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Federal judges are sharply divided over how to apply a 2002 decision from the Pennsylvania Superior Court that conflicts with two prior decisions from the 3rd U.S. Circuit Court of Appeals on the issue of whether an arbitration clause should be deemed “unconscionable” if it gives only one party the option of going to court. In Zimmer v. CooperNeff Advisors Inc., Senior U.S. District Judge Robert F. Kelly found that while two of his colleagues on the Eastern District bench have continued to apply the 3rd Circuit’s decisions that approved of such arbitration provisions, the more recent decision from the Superior Court shows that they must now be rejected. Unlike his colleagues, Kelly concluded that he is “not strictly bound” by the 3rd Circuit’s prior holdings “in view of the Superior Court’s more recent alternative ruling.” The disputes between plaintiff Steven Zimmer and CooperNeff sparked a pair of lawsuits — one brought by CooperNeff in the Montgomery County Court of Common Pleas and a second suit brought by Zimmer in U.S. District Court. According to court papers, Zimmer began his employment with CooperNeff in March 2003 working in the hedge fund area. When Zimmer left CooperNeff in late June 2004, a dispute arose over the ownership rights to a computer model created by Zimmer to help rank the quality of stocks that might be included in the hedge fund. Zimmer claims that the model was completed prior to the start of his employment with CooperNeff and, therefore, is his own intellectual property. But CooperNeff claims that since Zimmer updated, edited and perfected the model while at CooperNeff, it became CooperNeff’s property under the terms of his employment agreement. In early July, CooperNeff filed suit in Montgomery County alleging claims of breach of contract, misappropriation of trade secrets, conversion and unfair competition. Later that month, Zimmer responded by filing a federal suit against CooperNeff alleging claims of copyright infringement, defamation, conversion and tortious interference with contractual relations. Zimmer asked for an injunction ordering CooperNeff to cease all efforts to decipher his computer model and requiring CooperNeff to purge all copies of the model from its computer system. But on the eve of the injunction hearing, CooperNeff’s lawyers — A. Elizabeth Balakhani and Susan K. Herschel of Hoyle Fickler Herschel & Mathes in Philadelphia, along with Edward T. Colbert and Brian Mudge of Kenyon & Kenyon in Washington, D.C. — moved for an order compelling arbitration of Zimmer’s claims. In response, Zimmer’s lawyers — Gerald S. Berkowitz and Richard N. Lipow, both of Malvern, Pa., along with Frank R. Emmerich Jr. of Conrad O’Brien Gellman & Rohn — argued CooperNeff had waited too long to demand arbitration and had waived its right to do so by filing suit first in state court. Kelly found that the issue of the enforceability of the arbitration clause was a vexing one due to a conflict between decisions from the 3rd Circuit and the Superior Court. The specific issue, Kelly said, is “whether an arbitration clause that allows one party a choice to litigate or arbitrate, but requires the other party to arbitrate all disputes is substantively unconscionable.” CooperNeff’s lawyers pointed to a pair of 3rd Circuit decisions — the 1999 decision in Harris v. Green Tree Financial Corp. and the 2002 decision in Blair v. Scott Specialty Gases — to support their argument that such a difference in rights does not make the arbitration clause unconscionable. In Harris, the 3rd Circuit held that “as long as the requirement of consideration is met, mutuality of obligation is present, even if one party is more obligated than the other.” But Kelly found that after Harris and Blair were decided, the Pennsylvania Superior Court handed down a contrary decision in Lytle v. Citifinancial Services Inc., holding that “under Pennsylvania law, the reservation by [one party] of access to the courts for itself to the exclusion of the consumer creates a presumption of unconscionability, which in the absence of ‘business realities’ that compel inclusion of such a provision in an arbitration provision, renders the arbitration provision unconscionable under Pennsylvania law.” Kelly noted that the Lytle court “expressly recognized that its holding was contrary to the 3rd Circuit’s decision in Harris, but found that the exclusion of access to the courts for one party created the presumption of unconscionability absent some business reality for this difference.” Since Lytle, Kelly found that federal judges have split on how to apply the case. “Some courts have refused to apply Lytle and have continued to apply Harris and Blair,” Kelly said, citing two Eastern District decisions and one Eastern District Bankruptcy Court decision. But Kelly found that a second bankruptcy judge opted to follow Lytle. “The issue then becomes whether this court is bound by the 3rd Circuit’s opinions in Harris and Blair when a subsequent state appellate court has contradicted the 3rd Circuit,” Kelly wrote. On that point, Kelly found that he was free to consider the issue anew in light of the Superior Court’s ruling. “Based upon the Superior Court’s ruling in Lytle that a presumption of unconscionability arises where one party reserves sole access to the courts, we find that the arbitration clause in the employment agreement is presumed to be unconscionable,” Kelly wrote. “By giving CooperNeff the exclusive right to choose between judicial action or arbitration in intellectual property disputes, yet forcing Zimmer to arbitrate all of his claims, the arbitration clause is presumed to be unconscionable,” Kelly wrote. Under Lytle, Kelly found that CooperNeff was unable to point to any “business realities” that would overcome the presumption of unconscionability. But even if the arbitration clause were not unconscionable, Kelly found that CooperNeff had “effectively waived” its right to compel arbitration. “Through CooperNeff’s initiation of its judicial action against Zimmer, as well as continuing to pursue its purported rights to the model in state court, it has waived any rights it had under the arbitration clause to compel arbitration,” Kelly wrote. The employment agreement, Kelly said, “gave CooperNeff a choice to seek arbitration to enforce its purported intellectual property rights, or to file a judicial action, not both.” Kelly found that CooperNeff “made its choice to seek judicial action by filing and continuing to pursue its case in state court.” As a result, Kelly said, “Zimmer should be allowed to seek judicial action as well in his attempt to enforce the intellectual property rights that CooperNeff alleges are its own.”

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