Peter Nowak's lawsuit against the Philadelphia Union sent to arbitration by federal judge

Former Philadelphia Union manager Peter Nowak has been denied in his attempt to sue the team in federal court.

U.S. District Court, Eastern District of Pennsylvania judge Mary McLaughlin ruled that Nowak's complaint should not be settled in a courtroom. McLaughlin upheld the Union's argument that the matter should instead be decided by an arbitrator.

Officially, the case has been stayed, not dismissed. This means that the court's role in the process is not completely finished. But McLaughlin's memorandum siding with the Union left Nowak's side pretty well beaten.

As Judge McLaughlin wrote:

The defendant moves to dismiss on the grounds that the Agreement has an enforceable arbitration clause. The Court will grant the defendant's motion, compel arbitration, and stay the case pending arbitration.

McLaughlin only needed to lay out one fact of the case in presenting her ruling:

The parties agree that Article XIII of the Agreement contains the following arbitration clause: "Any controversy or claim arising out of or relating to this Agreement or the breach hereof, including, without limitation, any claims for wrongful termination or employment discrimination or disputes regarding Manager's right to Severance Payments hereunder, shall be settled by arbitration in accordance with the rules of the American Arbitration Association and under the laws of the State of Pennsylvania (without giving effects to the choice or conflict of law principles thereof); provided, however, that nothing herein shall prevent either party from seeking equitable relief from a court of competent jurisdiction."

The inference that Nowak's attorneys tried to draw was clear: because the contract allows for the possibility of going to federal court, Nowak pursued that course of action.

McLaughlin distilled the essence of the case well. She notes that the central question is whether the specific claims made by Nowak fall within the types of claims in the contract that are subject to arbitration.

Her answer was equally straightforward:

The Supreme Court has instructed that "any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration." Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983). 

Here, the language of Article XIII states that disputes "arising out of or related to the Agreement"including those related to "wrongful termination" and "severance pay" shall be settled in arbitration. That language speaks to precisely the type of dispute at issue in the instant case so the only remaining issue to consider is the arguments over whether the plaintiff's declaration judgment action falls under the arbitration clause's exception for equitable relief.

In other words, is there still some way by which Nowak can exploit the loophole in the contract?

The section header of the next part of McLaughlin's memorandum answered that question directly:

The Plaintiff's Declaratory Judgment Action Does Not Fall Under the Exception for Equitable Relief.

So there.

McLaughlin made the point by turning one of the arguments made by Nowak's attorneys back on itself.

Here, as the plaintiff concedes, if there was no declaratory judgment remedy, the plaintiff would have brought a claim for breach of contract, which is a claim that sounds in law, not equity. Accordingly, the Court finds that the plaintiff's declaratory judgment action does not fall under the exception to the arbitration clause for equitable relief.

The only question remaining is why the case was stayed instead of being dismissed. I spoke with a few local lawyers (none of whom are involved in this case) to get some clarification on the matter, and here's what I understand.

A case that a federal judge sends to an arbitrator is stayed because if there is money awarded to one side, that judgement needs to be officially confirmed by the court. It's possible for the losing side to contest that judgment in court, and McLaughlin wouuld make that ruling. But the standard for overturning an arbitration decision in court is very high.

In the wake of the court ruling, new information has emerged relating to my previous story about Nowak making money from player transactions.

Fox Soccer's Leander Schaerlaeckens reported Thursday morning that Nowak tried to pay off Michael Orozco Fiscal with money that would have been used to buy his contract from Mexican club San Luis.

Although no specific Union players were named in the initial allegation against Nowak, Schaerlaeckens' reporting seems to fit in very well with the allegation that "Nowak may have improperly profited from player transactions."

Orozco Fiscal was one of the Union's first major non-Expansion Draft signings. He was brought in on a one-year loan from San Luis in January of 2010, right around the time of the NSCAA Convention and MLS SuperDraft that took place here in Philadelphia. Orozco Fiscal had played for Nowak on the 2008 United States Olympic men's soccer team.

The Mexican-American central defender was paid $200,000 in guaranteed compensation during his one year in Philadelphia.

As Schaerlaeckens writes (with my own emphasis added):

Nowak told him the Union would pick up the option to purchase him from San Luis outright, claims Orozco. Orozco also claims the contract he agreed to with Nowak would pay him his full San Luis salary plus a scheduled raise.

Orozco put down a deposit for a new rental home in Philadelphia and bought furniture. But by the pre-season of the 2011 season, no contract had materialized, and Orozco says he wasn't paid by either club in the interim, nor was he compensated for his living expenses, as purportedly agreed. 

When Orozco confronted Nowak, Orozco believes Nowak offered less than what he claims a pre-contract called for. "I was making $200k and I was supposed to get a raise, but he wanted to give me only $120k," Orozco says.

He claims Nowak suggested they keep the $500,000 transfer fee that was due to San Luis and split it amongst themselves. He refused. "I wanted to do things right," Orozco says. But when he wouldn't play ball, he claims, Nowak badmouthed him to the club and sent him back to San Luis two weeks before the start of the season.

The team was in pre-season training camp in Greece but Nowak literally booked him onto the first plane home, without giving him the chance to say goodbye to teammates. "They said I was being difficult and Peter turned everybody against me," says Orozco. "He said he wasn't going to let one guy damage the team."

There is much more interesting stuff in that story in addition to the segment I've quoted. So please give it a read.

Recall that the allegation against Nowak surfaced in July of this year, and mentioned a time period of "the past 12-18 months" as of that point. The Union's 2011 trip to Greece took place from February 23 to March 10, so it would fall within the earlier end of the time span mentioned.

Although the e-mail chain between the two sides' attorneys refers to "players in South America," this seems to be an example of the alleged misconduct in question. Given Orozco Fiscal's current good standing with the U.S. national team, it will be very interesting to see whether this story plays out further.

Links to case documents

1. Judge McLaughlin's order sending the case to arbitration

2. Judge McLaughlin's memorandum explaining her decision

Links to past coverage of the Nowak lawsuit

July 24, 2012: Former Philadelphia Union manager Peter Nowak sues team for wrongful termination and unpaid severance money

August 24, 2012: Philadelphia Union move to dismiss lawsuit by former manager Peter Nowak

September 18, 2012: Peter Nowak 'may have improperly profited from player transactions' as Philadelphia Union manager