Jefferies LLC v. Gegeheimer

Background

Jefferies LLC offered Jon A. Gegenheimer a Managing Director position in its Investment Banking Division at its San Francisco office. The offer letter stated that Jefferies would keep the position open for 90 days and that Gegenheimer would begin work by August 17, 2016. It also contained a liquidated-damages clause requiring him to pay Jefferies $1 million if, during the period before his start date, he voluntarily failed to begin employment because he returned to Credit Suisse or engaged in competitive activity.

Gegenheimer signed the offer letter after consulting by telephone with his attorney and with his girlfriend, who was then an attorney at Skadden, Arps, Slate, Meagher & Flom LPP. He later received a better compensation proposal from Credit Suisse, rescinded the agreement, and did not join Jefferies by the specified date.

Arbitration

Jefferies initiated arbitration before the Financial Industry Regulatory Authority, commonly called FINRA, seeking $1 million in liquidated damages or, alternatively, actual damages, as well as attorneys’ fees and costs. The parties divided the arbitration into two phases. In the first phase, the arbitration panel found the liquidated-damages clause enforceable under New York law. In the second phase, the panel ruled for Jefferies on its breach-of-contract claim, rejected Gegenheimer’s affirmative defenses, and awarded Jefferies $1 million in liquidated damages plus $483,245.36 in attorneys’ fees and costs.

The panel reconsidered its earlier view that California Business and Professions Code § 16600 did not apply. It later concluded that the clause could affect Gegenheimer’s ability to work for another employer but was still enforceable. The panel relied in part on California Labor Code § 925 and the reasoning of a Delaware Chancery Court decision, as well as its finding that Gegenheimer had been represented by lawyers during the negotiations.

Standards for review

The Federal Arbitration Act governed the court’s review. Under that statute, a court generally must confirm an arbitration award unless a statutory ground for vacating, modifying, or correcting it applies. The party seeking to vacate an award bears the burden of proof, and judicial review is very limited.

Gegenheimer relied solely on the doctrine called “manifest disregard of law.” That doctrine permits vacatur only when arbitrators knew of a governing legal rule, deliberately refused to apply it or ignored it, and the rule was well defined, explicit, and clearly applicable. The court explained that an alleged legal error, even a serious one, is not enough by itself.

Reasons for denying vacatur

First, the court rejected Gegenheimer’s argument that the panel ignored New York’s rule that liquidated damages and actual damages are mutually exclusive remedies. The panel awarded only the $1 million liquidated-damages amount, not both that amount and additional actual damages. The court also concluded that New York law did not impose an automatic rule making a liquidated-damages clause unenforceable merely because it offered an alternative route to actual damages. Instead, enforceability required a context-specific inquiry into issues such as whether the amount was a penalty or was reasonably related to anticipated harm. The authorities before the panel did not establish a clearly applicable rule requiring the clause to be invalidated.

Second, the court rejected the argument that the panel manifestly disregarded California law by enforcing the agreement’s New York choice-of-law provision. The court found that the authority cited by Gegenheimer did not clearly establish that rights under § 16600 could never be waived through such a provision. It also held that the panel had a reasonable basis for relying on the Delaware decision concerning represented employees and California’s public policy. The court further explained that even if the panel had made an error in its conflicts-of-law analysis, that error would not justify vacating the award under the limited standard governing arbitration review.

Third, the court rejected Gegenheimer’s argument that the panel failed to analyze the clause as a restrictive non-compete covenant under New York law. The panel had applied standards for liquidated damages rather than standards for traditional restrictions imposed by a former employer. The court noted that Gegenheimer had not cited a case applying the same non-compete standard to a clause in an agreement between an employee and a prospective employer. The court also observed that the agreement contained a provision allowing overly broad terms to be narrowed or reduced so they could be enforced.

Fourth, the court rejected Gegenheimer’s challenge to the $1 million amount as grossly disproportionate to Jefferies’ anticipated loss. Under the legal standard the court applied, the party challenging a liquidated-damages clause had the burden to present evidence supporting nonenforcement. The panel found that Gegenheimer had not met that burden. The court also stated that a federal court may not reweigh the evidence or vacate an award merely because it disagrees with the arbitrators’ assessment of the record.

Disposition

Judge Naomi Reice Buchwald granted Jefferies’ motion to confirm the arbitration award and denied Gegenheimer’s cross-motion to vacate the award. The court also granted Jefferies’ request for attorneys’ fees and costs incurred in the federal proceeding and directed Jefferies to submit a fee application, supported by contemporaneous records, within 14 days. The order resolved docket entries 4 and 42.