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Appellate Court Finds Company Waived Arbitration Provision By Filing a Counter Claim

A corporate defendant waives the right to enforce an arbitration clause in an employment agreement if it asserts an affirmative defense to a complaint that is unrelated to arbitration. So ruled the First District Appellate Court of Illinois in a recent breach of employment contract case called Koehler v. Packer Group Inc., 2016 IL App (1st) 142767.

Michael K. was CEO of Packer Engineering, a subsidiary of The Packer Group. When he reported evidence of alleged financial improprieties on the part of Packer’s chairman to the company’s board, he claims he was dismissed in retaliation. He filed suit against the company for breach of his employment contract, and also against various Packer officers individually for tortious interference with contract, claiming they induced the company to breach the contract. The defendants argued that, pursuant to the contract’s terms, Michael’s claims should have been resolved in arbitration.

Michael’s four-year employment agreement contained an arbitration clause waiving the right to resolve disputes in court. The contract was signed by Michael, Packer’s chairman, and several Packer executives. Michael claimed that after he refused to go along with the alleged financial improprieties, he was offered the option of demotion or termination and chose termination. In his complaint, he sought future salary and bonus compensation plus punitive damages. In its answer, Packer asserted the affirmative defense of Michael’s own breach of the employment agreement, then later moved to dismiss the complaint on the grounds that the arbitration provision deprived the court of jurisdiction. The individual defendants argued that the arbitration clause also applied to Michael’s suit against them for tortious interference, claiming they had signed the agreement in their corporate and not individual capacities. The circuit court ruled that Packer waived its contractual right to arbitrate when it answered Michael’s complaint without asserting the right.  

After a jury found in Michael’s favor, the defendants appealed the denial of their right to arbitrate to the First District Appellate Court. Michael argued that his breach of contract claim was subject to the arbitration agreement, but that the company waived it by “participating in the litigation” by way of filing an answer and responding to discovery. He also argued that his claims against the individual defendants did not arise from the employment agreement. The appellate court agreed with Packer that its compliance with court discovery orders did not amount to a waiver of arbitration rights, but concluded that “[b]y filing an answer asserting an affirmative defense unrelated to the arbitration provision, … the corporate defendants in this case waived their right to arbitrate plaintiff’s claims against them. [ ] Where, as here, a defendant files an answer without simultaneously asserting the right to arbitrate, Illinois courts generally find that a waiver has occurred.” Writing for the court, Justice P.J. Liu further noted that the unrelated affirmative defense was itself an arbitratable matter submitted to the court, which undermined Packer’s argument.

The appellate court also denied the individual defendants’ request to extend the protection of the arbitration provision to them as “agents of the signatory,” because Michael’s claims alleged they acted outside the scope of their agency to advance their own interests at the company’s expense. The court also rejected the defendants’ argument that they were not capable of tortious interference with the contract because they had signed it on behalf of Packer as shareholders and directors. “The mere fact that [a] defendant was acting as a corporate officer will not render the defendant and the corporation identical,” Justice Liu concluded. The officers were not immunized from individual liability because Michael had presented sufficient evidence they had acted in their own self-interest, “outside the scope of their duties and to the detriment of plaintiff and the corporate defendants.”Super Lawyers named Illinois business trial attorneys Peter Lubin and Vincent DiTommaso Super Lawyers in the Categories of Class Action, Business Litigation and Consumer Rights Litigation. DiTommaso Lubin Austermuehle’s Illinois business trial lawyers have over a quarter of century of experience in litigating complex class action, copyright, non-compete agreement, trademark and libel suits, consumer rights and many different types of business and commercial litigation disputes including lawsuits between businesses or between shareholders and owners of the same business.  Our Naperville, Hinsdale and Oak Brook business dispute lawyers handle emergency business law suits involving copyrights, trademarks, injunctions, and TROS, covenant not to compete, franchise, distributor and dealer wrongful termination and trade secret lawsuits and many different kinds of business disputes involving shareholders, partnerships, closely held businesses and employee breaches of fiduciary duty. We also assist businesses and business owners who are victims of fraud. You can contact us by calling (630) 333-0000 or our toll free number (877) 990-4990.  You can also contact us online here.