Enforcing Non-Compete Agreements in Arbitration in Texas

non-compete-agreement-lawyer-philadelphia

When it comes to enforcing non-compete agreements, companies usually want to stop the bleeding right away.  This is usually done by obtaining a temporary injunction in court, which preserves the status quo and prevents the departed employee from competing with the former employer while the parties sort out whether the agreement is enforceable against that employee, whether its restraints are reasonable, and what damage has been caused by the employee’s competition in violation of the non-compete agreement.

For those companies that have arbitration agreements with their employees, a noncompete violation will usually have to be arbitrated.  And while an arbitration may generally provide a faster, cheaper, and more confidential route for resolving a noncompete dispute than litigation, it can be an inferior process when it comes to obtaining a temporary injunction in a situation where time is of the essence.

While the relevant arbitration rules usually allow an arbitrator to grant a temporary injunction or enter some sort of preliminary relief, a company that wishes to obtain such relief must first select an arbitrator and then schedule a hearing.  These steps can result in a loss of precious time – days or weeks during which the departed employee has the time to ramp up the competition, destroy relevant evidence and cover his tracks.  In contrast, the same company may obtain a temporary restraining order in court the same day it files a suit to enforce the non-compete agreement.

For that reason, every arbitration agreement should have a carve out for injunctive relief – the clause that allows a company to obtain a temporary restraining order as soon as it learns of a violation of the non-compete agreement.  Once the company has the court order in hand, it may safely proceed with an arbitration and take its time to investigate the violation and lay out its case. 

In deciding whether to arbitrate a non-compete dispute, seek a temporary restraining order from a court, or both, companies should consider the following  issues:

  1. Does the company arbitration agreement have the necessary language to allow the company to obtain a temporary relief in court?
  2. Will the company be waiving the arbitration clause by obtaining emergency relief in court? Hint: A recent case from the Houston Court of Appeals held that seeking injunctive relief in court does not waive an arbitration clause if its purpose is to simply preserve the status quo.  See Fisher v. Carlile, et al.
  3. Should the company file a claim of arbitration first and then seek an injunction in court or vice versa?

Leiza litigates non-compete and trade secrets lawsuits in a variety of industries in federal and state courts. If you are a party to a dispute involving a noncompete agreement or misappropriation of trade secrets, contact Leiza at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108. 

Negotiating Employment Agreements or the Real Reason Jennifer Lawrence Got Paid Less Than Bradley Cooper

jennifer lawrenceSomebody recently went through Sony’s hacked e-mails and found some that show Jennifer Lawrence and Amy Adams were paid less than the male leads in American Hustle. This prompted Jennifer Lawrence to write an essay titled “Why Do I make Less Than My Male Co-Starts?”

She blamed her lower pay partially on Hollywood being sexist and partially on her not wanting to appear “difficult” and feeling silly about negotiating regarding millions she didn’t really need.  As you can imagine, the essay sparked a whole lot of indignation about the “wage gap” and the sexism in the workplace when it comes to salaries, not just in Hollywood, but everywhere.

However, many of these responses focused on gender issues and failed to address Jennifer’s glaring violation of the cardinal rule of employment negotiations – IF YOU DO NOT ASK FOR IT, YOU WILL NOT GET IT.  This is not a gender specific rule, by the way. Some believe that men are better at asking or demanding to be paid according to their worth than women, but I personally do not think that’s true. In my experience, it’s more of a personality or experience issue than a gender-related trait.  If your personality is like Jennifer Lawrence’s (by her own admission) and does not allow you to ask, find a person who will ask and negotiate for you, i.e. a lawyer or an agent.

I see too often executives (men and women) not asking for what they want in an employment agreement, not asking about what the terms in their employment agreements mean, assuming that their employment terms are not negotiable, or giving up on negotiations too early in the process.  As in any negotiation process, knowledge is power.  So, here is a list of terms that are often negotiable in the executive employment agreements and that you should at least discuss with your employer and your attorney before signing an employment agreement:

1. Severanceis the employer going to provide severance and, if so, how much? Is death or disability a severance trigger? What will happen to medical benefit continuation, prorated bonus, equity vesting acceleration, extension of the option exercise period, or other benefits if the employment is terminated?

2. Term of employment – most executive employment agreements will specify a term of employment, which is, of course, an exception to the at-will approach taken with respect to non-executive employees.  If it is an at-will contract, ask for a specific term. Often, an employer will specify that the company may terminate the executive “for cause.”  What constitutes “cause” is purely up to the parties.

3. Restrictive Covenants – what restrictions will be imposed on the executive after he leaves the company? For how long? The length, geographic scope, term of restrictions and other parameters can be negotiated to strike a balance between protecting the company and allowing the executive to earn a living after he moves on.

4. Cause does the “termination for cause” clause define what the “cause” is? Does it allow for a cure period, i.e. a period during which the executive can address the company’s concerns before being terminated “for cause”? Is the company’s board involved in the termination process and what are the steps in that process that the company and the employee will have to follow?

5. Good Reason – a “good reason” separation provision allows an executive to resign for certain pre-approved reasons, such as demotion, relocation and other events that would materially change the terms of employment.  What constitutes a “good reason” is negotiable.

6. Equity will the executive receive equity in the company as part of the compensation? How much? When does it vest? What happens with it if the employee is terminated for cause v. employee leaves for a “good reason.”  Are there additional restrictive covenants tied to the equity award?

7. Arbitration – if a dispute about the employment agreement arises, where will it be brought?  If in court, will an executive want to give up his/her rights to a jury trial? If in arbitration, what arbitration body will decide the dispute and what rules will govern it? Who will pay for costs?

8. Assignment – what happens to the executive’s rights and obligations under the employment agreement if the company is sold or bought? Can the company assign the employment agreement to the new entity? Will it need the executive’s permission to do so?

9. 409A When possible, severance, other payments and the employment agreement generally should be structured so as not to trigger coverage under Section 409A of the Internal Revenue Code. If the agreement is subject to Section 409A, it should be written to comply with.  Failure to do so can expose the executive, among other things, to a 20 percent additional tax.

10. Other Provisions  –  there are many other employment provisions that an executive can negotiate.  A little bit of planning and persistence in the negotiations at the front end of employment will pay ten-fold at the end of that relationship.

Leiza Dolghih represents both companies and employees in litigation and arbitration proceedings in state and federal courts.  If you are facing an actual or a potential employment dispute, contact Ms. Dolghih for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.

Where CEO Drinks and Sleeps with Employees, A Company Is Not Required to Allow Him to “Cure” His Behavior Before Termination

MadMencocktailsIn Duncan v. Woodlawn Manufacturing, Ltd.the company fired the CEO after he became intoxicated at a work dinner charged to a company credit card and asked a subordinate employee to kiss him. The CEO sued the company for breaching his employment agreement, which required a company to provide him with a 30-day written notice of a specific action so that he could cure, i.e. fix it, before terminating him.

During the litigation, the following facts came to light about the CEO:

  • He had a drinking problem, which his mother, who also worked for the company, helped him cover up;
  • He had sexual relations with multiple female company employees;
  • He hired a prostitute on a company business trip when he was a CEO;
  • He entertained company clients at a strip club;

At trial, the CEO argued that because the company did not provide him with a 30-day “notice and cure” period specified in the employment agreement, it could not terminate such agreement. In his defense, he also argued that his conduct occurred away from the workplace and was not precluded by his contract or company policy (i.e. no morals clause or fraternization policy), and it did not impair his work performance. In fact, the plant’s sales increased from 17 million to 22 million during his tenure as the CEO.

The Court of Appeals rejected Duncan’s arguments after finding that the evidence showed that giving Duncan a 30-day period to cure his behavior would have been futile, “and the law does not require the performance of a futile act.”  With respect to his alcohol problem, he had been counseled for it prior to his termination without success, and by his own admission, he did not recognize that he had a problem with alcohol until three months after his termination when he finally came to the conclusion that he was an alcoholic.  Thus, the Court of Appeals concluded that “[a] jury might have believed that a letter from the company would not have resulted in an earlier solution of this problem, i.e., would have been futile.

Similarly, with respect to Duncan’s sexual escapades with employees, even if he could have ended them upon the receipt of a written demand from his employer to do so, he could not cure the effect of the rampant rumors around the plant, undo the perception of the favoritism garnered by those who had sexual relations with him, or eliminate the possibility of a sexual harassment claim from the employee whom he had attempted to kiss at a company dinner. Furthermore, the company’s owners believed that his efforts to hide these issues from them “completely” broke their trust in him  and there was nothing he could do to cure his lack of integrity or breach of such trust.

Thus, the Court of Appeals concluded that Duncan’s employer did not breach the employment agreement by failing to give Duncan notice prior to his termination.

TAKEWAY: Many executive employment agreements have a detailed description of what constitutes a termination “for cause” and what notice and cure period an executive must be provided before he can be terminated.  Such provisions are often negotiated by both parties to the agreement, ensuring that should an executive fail to meet his or her performance goals, he or she is allowed a certain time period to improve the performance before being terminated.  Having a clear definition of “good cause,” any “notice and cure” steps the company must follow before termination an employees, and an unambiguous statement of exceptions to such provisions is key to avoiding an expensive wrongful termination lawsuit and bad publicity.

The Duncan v. Woodlawn Manufacturing, Ltd. opinion highlights a simple proposition that a breach of employer’s trust by a high-level executive who owes fiduciary duties to the company, simply cannot be cured.  The determination of whether a particular act by an executive rises to the level of an incurable breach of trust depends on the facts of each particular case. Thus, a company considering termination of an employee “for cause,” or an employee who is facing or has been terminated “for cause,” should consult with an employment attorney to determine the best course of action.

Leiza Dolghih represents both companies and employees in litigation and arbitration proceedings in state and federal courts.  If you are facing an actual or a potential employment dispute, contact Ms. Dolghih for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.

Arbitration Policies and Employment Agreements – A Tricky Area

imagesMany business owners have been advised by their attorneys at some point in time to include an arbitration clause in their employment agreements or employee handbooks to make sure that any employment disputes are resolved by an arbitrator and not in a court of law.  After all, many attorneys subscribe to the school of thought that arbitration is cheaper and faster than litigation.

Any employers that follow that advice and want to include an arbitration clause, should follow a few simple rules to make sure that the arbitration clause is actually enforceable:

1.  The arbitration clause must be simple and clear.  For example, in Texas Health Resources and Texas Health Presbyterian Hospital Dallas d/b/a Presbyterian Hospital Dallas v. Kruse, an employee of the hospital was able to avoid arbitration by claiming that she did not know that she was required to arbitrate her employment disputes because the employee handbook “encouraged” employees to use an alternative dispute resolution process, but did not state that it was mandatory.

2.  When employment agreements are revised, make sure the arbitration clause remains in effect and covers the necessary areas.  Where a new and an old employment agreement contain different terms, and an old version has an arbitration clause, but the new version does not, the arbitration clause may still apply to those disputes that arise out of the terms contained in the old agreement, if such terms are not addressed in the new one. This is why it is always a good idea to keep all versions of the employment agreements on file and have an attorney review the new version to make sure that the scope of the arbitration policy is clear.

3. Include a “Halliburton Savings Clause” in an employment handbook.  An employment handbook that contains an arbitration policy should state that it can be changed at any time by the employer only after notice is provided to employees. If an employer can change the rules without giving an employee advance notice, then the agreement between the employer and its employees is illusory and will not be enforced by courts.  The arbitration policy should also make clear that the arbitration process or policy will not be changed once an employee has suffered an employment-related injury or initiated an adverse-employment claims.

If you are interested in having your handbook reviewed and/or revised or you are involved in an employment dispute that involves an arbitration clause and need assistance, please contact Leiza Dolghih at Leiza.Dolghih@GodwinLewis.com  or (214) 939-4458.

Two More Texas Courts of Appeals Find An Arbitration Waiver In Light of Litigation Conduct

Last November, the Dallas Court of Appeals upheld a trial court’s ruling that a party who substantially participated in litigation had waived its arbitration rights under an otherwise valid and enforceable arbitration clause. Yesterday, both the First Court of Appeals and the Fourteenth Court of Appeals in Houston reached a similar conclusion.

Like Ideal Roofing, decided last November, the lawsuit in Tuscan Builders, L.P. v. 1437 SH6 L.L.C, et al., involved a construction contract. The First Court of Appeals applied the same five-factor test used by the Dallas Court of Appeals, with the addition of one more criterion – whether the movant for arbitration was the plaintiff (who chose to file in court) or the defendant (who merely responded). The Court of Appeals affirmed the trial court’s order finding that the defendant had substantially invoked the litigation process and his actions were inconsistent with the intent to arbitrate, as demonstrated by the following:

  • Tuscan, while being a defendant in the lawsuit, proceeded to file a third-party lawsuit against other parties.
  • Tuscan moved for arbitration after the parties had completed written discovery, including expert designations and information, and had conducted a property inspection.
  • Tuscan had joined in the motions prolonging discovery and postponed the trial date and mediation deadline to allow the parties to pursue additional discovery on the merits.
  • It was Tuscan’s construction contract that referenced an industry form that contained an arbitration clause, indicating that Tuscan probably knew that such clauses existed prior to filing the lawsuit.
  • Other parties to the lawsuit were not aware of the arbitration clause because they did not receive a copy of the industry referenced in the contract.
  • Tuscan moved to compel arbitration more than a year after the suit was filed and when the trial setting was less than a month away.

When determining whether a party has waived its arbitration rights, a court must look at “the totality of circumstances.” In addition to the individual factors described above, the Court of Appeals found that Tuscan’s overall litigation strategy, such as bringing its subcontractors into the lawsuit in order to have access to discovery responses obtained by them as aligned parties, and obtaining a building inspection, allowed Tuscan to take advantage of litigation strategies that would not have been available in arbitration. Therefore, such a deliberate tactical approach was inconsistent with any intent to arbitrate.

The Court of Appeals also found that Tuscan’s invocation of the litigation process prejudiced the plaintiff who, not knowing that an arbitration clause existed, spent a significant amount of time and money litigating the case in what it considered to be a proper forum.

The same day that the First Court of Appeals found that the defendant in Tuscan Builder  waived its arbitration rights, the Fourteenth Court of Appeals reached a similar result in RSL Funding LLC v. Chaveze D. Pippins, et al., which involved an assignment of annuity contracts.

In this case, three individual defendants bought annuity from MetLife and subsequently executed contracts assigning their rights to RSL. The original annuity contracts between the individuals and MetLife did not contain an arbitration clause, but the assignment agreements with RSL did. When MetLife refused to pay RSL under the annuity contracts, RSL filed a lawsuit against both MetLife and the individuals.

Initially, RSL’s and the individuals’ interests seemed to be aligned since both wanted MetLife to pay RSL on the annuity contracts. However, once MetLife deposited the funds due under the annuity contracts in the court’s registry, the RSL and the individual defendants seemed to disagree as to who should receive such money and the individuals moved to withdraw the funds.  RSL promptly filed an arbitration demand against the individuals based on the arbitration clause in their assignment contract and moved to stay the litigation.

The Fourteenth Court of Appeals upheld the trial court’s denial of the stay of litigation on the grounds that RSL substantially invoked the litigation process and the individual defendants were prejudiced by such invocation, thus resulting in a waiver of RSL’s arbitration rights under the assignment contract. Justice Kem Thompson Frost dissented.

The Courts of Appeals added three more criteria for determining whether a waiver has occurred, in addition to those already enumerated in Ideal Roofing and Tuscan Builders:

  • whether the party who pursued arbitration sought or opposed arbitration earlier in the case
  • whether the party who pursued arbitration filed affirmative claims or dispositive motions
  • what discovery would be unavailable in arbitration

The Court noted that all of the waiver factors are rarely present in a single case, thus a waiver could be established based only on a few or even a single factor.  Instead of addressing each of the criteria, it concluded in broad strokes that RSL had invoked the litigation process because of the following actions:

  • it filed the lawsuit not only against MetLife, but also against the individuals with whom it had an arbitration agreement
  • when the individuals filed a counterclaim against RSL, the plaintiff did not move to compel arbitration, although it would have been appropriate to do so at that time
  • when the individual defendants non-suited their counterclaims and refiled them in another court, RSL waited 2 ½ months before filing a motion to stay litigation pending resolution of the arbitration
  • RSL filed a partial motion for summary judgment against both MetLife and the individual defendants on the same issue it sought to arbitrate

Furthermore, RSL’s invocation of the litigation process substantially prejudiced the individual defendants because they were forced to file numerous pleadings and motions in the trial court that they would not have needed to do had the case proceeded to arbitration. Furthermore, RSL’s failure to pay the individual defendants the amount that it owed under the assignment contracts while the litigation was proceeding put a significant financial constraint on them.

What makes this case different from Ideal Roofing and Tuscan Builders, however, is that in both of those lawsuits, the parties’ pattern of litigation activities established rather clearly that they took full advantage of discovery and other litigation procedures before seeking arbitration in the eleventh hour before trial.  In RSL Funding, however, as pointed out in the dissenting opinion, RSL’s litigation tactics were directed at MetLife, with whom it did not have an arbitration agreement, and not at the individual co-defendants.  Moreover, at the time RSL filed the lawsuit there were no disputes between itself and the individuals under any of the assignment agreements, and RSL added them as defendants only to obtain a full resolution of the rights under the Declaratory Judgment Act.  The arbitrable claims between RSL and the individual defendants did not arise until after the defendants had filed a motion to withdraw funds from the court registry, at which point RSL promptly filed an arbitration demand. 

CONCLUSION: While Ideal Roofing and Tuscan Builders suggest that a party has to conduct extensive discovery, participate in motion practice, and delay an arbitration demand until the eve of trial in order to cause a waiver of its arbitration rights, RSL Funding  indicates that a waiver can occur far earlier in the litigation process and be caused by far less rigorous participation in a lawsuit.

Thus, anytime a party finds itself pursuing or defending a lawsuit involving claims that might be covered by an arbitration clause, the party should plan its litigation strategy very carefully so as to avoid a waiver of its arbitration rights.

For more information regarding enforcement of arbitration agreements in Texas, contact Leiza Dolghih.

The Fifth Circuit Allows Class Arbitration Waivers in Employment Agreements

Last week, the Fifth Circuit Court of Appeals joined the Ninth, Second and Eighth Circuits in holding that class arbitration waivers in employment agreements are enforceable, notwithstanding the right of employees to engage in concerted activities under the National Labor Relations Act (NLRA). The ruling has been lauded as an enormous victory for employers, even though the National Labor Relations Board (NLRB) remains free to ignore the opinion and continue to strike down class arbitration waivers.

Under the Mutual Arbitration Agreement (MAA) at issue in D.R. Horton, Inc. v. National Labor Relations Board: (1) employees waived their right to a trial in court; (2) all disputes between D.R. Horton and employees had to be resolved by final and binding arbitration; and (3) the arbitrator did “not have the authority to consolidate the claims of other employees” and did “not have the authority to fashion a proceeding as a class or collective action or to award relief to a group or class of employees in one arbitration proceeding.” The combined effect of these three provisions was that D.R.Horton’s employees could not pursue class or collective claims in an arbitral or judicial forum. Instead, their only recourse for any employment disputes was individual arbitration.

When a former D. R. Horton’s superintendent and a number of similarly situated employees attempted to initiate a nationwide class arbitration arising out of D.R.Horton’s alleged violations of overtime provisions of the Fair Labor Standards Act (FLSA), the company responded that the MAA prohibited a collective arbitration, but that the employees could proceed with individual proceedings. The superintendent then filed an unfair labor practice charge alleging that the class-action waiver violated the NLRA. The (NLRB) agreed and found that the MAA violated Section 8(a)(1) of the NLRA for two reasons. First, it required employees to waive their right to maintain joint, class, or collective employment related actions in any form. Second, the employees could reasonably interpret the language of the MAA as precluding or restricting their right to file charges with the NLRB. Last week, the Fifth Circuit rejected the Board‘s first reason, but agreed with the second.

It explained that while Section 7 of the NRLA creates a right on behalf of employees to “engage in [ ] concerted activities for the purpose of collective bargaining or other mutual aid or protection,” it does not create a substantive right to use class action procedures. In fact, the U.S. Supreme Court and several Circuit Courts of Appeals have previously recognized that there is no substantive right to class or collective procedures under the Age Discrimination and Employment Act or the FLSA. On the other hand, using Section 7 of the NRLA to invalidate an agreed waiver of a class arbitration would violate the Federal Arbitration Act (FAA), which requires that any arbitration agreement be enforced according to its terms. The Fifth Circuit found that neither NRLA’s legislative history nor its language authorized it to override the FAA. Absent an explicit language of a congressional intent to override the FAA in the NLRA, the Act’s mandate that an arbitration agreement must be enforced according to its terms – here, with a class arbitration waiver – must be followed.

Although the Fifth Circuit found that class arbitration waiver provisions do not violate the NLRA, the MAA in this case contained the following language, which did violate the statute: the employee “knowingly and voluntarily waives the right to file a lawsuit or other civil proceeding relating to Employee’s employment . . . .” (emphasis in original). Because this statement would lead employees to reasonably believe that they were prohibited from filing unfair labor practice charges with the NLRB, the Court of Appeals ordered that D.R. Horton should clarify in the agreement that employees retain access to the NLRB regardless of their agreement to arbitrate disputes.

CONCLUSION: While the Fifth Circuit’s rejection of the NLRB‘s ruling in D.R. Horton is lauded as a victory for employers, it does not guarantee that the NLRB will allow the use of class waivers in mandatory arbitration agreements. The Board regularly treats Circuit Court decisions with which it disagrees as non-binding in any other case. Thus, it may continue to reject such waivers despite the ruling.

Although the battle over class arbitration waivers in employment agreements is far from over, all employers need to review their arbitration agreements and make sure that the language used there does not convey the impression to employees that they are prohibited from filing administrative charges with the NLRB.

For more information regarding the enforcement or drafting of arbitration agreements in Texas, contact Leiza Dolghih.

You Can’t Have Your Cake and Eat It Too – A Texas Court of Appeals Explains When Proceeding With Litigation Will Waive Arbitration Rights

Almost every contract now contains some sort of an arbitration clause. In fact, it is one of the first clauses an attorney looks for in an agreement when a dispute between the parties arises. This week, the Dallas Court of Appeals’s decision in Ideal Roofing, Inc., et al. v. Armbruster, et al. serves as a reminder that, at some point, proceeding with litigation of a dispute in court can result in a waiver of an applicable and otherwise enforceable arbitration clause.

In this case, Ideal Roofing and Ambrusters entered into a construction contract containing an arbitration clause. When Ambrusters’ roof started leaking, they filed a lawsuit against Ideal Roofing.  Although the defendant could have compelled arbitration almost immediately, it proceeded to litigate the case for eighteen and a half months before filing a motion to compel arbitration.  The trial court denied the motion and the Court of Appeals affirmed, providing an useful overview of the waiver standard.

In general, a party seeking to compel arbitration under the Federal Arbitration Act (FAA) must establish: (1) the existence of a valid, enforceable arbitration agreement and (2) that the claims at issue fall within that agreement’s scope. The party seeking to avoid arbitration must then establish an affirmative defense to enforcement of the otherwise valid arbitration agreement. Since Ambrusters had conceded on appeal that the arbitration agreement was enforceable, only one question remained – whether Ideal Roofing had waived its arbitration rights by participating in the litigation.

Under both federal and state law, there is a strong presumption against waiver of contractual arbitration.  A party waives its contractual arbitration rights when it “substantially invokes judicial process.” According to the Court of Appeals, a party does so when “it has taken specific and deliberate actions, after the filing of the suit, that are inconsistent with the right to arbitrate or has actively tried, but failed, to achieve a satisfactory result through litigation before turning to arbitration.”

What constitutes a “substantial” litigation conduct depends on the context, but a court must consider the following factors when deciding whether a party moving to compel arbitration has waived its contractual arbitration rights:

  • when the movant knew of the arbitration clause

  • how much discovery has been initiated and who initiated it

  • the extent to which discovery related to the merits rather than arbitrability or standing

  • how much of the discovery would be useful in arbitration

  • whether the movant sought judgment on the merits

  • whether the movant sought to compel arbitration on the “eve of the trial”

While the Court of Appeals emphasized that that delay (in moving to compel arbitration) alone does not establish waiver, in this case, the following five out of six factors supported the finding of a waiver:

  • Ideal Roofing was aware of the arbitration agreement at least four months after answering the lawsuit, but it did not move to compel arbitration until the case has been pending for 18 1/2 months and the case had been set for trial three times

  • Ideal Roofing both propounded and answered written discovery, took several expert witnesses’ depositions, and inspected the Ambrusters’ roof

  • None of the discovery conducted in this case related to arbitrability or standing

  • Ideal Roofing asserted affirmative defenses in court, filed a counter-claim, attended a two-day mediation, and filed a motion for summary judgment and set it for hearing twice

  • Ideal Roofing filed its motion to compel four months before the trial date

In addition to the burden of showing that a party seeking to compel arbitration has substantially invoked the judicial process, the party seeking to avoid arbitration must also show prejudice or “inherent unfairness in terms of delay, expense, or damage to its legal position that occurs when the party’s opponent forces it to litigate an issue and later seeks to arbitrate that same issue.” Prejudice is more easily shown when a party delays his request for arbitration and in the meantime engages in pretrial activity inconsistent with an intent to arbitrate.

The Court of Appeals found that the following evidence was sufficient to establish prejudice to Ambrusters: (1) plaintiffs’ attorney, whom they hired on contingency, would have to travel from Dallas to Houston to arbitrate; (2) plaintiffs had already paid for two days of mediation and over $3,500 in expert fees; (3) the arbitration agreement was silent as to whether discovery conducted during litigation could be used during arbitration; and (4) the Ambrusters had completed their discovery and were ready to proceed with trial when Ideal Roofing filed it motion to compel arbitration.

CONCLUSION: While answering a lawsuit and even conducting some discovery will probably not waive one’s arbitration rights, a party who is aware of an enforceable arbitration agreement, should proceed cautiously in court while it assesses whether to enforce the agreement or not and should avoid taking a position that is inconsistent with the intent to arbitrate.

For more information regarding enforcement of arbitration agreements in Texas, contact Leiza Dolghih.

Texas Allows Non-Signatories to Enforce Arbitration Agreements

Many companies prefer to resolve their business disputes through arbitration, rather than litigation, because in many cases the arbitration process is faster, cheaper, and more effective due to arbitrators’ familiarity with the industry.  A recent decision by the Fourteenth Texas Court of Appeals reassures business owners that even if they have not signed an arbitration agreement, they might be able to enforce it as long as it was signed by their agent or affiliate.

In Satya, Inc. et al. v. Mehtaplaintiff Mehta entered into a limited partnership agreement that contained an arbitration provision. The agreement was signed by Mehta, on his own behalf, and by Bahtija, on behalf of the general partner of the limited partnership.  When Mehta discovered what he thought was self-dealing by Bahtija, he filed a suit for breach of fiduciary duties and violations of the Texas Securities Act against Bahtija, the limited partnership, two owners of the general partner, and a corporation that the two individuals also owned. Mehta alleged that all the defendants were agents for one another and were acting within the scope of their agency when committing the alleged torts.

The defendants moved to dismiss the case and compel arbitration pursuant to the arbitration provision contained in the limited partnership agreement. Mehta argued that only the limited partnership should be dismissed, but that the rest of the defendants had to litigate the claims because they never signed the arbitration agreement.

After determining that Mehta’s claims fell within the scope of the arbitration agreement, the Court of Appeals ruled that the defendants could enforce the arbitration provision found in the limited partnership agreement even though they never signed the agreement, because they were agents of the general partner, which was a signatory to the agreement.

The Court of Appeals‘ decision is consistent with the Texas Supreme Court‘s ruling in In Re Kaplan Higher Education Corp., where plaintiffs tried to avoid arbitration by suing only the non-signatory agents of the signatory to the arbitration agreement.  The Supreme Court explained that while the arbitration clauses do not automatically cover all corporate agents or affiliates, where an agent or an affiliate of a signatory was acting on behalf of the affiliate, the agent could enforce the arbitration agreement signed by the party on whose behalf it was acting.

PRACTICAL ADVICE: When attempting to determine who can enforce a particular arbitration agreement, look beyond the names on the signature lines.  In Texas, a party to a legal dispute may enforce an arbitration agreement it did not sign, if its agent signed it.  Also, an agent who did not sign an arbitration agreement, might be able to compel arbitration if his/her employer signed such an agreement, as long as the legal dispute arises out of the agent’s actions on behalf of his/her employer.

A business using an arbitration agreement, should also consider defining the parties to the arbitration agreement broadly to include individual partners, affiliates, officers, directors, employees, agents, and/or representatives of any party to the arbitration agreement.  See In re Joseph Charles Rubiola, et al., where the Texas Supreme Court held that such a broad provision expressly allowed non-signatories that fell into the definition of the “parties” to enforce the arbitration agreement in question.

Leiza Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice.  His practice includes commercial, intellectual property and employment litigation.  You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108.

An Arbitration Agreement Found Unconscionable Without Translation

It is no secret that many Texas businesses employ Spanish-speaking employees.  It is also no secret that many businesses in Texas require their employees to sign arbitration agreements, in which employees agree to arbitrate any disputes with their employers.  What happens when an employee who only speaks Spanish is asked to sign an arbitration agreement in English?  The Eighth Court of Appeals of Texas ruled that such agreement, when not explained to the employee, is unconscionable.

In Delfingen US-Texas, L.P. v. Guadalupe ValenzuelaGuadalupe Valenzuela was hired to work for Delfingen in El Paso, Texas.  Following a company orientation that was conducted entirely in Spanish, Valenzuela signed a number of documents that were written in English including a “Dispute Resolution and Arbitration Policy and Agreement.”  The agreement included a clause that required all disputes related to Valenzuela’s employment be submitted to binding arbitration.

After Valenzuela was terminated, she filed a lawsuit against Delfingen for wrongful termination.  Delfingen then filed a motion to compel arbitration based on the agreement Valenzuela signed during the orientation.  Valenzuela argued against arbitration by stating the agreement was “procedurally unconscionable” and said she was rushed to sign the agreement despite that it was written in English.  She also alleged that the agreement was not fully explained to her.  Delfingen challenged Valenzuela’s assertions and argued that her inability to read English did not invalidate the agreement.  Following an evidentiary hearing, the district court found that Delfingen did not explain the agreement to Valenzuela and denied Delfingen’s motion to compel arbitration.  The company then filed an interlocutory appeal.

On appeal, Valenzuela argued that the agreement was procedurally unconscionable because: (1) she was unable to read English and Delfingen failed to provide a Spanish translation or explain the agreement to her in Spanish; and (2) Delfingen affirmatively misrepresented the nature of the arbitration agreement.  Because of the district court’s finding that Delfingen had not explained the agreement to Valenzuela at the orientation and because of Delfingen’s stipulation that Valenzuela spoke no English, the Court of Appeals found that the arbitration agreement was procedurally unconscionable.

In contrast, in a case involving a similar issue and decided by another Court of Appeals, the court found that an arbitration agreement was enforceable when a Spanish version of the agreement was provided to employees by their employer.  See Superbug Operating Co., Inc. v. Sanchez (First Court of Appeals, 2013).

THE MORAL OF THE STORY?  If you have Spanish-speaking employees, make sure that the translated versions of any agreements that they sign are available to them, to thwart any arguments of procedural unconscionability.

Leiza Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice.  His practice includes commercial, intellectual property and employment litigation.  You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108.

Why Adding an Arbitration Clause to a Non-Compete Agreement Is a Good Idea.

In Nitro-Lift Techs., L.L.C. v. Eddie Lee Howard, et al.the U.S. Supreme Court once again expressed its strong support of the Federal Arbitration Act (FAA), in finding that where an arbitration clause in a non-competition agreement is valid, all other disputes related to the non-compete agreement, including its enforceability, should be decided by an arbitrator rather than the court.

In Nitro-Lift, the dispute arose from an employment contract between Nitro-Lift Technologies, L.L.C., and two of its former employees, which contained a non-compete clause and the following arbitration clause:

“Any dispute, difference or unresolved question between Nitro-Lift and the Employee (collectively the “Disputing Parties”) shall be settled by arbitration by a single arbitrator mutually agreeable to the Disputing Parties in an arbitration proceeding conducted in Houston, Texas in accordance with the rules existing at the date hereof of the American Arbitration Association.”

When the two employees went to work for the Nitro-Lift’s competitor, the company served them with a demand for arbitration, claiming that they breached their non-compete agreement.  Instead of arbitrating the dispute, the employees filed a lawsuit in a state court alleging that the non-compete agreement violated the state law and was null and void.  The state court dismissed their case after determining that the arbitration clause in their employment agreement was valid, but the Oklahoma Supreme Court reversed the lower court and declared that the FAA arbitration clause gave way to Oklahoma’s public policy regarding non-compete agreements and, without addressing validity of the arbitration clause, declared the non-compete “void and unenforceable” under the Oklahoma state law.

The U.S. Supreme Court reversed the Oklahoma Supreme Court and held that under the FAA, it is for the arbitrator – and not the state court – to decide whether a covenant not to compete violates the applicable state law.

PRACTICAL IMPLICATIONS:

The Nitro-Lift decision is a significant ruling for employers, many of which have gravitated toward arbitration agreements to reduce their exposure to costly and time-consuming employment litigation.

The employers can now feel confident that placing an arbitration clause in an employment agreement will allow them to avoid often-messy litigation of the non-compete provisions.

Leiza Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice.  His practice includes commercial, intellectual property and employment litigation.  You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108.