Blair v. INFORM Software Corporation

Background

Robert Blair worked for INFORM Software from 2014 through August 2022 and then joined Springshot, Inc. Both companies sell aviation software. Blair signed an employment agreement in 2014 while living in Florida and moved to California in 2015 with INFORM’s approval. The agreement included noncompetition and customer-nonsolicitation covenants, an Illinois choice-of-law provision, and an arbitration clause requiring binding arbitration in Chicago under American Arbitration Association rules and Illinois substantive law.

After Blair announced that he would leave INFORM and join Springshot, INFORM sent letters threatening to enforce the restrictive covenants. Blair and Springshot filed an action seeking declarations that enforcing the covenants would violate California’s Unfair Competition Law and California Business and Professions Code section 16600. They also sought an injunction preventing INFORM from enforcing the covenants.

INFORM moved to dismiss based on the agreement’s requirement that employment disputes be arbitrated in Chicago. Alternatively, it moved to compel arbitration. The plaintiffs argued that the forum requirement was invalid for a California employee and that the arbitration agreement was unconscionable, meaning unfairly imposed or excessively one-sided.

Forum-selection clause

The court held that the requirement to litigate or arbitrate in Illinois was unenforceable under California Labor Code section 925. The parties agreed that the provision would be unenforceable if Blair’s employment contract had been modified after 2017. The court rejected INFORM’s argument that later changes to Blair’s employment were ineffective because they were not written and signed by the chief executive officer. It held that a unilateral modification may be binding even when the original contract requires written modifications.

The court also held that the Illinois forum was not supported by the private and public-interest factors required for dismissal on forum non conveniens grounds. California was the plaintiffs’ chosen forum, Blair worked there, and no party had meaningful ties to Illinois. The court said INFORM could not credibly show that litigating in California would inconvenience it or that Illinois had stronger local interests.

Arbitrability

The court decided that it, rather than an arbitrator, would determine whether the dispute was subject to arbitration. The agreement’s general reference to American Arbitration Association rules was not clear and unmistakable evidence that the parties delegated that question to an arbitrator. The agreement’s provisions contemplating court review of the restrictive covenants also created ambiguity about delegation.

Enforceability of the arbitration clause

The court applied California law because California had the greatest interest in the employment agreement. Although INFORM was incorporated in Illinois, its principal place of business was in Georgia, and Blair was a California employee. The court concluded that applying Illinois law would conflict with California’s public policy against enforcing noncompetition and nonsolicitation agreements.

The court found moderate procedural unconscionability. INFORM drafted the mandatory arbitration clause, the clause did not identify which American Arbitration Association rules applied, and Blair was not given those rules. The court found that Blair’s ability to negotiate compensation and benefits did not establish that he could negotiate the arbitration provision itself.

The court also found moderate substantive unconscionability, which concerns harsh or one-sided contract terms. First, the agreement allowed INFORM to seek injunctive relief without proving damages or irreparable harm, but did not provide a comparable right to Blair. The court found INFORM’s stated reasons for this advantage too conclusory to establish a special business need.

Second, the agreement required each side to bear its own arbitration costs. Under California law, an employee generally cannot be required to pay expenses that the employee would not have to pay in court, including the arbitrator’s fees. INFORM did not offer to pay the arbitration costs.

Third, the agreement attempted to prevent either party from seeking judicial review of an arbitration award. The court held that the Federal Arbitration Act’s limited judicial-review provisions cannot be waived by contract. Fourth, the plaintiffs argued that the agreement improperly waived rights under the California Labor Code and rights to file administrative charges with the Equal Employment Opportunity Commission or the California Department of Fair Employment and Housing. INFORM did not respond to that argument and instead suggested severing unlawful terms, which supported the court’s finding of substantive unconscionability.

Finally, the court held that requiring arbitration in Illinois was itself unenforceable because neither party had a meaningful connection to Illinois and the forum had no rational basis in the facts of the transaction.

Disposition

The court concluded that the combination of moderate procedural and substantive unconscionability made the arbitration clause unenforceable. It declined to sever, or remove, the problematic terms because the agreement contained multiple unlawful provisions and severing them would leave little more than a bare agreement to arbitrate and require extensive rewriting. The court denied the motion to compel arbitration and denied the motion to dismiss or, alternatively, to arbitrate. The order resolved ECF No. 7.