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As the costs of employment litigation continue rising, employers continue to look to alternative dispute resolution processes to gain control over potential lawsuits. In Zimmer v. CooperNeff Advisors Inc., the 3rd U.S. Circuit Court of Appeals recently addressed the enforcement of a contractual arbitration provision in the face of challenges based upon unconscionability and waiver. Arbitration in Employment Agreement Steven Zimmer holds a doctorate in economics from Harvard and worked as a portfolio manager for Vanguard when, in late 2002, he met with the chief executive officer of CooperNeff, a hedge fund, about possible employment. During the interview process, Zimmer discussed and demonstrated the capabilities of a computer stock trading model that he had developed and intended to use at CooperNeff. An offer was extended in early February, and Zimmer began his employment in late March 2003. On the first day of his employment, Zimmer was provided with an employment agreement including a mandatory arbitration clause including that “all claims and disputes arising under this Agreement or in connection with your employment by the Company; all claims arising from the terms and conditions of your employment; [and] all claims arising from the termination of your employment … would be subject to mandatory arbitration.” Under the agreement, however, the company retained the right to litigate directly in court without arbitration. Significantly, the agreement included an intellectual property provision that all such property would be the “sole and exclusive property of the Company.” When Zimmer balked at this provision in the agreement, based upon his stock trading model, he was told to either sign the agreement or his employment would be terminated. Zimmer signed but, during the course of his employment, went to great lengths to maintain control over what he considered to be his computer program. Fifteen months later, however, Zimmer gave notice to CooperNeff that he had accepted employment at another hedge fund. At his exit interview, Zimmer was presented with an unfiled six-count complaint in which CooperNeff sought to retain the stock trading model that Zimmer had brought to and used during his employment. Zimmer left his employment and CooperNeff sought, and obtained, a temporary restraining order the next day, enjoining Zimmer from using the computer model in his new position. Employer Moves to Compel Arbitration Shortly thereafter, Zimmer obtained a copyright on his trading model and then filed a federal complaint against CooperNeff alleging, in part, copyright infringement and misappropriation of trade secrets. In response to this complaint, CooperNeff filed an answer asserting, as an affirmative defense, that Zimmer was required to arbitrate his complaint under his employment agreement. The court denied CooperNeff’s motion to compel arbitration on the grounds that the arbitration clause was unconscionable and that CooperNeff had waived its right to compel arbitration by initiating litigation against Zimmer in state court. CooperNeff appealed. Unconscionability The district court found that the arbitration clause in the agreement was both procedurally and substantively unconscionable. The 3rd Circuit observed that procedural unconscionability refers specifically “to the process by which an agreement is reached in the form of an agreement, including the use therein of fine print and convoluted or unclear language.” Substantive unconscionability, on the other hand, looks to whether the arbitration provision “unreasonably favors the party asserting it.” Initially, the court found that Zimmer’s educational background, coupled with his failure to negotiate the agreement before accepting the job offer or beginning his employment, defeated his claim of procedural unconscionability. The court specifically found that Zimmer “does not allege that he was denied an opportunity to negotiate the contract before accepting CooperNeff’s offer of employment; rather, he alleges that the Company forced him to sign the agreement after he had already been on CooperNeff’s payroll for over a month.” The court distinguished Zimmer’s situation from cases where the employees were unsophisticated, and relatively uneducated, and were directed to sign an agreement during the course of their employment. In this case, the court observed that Zimmer could have inquired about an agreement before accepting the position with CooperNeff but did not. With respect to the district court’s finding of substantive unconscionability, the court found that the Pennsylvania Supreme Court had recently held that the party challenging an arbitration agreement carries the burden to demonstrate that the agreement is both procedurally and substantively unconscionable. The court rejected Zimmer’s argument that the agreement was unfair (i.e., substantively unconscionable) because Zimmer was required to arbitrate all disputes, while the company reserved the right to enforce the agreement in court. The appellate court found that because the district court had based its finding of substantive unconscionability on the fact that the agreement provided unequal access to courts, and the Pennsylvania Supreme Court had subsequently rejected this blanket finding, the finding of substantive unconscionability could not be upheld. Waiver Finally, the court rejected Zimmer’s argument that CooperNeff had waived its right to arbitration by initially litigating in state court. In assessing whether CooperNeff had waived its right to enforce the arbitration provision, the court found that “prejudice is the touchstone for determining whether the right to arbitrate has been waived by litigation conduct.” Among the factors to be considered in determining prejudice are “the timeliness of the Motion to Compel Arbitration, the degree to which the merits of the non-movant’s claims have been contested by the party moving for arbitration, whether the non-movant is otherwise aware of the movant’s intention to seek arbitration” and the extent of trial court proceedings, including motion practice, pretrial orders and whether discovery has taken place. The court found that the district court had not properly considered these factors in determining whether CooperNeff had waived its right to arbitrate. Courts determining waiver must look “beyond the mere initiation of litigation to consider the extent to which the party seeking to compel arbitration took unfair advantage of the litigation process to the detriment of the other party.” In this light, the court found that the case should be remanded to the district court for findings of facts on this issue. The decision strongly favors the enforcement of arbitration provisions and permits an employer to present an arbitration process that is favorable to its interests. The process, however, must be fair and should be presented in such a way that the employee, or applicant, has an opportunity to consider its terms and acknowledges having done so without duress or coercion. Sid Steinberg is a partner in Post & Schell’s business law and litigation department. He concentrates his national litigation and consulting practice in the field of employment and employee relations law. Steinberg has lectured extensively on all aspects of employment law, including Title VII, the FMLA and the ADA.

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