Spock: “I am a [lawyer], sir. We embrace technicalities.”
Arbitration is no longer the final frontier. Instead, arbitration is often the first and only forum for resolving disputes. The business community has embraced arbitration as an alternative method of dispute resolution, but sophisticated parties still maintain a preference favoring court resolution of disputes involving preliminary and injunctive relief.
What someone wants and what someone agrees to, however, can vary drastically. Including an arbitration carve-out for preliminary injunctive relief is extremely common, but will the court honor it?
This issue arises at the intersection of two different provisions in an arbitration agreement: the carve-out to an arbitration provision and the delegation provision. The carve-out typically excludes certain disputes from arbitration, such as:
- Example: “The Parties agree to resolve any dispute, controversy or claim that arises during the course of the Parties’ Agreement. If the Parties are unable to resolve a dispute, the dispute, other than a dispute relating to the breach of the confidentiality provision of this Agreement, shall be subject to final and binding arbitration by a single arbitrator.”
- Example: “Any dispute arising out of or in connection with this Agreement shall be referred to and finally resolved by arbitration before a single arbitrator. The foregoing, however, shall not preclude the parties from applying for any preliminary or injunctive remedies available under applicable laws for any purpose.”
The delegation provision is a statement by the parties about who decides whether a dispute is arbitrable, usually indicated by:
- A statement expressly reserving questions about the scope of arbitration for the arbitrator.
- Example: “Any dispute arising out of or in connection with the arbitration provision of this Agreement, including any questions regarding its existence, validity or termination, shall be referred to and finally resolved by the arbitrator.”
- Incorporating the Rules of the American Arbitration Association (“AAA”) or another arbitration organization’s rules that reserve disputes over the scope of an arbitration provision for the arbitrator.
- Example: “The Parties agree that any dispute regarding the interpretation or enforcement of this Agreement shall be resolved by binding arbitration according to the rules of the American Arbitration Association.”
So what happens if an arbitration provision includes both a carve-out for preliminary injunctive relief and a delegation provision? According to several recent cases in the Eleventh Circuit, everything goes to arbitration, even claims expressly carved out by the parties.
The anomaly occurs because of the order in which the court must address what it has the authority to decide and what is reserved for the arbitrator.
The court begins by assessing whether questions about the scope or applicability of the arbitration provision may be addressed by the court. The default setting is that the court retains the authority to decide “questions of arbitrability.” The parties, however, have the ability to reassign that authority from the court to the arbitrator. Doing so means that the arbitrator decides whether a dispute should be in arbitration and the merits of any dispute subject to arbitration.
The delegation provision trumps any carve-out. If questions of arbitrability are reserved for the arbitrator, then the court cannot address claims within the carve-out unless both parties agree that the carve-out claims may be brought in court.
But any dispute about whether a claim is arbitrable or carved out obliterates the court’s authority to address the claim because questions of arbitrability must be heard by the arbitrator.
A recent case in the Northern District of Georgia demonstrates how a delegation provision stopped a former employer from enforcing non-compete and non-disclosure provisions against a former employee.
In Cellairis, Inc. v. Duarte, Case No. 2:15-cv-101-WCO (N.D. Ga. 2015), a cell phone kiosk franchisor filed a preliminary injunction to enforce non-compete and non-disclosure provisions against a former employee. The agreement contained an arbitration clause that sent everything to arbitration except for a few disputes where irreparable harm could result, like a confidentiality or non-compete violation.
But the agreement also contained a delegation provision, which unequivocally provided that all disputes over the scope of the arbitration clause must be decided by the arbitrator.
Even though the franchisor had some very compelling evidence that its former employee was competing in the same industry and violating the scope of the non-compete agreement, the court found that it lacked the authority to enjoin the employee because the arbitrator had to first decide whether a request for preliminary injunctive relief qualified as a “request for preliminary injunctive relief.”
Because the franchisor overlooked the effect of the delegation provision on its ability to bring an action in court, the franchisor wasted time and money seeking relief the court could not provide. Instead, after several weeks, the franchisor left the court with nothing more than an order to initiate arbitration proceedings.
NOTES FOR THE CAPTAIN’S LOG
- If your agreements contain carve-outs in any form and either incorporate the AAA Rules or expressly delegate questions of arbitrability to the arbitrator, consider placing a “carve-out” in the delegation provision allowing the court to decide whether a dispute falls within the arbitration carve-out.
- If you are involved or about to be involved in a dispute over an agreement with this issue, it may be more cost-effective and efficient to simply start in arbitration and decide scope issues in that forum. Otherwise, you run the risk of spending precious time arguing about whether the court can even consider your request for relief in the first place–let alone decide it.