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Employment Agreement Mandating Arbitration With Exclusion To Seek Equitable Relief From Court For Non-Compete Violations Found Unconscionable

Posted in Non-Compete Enforceability, Practice & Procedure, Restrictive Covenants

Summary:  Tatum, an employee of ProBuild, purportedly blew the whistle on her subordinate for allegedly stealing from ProBuild.  Shortly thereafter, she was fired, but alleged similarly situated male employees were not.  She filed a gender discrimination suit in a New Mexico state court. ProBuild removed the case to federal court and then moved to compel arbitration based on the mandatory arbitration clause in ProBuild’s employment agreement.  That clause provided, however, that equitable relief could be sought in a court for violation of the non-competition, non-solicitation, and confidentiality covenants in the agreement.  Since those were allegations ProBuild could be expected to assert, whereas the claims employees would tend to file (such as employment discrimination) had to be arbitrated, “common sense” led the federal court to hold that the agreement was one-sided and unfair.  Tatum v. ProBuild Co., No. Civ. 12001060 LH/LFG (D.N.M., July 17, 2013).

The Agreement.  The parties’ agreement required them to attempt to settle their disputes but, if not resolved amicably, to proceed to final and binding arbitration.  However:

1.         The parties had “the right to seek an injunction or other equitable relief from a court in connection with a claim for breach or violation of a non-competition, non-solicitation, non-disclosure or similar protection of business and confidential information obligation.”  Nevertheless, “the enforceability of any such obligation and merits of the underlying claim of breach or violation shall . . . be resolved through arbitration.” 

2.         If a party instituted “court action against the other with respect to any Dispute required to be arbitrated . . ., the responding party shall be entitled to recover from the initiating party all damages, costs, expenses, and attorneys’ fees incurred as a result of such action.”

The Court’s Holdings.  The New Mexico federal court concluded that the agreement was a contract of adhesion since ProBuild drafted it, all employees were required to sign it, and its terms were not negotiable.  Under New Mexico law, adhesion contracts are enforceable except if “the terms are patently unfair to the weaker party.”  Relying primarily on “common sense” (but also mentioning a 2002 California Appellate Court decision, and dicta in a 2010 federal court opinion in a case based on California law), the court in Tatum held that the agreement was unconscionable because “ProBuild has exempted from arbitration the claims it is most likely to bring . . . and confined to arbitration the claims its employees are most likely to bring.”

ProBuild protested that the agreement was not one-sided because after a judge rules on a request for equitable relief, the parties could proceed to arbitrate the enforceability of the covenants.  But the New Mexico federal court explained that this supposed opportunity to obtain an arbitrator’s ruling is illusory.  If ProBuild seeks and obtains an injunction from a court, necessarily the court will have made at least a preliminary determination that the covenants are enforceable, and an arbitrator is unlikely to challenge that determination.  On the other hand, if an employee asks a court for equitable relief and it is denied, few employees would then initiate arbitration and run the risk of having the arbitrator shift to the employee ProBuild’s costs and attorneys’ fees relating to the court proceeding.  For these reasons, too, the district court concluded that the agreement was unconscionable.

The court’s decision runs contrary to a recent California appellate decision which reached a different result. Special care should be given in using such exclusions in employment agreements and counsel should analzye applicable state law, including any recent decisions, before using such provisions.