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Fairfax Circuit Court Stays Employment Dispute Pending Arbitration

Published by on April 5, 2010

A Fairfax Circuit Court recently granted the employer defendants’ motion to stay an action pending arbitration in the face of an arbitration clause governed by California law.  More after the break. GKM Newport Generation Capital Services, LLC (“GKM”) was a private equity fund management company located in California but transacting business in Virginia.  In 2006, […]

A Fairfax Circuit Court recently granted the employer defendants’ motion to stay an action pending arbitration in the face of an arbitration clause governed by California law.  More after the break.

GKM Newport Generation Capital Services, LLC (“GKM”) was a private equity fund management company located in California but transacting business in Virginia.  In 2006, GKM entered into an employment agreement with the plaintiff, Randy Domolky, with the following terms:  agreeing to pay Domolky an annual salary of $50,000; giving him a membership and profit interest in Fund V GP (an affiliated entity of GKM); fifty percent of the net management fees up to an annual cap of $200,000; and fifteen percent of Fund V GP’s carried interest in and/or profits from an associated fund.  The agreement also contained a binding arbitration provision.

In 2007, Domolky entered into another agreement related to his interest in Fund V GP.  The agreement did not contain an arbitration clause, but did include an integration provision.  In 2009, some issues arose regarding the amounts of Domolky’s compensation.  Domolky was subsequently terminated without notice in March 2009.  In July 2009, GKM filed a demand for arbitration in California.  In September 2009, Domolky sued GKM in Fairfax Circuit Court alleging breach of contract, unjust enrichment, breach of the covenant of good faith and fair dealing, and actual and constructive fraud.  Domolky also filed a motion to dismiss the arbitration proceeding, alleging that the dispute at issue was not subject to the arbitration clause in the employment agreement, that the clause was unconscionable, and that issues of arbitrability should be decided by the court and not the arbitrator.

The court began its analysis by stating that in deciding issues of arbitration, courts generally apply state contract law.  The court stated that California law favors arbitration, and places the burden of showing otherwise on the party opposing arbitration.  Domolky argued that subsequent agreements, including the Fund V GP agreement, which did not contain an arbitration clause, superseded the first agreement.  GKM argued that the arbitration clause in the first agreement (the employment agreement) should be interpreted broadly.  Citing California precedent, the court stated that so long as the dispute at issue arose out of the first agreement, the arbitration clause in the first agreement would apply even if the agreement was later superseded by a subsequent agreement.  The court pointed out that claims that are not closely related to the agreement provisions would not necessarily be covered by an arbitration clause in the agreement, but that that was not the case here.  The court held that since the claims at issue arose out of the initial employment agreement, the arbitration clause contained in that agreement governed the claims, regardless of whether any subsequent agreements incorporated the initial agreement explicitly or by reference.

Domolky also argued that the arbitration provision at issue was unconscionable because it required the parties to split arbitration costs, rendering it presumptively unconscionable.  The court stated that under California law, to be held unenforceable an arbitration provision must be both procedurally and substantively unconscionable.  Although the court agreed that the arbitration clause was substantively unconscionable, the court found that the clause was not procedurally unconscionable because the parties had equal bargaining power, i.e. Domolky was an experienced business person who had control over the terms of his employment.  Thus, the court concluded that the arbitration clause was not unconscionable.

With respect to Domolky’s claim that issues of arbitrability are for the court to decide, the court found that while California law supports his argument, precedent dictates that proceedings should be stayed to allow the arbitrator to determine the scope of his jurisdiction over the case. 

A case summary can be found here.

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