Just a couple of days after Location Services announced that DigitalDog Auto Recovery was among its five acquisitions, Digital Recognition Network (DRN) said on Friday that it secured a federal court victory involving both of those recovery industry companies.

DRN, an artificial intelligence and data analytics company that provides vehicle location data and analytics to auto finance companies, insurance carriers and other commercial verticals, announced that on Oct. 5, a U.S. District Court Judge in the Northern District of Texas ruled on three key findings. Those rulings included:

—That DRN’s one-year, non-competition contract provision is valid and enforceable.
—That Bay Cities Recovery Inc., which does business as DigitalDog Auto Recovery breached its contract with DRN.
—That Location Services tortiously interfered with the contract by participating with DigitalDog Auto Recovery to breach its agreement with DRN.

“We are grateful to the court for its thorough application of the facts to the law and its thoughtful decision-making in its ruling,” said Todd Hodnett, executive chairman and founder of DRN. “Most importantly, we are pleased with the decision because it helps to reinforce the importance of contracting integrity within the auto recovery industry. 

"Contracts are more than words on paper. They create structure and build a foundation of trust between partners in the industry,” Hodnett continued. “At DRN, our word is our bond. We negotiate contracts in good faith and stand behind them. We expect no less from our partners, as well.”

In 2010, DRN said DigitalDog Auto Recovery, a California repossession agency (owned and operated at the time by Michael Eusebio) contracted with DRN to use its license plate recognition (LPR) technology to help locate vehicles subject to repossession. In March 2014, DRN indicated DigitalDog Auto Recovery signed a new contract with DRN, which (just like the 2010 contract) contained a one-year, non-competition provision and increased their share of DRN revenue. 

“Most importantly, as an inducement for DRN to enter into the agreement, DigitalDog Auto Recovery represented in the contract that the non-competition language was reasonable in duration and scope,” DRN said.

In reliance on the representations made by DigitalDog Auto Recovery, DRN said it entered into the agreement and paid Eusebio’s company more than $220,000 during the life of the contract. 

Then on April 11, DRN said DigitalDog Auto Recovery notified DRN that it was terminating the contract effective May 11 and immediately filed suit against DRN claiming that the non-competition agreement was unreasonable in both duration and scope. 

DigitalDog Auto Recovery stated its intention to work with Location Services using different LPR technology after May 11, but DRN said it learned in discovery that DigitalDog Auto Recovery and Location Services had been interacting for several months before that date. 

DRN said DigitalDog Auto Recovery and Location Services claimed that those interactions were “legitimate business negotiations,” but the court noted that “the evidence is to the contrary,” and held those interactions both prior to termination of the contract and after to be a breach of the contract between DRN and DigitalDog Auto Recovery.

In ruling that DRN’s one-year, non-competition contract provision is reasonable and that it applies to DigitalDog Auto Recovery, the court noted that DigitalDog Auto Recovery “clearly understood that it would be limited from competing for one year” and had accepted benefits from DRN under the contract. 

DRN added that the Court specifically found the one-year duration of the non-competition provision to be reasonable, and noted that the lack of a geographical limitation was not unreasonable because DRN’s business is nationwide. 

DRN also mentioned DigitalDog Auto Recovery also unsuccessfully argued that the one-year non-competition period should not be enforceable because its employees would be harmed, but the court specifically noted that claim was belied by the evidence presented to the court.    

Additionally, the court found that Location Services “willfully and intentionally interfered” with the contract between DRN and DigitalDog Auto Recovery, writing that

“Clearly third-party defendant (Location Services) was aware of the terms of the agreement” as DigitalDog Auto Recovery “insisted upon an indemnification agreement before it would proceed with communications it knew would violate the agreement.” 

Following the court’s ruling, DRN said the only issues remaining for trial, which is currently set for later this year, are the amounts of compensatory and punitive damages and attorneys’ fees to be awarded to DRN based on DigitalDog Auto Recovery’s breach and Location Services’ interference.    

Despite the court’s order, DRN pointed out that Location Services issued a press release earlier that it had gone ahead and completed an acquisition of DigitalDog Auto Recovery despite the fact that the non-competition provision in DigitalDog Auto Recovery’s contract with DRN did not expire until May 2019. 

“We are very pleased about winning this case and feel vindicated by the Court’s ruling,” said Jeremiah Wheeler, executive vice president and general manager for fintech at DRN. 

“This case is important because it tells the auto recovery industry that integrity matters and clearly demonstrates to our recovery community of providers and affiliate agents that we are a leader in this community who is dedicated to honoring our word in our agreements and promoting the highest standards of conduct as a partner,” Wheeler continued. 

“We look forward to continuing to ensure that our providers and the recovery agent affiliates who work for them have the best tools in the industry to work with in the field,” he went on to say.