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Zymes, LLC v. Mamola

A-3527-09T4 (N.J. Super. App. Div. 2011) (Unpublished)

NON-COMPETITION; ARBITRATION — A broad arbitration provision in a non-competition agreement does not necessarily bar a request for provisional relief from a court, but can require the issue of permanent injunctive relief to be resolved in an arbitration forum.

A bioscience company was formed for the purpose of providing technologies for the development of innovative products and efficient processes. It entered into a licensing agreement for the exclusive right to a family of compounds. At the time of its formation, its three principals executed an operating agreement subjecting them to duties of loyalty, care, and good faith and fair dealing. It required confidentiality of all business information. They also executed a non-disclosure and non-competition agreement under which they could not compete against the company for a five year period after separation, and could never disclose confidential company information without the company’s permission.

Four years later, the two principals with holdings of 20% each tendered their resignations to the chief executive officer and president, who held a 55% interest. They expressed fears of the company’s insolvency. Subsequently, the president received a letter terminating the exclusive license because the licensor believed the company had become insolvent. The license agreement did not provide for access to confidential information, so the president suspected the departing members had disclosed private financial information. His review of company e-mails supported this belief.

The company sued the two former members, alleging violation of the non-disclosure and non-competition agreement. It sought enforcement of the non-competition covenant. It was granted temporary restraints and preliminary injunctive relief. The two members filed an answer and also sought lost wages and reimbursement for their out-of-pocket expenses. The company moved to dismiss these claims, arguing that the operating agreement contained a broad arbitration provision covering those claims, but did not preclude the initial complaint for injunctive relief. The lower court determined that the entire matter belonged in arbitration, leaving the preliminary injunctive relief in place, and entrusting the arbitrator to determine what relief should ultimately be granted.

On appeal, the Appellate Division affirmed, holding that the agreement permitted both “provisional relief” as well as a broad arbitration clause, and was designed to ensure that no damage would ensue to the detriment of an injured party while an arbitration was proceeding to resolve underlying contract issues. A full reading of the arbitration provision of the agreement ascribed to the parties an intention to resolve their contract differences, first in mediation, and then by arbitration. The Court concluded that the issue of permanent injunctive relief had to be ultimately resolved in an arbitration forum.

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