Arbitration of Restrictive Covenant Disputes: Awards and Enforcement

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We have previously addressed the pros and cons of including arbitration provisions in restrictive covenants and the efficiency of arbitrating disputes concerning those covenants.  In this entry, we address how an employer can enforce an arbitrator’s award. 

Once an arbitrator issues an award, it is difficult for the losing party to overturn it.  The standards for vacating an arbitration award are strict.  While this can be a disadvantage to the company seeking to enforce a restrictive covenant if it fails to persuade the arbitrator of the merits of its case, arbitration presents a sensible alternative warranting consideration since a company can draft an employment contract to maximize the prospects of enforcement of a restrictive covenant.

An arbitrator is a creature of contract who is supposed to decide a claim pursuant to the contract that empowered him with authority.  It follows that an arbitrator should decide the claim in accordance with the plain terms of the restrictive covenant provision.  This should render arbitration a superior forum to court because judges review restrictive covenants with an eye to case law and in most jurisdictions restrictive covenants are disfavored because they are restraints on competition.  Although arbitrators typically are familiar with these principles, their mandate is to enforce the provisions of the employment agreement and, therefore, the restrictive covenant.  We have not seen any empirical studies that test this premise, but a company that decides to utilize arbitration of restrictive covenant disputes, including the application for injunctive relief that often “kicks off” the case, can draft a clause that informs the arbitrator that his responsibility is to enforce the contract as written and that the parties’ expectation is that he will do just that. 

While there is precedent to the effect that courts should not enforce an arbitration award that violates a clear mandate of public policy, courts generally do enforce arbitration awards that are inconsistent with statutory and common law.  Precisely because arbitrators are creatures of contract, their responsibility is to effectuate the bargain the contracting parties reached.  In many, if not most, instances that means that a judge enforces an arbitration award even though the arbitrator decided the dispute differently than the judge would have under the law had the matter been presented to the court in the first instance. 

This does not mean that companies in jurisdictions, such as California, that nullify or significantly minimize effective use of certain kinds of restrictive covenants can bypass those obstacles by resorting to arbitration.  However, it does mean that in other jurisdictions that permit them but are restrictive, arbitration very possibly presents a superior alternative for maximizing enforcement.  As an initial matter, then, companies should certainly give consideration to arbitration as the principal route for enforcement of restrictive covenants and follow through with it where there is reason to believe arbitration is likely to yield results at least as favorable as if disputes were heard only in court.

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.