Appeals Court: Arbitration Necessary to Determine if Arbitration Required 

By Joe Forward, Legal Writer, State Bar of Wisconsin

Sept. 21, 2012 – In an employment contract dispute between a company and its former chief executive officer, a state appeals court has ruled that arbitration is necessary to determine whether an oral contract negated a prior written contract’s arbitration clause.

William Mortimore founded Merge Technologies Inc. in 1987 and served as its CEO until replaced in 2000. However, Mortimore stayed on with the company in other capacities.

Mortimore’s previous employment contracts with Merge contained an arbitration clause, including a contract the parties signed in 2004. In 2005, the corporation delegated a compensation committee to create new employment contracts for various executives.

In 2006, new employment contracts were not yet in place when Merge received whistleblower letters alleging improper financial reporting by the corporation. Upon investigation, the sitting CEO was forced to resign, and Mortimore was appointed to serve as interim CEO.

Pursuant to Securities and Exchange Commission regulations, Merge filed documents reporting that Mortimore’s employment with Merge was governed by the 2004 employment contract between the parties. The 2004 contract was then amended to reflect Mortimore’s CEO status.

After filing the SEC document, the compensation committee began working on a new employment contract for Mortimore. Before a new contract was signed, Merge’s outside counsel alleged that Mortimore interfered with an audit investigation of the company.

On recommendation of the board of directors, Mortimore resigned his CEO post. Mortimore then retained his own counsel to pursue legal actions related to the whistleblower letters. Pursuant to Merge’s bylaws and Wis. Stat. § 180.0853, the corporation paid his legal fees.

At some point, however, the corporation stopped paying Mortimore’s legal fees, and Mortimore filed a complaint in Milwaukee County Circuit Court alleging the corporation breached his employment contract. Merge moved to dismiss, claiming the 2004 contract required the parties to arbitrate breach of employment contract claims.

Mortimore responded, arguing that his 2004 employment contract was superseded by an oral agreement that did not include an arbitration clause. A circuit court agreed, concluding that a 2006 oral contract was effective to eliminate the 2004 contract’s arbitration requirement.

Merge appealed, and the District I Wisconsin Court of Appeals reversed in Mortimore v. Merge Technologies Inc., 2011AP1039 (Sept. 18, 2012).

“The heart of Mortimore’s argument is, in essence, that the parties agreed to execute a new written contract without an arbitration clause,” wrote Judge Joan Kessler for a three-judge appeals panel. “Because Mortimore contends that his alleged oral agreement is enforceable, he argues his breach of contract claims are not subject to arbitration. Mortimore is mistaken.”

The appeals panel noted that the 2004 contract required amendments or modifications to be in writing, and the contract adopted the AAA Commercial Arbitration Rules, which required arbitrators to decide if a claim is arbitrable.

“Given Wisconsin’s strong policy promoting arbitration, we conclude, like many other jurisdictions, that the parties’ adoption the AAA Rules in the 2004 contract required arbitration of the question of whether an oral agreement superseded the 2004 contract,” Kessler wrote.