Dallas COA Reverses After Trial Court Vacates Arbitral Award in Non-Compete Case

Texas’ Fifth District Court of Appeals in Dallas has reversed a lower court’s decision to vacate an arbitration award.  In Nationsbuilders Ins. Services, Inc. v. Houston Intern. Ins. Group, Ltd., No. 05–12–01103–CV, (Tex.App.-Dallas, July 3, 2013), two men, Kevin Cunningham and Michael Leamanczyk, sold their insurance underwriting firm to Nationsbuilders Insurance Services (“NBIS”).  As part of the sale, the two men went to work for NBIS and signed a covenant not to compete.  Four years later, the men left NBIS and went to work for Houston International Insurance Group, Ltd. (“HIIG”).  Not long after Cunningham and Leamanczyk went to work for HIIG, NBIS filed a lawsuit against the two men, HIIG, and HIIG’s chairman and CEO, Stephen Way.  As part of a settlement agreement, Cunningham and Leamanczyk agreed not to engage in competition with NBIS for a period of one year, agreed to arbitrate any future disputes related to the settlement, and agrees that the settlement would be controlled by Delaware law.

The agreement stated in part,

The Restricted Parties also agree during the Restricted Period not to acquire, own or have an ownership interest in, manage, operate, or be employed or engaged by, any person or entity that conducts or plans to conduct a business that is in Competition with the NBIS Parties.

Although Cunningham and Leamanczyk did not engage in direct competition with NBIS during the one-year-period, they did make plans to begin competing with the company as soon as the restricted period ended.  In addition, the two men distributed marketing materials to potential customers, prepared regulatory filings, drafted insurance forms, and made other preparations in anticipation of competing with NBIS during the course of the year.

During the one-year-period, NBIS filed a demand for arbitration against Cunningham, Leamanczyk, Way, and HIIG for breach of the parties’ settlement agreement.  Following a three-day arbitral hearing that concluded before the one-year-period ended, an arbitrator found in favor of NBIS.  In an opinion that was issued after the one-year-period ended, however, the arbitrator ordered that the non-compete period be extended by 12 months and told each party to pay its own attorney’s fees.  Cunningham, Leamanczyk, Way, and HIIG (“Appellees”) asked a trial court to vacate the arbitral award because the arbitrator “exceeded his powers under the federal, Texas, and Delaware arbitration acts by extending the restricted period.”  The trial court agreed and NBIS appealed to the Dallas Court of Appeals.

First, the court addressed NBIS’ claim that the trial court committed error when it found the arbitrator exceeded his powers.  According to the appeals court,

The parties first dispute whether the result—the extension of the restrictive covenant— was “rationally inferable from the contract.” Appellees argue the extension was not rationally inferable because it does not “draw its essence” from the settlement agreement. We disagree. The agreement required appellees for one year to do no planning to conduct a business in competition with Nationsbuilders. The arbitrator found appellees violated this provision. The remedy of a one-year extension of the restricted period gave Nationsbuilders the benefit of its bargain of a one-year period without appellees preparing to conduct a business in competition with Nationsbuilders. The remedy “[drew] its essence” from this provision and is rationally based on that provision.

Next, the court distinguished the case from those cited by the Appellees,

Both American Eagle and Beaird involve a distinguishable situation from the case before us. In those cases, the arbitrators concluded the companies violated the agreements by conduct they had the right under the contracts to perform: discharging an employee for just cause, and contracting out work. The arbitrators’ awards disallowing this conduct were necessarily contrary to the express contractual provisions authorizing the companies’ conduct. By prohibiting conduct expressly authorized by the agreements, those arbitration awards did not draw their essence from the agreements. In this case, appellees do not dispute that the arbitrator correctly determined their conduct breached the no-planning provision of the agreement. The arbitration award ordered the parties to engage in conduct expressly required by the parties’ agreement: that appellees go one year without planning a business in competition with Nationsbuilders. We conclude the arbitration award draws its essence from the agreement. Appellees’ arguments to the contrary lack merit.

After that, the Court of Appeals dismissed the Appellees’ argument that “enforcement of the restricted period became moot when the period expired under the terms of the contract,” by stating,

However, the arbitrator’s award was not one of specific performance of the noncompetition provision; the award was an equitable extension of the restricted period under the arbitrator’s powers of equity. The parties’ settlement agreement provided that “Delaware law will be applicable to any disputes between the Parties.” Delaware law permits a court to extend the period of a covenant not to compete when necessary to prevent a party from being deprived of the benefit of the covenant. See Deloitte & Touche USA LLP v. Lamela, No. Civ. A 1542-VCP, 2007 WL 1114075, *6 (Del. Ch. Apr. 6, 2007) (“courts have extended a covenant not to compete beyond the contractually specified time period only when the party seeking the extension has a legitimate business interest . . . and that party effectively has been deprived of the benefit of its noncompete covenant”). The concept of equitable extension has also been recognized under Texas law.

The Dallas court also rejected Appellees’ claim “that the Fifth Circuit rejected the concept of equitable tolling in its 1984 opinion in Gaylord Broadcasting.”  According to the court,

The court was applying Louisiana law, however, not Delaware or Texas law, and was interpreting a First Circuit opinion applying Massachusetts law. See id. at 252 (citing A-Copy, Inc. v. Michaelson, 599 F.2d 450, 452 n.1 (1st Cir. 1978)). When the Fifth Circuit applied Texas law in Guy Carpenter, it concluded that Texas law permitted equitable extensions. See Guy Carpenter, 334 F.3d at 464.

The arbitration agreement gave the arbitrator authority to apply Delaware law. Delaware law allows for the equitable extension of a noncompetition period. See Deloitte & Touche, 2007 WL 1114075, at *6. Equitable extensions are not contrary to Texas public policy. See Guy Carpenter, 334 F.3d at 464 (concluding equitable extensions of noncompetition periods allowed under Texas law). Therefore, equitable extension of the restricted period was within the powers of the arbitrator. We conclude the arbitrator did not exceed his powers by awarding an equitable extension of the restricted period to May 5, 2013. We sustain Nationsbuilders’ first issue.

Next, the appeals court addressed NBIS’ claim that “the trial court erred by vacating the award for being such an imperfect execution of the arbitrator’s powers that a mutual, final, and definite award was not made.”  After carefully examining the arbitrator’s award, the court stated,

We conclude the trial court erred by vacating the award on the ground that the arbitrator so imperfectly executed his powers “that a mutual, final and definite award upon the subject matter submitted was not made.”  We sustain Nationsbuilders’ second issue.

Finally, the Dallas court refused to issue an order directing that the arbitral award be confirmed due to the fact that the trial court failed to address two of Appellees’ grounds for vacatur.   Because of this, Texas’ Fifth District reversed the trial court’s judgment and remanded the case for additional proceedings.