Company Could Not Compel Arbitration in Non-Compete Dispute

In standard employment agreements and related staffing contracts, companies often include both a non-compete clause and an arbitration clause.  They do so to protect against unfair employee competition, and against the costs and uncertainty of employees’ legal claims.  While arbitration clauses may assist in reducing costs from employment law claims, they are typically ill-suited for resolution of a non-compete dispute.  As a best practice, such arbitration clauses should exclude non-compete disputes from the scope of arbitration.  In a recent decision by the Federal District Court for the Western District of Virginia, the court prevented arbitration of a non-compete dispute by closely reviewing the language of the company’s franchise agreement with an individual, and determining that the arbitration clause did not apply. Hamden v. Total Car Franchising Corp., 2012 U.S. Dist. LEXIS 71251 (May 22, 2012).

In May 1996, Devin Hamden entered a 15-year franchise agreement with Total Car Franchising Corp. (“Total Car”), a car painting and restoration chain doing business as “Colors on Parade.”  As part of that agreement, Hamden agreed that, while a franchisee and for two years after being a franchisee, he would not own or manage any other “mobile or fixed paint restoration business” in the same metropolitan area.  After finishing the 15-year term of the agreement, Hamden informed Total Car that he was closing up the franchise.  He then notified Total Car that he intended to open his own dent-repair business, and asked Total Car to agree that the non-compete’s provisions had expired.  When it refused, Hamden filed a complaint in federal court seeking to have the court rule that he was no longer restricted by the non-compete clause.  In response, Total Car filed a motion to dismiss the complaint, claiming that the parties had to resolve their disputes through arbitration under the franchise agreement.

As the drafter of the franchise agreement, Total Car had to prove that the parties intended to resolve all of their disputes through arbitration.  The arbitration clause, however, required arbitration of disputes “within the Colors on Parade community.”  It further required disputants to “submit[] a demand for arbitration to us” and stated that “[w]e will assist in the selection of arbitrators and serve as case administrator.” As a result, Hamden argued that the language referred only to disputes between different franchisees, and not disputes between Total Car and individual franchisees.  The court agreed, reasoning that the language used the words “we” and “us,” which were defined in the agreement to refer to Total Car.  Hence, the arbitration provision only applied to disputes between Hamden and other franchisees, which Total Car would help manage.

This decision allowed the case to proceed in federal court.  It also prevented the company from forcing arbitration in which it would select the arbitrators and administer the case.  As such, the decision allowed the court to determine the application of the non-compete and provide the parties the benefit of its objective determination.  This result typically represents the best scenario for both employers and employees in adjudicating the enforceability of a non-compete agreement.