Former Employees’ Efforts to Block Foreign Proceedings Relating to Restrictive Covenants Fail

Posted by Neal F. Weinrich on

Supply Basket, Inc. v. Global Equipment Company, Inc., Civil Action No:  1:13-cv-3220-RWS, 2013 WL 5729574 (N.D. Ga. Oct. 22 2013), illustrates some of the issues that frequently come into play when parties battle over the particular forum where a non-compete dispute should be litigated.

The individual plaintiffs in Supply Basket were former employees of Global Equipment.  They were subject to employment agreements containing non-compete and non-disclosure covenants.  Their agreements also contained a mandatory arbitration provision. 

The individuals left Global Equipment and began working for Supply Basket in May 2013.  After the parties’ counsel exchanged letters regarding whether their employment with Supply Basket was in violation of their restrictive covenants, Global Equipment filed a demand for arbitration with the American Arbitration Association against the individual former employees.  Global Equipment also initiated a petition for a temporary restraining order in aid of arbitration in a New York state court.  The petition for the temporary restraining order was filed on the day after the arbitration was filed.

The day after the arbitration was filed but before the TRO petition was filed, the former employees filed an action for declaratory and injunctive relief in the Superior Court of Gwinnett County.  Their suit sought to prevent Supply Basket from pursing litigation or arbitration outside of Georgia to enforce the restrictive covenants.  The Superior Court of Gwinnett County denied the plaintiffs’ request for emergency relief.  Supply Basket removed the case to federal court. 

Faced with a deadline to respond to Global Equipment’s demand for arbitration, the former employees and Supply Basket sought preliminary injunctive relief in the federal court.  More specifically, they asked the federal court to enjoin Global Equipment from pursuing the arbitration and the litigation in New York. 

Global Equipment relied on the Anti-Injunction Act to argue that the district court could not stay the proceedings in the New York state court.  The district court agreed and denied the plaintiffs’ request to enjoin the New York litigation.

The plaintiffs also asked the district court to enjoin the arbitration proceedings.  At a hearing on the plaintiffs’ request for injunctive relief, the plaintiffs challenged the validity of the arbitration clauses in the employees’ agreements.  The district court rejected the plaintiffs’ arguments.  The district court noted that the employees had agreed in their agreements to arbitrate under the auspices of the American Arbitration Association (“AAA”).  The district court further noted that the rules of the AAA provide that an arbitrator has the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement.  The district court therefore found that any questions regarding the validity of the agreement to arbitrate should be decided by the panel in the arbitration.  The district court thus denied the plaintiffs’ request to enjoin the arbitration proceedings. 

Non-compete disputes often involve battles of where and in what forum the disputes should be litigated.  In Supply Basket, the plaintiffs’ efforts to block Global Equipment from pursing injunctive relief in the New York state court and from pursuing its damages claims in arbitration were wholly unsuccessful.