Court of Appeal Holds Statutory Rights Supersede Arbitration Award

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Seyfarth Synopsis: California Business and Professions Code section 16600 expresses California’s strong public policy of protecting the right of citizens to pursue any lawful employment. The Court of Appeal vacated an arbitration award on the ground that the arbitrator exceeded the authority of the arbitration agreement by enforcing an employment contract that violated the plaintiff’s statutory right to pursue lawful employment.

The Facts

Richard Brown worked for TGS Management Company, an equities trading company specializing in statistical arbitrage. As a condition to employment, Brown signed an agreement containing a two-year non-compete provision, as well as numerous confidentiality provisions.

After TGS terminated Brown, he made an arbitration claim against TGS for (1) a judicial declaration that he could compete with TGS without breaching the confidentiality provisions, and (2) an injunction prohibiting enforcement of the non-compete provision. The arbitrator found there was no showing that the confidentiality provisions were unreasonably restrictive, and ruled the non-compete provision did not present a “ripe” controversy because the two-year period had already passed. The arbitrator also agreed with TGS’s claim that Brown forfeited two deferred bonuses, and ordered Brown to refund $652,243 and pay TGS $2,462,721 in attorney’s fees and $172,682 for costs.

Brown filed a petition to vacate the arbitration award, arguing that the arbitrator “exceeded his power” in issuing an award violating “fundamental public policy and California statutes.” The trial court denied Brown’s petition, noting that because the arbitrator denied Brown’s declaratory relief request on the ground that the controversy was not “ripe,” the arbitration award did not implicate public policy. Brown appealed that decision.

The Court of Appeal’s Decision

At issue on appeal was whether the arbitration award exceeded the arbitrator’s powers by issuing an award that (a) violated an individual’s unwaivable statutory rights, or (b) contravened an explicit legislative expression of public policy. Brown argued that the confidentiality provisions in his employment contract illegally restrained him from working in statistical arbitrage after leaving TGS, and that the arbitration award left these unlawful anti-competitive provisions in effect, thereby exceeding the arbitrator’s powers.

In resolving this issue, the Court of Appeal looked at California Business and Professions Code section 16600, which creates a strong public policy of voiding contracts that restrict an individual’s right to pursue lawful employment. The Court of Appeal then concluded that TGS’s confidentiality provisions were so broad as to operate as a de facto non-compete provision barring Brown in perpetuity from doing any work in the securities field. For example, by defining “Confidential Information” as all information usable in or related to the securities industry at large, and not just statistical arbitrage, TSG effectively barred Brown from trading securities for the remainder of his life.

The Court of Appeal thus held that the arbitration award improperly allowed the confidentiality provisions to stand as a perpetual restriction on Brown’s right to compete with TGS, and that this was inconsistent with California’s public policy of protecting Brown’s rights under section 16600. Consequently, the trial court erred in denying Brown’s petition to vacate the arbitration award, and in entering judgment for TGS on the award. 

What Brown Means to Employers

Although Brown generally concerns an arbitrator’s authority where statutory rights are concerned, it involved only those rights conferred on Californians by Business and Professions Code section 16600. Unfortunately, the fact that the Brown decision involved only section 16600 might not prevent some plaintiffs from trying to have courts apply its limited holding to unfavorable arbitration awards involving other public policies.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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