Last week we profiled the Nationsbuilders case, an opinion from the Dallas Court of Appeals that touched on a number of post-employment covenant issues. The underlying case was an attempt by a group of defendants to undo an arbitration award entered against them. They were successful with the trial court but reversed by the court of appeals.
Last week we discussed the anti-planning provision that was in the agreement between the parties. The arbitrator made the following finding with respect to that provision:
[it] not only prohibits the [defendants’] from the active conduct of competition, during the restricted period, but also restricts them to a dormant period, which includes no planning to conduct a business that is in competition. Obviously, passive contemplation would not rise to a material level; however, the provision does clearly contemplate and prohibit planning and conduct which would give the [defendants] any business “head start" prior to the conclusion of the restricted period.
The arbitrator found that the defendants violated this provision and entered an equitable extension of the non-compete for 12 months.
The court spent a significant amount of time discussing Texas courts deference to arbitration awards and the difficulty of reversing an arbitration award under the Federal Arbitration Act. Essentially, the party challenging an arbitration award has to show that the other side or arbitrator lied, stole, or cheated to reverse a finding. The court also recognized the broad discretion the arbitrator has in fashioning award.
To determine whether an award is beyond the scope of the arbitrator’s powers, the court noted it would look only at the result and whether the award is rationally inferable from the contract. The court concluded that the equitable extension of the non-compete was rationally inferable from the contract because the remedy gave the plaintiffs the benefit of its bargain of a one-year period without competition. The court upheld the extension noting that this concept is recognized under both Delaware and Texas law.