Trade Secret Suit May Continue Despite Arbitration Clause in Employment Agreement

Abstract

The Federal Circuit affirmed a California court’s decision that Waymo and Uber were not required to arbitrate their trade secret dispute. An employment agreement between Waymo and one of its former employees who left to join Uber contained a provision requiring disputes to be arbitrated. However, the provision only bound the parties to the agreement. It did not bind Uber, who was not a party to the agreement.

Agreements sometimes specify where and how disputes will be resolved, for example, whether by litigation or arbitration. In a case where Waymo sued Uber for stealing trade secrets, Uber sought to enforce a binding arbitration provision contained in a former employee’s employment contract with Waymo. However, the Federal Circuit found the arbitration provision only extended to disputes between the actual parties to the employment contracts and that equitable estoppel did not require Uber to arbitrate the dispute.

Background

Waymo sued Uber in a California court, alleging that Uber misappropriated Waymo's trade secrets on self-driving technology. The underlying complaint was that Waymo’s former employee, Anthony Levandowski, left Waymo to head up Uber’s self-driving car program. Uber argued that Levandowski's employment agreement required arbitration. Waymo countered that arbitration was required only in disputes directly with Levandowski, and not disputes with third parties, such as Uber. Waymo also pledged not to rely on any employment contract with Levandowski in its case against Uber. 

The California court ruled that the arbitration provision only bound the agreement’s signatories and that equitable principles did not warrant extending the provision to require having Waymo’s claims against Uber resolved by arbitration.

The Waymo Decision

On appeal, the Federal Circuit found under California law that agreements to arbitrate are subject to contract law principles, and as a general rule, a contract applies only to the parties to the contract. 

The court found that the doctrine of equitable estoppel may allow an arbitration clause to be enforceable by a non-signatory—someone who was not a party to the agreement—for claims that are interdependent: (1) where a signatory must rely on the terms of the contract in asserting its claims against the non-signatory, and (2) where the signatory alleges substantially interdependent and concerted misconduct by the non-signatory and another signatory, and the issues involved in the case are intimately connected and intertwined with the obligations set forth in the contract containing the arbitration agreement. 

Uber argued that the first circumstance applied because Waymo’s trade secret claims against Uber relate to the actions by Levandowski in purported violation of his employment agreements with Waymo. 

The Federal Circuit noted that Waymo's complaint did not allege any breach of the Waymo-Levandowski employment contracts, and it did not cite to any provisions of the contracts. Therefore, it did not show sufficient reliance on the contract necessary to invoke the principle of equitable estoppel. The Federal Circuit also considered Uber’s arguments that the actions between the contract signatory, Levandowski, and the non-signatory, Uber, were interdependent and intertwined such that equitable estoppel should apply. Waymo argued in response that it is not asserting that Uber conspired with Levandowski to breach his employment agreements. The court agreed with Waymo, holding that mere allegations of collusive behavior between signatories and non-signatories did not create equitable estoppel and compel arbitration, where the non-signatory had no relationship to the terms of the underlying contract at all.

Strategy and Conclusion

This case demonstrates that a provision in an agreement between two parties requiring arbitration for resolving disputes may not be relied upon to require using arbitration to resolve a dispute with a third party.

The Waymo decision is found here.