Arbitration Fairness Act May Push More Competitive Conflicts Into Court

Once favored as a litigation cost-and time-reduction panacea, arbitration as an institution may be falling out of favor, and a current legislative response to this climate of disfavor could eliminate arbitration as a forum for most non-competition and non-solicitation legislation. The Arbitration Fairness Act of 2009 is a pending bill that would, among other things, invalidate binding arbitration clauses in employment agreements. As drafted, the AFA would take effect for disputes “arising on or after” the date of enactment – in other words, it would apply retroactively to employment agreements, many of which include not only business non-competes and non-solicits, but mandatory arbitration provisions as well.

The result will be a trip to court for the business that may have contracted to avoid it. Suppose your business has key manager who leaves to work for a competitor. His non-compete should restrict that move, but the manager claims it is unenforceable. Assuming no challenge to the bargaining process or fundamental fairness of the agreement exists, your company might ordinarily invoke the arbitration clause. In arbitration, you have the opportunity to present arguments about the enforceability of the clause in a confidential setting, and a ruling against your company is not one that will set precedent that might impact your company’s other agreements.

With the AFA in effect, your company would need to head to Court, or, as is often the case, the manager might preempt that move by filing his own declaratory judgment action to declare your agreement unenforceable. In that forum, a negative ruling – especially one that is appealed unsuccessfully – could work to establish the invalidity of other, like agreements within the company. The litigation will be a very public undertaking, and the results accessible to anyone who chooses to view the docket.

If the AFA’s passage appears imminent, contingency planning may be in order. Here’s the text: http://tinyurl.com/bnjhk8. In committee now, the AFA stands a fair chance of passage by a Democratic Congress. We’ll keep you apprised of the bill’s progress, and in the meanwhile, it may be worth evaluating existing agreements and having in place a forward-looking response strategy that accounts for the AFA or similar legislation.

As an aside, your author is not so certain that arbitration is the necessarily the best forum to litigate these competitive provisions in every setting. For example, even if prevailing law favors your position, a negative arbitration result is virtually unappealable. The key is flexibility, and planning to account for your business’ particular competitive needs: there is no “one size fits all” solution.

--Andrew Flake

Andrew B. Flake is a partner in the Litigation Group at Arnall Golden Gregory LLP (andrew.flake@agg.com). Our firm serves the business needs of growing public and private companies, helping clients turn legal challenges into business opportunities. We don't just tell you if something is possible, we show you how to make it happen. Please visit our website for more information, www.agg.com.