Press Release
Washington, DC, April 21, 2008--The U.S. Court of Appeals for the Third Circuit last week reversed a district court’s holding that an arbitration clause was unenforceable by reason of “unconscionability.”
The case, Steven A. Zimmer v. Cooperneff Advisors, Inc and BNP Paribas SA, was on appeal from the U.S. District Court for the Eastern District of Pennsylvania (in Philadelphia) involving an arbitration clause in an employment agreement between
Mr. Zimmer and his employer, Cooperneff.
The company’s employment agreement required all claims to be arbitrated except certain enumerated claims, which included any claim involving the company's intellectual property. The case involved a software program to trade securities that was being developed while Zimmer was employed at Cooperneff. But, according to the company, Zimmer was intending to move to a competitor and use it there. To stop that misappropriation, Cooperneff Advisors obtained a temporary restraining order against disclosure of the program to the competitor.
In reversing the district court, the Third Circuit held that there is no such thing as a "presumption" of unconscionability, and that the burden is on the persons seeking to prevent enforcement of the arbitration clause (in this case the employee) to prove it is so unreasonable as not to be enforceable. The Court further held that the person must prove both that the arbitration clause was obtained through unfair leverage, and that the imbalance was so great as to be fundamentally unfair. The Court held that the arbitration clause was not obtained through unfair advantage, and opined that it did not appear to be so imbalanced as to be fundamentally unfair either.
"The Court has affirmed the strong judicial policy favoring arbitration, not only at the federal level but as enunciated by the Pennsylvania Supreme Court and made clear that the federal courts in the Third Circuit are to adhere to that policy," said Kenyon & Kenyon partner Edward T. Colbert, who represented Cooperneff.
On the issue of waiver, the Court of Appeals again reversed the lower court decision. The Court noted that the lower court ruled only that a "non-traditional" waiver had taken place.
Kenyon & Kenyon’s Colbert , who is based in the firm’s Washington, DC office, added that the decision of the United States District Court in Philadelphia “had the potential to play havoc with normal business practices, including the ability to protect even the most valuable trade secrets. Had it been affirmed, the widely used arbitration clauses in employment contracts would have become virtually worthless.”
“Although the positions of the Court of Appeals regarding unconscionability and waiver were not new, they were reiterated in the context of arbitration clauses because of the number of lower courts departing from Third Circuit precedent on the question of enforceability of unequal arbitration clauses and waiver,” Colbert said.
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