Former Employer Bounced From Court – Forced to Arbitrate Noncompete Claims

A recent decision from Judge Kaplan in the MA Business Litigation Session highlights some interesting issues that arise when a noncompete case is complicated by the existence of an agreement to arbitrate claims. In Tibco Software, Inc. v. Zephyr Health, Inc. and Kevin Willoe,  Kaplan required a plaintiff seeking to enforce restrictive covenants to arbitrate – rather than litigate in court – claims against both the former employee and his new employer. What makes this case interesting is that the new employer was not a party to the former employee’s employment agreement that contained the arbitration clause at issue.

The decision arose out of lawsuit brought by Plaintiff Tibco Software (“Tibco”), in which Tibco filed an emergency motion for a temporary restraining order against Kevin Willoe (“Willoe”), a former employee, and Zephyr Health (“Zephyr”), Willoe’s new employer. Tibco alleged that Willoe breached his employment agreement’s noncompete provision. However, in addition to a non-compete clause, Willoe’s contract contained an arbitration provision. Relying on this arbitration provision, shortly after Tibco filed its motion, Willoe and Zephyr filed an emergency motion for an order requiring arbitration and staying all arbitrable claims. While Willoe’s reliance on the arbitration provision was straightforward, Zephyr’s argument was more complicated, as Zephyr had not signed the agreement containing the arbitration clause.

After a hearing, Judge Kaplan granted Willoe’s and Zephyr’s motion. Kaplan found that although Zephyr was not a party to the agreement containing the arbitration provision, Tibco was still obligated to arbitrate claims against Zephyr because the claims arose directly out of the restrictions imposed on Willoe through the agreement.

This short order contains several important reminders for employers that wish to implement and enforce post-employment noncompetes and other restrictive covenants. First, it makes clear that plaintiffs can be forced to arbitrate claims against defendants with whom they have no agreements. This fact is particularly significant in non-compete cases, as the plaintiff employer often will want to pursue claims against the hiring employer.

The order also illustrates the importance of carefully drafting arbitration provisions in employment agreements. When an employer chooses to include an arbitration provision in its employment agreements, it often includes language making clear that although employment-related claims will be arbitrated, the employer is permitted to seek emergency injunctive relief in court to protect its rights and interests. This makes sense given the urgent nature of obtaining an injunction in many of these cases. Arbitration can be slow, especially at its early stages where the parties have to go through the process of selecting an arbitrator. This delay is unattractive when a former employee is contacting customers or bringing trade secrets to a competitor. While it is unclear from the order precisely what Tibco’s arbitration provision said, the case may have turned out differently if the arbitration provision contained an appropriate carve-out for injunctive relief.

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