Court Opinion

ID: 4185650
Source: CourtListenerOpinion
Date Created: 2017-07-12 20:00:48.309457+00
Date Added: 2024-06-11T07:47:21.143544
License: Public Domain

NOT PRECEDENTIAL

                      UNITED STATES COURT OF APPEALS
                           FOR THE THIRD CIRCUIT
                                ____________

                                       No. 16-3196
                                      ____________

                                  TIMOTHY MCHALE

                                             v.

                               TAYLORED SERVICES, LLC,

                                                           Appellant

                    On Appeal from the United States District Court
                             for the District of New Jersey
                       (D. C. Civil Action No. 2-16-cv-01785)
                      District Judge: Honorable Jose L. Linares

                                Argued on March 21, 2017

                Before: AMBRO, JORDAN and ROTH, Circuit Judges

                               (Opinion filed: July 12, 2017)

Christopher M. Farella, Esq,       (Argued)
Anthony J. Laura, Esq.
Epstein Becker & Green
One Gateway Center
13th Floor
Newark, NJ 07102

                    Counsel for Appellant
Robert H. Bernstein, Esq.
Mark D. Lurie, Esq.                (Argued)
Greenberg Traurig
500 Campus Drive
Suite 400
Florham Park, NJ 07932

                     Counsel for Appellee

                                   ________________

                                       OPINION *
                                   ________________

ROTH, Circuit Judge

       This case involves the modification of an arbitration award. Timothy McHale

requested arbitration regarding his termination from Taylored Services, LLC, alleging

that he was fired without cause and without severance, in violation of his employment

agreement. Taylored claimed that McHale was fired for cause and that he waived any

right to severance by violating the restrictive covenants required by the agreement. The

Arbitrator awarded McHale severance but did not award attorney’s fees to either party.

McHale moved to partially confirm and partially modify the award, and the District Court

modified the award to grant McHale attorney’s fees. Taylored now appeals the District

Court’s modification of the award. We will reverse.

                                             I.

       McHale was hired by Taylored as its Chief Operating Officer in June 2011. In

*
 This disposition is not an opinion of the full Court and pursuant to I.O.P. 5.7 does not
constitute binding precedent.

                                              2
November 2012, McHale signed an employment agreement (Agreement) which included

terms for termination and an arbitration clause. Section 5(c) of the Agreement provided

that Taylored was able to terminate McHale immediately for cause if, inter alia, McHale

“engag[ed] in any conduct amounting to . . . gross negligence . . ..” Under Section 5(d),

Taylored could also terminate McHale without cause as long as, inter alia, Taylored

provided written notice and paid McHale severance. Section 5(d) also provided that

“[n]otwithstanding any other term of this Agreement, or of the Employee Release,

[Taylored] shall have no obligation to pay any severance compensation to [McHale]

following any breach” of the Section 7 restrictive covenants. In relevant part, Section 7

required that upon termination, McHale would not take, or would promptly return, all

company property in his control.

       The Agreement also specified that disputes arising out of the Agreement would be

resolved by arbitration. Section 17 specified that “arbitration shall be the exclusive

process for the resolution of any claim, action, dispute or controversy of any kind or

nature, at law or in equity, as between or among Employer and Employee and related to,

arising from or otherwise with respect to this Agreement or the subject matter hereof.”

The only matters not required to be arbitrated involved Taylored’s right to pursue

equitable remedies in the event of actual or threatened breach of the restrictive covenants

outlined in Section 9. Section 17 also provides that “[t]he prevailing party shall be

entitled to . . . reasonable attorneys’ fees and expenses . . ..”

       McHale was terminated on July 19, 2013, purportedly for gross negligence in

hiring illegal aliens through a staffing agency. McHale kept his company laptop for

                                                3
several months after termination, despite numerous requests for its return. In October

2013, Taylored filed suit in the Superior Court of New Jersey, requesting return of the

laptop. In November 2013, Taylored reported that McHale had returned the laptop and

dismissed the action. On April 13, 2014, McHale initiated arbitration, alleging that he

was terminated without cause and seeking, among other things, severance. Taylored

denied liability, both because McHale was terminated for cause and because McHale

violated the Section 7 restrictive covenants.

         The Arbitrator issued an opinion finding that 1) Taylored breached the Agreement

by firing McHale without cause, and 2) McHale violated the restrictive covenant in

Section 7. The Arbitrator awarded McHale severance. The Arbitrator then stated that

“[b]ased upon my equitable power afforded by the arbitration provision in the

employment agreement, I treat the breach of the restrictive covenant requiring return of

the laptop as a counterclaim.” 1 Reasoning that “[McHale] prevailed on his breach of the

employment claim and [Taylored] prevailed on the breach of restrictive covenant

counterclaim[,]” the Arbitrator could not “find that one party prevailed ‘more’ than the

other” and did not award attorney’s fees to McHale. 2

         To challenge the Arbitrator’s Award, McHale filed a Verified Complaint for

Summary Action in the New Jersey Superior Court. Taylored Services removed this

complaint to the District Court. McHale then moved to partially confirm and partially

modify the Award. The District Court held that “[w]hether McHale breached a restrictive

1
    JA 11.
2
    JA 12.
                                                4
covenant by maintaining possession of the company issued [laptop] was unrelated to the

core underlying claim.” The District Court also emphasized the distinction between an

affirmative defense and a counterclaim and held that the Arbitrator could not create a

counterclaim out of an affirmative defense. Based on this conclusion, the District Court

modified the arbitration award by awarding McHale attorney’s fees. This appeal

followed.

                                              II. 3

       A court has limited authority to vacate or modify an arbitration award. Under

N.J.S.A 2A: 23B-24, a court may modify an award if “the arbitrator made an award on a

claim not submitted to the arbitrator and the award may be corrected without affecting the

merits of the decision upon the claims submitted[.]” 4 These grounds are very narrowly

construed. In Tretina Printing, Inc. v. Fitzpatrick & Associates., Inc., the New Jersey

Supreme Court adopted a standard that narrowed the grounds for modification to those

listed in the previous arbitration statute. 5 The standard clarified that “parties are free to

3
  The District Court had jurisdiction under 28 U.S.C. § 1332(a), and this Court has
jurisdiction under 28 U.S.C. § 1291. “[W]e review the [District Court’s] legal
conclusions de novo and its factual findings for clear error.” Freeman v. Pittsburgh
Glass Works, LLC, 709 F.3d 240, 251 (3d Cir. 2013) (citations omitted). “[A] federal
court must apply the substantive laws of its forum state in diversity actions.” Lafferty v.
St. Riel, 495 F.3d 72, 76 (3d Cir. 2007), as amended (July 19, 2007), as amended (Nov.
23, 2007) (citation omitted). The substantive laws of New Jersey therefore apply here.
4
  New Jersey adopted the Revised Uniform Arbitration Act of 2000, effective January 1,
2003, which created new provisions, found in N.J.S.A 2A: 23B-1 et seq. The Act
modified the existing New Jersey arbitration law so that the old provisions now apply
only to collective bargaining or collectively negotiated agreements. N.J.S.A. 2A: 24-1.1.
The new provision, in 2A: 23B-24, is virtually identical to the old provision in 2A: 24-9.
5
  640 A.2d 788, 793 (N.J. 1994) (adopting the view that arbitration awards “can be
corrected or modified only for very specifically defined mistakes as set forth in [N.J.S.A.
                                               5
expand the scope of judicial review by providing for such expansion in their contract . . .

[such as] that such awards may be reversed either for mere errors of New Jersey law,

substantial errors, or gross errors of New Jersey law and define therein what they mean

by that.” 6 Lower courts have interpreted this standard as not allowing review for

mistakes of law, unless parties have contracted otherwise. 7

       We understand McHale to make three arguments as to why the Arbitrator erred in

considering the restrictive covenant issue. First, McHale suggests that the Agreement

requires that restrictive covenant claims be brought in court. However, Sections 17 and 9

of the Agreement merely allow Taylored to also seek injunctive relief from a court for a

breach of the restrictive covenant. The current issue, whether McHale breached the

restrictive covenant, is not a claim for injunctive relief and is clearly covered by the broad

language and scope of the arbitration clause in Section 17. 8

       Second, McHale argues that even if the claim were theoretically arbitrable, the

claim was not actually submitted to the Arbitrator. McHale cites Habick v. Liberty

2A:24-9]”) (alteration in original) (quoting Perini Corp. v. Greate Bay Hotel & Casino,
610 A.2d 364, 399 (N.J. 1992) (Wilentz, C.J., concurring)).
6
  Id. (quoting Perini Corp., 610 A.2d at 399).
7
  Empire Fire & Marine Ins. Co. v. GSA Ins. Co., 808 A.2d 98, 102 (N.J. App. Div. 2002)
(“This was not a public sector arbitration matter and, thus, unless agreed by the parties
(not here contended), the appropriate judicial scope of review does not encompass errors
of law or facts.”) (citation omitted); Cap City Prods. Co. v. Louriero, 753 A.2d 1205,
1208 (N.J. App. Div. 2000) (“Thus, even assuming [the arbitrator] made a mistake of law
by using a marketability discount, that assumed mistake would provide no basis to
overturn or modify his award[.]”). Both cases concerned vacatur of an award rather than
modification, but their discussion of the scope of review is equally applicable here.
8
  McHale also argues that this issue was beyond the Arbitrator’s jurisdiction because
Taylored had already sought and received relief for the laptop return. However, the
earlier motion for injunctive relief did not render moot the issue of whether retaining the
laptop was a breach of the contract.
                                              6
Mutual Fire Insurance Company, in which the plaintiff submitted her personal injury

protection claim to an arbitrator to decide whether an accident necessitated knee

replacement surgery for the plaintiff. When the arbitrator made a ruling on whether

Liberty Mutual authorized an entirely separate surgery to the plaintiff’s other knee, the

Superior Court of New Jersey held that the arbitrator erred by ruling on a claim not

submitted to him. 9 Unlike the arbitration in Habick, however, the two issues in McHale’s

arbitration are highly related. 10 Section 5(d) explicitly links the two issues, such that

McHale could not expect a ruling on severance without discussion of the restrictive

covenants. Indeed, both parties extensively briefed and argued these issues. 11 For this

reason, the restrictive covenant issue was properly submitted to the Arbitrator.

       Third, McHale focuses on the distinction between a counterclaim and an

affirmative defense, suggesting that the Arbitrator could not convert an affirmative

defense into a counterclaim and award fees accordingly. This, however, is at most an

error of law, which is unreviewable by a court absent agreement to the contrary. 12

9
  Habick v. Liberty Mut. Fire Ins. Co., 727 A.2d 51, 56-57 (N.J. App. Div. 1999) (relying
on N.J.S.A. 2A: 24-9).
10
   Cf. Bound Brook Bd. of Educ. v. Ciripompa, 153 A.3d 931, 939-40 (N.J. 2017)
(vacating an arbitration award when the arbitrator converted a claim of “conduct
unbecoming” to one of sexual harassment and required the party to prove that the charged
conduct satisfied that claim).
11
   McHale argues that he would have raised additional objections if he had been aware
that the Arbitrator was construing the issue as a counterclaim. However, even if we
assume that these arguments were not waived, none of them would change our opinion.
Additionally, to the extent that these arguments discuss legal bars to the Arbitrator’s
award, we cannot review the award for mistakes of law.
12
   McHale also alleges that the Arbitrator’s award of severance necessarily means that the
Arbitrator should have found that McHale no longer had any obligation to keep the
restrictive covenants. Even if the Arbitrator’s two findings were potentially
                                               7
      Thus, we conclude that the restrictive covenants issue was properly before the

Arbitrator. This conclusion ends our review. 13

                                           III.

      For the foregoing reasons, we will reverse the judgment of the District Court,

modifying the Arbitrator’s award.

contradictory, this is also an error of law which we cannot review.
13
   Because we conclude that the restrictive covenant issue was properly before the
Arbitrator, we decline to discuss whether a modification of the Arbitrator’s award would
affect the merits of the decision.
                                            8