Pennsylvania Court Holds Contract Mandating Arbitration of Release of Non-Compete Agreement Waived Where Party Chose to Litigate

Posted: Thursday, October 23, 2008

By: Joshua C. Dickinson

Topic: Arbitration Provision

Written By:      Joshua C. Dickinson

                          Mick Messbarger

The Pennsylvania Superior Court, recently held that a party seeking a release of a non-compete agreement waived its contractual right mandating arbitration of this issue where they had already litigated this claim.  The Pennsylvania Court noted that "a waiver of a right to proceed to arbitration pursuant to the term of a contract providing for binding arbitration should not be lightly inferred" but once a party chose to instead litigate the claim in court and litigated the claim to conclusion, this course of conduct waived its right to arbitrate.  LSI Title Agency, Inc. v. Evaluation Services, Inc., 951 A.2d 384, 392 (Pa. Super. Ct. 2008). 

ESI had previously litigated this claim, asserting that LSI had breached the implied covenant of good faith and fair dealing by failing to waive in a timely manner the covenants against competition contained in a Software Purchase Agreement.  Id. at 386.  Later, with ESI's consent, the court dismissed this count with prejudice on May 1, 2006.  Id.

In October, 2006, ESI sought to have this claim arbitrated.  Id. at 386-87.  LSI objected asserting ESI waived its right to arbitration when it litigated this claim and consented to the court's decision to dismiss their claim with prejudice.  Id. at 387.  ESI asserted that while it had consented to the dismissal of its claim for breach of the implied covenant of good faith and fair dealing, that claim was different than its breach of contract claim, even though the factual underpinnings that LSI had injured ESI by failing to timely waive the covenants against competition remained unchanged.

The court determined (1) that ESI waived its right to arbitrate by litigating its claim to conclusion; and (2) that a claim for breach of the implied covenant of good faith and fair dealing is subsumed in a breach of contract claim.  Id. at 392.  The court noted "ESI could have demanded arbitration at the outset or brought an inclusive breach of contract cause of action within the scope of its complaint in the prior action.  ESI's failure to do either precludes it from further litigating its alleged breach of contract claim."  Id. 

In short, ESI's attempt to get a second bite at the apple by invoking the mandatory arbitration provision failed because its earlier decision to litigate its claim to conclusion waived its right to arbitration.  Similarly, its attempt to now assert a claim for breach of contract after earlier asserting a narrower claim for breach of the implied covenant of good faith failed where both arose under the same factual situation and could have been brought contemporaneously.  This issue may have been avoided through careful evaluation of their agreement and careful drafting of the initial complaint to bring all related claims in a single action.