How Your Company Can Get the Benefits of an Arbitration Clause

The answer to this dilemma is to draft an agreement that directs the parties to arbitrate the final merits of their claim, but also provides that temporary and preliminary relief can be obtained in court. Courts of Appeals around the country have widely held that parties can seek injunctive relief pending arbitration to preserve the status quo and prevent arbitration from becoming a “hollow formality.” See Teradyne Inc. v. Mostek Corp., 797 F.2d 43 (1st Cir. 1986); Blumenthal v. Merrill Lynch, 910 F.2d 1049 (2nd Cir. 1990); Ortho Pharmaceutical Corp. v. Amgen, Inc., 887 F.2d 460 (3rd Cir. 1989); Merrill Lynch v. Bradley, 756 F.2d at 1048, 1053-54 (4th Cir. 1985); RGI v. Tucker, 858 F.2d 227, 229-30 (5th Cir. 1988); Performance Unlimited, Inc. v. Questar, 52 F.3d 1373 (6th Cir. 1995); Merrill Lynch v. Salvano, 999 F.2d 211, 214 (7th Cir. 1993); Peabody Coalsales Inc. v. Tampa Elec. Co., 36 F.3d 46, 48 (8th Cir. 1994); PMS Dist. Co. v. Huber, 863 F.2d 639 (9th Cir. 1988); Merrill Lynch v. Dutton, 844 F.2d 726 (10th Cir. 1988); Merrill Lynch v. Hegarty, 2 F.3d 405 (11th Cir. 1993), aff'd, 808 F. Supp. 1555 (S.D. Fla. 1992). Carving out injunctive relief enables the company and the employee to have the benefits associated with arbitration while still allowing for an expedited injunction in court if there is a breach of the agreement. By drafting the contract so as to provide for injunctive relief in court, the status quo can be maintained pending a determination on permanent injunctive relief and damages by the arbitrators.

Key Questions

Before drafting such an agreement, practitioners should consider what claims they want to arbitrate and what claims they want to be able to bring in court. Some questions to consider are:

• Do you want to carve out all injunctive relief or just temporary and/or preliminary injunctive relief?
• Do you want the issue of permanent injunctive relief to be addressed in court or arbitration?
• Do you want to carve out damages for breach of the restrictive covenants or do you want that to be decided in arbitration?
• Are you willing to bear the expense of putting on your liability case twice, once in court and then again in arbitration?

Once you decide how you want to structure your agreement, you want to make sure that you use the proper language. For example, in some states you need to have “qualifying language” in the arbitration agreement that permits a party to seek injunctive relief pending arbitration. The Eighth Circuit has held qualifying language to mean “language which provides the court with clear grounds to grant relief without addressing the merits of the underlying arbitrable dispute.” Peabody Coalsales Inc. v. Tampa Elec. Co., 36 F.3d 46, 47 fn. 3 (8th Cir. 1994). Although this is not required in all states, it is best to include language to that effect indicating that the parties' absolute agreement to arbitrate is qualified to the extent necessary to address injunctive relief.

Practitioners also want to be precise about what matters must be addressed in arbitration and what can be brought to court. You will also want to think about how the issues will play out procedurally and specify those procedures in your agreement. For example, if you are going to draft your agreement to direct the parties to seek preliminary injunctive relief in court, then you will also want to include a provision providing that the parties agree to conduct expedited discovery, including depositions, in court pending the preliminary injunction hearing. Similarly, since employees often take company information by e-mailing it or downloading it from their computers, you may also want to include a clause providing that the employee will make his/her home or other computers available for forensic inspection prior to the preliminary injunction hearing.

Some sample provisions addressing these issues are set forth below. While these are a good start, each company's interests should be separately considered so that the provisions are properly tailored to address them.

Sample Arbitration Clause Number One

In the event a dispute shall arise between the parties to this Agreement, it is hereby agreed that the dispute shall be referred to [fill in selected forum] for arbitration in accordance with that organization's rules of arbitration. [If you are using an arbitration forum that has multiple sets of rules, it is best to state which rules will govern.] The decision of the arbitrator(s) shall be final and legally binding and judgment may be entered thereon.

In the event Employee breaches the terms of this Agreement, or Company reasonably believes that Employee is about to breach the terms of this Agreement, the parties agree that Company is entitled to temporary and preliminary injunctive relief in a court of competent jurisdiction in order to, among other things, prevent a breach of the Agreement or to protect and preserve the status quo pending full resolution of any dispute relating to this Agreement in arbitration.

Each party shall be responsible for its share of the arbitration fees in accordance with the applicable rules of arbitration. In the event a party fails to proceed with arbitration, unsuccessfully challenges the arbitrator's award, or fails to comply with the arbitrator's award, the other party is entitled to costs of suit, including a reasonable attorney's fee for having to compel arbitration or defend or enforce the award.

It is also recommended that the contract contain the following language, in boldface print above the signature lines:

THIS CONTRACT CONTAINS A BINDING ARBITRATION PROVISION WHICH AFFECTS YOUR LEGAL RIGHTS AND MAY BE ENFORCED BY THE PARTIES.

Sample Clause Providing for Expedited Discovery

The parties agree that in any proceeding alleging breach of this Agreement, each party shall have the right to engage in deposition and document discovery on an expedited basis pending any application for injunctive relief. Further, the parties agree that the Company shall have the right to conduct forensic examination(s) of any Electronic Devices in Employee's possession or control if Company reasonably believes that such devices may contain Confidential Information and/or Intellectual Property. The parties understand and agree that this paragraph is an essential term of the parties' agreement to arbitrate their claims.

Conclusion

By carefully drafting the employment agreement, parties can take advantage of the benefits of arbitration while still enabling the company to seek and obtain immediate injunctive relief in court if the need arises.

Susan Guerette is a partner in the Philadelphia office of Fisher & Phillips, LLP. She has a national practice representing management on a wide range of labor and employment matters, including defending claims of discrimination based on race, gender, age, disability, and national origin. Ms. Guerette also counsels employers on employment policies, immigration issues and compliance with local, state and federal statutes. E-mail: [email protected]. Phone: 610-230-2133.

Many companies have started including arbitration clauses in their employment agreements. Arbitrating employment disputes can provide for more efficient and more economical resolutions. It can be less destructive of business relationships and allow the parties to decide their disputes privately. It also potentially reduces the time spent on discovery and appeals and eliminates the bias of local juries.

Yet, in-house attorneys often question whether to include arbitration clauses in their employment agreements because they do not want to limit their ability to obtain emergency relief in court if an employee misappropriates their confidential information or solicits and attempts to divert their clients after they resign.

What to Do

The answer to this dilemma is to draft an agreement that directs the parties to arbitrate the final merits of their claim, but also provides that temporary and preliminary relief can be obtained in court. Courts of Appeals around the country have widely held that parties can seek injunctive relief pending arbitration to preserve the status quo and prevent arbitration from becoming a “hollow formality.” See Teradyne Inc. v. Mostek Corp. , 797 F.2d 43 (1st Cir. 1986); Blumenthal v. Merrill Lynch , 910 F.2d 1049 (2nd Cir. 1990); Ortho Pharmaceutical Corp. v. Amgen, Inc. , 887 F.2d 460 (3rd Cir. 1989); Merrill Lynch v. Bradley , 756 F.2d at 1048, 1053-54 (4th Cir. 1985); RGI v. Tucker , 858 F.2d 227, 229-30 (5th Cir. 1988); Performance Unlimited, Inc. v. Questar , 52 F.3d 1373 (6th Cir. 1995); Merrill Lynch v. Salvano , 999 F.2d 211, 214 (7th Cir. 1993); Peabody Coalsales Inc. v. Tampa Elec. Co. , 36 F.3d 46, 48 (8th Cir. 1994); PMS Dist. Co. v. Huber , 863 F.2d 639 (9th Cir. 1988); Merrill Lynch v. Dutton , 844 F.2d 726 (10th Cir. 1988); Merrill Lynch v. Hegarty , 2 F.3d 405 (11th Cir. 1993), aff'd, 808 F. Supp. 1555 (S.D. Fla. 1992). Carving out injunctive relief enables the company and the employee to have the benefits associated with arbitration while still allowing for an expedited injunction in court if there is a breach of the agreement. By drafting the contract so as to provide for injunctive relief in court, the status quo can be maintained pending a determination on permanent injunctive relief and damages by the arbitrators.

Key Questions

Before drafting such an agreement, practitioners should consider what claims they want to arbitrate and what claims they want to be able to bring in court. Some questions to consider are:

• Do you want to carve out all injunctive relief or just temporary and/or preliminary injunctive relief?
• Do you want the issue of permanent injunctive relief to be addressed in court or arbitration?
• Do you want to carve out damages for breach of the restrictive covenants or do you want that to be decided in arbitration?
• Are you willing to bear the expense of putting on your liability case twice, once in court and then again in arbitration?

Once you decide how you want to structure your agreement, you want to make sure that you use the proper language. For example, in some states you need to have “qualifying language” in the arbitration agreement that permits a party to seek injunctive relief pending arbitration. The Eighth Circuit has held qualifying language to mean “language which provides the court with clear grounds to grant relief without addressing the merits of the underlying arbitrable dispute.” Peabody Coalsales Inc. v. Tampa Elec. Co. , 36 F.3d 46, 47 fn. 3 (8th Cir. 1994). Although this is not required in all states, it is best to include language to that effect indicating that the parties' absolute agreement to arbitrate is qualified to the extent necessary to address injunctive relief.

Practitioners also want to be precise about what matters must be addressed in arbitration and what can be brought to court. You will also want to think about how the issues will play out procedurally and specify those procedures in your agreement. For example, if you are going to draft your agreement to direct the parties to seek preliminary injunctive relief in court, then you will also want to include a provision providing that the parties agree to conduct expedited discovery, including depositions, in court pending the preliminary injunction hearing. Similarly, since employees often take company information by e-mailing it or downloading it from their computers, you may also want to include a clause providing that the employee will make his/her home or other computers available for forensic inspection prior to the preliminary injunction hearing.

Some sample provisions addressing these issues are set forth below. While these are a good start, each company's interests should be separately considered so that the provisions are properly tailored to address them.

Sample Arbitration Clause Number One

In the event a dispute shall arise between the parties to this Agreement, it is hereby agreed that the dispute shall be referred to [fill in selected forum] for arbitration in accordance with that organization's rules of arbitration. [If you are using an arbitration forum that has multiple sets of rules, it is best to state which rules will govern.] The decision of the arbitrator(s) shall be final and legally binding and judgment may be entered thereon.

In the event Employee breaches the terms of this Agreement, or Company reasonably believes that Employee is about to breach the terms of this Agreement, the parties agree that Company is entitled to temporary and preliminary injunctive relief in a court of competent jurisdiction in order to, among other things, prevent a breach of the Agreement or to protect and preserve the status quo pending full resolution of any dispute relating to this Agreement in arbitration.

Each party shall be responsible for its share of the arbitration fees in accordance with the applicable rules of arbitration. In the event a party fails to proceed with arbitration, unsuccessfully challenges the arbitrator's award, or fails to comply with the arbitrator's award, the other party is entitled to costs of suit, including a reasonable attorney's fee for having to compel arbitration or defend or enforce the award.

It is also recommended that the contract contain the following language, in boldface print above the signature lines:

THIS CONTRACT CONTAINS A BINDING ARBITRATION PROVISION WHICH AFFECTS YOUR LEGAL RIGHTS AND MAY BE ENFORCED BY THE PARTIES.

Sample Clause Providing for Expedited Discovery

The parties agree that in any proceeding alleging breach of this Agreement, each party shall have the right to engage in deposition and document discovery on an expedited basis pending any application for injunctive relief. Further, the parties agree that the Company shall have the right to conduct forensic examination(s) of any Electronic Devices in Employee's possession or control if Company reasonably believes that such devices may contain Confidential Information and/or Intellectual Property. The parties understand and agree that this paragraph is an essential term of the parties' agreement to arbitrate their claims.

Conclusion

By carefully drafting the employment agreement, parties can take advantage of the benefits of arbitration while still enabling the company to seek and obtain immediate injunctive relief in court if the need arises.

Susan Guerette is a partner in the Philadelphia office of Fisher & Phillips, LLP. She has a national practice representing management on a wide range of labor and employment matters, including defending claims of discrimination based on race, gender, age, disability, and national origin. Ms. Guerette also counsels employers on employment policies, immigration issues and compliance with local, state and federal statutes. E-mail: [email protected]. Phone: 610-230-2133.