Arbitration of Restrictive Covenant Disputes: Panacea or Problem?

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In recent years, there has been enormous controversy over whether arbitration of statutory employment claims should be encouraged.  Courts have generally encouraged arbitration to alleviate crowded dockets, while the plaintiff-side employment bar has pushed back with proposed legislation that would limit or prevent arbitration of certain kinds of disputes.   Within this back-and-forth, little attention has been paid to the role of arbitration in restrictive covenant disputes.  In this entry, we will address the pros and cons of including arbitration provisions in restrictive covenants.

The matter is subject to a different set of concerns since in many, if not most, instances the underlying dispute arises out of an employment agreement to which the disputant employee agreed (in contrast to a statutory employment claim borne out of alleged unlawful employer conduct).  Should companies draft employment agreements that provide for arbitration of disputes under the restrictive covenant provisions of the agreement?

Some would argue that companies should not include arbitration provisions in an employment agreement’s restrictive covenant on the ground that courts that hear injunction applications in restrictive covenant actions offer the prospect of expedited relief and a former employee can block expedited arbitration through an obstructive lawsuit.  While a former employee’s lawsuit can sometimes interfere with expedited arbitral consideration of an company’s request for injunctive relief, increasingly the rules of the game have evolved in such a way as to increase the likelihood of a company securing an expedited arbitral injunction.

In recent years, organizations such as the American Arbitration Association have modified their employment dispute rules to provide for appointment of an arbitrator who is available to hear an expedited application for injunctive relief.  Both the Federal Arbitration Act and state arbitration statutes have been interpreted to provide that courts may “act in aid of arbitration” to take such steps as are necessary to protect a company pending arbitration of the merits of a restrictive covenant dispute.  Accordingly, although a company seeking to enjoin a former employee from engaging in certain conduct must satisfy the traditional tests for injunctive relief , even on an application seeking the court’s assistance in aid of arbitration, the reality is that courts will most likely do so on an appropriate showing.  The upshot is that expedited arbitration on restrictive covenant applications for injunctive relief is a tool that is more accessible to companies now than it was even a decade ago.      

The above is not to say that a former employee (especially one backed by its new employer) can never derail the process.  The fact that arbitrators are private actors clothed with authority by the disputants necessarily means that a resistant former employee may be able to stymie an arbitrator’s attempt to address a company’s injunction application.  But the flip side is that a former employee who takes that tack faces the peril of the arbitrator granting the company’s request if the former employee refuses to appear before the arbitrator.  Moreover, the employee who seeks to block an arbitrator from acting may, despite commencing a lawsuit, face obstacles in convincing a judge to block an arbitrator from acting.  Similarly, if the employee disregards the arbitrator’s order, the employee acts at his peril because courts tend to enforce arbitral determinations given the strict standard of review and, beyond that, as the arbitration case proceeds the arbitrator is unlikely to be pleased that his order enjoining certain conduct was flouted.

In future entries, we will address the efficiency of arbitration process in enforcing restrictive covenants and how companies can enforce arbitration awards.

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.