A recent case in Arizona dealt with the issue of whether an arbitration provision in an employment agreement can be enforced.

The plaintiff, a security and patrol company, hired a general manager who signed an employment agreement stating that, “If litigation is initiated in any manner, by either party, pertaining to this agreement, both employer and employee agree to submit to binding arbitration under the jurisdiction of the courts of Maricopa County, Ariz.”

The general manager and several other employees subsequently resigned and started their own security company. According to the plaintiff, they then induced other employees to leave, causing a “massive walk-off of employees that resulted in the inability of the plaintiff to provide adequate security services from multiple existing contracts.” In addition, the plaintiff alleged that the defendants acted in ways detrimental to the plaintiff before resigning, by informing other employees that the plaintiff had changed its name to the name of the defendant; misrepresenting to clients that the plaintiff had changed its name or that the plaintiff and defendant were one and the same; and using the plaintiff’s property, financial resources, and proprietary information for the benefit of the defendant.

The plaintiff filed a complaint in the superior court alleging breach of contract against the general manager and tortious interference with contract breach of fiduciary duty, unjust enrichment, civil conspiracy, and direct officer liability against the defendants. The defendants filed a motion to compel arbitration based on the general manager’s employment agreement. They acknowledged that only the general manager was bound by the employment agreement, but sought to compel arbitration for all of the parties. The superior court denied the motion to compel arbitration.

The defendants appealed, claiming that Arizona law was preempted by the Federal Arbitration Act (FAA), which applies to employment agreements, therefore requiring the plaintiff to arbitrate. The FAA was enacted to overcome “judicial hostility to arbitration agreements … and to place arbitration agreements upon the same footing as other contracts.”

The Arizona Supreme Court recognized that the FAA “preempts state law and governs all written arbitration agreements involving interstate commerce, making such agreements enforceable in both federal and state courts.” Under the FAA, the courts must stay litigation of arbitrable claims pending arbitration and must compel arbitration in accordance with the terms of the contract.

But the court pointed out that the party moving for arbitration has the burden of proving the existence of a contract containing an arbitration clause, in a transaction that substantially affects interstate commerce. If the party moving to compel arbitration fails to make such a showing, the motion should be denied.

In the defendants’ motion to compel arbitration, the court noted they did not explain how the general manager’s employment substantially affects interstate commerce. The court further indicated that when the issue was raised in the lower court, the defendants stated simply that “security services could be provided to out-of-state entities and the plaintiff could purchase security supplies, such as guns or uniforms, from outside the state of Arizona. This was insufficient to create a genuine issue of material fact requiring resolution at an evidentiary hearing.

Thus the defendants failed to carry their burden of establishing that the FAA applied. The superior court denied the motion to compel arbitration.

The defendants also argued the arbitration clause was enforceable as a common law contract. The court indicated that they did not, however, make that argument in their motion to compel arbitration. The defendants included only one sentence asserting that “the language in the employment agreement is also enforceable as a common law contract term.” They offered no legal authority or factual support for that belated assertion.

Therefore, the court affirmed the denial of the defendants’ motion to compel arbitration, further stating that because the case has not been resolved on its merits, the court deferred any decision on fees to the superior court after the successful party has been identified.