A New Jersey federal court recently granted a defendant-company’s motion to compel arbitration pursuant to a non-compete agreement between the plaintiff-company and two former employees who had discontinued employment with the plaintiff and went to work for the defendant.  The case is Precision Funding Group, LLC v. National Fidelity Mortgage,  Civ. No. 12-5054 (RMB/JS), 2013 U.S. Dist. LEXIS 76609, 2013 WL 2404151 (D.N.J. May 31, 2013).

Precision Funding Group (“PFG”) and National Fidelity Mortgage (“NFM”) are competing mortgage brokerage firms.  This action arose when two PFG employees, John Itri and Matthew Prizzi, resigned from their positions and started working for NFM.  While at PFG, Itri and Prizzi had signed employment contracts containing a non-compete clause, prohibiting them from working for a competitor within two years from leaving PFG.  These agreements also contained an arbitration clause providing that “[a]ny controversy, dispute, or claim of whatever nature arising out of, in connection with, or in relation to … this agreement … shall be settled, at the request of any party by the final and binding arbitration … determined by the arbitrator….”

PFG brought suit against NFM and subsequently filed arbitration complaints against Itri and Prizzi, making similar allegations in each complaint, contending that Itri and Prizzi recruited PFG employees to join NFM and engaged in misleading activities to steal existing PFG clients. In a six-count complaint against NFM, Precision alleged defamation, commercial disparagement, conversion, unfair competition, intentional interference with a prospective contractual relationship, and intentional interference with a contractual relationship.

NFM, a non-signatory to the employment agreements, sought to compel PFG to arbitrate its claims pursuant to the agreements with Itri and Prizzi, arguing that the allegations arise out of the agreements and that the claims brought in the present case and those in arbitration are “inextricably intertwined.”  In response, PFG argued that there was an insufficient nexus between the claims and that the claims in the present case fall outside the scope of the arbitration clause, or alternatively, that the case should be stayed pending the outcome of the arbitration proceedings between Itri, Prizzi, and PFG.

The court noted that PFG had no contractual obligation to arbitrate claims against NFM because no agreement between the parties existed.  It held, however, that arbitration could be compelled in this case under a theory of equitable estoppel.  Specifically, a non-signatory to an arbitration clause may  compel a signatory to arbitrate if either (1) the issues to be litigated are “inextricably intertwined” with the arbitration agreement, or (2) there is a sufficient nexus as well as an integral relationship between the parties.  Here, the court determined that NFM had standing to compel PFG’s claims to arbitration because the claims arose directly from the actions of Itri and Prizzi which are subject to arbitration.

The court disagreed with PFG’s contention that a sufficient relationship for purposes of compelling arbitration requires a parent/subsidiary relationship, a successor corporation, or a signatory acting as an agent for a non-signatory.  Rather, a non-signatory merely needs to be “closely aligned” with parties to the agreement to compel arbitration, a standard satisfied by NFM’s employment of Itri and Prizzi and PFG’s claims having arisen directly from that employment relationship.

Concluding that NFM had standing to compel arbitration, the court then had to determine whether PFG’s claims fell within the scope of the agreement.  In responding affirmatively the court noted a general presumption in favor of arbitrability, the broad reading typically afforded to the “arising out of” language used in the arbitration clause, and that NFM’s liability depends on whether Itri and Prizzi have breached their non-compete agreements.

The court’s ruling in Precision Funding indicates a broad judicial inclination favoring arbitrability even when sought by non-signatories, particularly where claims against non-signatories are based on the actions of parties having an arbitration agreement with the plaintiff. Defendant-employers seeking to compel arbitration should consider this and explore employment agreements relating to a dispute notwithstanding their status as a non-party. Employers who could be potential plaintiffs may want to carve out non-compete provisions from their arbitration clauses as arbitrating non-compete issues can be awkward and injunctive relief may be more difficult to obtain on an expedited basis.