Timothy McHale v. Taylored Services LLC
705 F. App'x 99
| 3rd Cir. | 2017Background
- McHale was Taylored Services’ COO and signed an employment agreement (Nov. 2012) containing termination provisions, restrictive covenants (including return of company property), an arbitration clause, and a prevailing-party attorneys’ fees clause.
- Taylored terminated McHale (July 19, 2013), alleging cause (gross negligence in hiring illegal aliens). McHale kept his company laptop for months after termination despite requests to return it; Taylored briefly sued in state court to recover the laptop and then dismissed after it was returned.
- McHale initiated arbitration claiming termination without cause and seeking severance; Taylored defended by alleging cause and that McHale breached the restrictive covenant (property-return) which would bar severance.
- The arbitrator found Taylored breached the employment agreement (awarded severance) but also found McHale breached the restrictive covenant. Treating the restrictive-covenant finding as a counterclaim, the arbitrator concluded neither side prevailed more than the other and denied attorneys’ fees to both.
- McHale sought confirmation/modification in New Jersey court; Taylored removed to federal court. The District Court modified the award, holding the arbitrator improperly converted an affirmative defense into a counterclaim and therefore awarded McHale attorneys’ fees.
- The Third Circuit reversed the District Court, holding the restrictive-covenant issue was arbitrable and properly submitted; modifying the award on that ground was not permitted under New Jersey’s narrow arbitration-review standards.
Issues
| Issue | Plaintiff's Argument (McHale) | Defendant's Argument (Taylored) | Held |
|---|---|---|---|
| Whether the restrictive-covenant/ laptop-return issue was arbitrable | Section 9 reserved only injunctive relief to court; breach issues not for arbitration | Arbitration clause broadly covers disputes arising from the agreement; restrictive-covenant breach is arbitrable | Court: Arbitrable — Section 17’s broad language covers the breach claim |
| Whether the restrictive-covenant matter was submitted to the arbitrator | It was not submitted; arbitrator exceeded authority by deciding an unsubmitted claim | Issues were closely related and linked by Section 5(d); parties briefed and argued it | Court: Properly submitted — related to severance claim and litigated by parties |
| Whether the arbitrator could treat the defense as a counterclaim and deny fees | Arbitrator erred by converting an affirmative defense into a counterclaim, so fees should be awarded | Even if converted, any such conversion is at most an error of law not reviewable by courts under NJ law | Court: Conversion/error of law is unreviewable absent contractual expansion of review; cannot modify award on that basis |
| Whether the District Court could modify the award to grant fees | District Court modified award to grant fees based on its view of arbitrator’s jurisdictional error | Modification improper because grounds for modification are narrowly construed under NJ law | Court: Reversed District Court — modification unwarranted; arbitration award stands as to fees |
Key Cases Cited
- Perini Corp. v. Greate Bay Hotel & Casino, 610 A.2d 364 (N.J. 1992) (parties may contractually expand judicial review of arbitration awards)
- Tretina Printing, Inc. v. Fitzpatrick & Associates, Inc., 640 A.2d 788 (N.J. 1994) (adopting narrow statutory grounds for modifying/correcting arbitration awards)
- Habick v. Liberty Mut. Fire Ins. Co., 727 A.2d 51 (N.J. App. Div. 1999) (arbitrator erred by deciding a claim not submitted to arbitration)
- Empire Fire & Marine Ins. Co. v. GSA Ins. Co., 808 A.2d 98 (N.J. App. Div. 2002) (judicial review of private arbitration does not include errors of law absent agreement)
- Cap City Prods. Co. v. Louriero, 753 A.2d 1205 (N.J. App. Div. 2000) (mistake of law by arbitrator is not a basis for vacatur/modification absent contractual provision)
- Bound Brook Bd. of Educ. v. Ciripompa, 153 A.3d 931 (N.J. 2017) (vacatur appropriate where arbitrator converted claims into materially different claims)