McHale v. Taylored Servs., LLC, 16-3196

CourtUnited States Courts of Appeals. United States Court of Appeals (3rd Circuit)
Docket NumberNo. 16-3196,16-3196
Decision Date12 July 2017


No. 16-3196


Argued on March 21, 2017
July 12, 2017


On Appeal from the United States District Court for the District of New Jersey
(D. C. Civil Action No. 2-16-cv-01785)
District Judge: Honorable Jose L. Linares

Before: AMBRO, JORDAN and ROTH, Circuit Judges

Christopher M. Farella, Esq, (Argued)
Anthony J. Laura, Esq.
Epstein Becker & Green
One Gateway Center
13th Floor
Newark, NJ 07102

Counsel for Appellant

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Robert H. Bernstein, Esq.
Mark D. Lurie, Esq.
Greenberg Traurig
500 Campus Drive
Suite 400
Florham Park, NJ 07932

Counsel for Appellee


ROTH, Circuit Judge

This case involves the modification of an arbitration award. Timothy McHale requested arbitration regarding his termination from Taylored Services, LLC, alleging that he was fired without cause and without severance, in violation of his employment agreement. Taylored claimed that McHale was fired for cause and that he waived any right to severance by violating the restrictive covenants required by the agreement. The Arbitrator awarded McHale severance but did not award attorney's fees to either party. McHale moved to partially confirm and partially modify the award, and the District Court modified the award to grant McHale attorney's fees. Taylored now appeals the District Court's modification of the award. We will reverse.


McHale was hired by Taylored as its Chief Operating Officer in June 2011. In

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November 2012, McHale signed an employment agreement (Agreement) which included terms for termination and an arbitration clause. Section 5(c) of the Agreement provided that Taylored was able to terminate McHale immediately for cause if, inter alia, McHale "engag[ed] in any conduct amounting to . . . gross negligence . . .." Under Section 5(d), Taylored could also terminate McHale without cause as long as, inter alia, Taylored provided written notice and paid McHale severance. Section 5(d) also provided that "[n]otwithstanding any other term of this Agreement, or of the Employee Release, [Taylored] shall have no obligation to pay any severance compensation to [McHale] following any breach" of the Section 7 restrictive covenants. In relevant part, Section 7 required that upon termination, McHale would not take, or would promptly return, all company property in his control.

The Agreement also specified that disputes arising out of the Agreement would be resolved by arbitration. Section 17 specified that "arbitration shall be the exclusive process for the resolution of any claim, action, dispute or controversy of any kind or nature, at law or in equity, as between or among Employer and Employee and related to, arising from or otherwise with respect to this Agreement or the subject matter hereof." The only matters not required to be arbitrated involved Taylored's right to pursue equitable remedies in the event of actual or threatened breach of the restrictive covenants outlined in Section 9. Section 17 also provides that "[t]he prevailing party shall be entitled to . . . reasonable attorneys' fees and expenses . . .."

McHale was terminated on July 19, 2013, purportedly for gross negligence in hiring illegal aliens through a staffing agency. McHale kept his company laptop for

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several months after termination, despite numerous requests for its return. In October 2013, Taylored filed suit in the Superior Court of New Jersey, requesting return of the laptop. In November 2013, Taylored reported that McHale had returned the laptop and dismissed the action. On April 13, 2014, McHale initiated arbitration, alleging that he was terminated without cause and seeking, among other things, severance. Taylored denied liability, both because McHale was terminated for cause and because McHale violated the Section 7 restrictive covenants.

The Arbitrator issued an opinion finding that 1) Taylored breached the Agreement by firing McHale without cause, and 2) McHale violated the restrictive covenant in Section 7. The Arbitrator awarded McHale severance. The Arbitrator then stated that "[b]ased upon my equitable power afforded by the arbitration provision in the employment agreement, I treat the breach of the restrictive covenant requiring return of the laptop as a counterclaim."1 Reasoning that "[McHale] prevailed on his breach of the employment claim and [Taylored] prevailed on the breach of restrictive covenant counterclaim[,]" the Arbitrator could not "find that one party prevailed 'more' than the other" and did not award attorney's fees to McHale.2

To challenge the Arbitrator's Award, McHale filed a Verified Complaint for Summary Action in the New Jersey Superior Court. Taylored Services removed this complaint to the District Court. McHale then moved to partially confirm and partially modify the Award. The District Court held that "[w]hether McHale breached a restrictive

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covenant by maintaining possession of the company issued [laptop] was unrelated to the core underlying claim." The District Court also emphasized the distinction between an affirmative defense and a counterclaim and held that the Arbitrator could not create a counterclaim out of an affirmative defense. Based on this conclusion, the District Court modified the arbitration award by awarding McHale attorney's fees. This appeal followed.


A court has limited authority to vacate or modify an arbitration award. Under N.J.S.A 2A: 23B-24, a court may modify an award if "the arbitrator made an award on a claim not submitted to the arbitrator...

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