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Applications Software Technology LLC v. Kapadia

United States District Court, N.D. Illinois, Eastern Division

June 26, 2018



          Ronald A. Guzmán, Judge

         For the reasons stated below, defendants' motion to compel arbitration is granted in part and denied in part, and plaintiffs' motion to strike arguments raised in defendants' reply brief is denied as moot.


         Plaintiffs, Applications Software Technology LLC (“AST”) and Serene AST, LLC (“Serene”) are companies that provide “information technology solutions through both cloud-based and traditional software for customer experience applications.” (ECF No. 1, Compl. ¶ 1.) In August 2015, AST entered into acquisition discussions with Serene's predecessor company, Serene Corporation. At the time of those discussions, defendant Paresh Kapadia was one of Serene Corporation's four shareholders. (Id. ¶ 8.) Following those negotiations, AST agreed to purchase all of Serene's equity. (Id. ¶ 9.) In a Purchase Agreement dated September 14, 2015, AST purchased all of Serene's equity securities (through a corporation called VANP, Inc. (“VANP”), of which Kapadia owns 46.7 percent). (Id. ¶¶ 9-10 & ECF No. 1-2, Purchase Agreement.) Kapadia executed the Purchase Agreement in his individual capacity as a stockholder of VANP.

         As part of the transaction, Serene retained three of Serene Corporation's former shareholders as Serene's employees, one of whom was Kapadia. (Compl. ¶ 13.) Serene and Kapadia entered into an Employment Agreement that took effect on September 14, 2015 and was later amended on January 10, 2017. (Id. ¶¶ 14-15.) The Employment Agreement sets forth, among other things, Kapadia's term of employment and compensation, as well as his confidentiality, non-competition, and non-solicitation obligations. (ECF No. 1-3, Employment Agreement.) It also contains a mandatory arbitration provision that states in pertinent part as follows:

7.9 Arbitration. Except as provided in Section 7.1 above with respect to injunctive relief, any controversy or claim arising out of or relating to this Agreement, the breach hereof or [Kapadia]'s employment by [Serene], including without limitation wrongful termination or discrimination claims, shall be settled by binding arbitration held in Chicago, Illinois in accordance with the rules of the American Arbitration Association's (“AAA”) Model Employment Dispute Arbitration Procedures then in effect, and judgment upon the award rendered may be entered in any court having jurisdiction thereof. . . . The award of the arbitrator shall be binding and final on all parties. . . .

(Employment Agreement at 11.) Also on September 14, 2015, Kapadia entered into a separate Non-Competition Agreement with AST. (ECF No. 1-1, Non-Competition Agreement.) Neither the Purchase Agreement nor the Non-Competition Agreement contains an arbitration provision.

         Plaintiffs allege that in December 2017, they became aware of “an ongoing and nefarious scheme” pursuant to which Kapadia created a new corporation, defendant Suavis Corporation (“Suavis”), “and began competing directly with the business of AST and [Serene], ” in violation of various covenants in the agreements described above. (Compl. ¶¶ 3, 34.) Serene terminated Kapadia's employment on January 9, 2018. (Id. ¶ 65.) Plaintiffs allege that while employed by Serene, Kapadia misappropriated plaintiffs' client relationships and trade secrets and “poached” AST and Serene's employees to leave plaintiffs' employment and work for Suavis. (Id. ¶ 3.) They also allege that Kapadia converted plaintiffs' property. (Id.)

         Plaintiffs filed this action on January 31, 2018. In Counts I and II of the complaint, plaintiffs allege that Kapadia and Suavis violated the Defend Trade Secrets Act, 18 U.S.C. § 1836, and the Illinois Trade Secrets Act, 765 ILCS 1065/1 et seq. In Counts III, IV, and V, plaintiffs allege that Kapadia breached the Employment Agreement, breached the NonCompetition Agreement, and breached his duty of loyalty to Serene. Counts VI and VII are plaintiffs' claims against Suavis for tortious interference with contract and prospective economic advantage. Count VIII is a claim that defendants converted plaintiffs' property. In Count IX, which is pleaded in the alternative, plaintiffs allege that Kapadia was unjustly enriched.

         Defendants move to compel arbitration and dismiss this case for lack of subject-matter jurisdiction or, in the alternative, to stay these proceedings pending arbitration.


         The Federal Arbitration Act, 9 U.S.C. § 1 et seq. (“FAA”), governs the enforcement of arbitration agreements. Int'l Ins. Co. v. Caja Nacional de Ahorro y Seguro, 293 F.3d 392, 395 (7th Cir. 2002). The FAA “evinces a national policy favoring arbitration” and “requires federal courts to place arbitration agreements on an equal footing with other contracts and enforce them according to their terms.” A.D. v. Credit One Bank, N.A., 885 F.3d 1054, 1059-60 (7th Cir. 2018) (internal quotation marks and citations omitted). The Court will compel arbitration under the FAA “if three elements are present: (1) an enforceable written agreement to arbitrate, (2) a dispute within the scope of the arbitration agreement, and (3) a refusal to arbitrate.” Id. at 1060. The third element is satisfied because plaintiffs refuse to arbitrate.

         A. Enforceable Written Agreement to Arbitrate

         Defendants ask the Court to compel arbitration based on the mandatory arbitration provision in the Employment Agreement. Plaintiffs contend that there is no valid agreement to arbitrate because, in contrast to the Employment Agreement, the Purchase Agreement and the Non-Competition Agreement do not contain arbitration provisions, but do contain ...

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