Be Careful What You Ask for: Selecting Forums for Arbitration

On October 2, 2014, the United States Court of Appeals for the Eleventh Circuit rendered its decision in Inetianbor v. CashCall, Inc. A copy of the slip opinion can be found here. Although this case did not involve a non-compete agreement, the Eleventh Circuit’s guidance regarding contractual arbitration provisions may have implications for those drafting and litigating non-competes.

The arbitration clause at issue in Inetianbor was a bit unusual (at least as to the specified forum), but the underlying dispute between the parties was not out of the ordinary. The plaintiff, Mr. Inetianbor, was a Florida resident who borrowed money from Western Sky Financial, LLC. The defendant CashCall, Inc. serviced this loan. Mr. Inetianbor sued the servicer in a Florida court, alleging, among other things, violations of the Fair Credit Reporting Act. After removing the case to a federal court, the servicer then moved to compel arbitration of the dispute pursuant to the terms of Mr. Inetianbor’s loan agreement with Western Sky. This loan agreement contained the following arbitration provision: “You agree that any Dispute … will be resolved by Arbitration, which shall be conducted by the Cheyenne River Sioux Tribal Nation by an authorized representative ….

After the trial court initially compelled arbitration in accordance with this provision, Mr. Inetianbor contacted the Tribe in Eagle Butte, South Dakota. In response, Mr. Inetianbor received a letter from a Tribal Judge stating that the Tribe “does not authorize Arbitration,” but after some back-and-forth, a Tribal Elder was eventually chosen to arbitrate Mr. Inetianbor’s dispute. However, at the preliminary arbitration hearing, the arbitrator explained that “this is a private business deal” and that “[t]he Tribe has nothing to do with any of this business.” When Mr. Inetianbor brought the arbitrator’s statements to the attention of the trial court in Florida, the court was persuaded to reconsider its previous orders compelling arbitration.

The trial court determined that it was not possible to conduct an arbitration in accordance with the parties’ agreement, because the arbitration was not being conducted by an “authorized representative” of the Tribe. On appeal, the Eleventh Circuit affirmed the trial court’s decision. The dispute between Mr. Inetianbor and his loan servicer will now be resolved through judicial proceedings, not through arbitration.

So what does this mean for non-compete agreements? It is probably fair to say that most practitioners have never encountered a non-compete agreement specifying resolution of disputes through arbitration conducted by the Cheyenne River Sioux Tribal Nation. However, employment contracts sometimes contain both non-compete provisions and arbitration provisions. As an initial matter, such arbitration provisions may add additional steps to the process of obtaining injunctive relief from a court when an employer seeks to enforce its non-compete provisions. This said, when the arbitration provisions are enforceable, it is the arbitrator — and not a court — who will ultimately determine the scope and application of the non-compete provisions. The Eleventh Circuit’s decision in Inetianbor underscores the need to pay attention to the forum(s) specified for arbitration when drafting or litigating non-compete clauses subject to arbitration.

Litigation Risks From Job Applicants With Non-Compete Agreements

When a job applicant discloses a non-compete agreement with a former employer, the prospective employer may already be aware that, if the applicant is hired, the former employer might sue for “tortious interference.”  However, as two recent decisions by federal courts in Alabama make clear, a prospective employer can also face claims brought by job applicants — especially if a job offer is rescinded or if the proposed employment does not go as planned.

In Jones v. Océ Imagistics, Inc., No. 1:12-cv-163-CG-M, 2012 WL 6014612 (S.D. Ala. Dec. 3, 2012), an employer (Océ Imagistics) allegedly hired an employee (Mr. Jones) knowing that he had a non-compete agreement with a former employer.  Océ Imagistics later terminated Mr. Jones’s employment when the former employer threatened to sue.  Following his termination, Mr. Jones sued Océ Imagistics.

Similarly, in Cochran v. Five Points Temporaries, LLC, — F. Supp.2d —, 2012 WL 5492597 (N.D. Ala. Sept. 28, 2012), an employer (Five Points) hired an employee (Ms. Cochran) who had a non-compete agreement with a former employer.  However, when the former employer filed suit, Five Points did not initially terminate Ms. Cochran’s employment, but instead hired attorneys to defend her.  Notwithstanding, when Five Points stopped paying for the attorneys, Ms. Cochran turned around and sued Five Points.

The employees in Jones and Cochran attempted to bring “misrepresentation” claims based on almost identical statements by the employers.  When Mr. Jones first told his new employer about his non-compete, the new employer allegedly told him that the “Legal Department says that the non-compete agreement is not enforceable.”  Likewise, when Ms. Cochran told her new employer about her non-compete, the new employer allegedly told her that the attorneys said the non-compete agreement was “not worth the paper on which it was written.”  Both courts, however, rejected such “misrepresentation” claims.  Under Alabama law, stating that a non-compete agreement is “not enforceable” does not necessarily misrepresent anything — this is a statement of opinion, not fact.

Unlike the Jones case, though, the Cochran case did not dismiss the employee’s claims in their entirety.  Ms. Cochran also claimed breach of contract, pointing to a document in which her employer had allegedly agreed to pay for her attorneys.  The court found the allegations in Ms. Cochran’s complaint sufficient to state a claim for breach of this alleged contract.

However, Ms. Cochran’s attorneys not only defended her from her former employer’s claims for breach of the non-compete agreement; her attorneys also filed counterclaims on her behalf.  According to the filings in the state court action initiated by the former employer, the countersuit included allegations that the former employer’s president had “grabbed Cochran’s right buttock” at a company Christmas party.  Her new employer did not believe there was any obligation to fund such a countersuit.  Although the litigation between the former employer and Ms. Cochran has since been resolved, her claims against the new employer (Five Points) are still being litigated.  Meanwhile, the relationship was further soured when Five Points subsequently terminated Ms. Cochran’s employment.

As Jones and Cochran both illustrate, too much focus on a non-compete agreement can lead to litigation exposure in other areas.  In Jones, the employer terminated the new hire (so as to avoid non-compete litigation with the former employer) and was sued by the new hire.  In Cochran, the new employer initially stuck by the new hire through funding litigation over alleged misdeeds at the former employer’s Christmas party.  However, the employer in Cochran was sued by the new hire, too.  Employers considering job applicants who have non-compete agreements should keep in mind general employment-law principles and evaluate the risk of claims by job applicants and new hires, as well as the risk of claims by former employers.

Preparing for a Smack Down: Local Wrestling Company Sues Former Employee and World Wrestling Entertainment for Trade Secrets Violation

A local professional wrestling promotions company, TNA Entertainment, LLC (“TNA”), has sued former employee, Brian Wittenstein, and direct competitor, World Wrestling Entertainment, Inc. (“WWE”), for unlawfully using TNA’s trade secrets against them in unfair competition.  The case, entitled TNA Entertainment, LLC v. Wittenstein and World Wrestling Entertainment, Inc., was filed on May 23, 2012 in the Davidson County Chancery Court, Docket No. 12-746-III and alleges that Wittenstein and WWE violated Tennessee’s Uniform Trade Secrets Act.

According to TNA, Wittenstein was terminated from the company on August 3, 2011.  In connection with his separation, Wittenstein entered into a Separation Agreement and General Release (the “Agreement”), which expressly prohibited him from disclosing TNA’s confidential trade secrets, including information about TNA’s contracts with other wrestling talent.

TNA claims that Wittenstein violated the agreement by downloading TNA’s company policies, contractual agreements with other wrestling talent, and detailed information about its wrestling talent (including compensation). TNA then claims that Wittenstein disclosed the gathered information to his new employer, and direct competitor of TNA, WWE.  TNA asserts that WWE’s possession and use of TNA’s confidential trade secrets provide WWE an unfair competitive advantage regarding wrestling talent.

TNA alleges that WWE has used TNA’s confidential trade secrets to solicit wrestling talent currently, under contract with TNA, and encourage them to join WWE.  Wrestler Ric Flair is a recent example of a client that TNA claims attempted to terminate his exclusive contract with them to sign up with WWE.

To date, the court has entered a temporary restraining order, prohibiting WWE from using TNA’s confidential information.  Though this case is relatively new, it is a prime example of how costly unlawful use of trade secrets can be to former employees and new employers.  Under the Tennessee Uniform Trade Secrets Act, the unlawful user of trade secrets can be liable for the plaintiff’s actual loss caused by the misappropriation of trade secrets and any “unjust enrichment.”  In certain cases, the defendant may also be liable for “exemplary damages” resulting in up to twice the award for the plaintiff’s damages and the plaintiff’s attorney fees.

Ultimately, employers should always be aware of and protect themselves against potential liability when hiring an employee who may possess a former employer’s confidential trade secrets. If you need more information on confidential trade secrets and defenses against former employees, please contact any of the Burr & Forman Non-Compete & Trade Secrets team members for assistance.