August 03, 2015 Practice Points

California Denies Arbitration Due to Possible Conflicting Rulings

By Brian Farkas

In VOX Entertainment, Inc. v Reese et al., 2014 WL 462251 (Cal. App. 2 Dist. Feb. 5, 2014), a California appellate court affirmed a denial of a motion to compel arbitration where not all defendants were bound by an arbitration agreement and conflicting decisions could result.

VOX, a marketing and event company, sued five defendants—three individuals and two corporations. The three individuals were all previous members of VOX management, with leading roles in the company’s finance, marketing, and sales divisions. According to the complaint, in 2011 the three decided to establish a competing business and used their positions at VOX to advance their competitive advantage by “encumbering VOX financially to the benefit of their planned competing business and positioning clients to transition to their planned competing business.” The client base for this competing business would be “selected from the most lucrative clients of VOX.”

The two corporate defendants were VOX clients. The individual defendants allegedly disclosed their secret plan to establish a competing business, and the corporate clients sought to establish a joint venture with them in order to save money on the types of services provided by VOX.

VOX’s claims included inter alia, disclosure of confidential information, misappropriation of trade secrets, unfair competition, and breach of contract.

The three individuals each had signed employment agreements with the company that required arbitration of “any dispute, controversy, or claim arising out of or related to the agreement, or its validity, enforcement, interpretation, breach, or termination.” The corporate defendants, however, did not have any arbitration agreement with VOX.

The individual defendants moved to compel arbitration pursuant to their employment agreements. VOX, preferring court, opposed the motion to compel on the grounds that VOX’s claims against the corporate defendants arose from the same transactions as those against the individuals. VOX argued that resolution of some claims in a judicial forum and others in an arbitral forum could result in conflicting or inconsistent rulings. Moreover, VOX argued that the defendants in each forum would attempt to blame the defendants in the other proceeding in order to seek to escape liability, or minimize their apportionment of fault. This could hurt VOX’s potential recovery.

Both the trial and appellate courts agreed with VOX, citing California Code of Civil Procedure section 1281.2(c). That section gives courts discretion to deny a motion to compel arbitration where “[a] party to the arbitration agreement is also a party to a pending court action… with a third party, arising out of the same transaction or series of related transactions and there is a possibility of conflicting rulings on a common issue of law or fact.” Despite the strong public policy in California and elsewhere that favors the enforcement of arbitration agreements, the court here agreed that the facts connecting the corporate and individual defendants were too similar to allow the claims against them to proceed in different tribunals. Instead, the court held that all claims against all defendants would be heard in court.

Keywords: arbitration, alternative dispute resolution, litigation, conflicting results, California Code of Civil Procedure, motion to compel

Brian Farkas is with Goetz Fitzpatrick LLP in New York, New York.

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