Be Careful What You Wish For: Employer’s Arbitration Clause Backfires

Employment contractA recent decision from the Business Litigation Session of the Massachusetts Superior Court has broad implications for non-compete cases involving arbitration clauses. In TIBCO Software, Inc. v. Zephyr Health, Inc. and Kevin Willoe, the court denied an employer’s motion for a temporary restraining order enforcing a non-compete, finding the employer’s own arbitration provision required it to pursue its restrictive covenant claims before the American Arbitration Association (AAA) in California.

Plaintiff TIBCO had sued a former employee for violating a non-compete clause contained within his employment agreement, and sued the employee’s new employer, Zephyr, for tortious interference with that agreement. TIBCO also filed a motion for a temporary restraining order to enforce the terms of the non-compete. The defendants responded with a motion to compel arbitration based on an arbitration clause also in the employment agreement. The court granted the motion to compel and held that although Zephyr was not a signatory to the employment agreement, it could enforce the arbitration clause against TIBCO because the claims that TIBCO was asserting against Zephyr arose directly out of the restrictions imposed on the employee under his employment contract with TIBCO.

The judge noted that the arbitrator would be authorized to issue preliminary injunctive relief, but that if there was any delay in arbitration, then TIBCO could request an emergency hearing on its motion for a preliminary injunction. However, TIBCO first would have to take its case to the AAA. Although it was not entirely clear from the decision, presumably the employment contract at issue did not contain a typical arbitration carve-out clause permitting the employer to seek emergency injunctive relief in court. This decision thus serves as an important reminder to businesses to carefully draft non-competes and to understand the full implications of the growing use of arbitration clauses. Here, TIBCO presumably included the arbitration clause in its employment agreement to require its employees to enter arbitration with respect to employee-asserted claims in an effort to reduce costs—without contemplating the ramifications on enforcing the restrictive covenant in another part of the contract. Given the urgent need to obtain injunctive relief in a non-compete case, and the often tortured path to selecting an arbitrator or panel, employers will want to avoid any such delay associated with arbitration.

In the rapidly changing business world, protecting a company's human capital and proprietary information is critical to maintaining a competitive edge. On this blog, Nutter's experienced Business Litigation and Labor, Employment & Benefits attorneys offer news and insights on all aspects of restrictive covenants and trade secrets—from analyzing a rapidly evolving body of case law, to summarizing new legislation and legislative efforts, to providing other need-to-know updates and more.

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