• May 8, 2011

A decision last week by Judge Ann Montgomery in RSM McGladrey v. Epp should be required reading for all attorneys who draft employment agreements, especially those with non-competition and arbitration provisions.

The defendants were managing directors of RSM, working out of its New York office, specializing in RSM’s health care practice. As a condition of their employment, each signed a Managing Director Employment Agreement, which includes covenants restricting the solicitation and servicing of certain RSM clients for a period of two years after termination of employment.  The Employment Agreement also has provisions regarding enforcement, preliminary equitable relief, and arbitration.

RSM terminated Defendants as employees in January 2011.  Defendants then joined a competitor of RSM, and have allegedly breached the covenants in the Employment Agreement by servicing and soliciting RSM clients.  RSM obtained an ex-parte Temporary Restraining Order against Defendants in state court. Defendants then removed this action to federal court.

The parties dispute whether their agreement to arbitrate disputes under the Employment Agreements deprives the Federal Court of authority to grant a preliminary injunction. Under Eighth Circuit precedent, a preliminary injunction may be granted in a case subject to arbitration only where “the contract terms contemplate such relief and it can be granted without addressing the merits.” Therefore, injunctive relief is appropriate only if a contract has “qualifying contractual language”; i.e.,  language that provides the Court with clear grounds to grant injunctive relief without addressing the merits of the underlying arbitrable dispute. Without qualifying contractual language, courts must necessarily pass on the merits of a claim because the Dataphase standard for granting a preliminary injunction requires consideration of: the merits of the case.  However, a preliminary injunction pending arbitration may be granted without considering “the probability that the movant will succeed on the merits” because courts may disregard the Dataphase criteria in deference to the arbitrators.

Judge Montgomery then considered just what constitutes “qualifying contractual language” by examining two previous 8th Circuit cases on the topic.  In one, Manion v. Nagin,  while the contract between the parties stated that the agreement to arbitrate “is without prejudice to the right of a party to request interim relief directly from any court  of competent jurisdiction without prior authorization of the arbitrator(s),” that language was not “qualifying contractual language” because it merely authorized a party to request relief, as opposed to being entitled to relief, which would necessarily embroil the court in the merits of the dispute.   

In the second case, Peabody Coalsales Co. v. Tampa Electric Co., the Eighth Circuit found qualifying contractual language and allowed injunctive relief notwithstanding the agreement to arbitrate. There, the parties’ agreement expressly stated that “performance of [the parties’] respective obligations under this Agreement shall be continued in full by the parties during the dispute resolution process.”  Based on that language, the Court ruled that it could grant the injunction without delaying arbitration and without considering the merits of the case.

Applying these standards to the RSM case, Judge Montgomery held that the preliminary injunction was appropriate because the Employment Agreements include “qualifying contractual language.” The terms of the Employment Agreements provide the Court with clear grounds to grant injunctive relief without addressing the merits of the underlying arbitrable dispute. Specifically, Defendants agreed to waive arguments relating to irreparable injury and with respect to enforceability of the contract. Therefore, unlike cases where the contract language only allowed the parties to request injunctive relief by embroiling the court in the merits of this case, the RSM Employment Agreement evinces an intent to avoid addressing the merits of the dispute by waiving any arguments relating to irreparable injury or enforceability. By waiving those arguments, the parties clearly intended that the first Dataphase factor not be reached.

There are many advantages to choosing arbitration of disputes over employment agreements, but lawyers drafting those agreements should make sure to include the requisite language allowing their client to seek immediate injunctive relief where necessary.  Judge Montgomery’s decision provides a template for how to do that.

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