Before 2017

Obligation to Enforce Arbitration under FAA Policy Trumps Motion to Prevent Enforcement of “Clearly Void” Non-Competition Agreement

On May 20, 2015, Judge Dudley H. Bowen of the United States District Court for the Southern District of Georgia, entered an order denying the Motion for Preliminary and Permanent Injunction filed by one of the plaintiffs (Christopher Hermann) and granting in part the motion for dismissal and to compel arbitration filed by Defendant Unishippers Global Logistics, LLC (“Unishippers”). Mr. Hermann’s motion sought to prevent Unishippers from claiming that he was in violation of a covenant not to compete agreement signed with MSA which had originally made Unishippers a third party beneficiary (the “Non-competition Agreement”).  Mr. Hermann asserted the Non-competition Agreement was invalid and unenforceable.

The case was initiated by one corporate (Morning Star Associates, Inc.) and three individual franchisees (collectively “MSA”) against their franchisor, Unishippers, following the termination of three franchise agreements. MSA alleged several claims largely based on Unishippers termination of the franchise agreements under one provision and then pursing enforcement of inconsistent, waived provisions. Both the franchise agreements and the Non-competition Agreement contained arbitration provisions.

The Court noted that it “must ‘construe arbitration clauses generously, resolving all doubts in favor or arbitration.” Becker v. Davis, 491 F.3d 1292, 1305 (11th Cir. 2007). The author notes that the 11th Circuit and the State of Georgia lead the country in enforcement of arbitration provisions and hospitality to non-resident claimants and their representatives. The Atlanta International Arbitration Society.[1]

MSA challenged enforcement of the arbitration provisions on four grounds: (1) the FAA exempts transportation workers, (2) the Non-competition Agreement was waived or invalid, (3) Unishippers has no valid agreement to arbitration, and (4) the claims are outside the scope of the Franchise Agreements’ arbitration provisions.

The FAA Exemption. The Court noted that the asserted exemption was to be “narrowly construed to apply only to ‘transportation workers; and not to employment contracts in general,” quoting Hill v. Rent-A-Center, Inc., 298 F.3d 1286, 1289 (11th Cir. 2005). Noting again that “the Eleventh Circuit has been exceptionally clear about one thing; ‘[A]ll doubts are to be resolved in favor of arbitration,’” the Court found that MSA had not proven employment status (and found as a matter of law to the contrary). Ruby-Collins, Inc. v. City of Huntsville, Ala., 748 F.2d 573, 576 (11th Cir. 1984). Similarly, the Court found no employer-employee relationship between Mr. Hermann and Unishippers based on the Non-competition Agreement between Mr. Hermann and MSA (of which Unishippers was a terminable third-party beneficiary). Reinforcing its decision, the Court found that Mr. Hermann as a freight broker was not a transportation worker as required for the exemption and the eight-factor test to meet the relation to interstate commerce requirement had not been met.[2]

The Court found that the other three arguments raised by MSA were controlled by the fact the Franchise Agreements and the Non-competition Agreement all contained a delegation provision, conferring authority on the arbitrator to resolve disputes of enforceability (including whether the agreement is void or voidable). Citing Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63, 70-71 (2010), the Court noted that the arbitration provision is severable from the remainder of the contract and, therefore, the delegation provision is unaffected by assertions the underlying contract, was void, terminated, voidable, or even that the dispute was exempted from the arbitration provision’s application.

Despite the Court’s unequivocal adherence to the legal compulsion of arbitration for all issues under the law,[3] the Court did pause to note that “the Non-Competition Agreement is clearly void under applicable Georgia law.” Query whether many arbitrators would ignore this comment when it is placed before them during the arbitration.

The case is Morning Star Associates, Inc. v. Unishippers Global Logistics, LLC, No. 1:15-cv-033-DHB, 2015 WL 2408477, entered 05/20/15 by Judge Dudley H. Bowen in the U.S. District Court for the Southern District of Georgia, Augusta Division.
[1] The author is a member of the Executive Board of the Atlanta International Arbitration Society.

[2] The eight factors as set forth in Lenz v. Yellow Transp., Inc., 431 F.3d 348, 351 (8th Cir. 2005), are: (1) works in transportation industry; (2) directly responsible for transporting goods; (3) handles goods that travel interstate; (4) supervises other transportation workers; (5) is within a class for which special arbitration already existed when FAA enacted; (6) vehicle itself is vital to commercial enterprise of employer; (7) strike by specific individual would disrupt interstate commerce; and (8) there is a nexus between employee and vehicle he utilizes necessary to perform job.

[3] The Court noted in beginning its Conclusion, “the Court is obliged to adhere to the strong federal policy of the FAA encouraging the enforcement of arbitration provisions.”

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