Unintended Consequences of Arbitration Provisions
A recent unpublished decision of the United States District Court, Eastern District of Pennsylvania, highlights the importance for employers to review carefully their agreements containing restrictive covenants to ensure they do not unintentionally limit the available avenues for relief.
In Healthcare Servs. Grp., Inc. v. Fay, 2015 BL 33694 (Oct. 14, 2015), Healthcare sued two former employees (and their new employer) for violation of their non-compete agreements, misappropriation of trade secrets, and tortious interference. The District Court granted Healthcare’s motion for a preliminary injunction in May 2013. The two former employees appealed, and the Third Circuit affirmed in February 2015, sending the matter back to the District Court for further proceedings. The case remained in the District Court without further action until a telephone conference with the court in July 2015. In August 2015, the two former employees moved to compel arbitration of Healthcare’s claims pursuant to the arbitration provision of the employment agreement at issue. The arbitration provision stated in relevant part:
Any dispute that in any way relates to the Plan or this Stock Option Agreement … shall be submitted to mandatory and binding arbitration … The decision of the arbitrator shall be final and binding on both parties … Notwithstanding the foregoing, the Company may seek temporary and/or preliminary injunctive relief against Employee … in an appropriate state or federal court with jurisdiction over the matter before initiating arbitration.
Healthcare opposed the employees’ motion to compel arbitration. Healthcare did not argue the arbitration provision was invalid; after all, it had drafted the agreement in the first instance. Rather, Healthcare argued that it would be prejudiced by arbitration now, more than two years after it commenced the action in the District Court.
The court granted the motion to compel arbitration, reasoning that the provision was valid, and Healthcare suffered no prejudice. Although more than two years had elapsed since the commencement of the action, nothing substantive had occurred in the matter beyond the preliminary injunction application and appeal. The court further reasoned that arbitration could not have commenced anyway until after the appeal was ruled upon, which process concluded in February 2015. The Court also noted that Healthcare allowed the matter to lay dormant from that point until August 2015.
It is not unusual to see an arbitration clause in an employment agreement which permits the employer to seek a temporary restraining order or preliminary injunction in court. In certain situations, there may be legitimate business reasons why an employer would want proceedings in a non-compete matter, beyond the initial preliminary injunction application, decided by an arbitrator. For example, the employer may prefer the confidentiality associated with arbitration as well as potentially more limited discovery and lower litigation costs. However, there often are equally or more compelling reasons to keep restrictive covenant proceedings in court, before a judge. For example, broader discovery may be needed to effectively prosecute the case. In addition, the need for exigent relief often is better addressed by emergent applications to a judge than the likely slower process of arbitration.
Here, even if Healthcare had been denied preliminary injunction relief, it may have preferred to keep the matter before a judge to be able to renew the application on a fuller discovery record. With the preliminary injunction granted, Healthcare likely preferred to have the same judge from whom it received a favorable ruling determine an application for a permanent injunction. Despite Healthcare’s desire to keep the matter in the district court (for these or perhaps other reasons), it was hamstrung by the language of its own agreement, which did not exclude restrictive covenant matters in their entirety from arbitration.
For these reasons, employers should review their agreements containing restrictive covenants to make sure the language concerning arbitration of claims is consistent with their needs.