Litigation Of Complaint Continues, While Court Orders Counterclaim Be Arbitrated

A federal case arising in Pennsylvania presents an interesting and unusual circumstance. Notwithstanding an arbitration agreement sufficiently broad to capture the dispute, a plaintiff employer brought suit against departing employees, alleging wrongdoing in connection with their establishment of a competing endeavor. The defendants, apparently comfortable with the judicial enforcement, did not seek to compel arbitration of the dispute.

However, when the defendants filed a counterclaim, alleging violation of the Fair Labor Standards Act regarding non-payment of overtime, the employer promptly invoked the arbitration provision that it ignored when it commenced the lawsuit. The former employees cried “foul” and the court was presented with the question of whether the counterclaim, under the circumstances, was arbitrable.

The court answered the question with a resounding “yes”. In Keystone Automotive Industries, Inc. v. Gorgone, held that the plaintiff had not waived arbitration of the counterclaim by initiating and pursuing its claims in a judicial forum. Noting also that “[t]he wage claim brought by Defendants is separate from and unrelated to the claims brought by Plaintiff,” the court explained that “Plaintiff cannot be faulted for failing seek arbitration of a distinct claim that Defendants had not yet asserted.” Finally, observing that the “strong policy in favor or arbitration compels this result,’ the court concluded that “[i]ronically, Defendants could have invoked the arbitration provision at the inception of this action. Their election not to do so does not limit the rights of the other party to the agreement where the newly raised claim is legally and factually distinct and has not yet been the focus of litigation in this court.”

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