On July 3, 2013, the Dallas Court of Appeals held that an arbitrator has the power to extend a non-compete agreement by one year. The non-compete at issue prohibited two insurance executives from planning a business that competed with their former employer. The two executives breached the non-compete and the former employer sued. The litigation was resolved with a settlement agreement preventing the two executives from "engaging in competition" from May 4, 2011 through May 4, 2012. The definition of "competition," in part, included planning to conduct a competing insurance business. The settlement agreement was governed by an arbitration clause if any dispute arose, but the clause did not detail what the arbitrator could award for violations of the non-compete.
The bad executives began to "plan" and prepare to sell competing insurance, including: a) advertising the new business; b) preparing regulatory filings; and c) developing underwriting guidelines. Naturally, the former employer filed an arbitration demand. The arbitrator ruled in the former employer's favor and awarded an equitable extension of the non-compete for an additional one year period – May 5, 2012 through May 5, 2013. The two men appealed, winning in the trial court wherein the judge held that the arbitrator exceeded his authority in awarding such an equitable remedy.
The Court of Appeals reversed the trial court's decision. So, what is the lesson learned? If your non-compete includes an arbitration clause, be certain that the clause outlines the penalties for a breach. Include an equitable extension for the non-compete provided, as well as an award of damages for any harm caused to your company resulting from the illegal competition. Remember, the arbitrator – and you – have the power!
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