Arbitration clause prevents court from enjoining employee’s violations of employment contract
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Friday, May 25, 2018

Arbitration clause prevents court from enjoining employee’s violations of employment contract

By Robert Margolis, J.D.

A clause requiring arbitration of “any controversy … giving rise to a claim … relating to this agreement” precluded a federal district court in Virginia from issuing a preliminary injunction against a former employee who joined a competitor after allegedly improperly accessing and using his former employer’s confidential information. Because the employer acknowledged that after three months of the employee working for the competitor, it had not lost any employees or customers as a result of his alleged misconduct, the court concluded that an arbitral award of money damages would be adequate to make it whole (Hawk Advisors Inc. v. Gillenwater, May 18, 2018, Urbanski, M.).

After the employee joined an insurance company as an insurance agent, he signed a “producer agreement” that prohibited him from disclosing the insurer’s confidential or trade secret information, and required him to return all the insurer’s business records when his employment ended. The agreement also barred him from soliciting the insurer’s customers or employees for three years after the end of his employment. Finally, the agreement included a provision requiring that “[a]ny controversy, claim, or breach [sic] giving rise to a claim for liquidation [sic] or monetary damages arising out of or relating to this Agreement shall be submitted for settlement to an arbitrator …”

The owners of the insurance company subsequently formed a new entity, which took over the book of insurance business that the employee developed and made the employee an officer and vice president. He signed a nondisclosure and confidentiality provision in the new entity’s employment handbook.

On January 16 and 17, 2018, the employee secretly met with a competitor of his employer. The night before he left for those meetings, he compiled information about his employer’s finances and customers. He also spoke with other employees of the employer about selling his book of business to the competitor and working there. Shortly thereafter, the employee was fired. He then went to work for the competitor as a vice president. His (now) former employer suspects that he is soliciting its customers in violation of his employment agreement and that he retains administrative authority and credentials to a Facebook page and Cloud system with information about the employer’s clients.

The employer sued the employee for trade secret misappropriation, breach of contract, conversion, violation of the Computer Fraud and Abuse Act, breach of fiduciary duty and the duty of loyalty, violation of the Virginia Business Conspiracy Act, tortious interference, and punitive damages. It moved for a preliminary injunction prohibiting him from, among other things, soliciting its clients and employees, or using its confidential and proprietary information for any purpose.

At a hearing on the injunction motion, the court asked whether the employment agreement’s arbitration provision prevented it from acting on the injunction motion. After that, the employee moved to compel arbitration and stay the proceedings pending arbitration, pursuant to the Federal Arbitration Act. The employer opposed the motion.

Arbitration mandatory. The employer argued that the arbitration clause permitted it to choose between suing in court or arbitration, citing the heading to the clause, which reads “Arbitration/ Litigation,” and a phrase within the clause referring to “either legal action or arbitration.” The court rejected the argument. It pointed to language in the clause providing that disputes “shall be submitted for settlement to an arbitrator ….” The use of “shall” means “mandatory,” the court held, citing precedent within the Fourth Circuit.

The court analogized with cases involving agreements with both arbitration clauses and forum selection clauses. Based on how courts have treated those cases, the court held that it could reconcile the reference to both arbitration and litigation by finding that legal action may be available for non-arbitrable disputes, or when a party must file in court to compel arbitration or enforce an arbitration award. Otherwise, and under the circumstances here, arbitration is mandatory.

Arbitration for injunctive relief. The court next rejected the employer’s argument that the arbitration clause by its terms applies to claims for “for liquidation [sic] or monetary damages,” not to claims for injunctive relief. The arbitration clause includes claims “giving rise to” liquidated or monetary damages, and that language “conceivably includes more than monetary relief,” the court held. Noting that any doubts should be resolved in favor of arbitration, the court held that this “broad” language brought the clause within that presumption for arbitration.

Claims related to agreement. The employer also argued that its claims did not arise out of the employment agreement, but the court found otherwise. Under Fourth Circuit law, clauses requiring arbitration of all disputes “arising out of or relating to” an agreement included every dispute with a “significant relationship” to the contract. The employer’s claims meet this standard, the court held, as they relate to the allegations of improper access to, use of, and misappropriation of confidential information, subjects that the agreement covers.

“Hollow formality rule.” The court also rejected the employer’s argument that an exception to mandatory arbitration, the “hollow formality rule” applied. Under that rule, a court may preliminarily enjoin violations of the employment agreement to maintain the status quo pending arbitration if it finds that the enjoined conduct, if allowed to continue, would render the arbitration process a “hollow formality.” That rule applies, under Fourth Circuit law, where “the arbitral award when rendered could not return the parties substantially to the status quo ante.” Merrill Lynch, Pierce, Fenner & Smith v. Bradley, Inc.

The court held that this rule does not apply because the employer did not show that recovering damages in arbitration would be insufficient to return the parties to the status quo ante. Similarly, the employer did not show that recovering money damages would not make it whole. The court highlighted that the employer admitted at the preliminary injunction hearing that after three months of the employee working for its competitor, it had not lost any employees or customers as a result of his alleged misconduct.

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