in opposition to the motion for a preliminary injunction on August 24, 1994.

Pursuant to the agreement of the parties, the motion for a preliminary injunction was submitted to the district court based upon the documentary evidence in the record. Oral argument on the motion was held before the district court on August 25, 1994; however, the parties presented no testimonial evidence to the district court at that time.

On September 2, 1992, the district court denied Performance's motion for a preliminary injunction. Specifically, in denying Performance's motion, the district court found that it need not address the issue of whether Performance was likely to succeed on the merits of its claim that Questar breached the license agreement, "because the agreement has a mandatory arbitration provision." J.A. 26. The district court further concluded that

it should not involve itself in the merits of a dispute when the parties, in their agreement, have clearly provided that arbitration is the sole and exclusive means to remedy disputes.

. . . . .

In summary, the Court does not feel that Performance is likely to succeed on the merits given the mandatory arbitration provision in the agreement.

J.A. 27-28.

Furthermore, the district court stated that while it

realize[d] that the royalties [provided for in the licensing agreement] are necessary for the operation of Performance's business, .... because Performance has come to the Court with "unclean hands," the Court concludes it should not grant Performance's request for equitable relief even though Performance's business might suffer irreparable harm.

J.A. 28-29. This timely appeal followed. 2

II.

A.

Performance argues that the district court erred in finding that it could not issue injunctive relief because of the mandatory mediation/arbitration provision in the agreement between the parties. Performance asserts that the district court's refusal to grant injunctive relief because of the mandatory arbitration provision is contrary to the rule adopted by the majority of the United States Circuit Courts of Appeals. Performance further asserts that injunctive relief is appropriate in this case to preserve the status quo pending the arbitration of the parties' dispute, because absent injunctive relief Performance will suffer irreparable harm; namely, the collapse of its business, which will render the process of arbitration a hollow and meaningless formality.

In its opinion, the district court acknowledged that this issue was one of first impression in the Sixth Circuit. The district court further acknowledged that a number of other Circuits have held that district courts may issue injunctive relief under appropriate circumstances pending arbitration. Nevertheless, the district court rejected that approach,...

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