Arbitrator’s Failure to Void Non-Compete, Non-Solicitation Provisions Violated Employee’s Statutory Rights Under B&P § 16600.

Brown v. TGS Mgmt. Co., LLC, 57 CalApp5th 303 (Oct. 13, 2020)

Plaintiff appealed the trial court’s confirmation of an arbitration award in Defendant’s favor. Relying on Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1 and on Business & Professions Code section 16600, the Fourth Appellate District reversed the judgment on the grounds that the arbitrator had exceeded his authority[i] by enforcing a two-year non-compete provision in Plaintiff’s Employment Agreement (“Agreement”) which ran contrary to public policy by restricting Plaintiff’s right to work, including, as Plaintiff contended, from ever working again in the securities trading industry entirely, much less with Defendants’ competitors.

Plaintiff worked for Defendant, an equities trading company, for over a decade in a specialty known as statistical arbitrage. Defendant terminated Plaintiff in February 2016 without cause so he could receive two bonuses he was owed, one for $652,243 (deferred from his 2014 bonus) and the other for $300,000 (deferred from his 2015 bonus). The parties engaged in discussions for over one month regarding a separation agreement that Plaintiff ultimate rejected. In October 2016, Plaintiff filed a complaint in court, seeking (inter alia) declaratory relief from the two-year non-compete clause in his contract (as Plaintiff did not want to risk a breach of contract claim for damages or risk forfeiting his bonuses) as well as injunctive relief against the non-compete provision. Ten days later, Plaintiff filed a petition to compel arbitration. Once in arbitration, Plaintiff considerably expanded his claims to include whistleblower retaliation, regulatory compliance violations (under the Dodd-Frank and Sarbanes-Oxley Acts), and wrongful termination in violation of public policy. Defendant filed an answer, stating it would “not seek to enforce the covenant not to compete,” and a counterdemand for breach of contract and declaratory relief, alleging Plaintiff had forfeited his bonuses by violating the confidentiality provisions of the Agreement when he attached a copy of the draft separation agreement to his arbitration demand.

The arbitrator found Plaintiff had violated the confidentiality provisions and ordered Plaintiff to repay the 2014 bonus and denied him the 2015 bonus. The arbitrator further held that Plaintiff was not entitled to the declaratory relief he sought as the arbitrator refused to find the non-compete and confidentiality provisions of the Agreement illegal and unenforceable under Section 16600, holding that the non-compete provision was mooted since the two-year period had elapsed and Plaintiff had made no effort to be employed in statistical arbitrage during those two years. The arbitrator similarly dismissed the claim for declaratory relief from the confidentiality provision, holding Plaintiff’s claim lacked merit for lack of any showing that the confidentiality provision had been “unreasonably” restrictive and that the arbitrator could not guess the nature of Plaintiff’s conduct in any “anticipated future employment.” The arbitrator (and the trial court) also found Plaintiff had unclean hands because he had stolen Defendant’s confidential information about “historical earnings” by copying it to his cell phone and retaining it after his separation of employment and because he had provided “intentionally” false testimony at the arbitral hearing. The arbitrator ordered Plaintiff to pay Defendant nearly $2.5 million in attorney’s fees and $175,000 in costs and ordered Plaintiff to repay the $652,243 bonus plus $134,031 in interest.

Plaintiff attacked the arbitrator’s award as a refusal to decide the facial challenge of the confidentiality provision under Section 16600; Defendant argued the award was proper because Plaintiff’s challenge was not “ripe” given the award’s focus on “anticipated future employment.” Plaintiff also argued the Agreement’s fee-shifting provision violated Armendariz v. Found. Health Psychare Servs., Inc. (2000) 24 Cal.4th 83 by requiring him to prove Defendant had acted in bad faith, a burden he would not have had to meet in court.

The Court of Appeal analyzed the award in the context of Monscharsh’s rule that arbitrators’ awards are “not generally reviewable for errors of fact or law, whether or not such error appears on the face of the award and causes substantial injustice to the parties.”[ii] The Brown court, however, found that the award fell within two of the limited exceptions articulated in Monscharsh: (1) where a party claims “the entire contract or transaction was illegal”;[iii] and (2) where “granting finality to an arbitrator’s decision would be inconsistent with the protection of a party’s statutory rights [even where a contract was not entirely illegal].”[iv] The appellate court agreed with Plaintiff that the trial court’s confirmation of the arbitrator’s award conflicted with his statutory right under Section 16600 to pursue lawful employment.[v] Moreover, the Court of Appeal held the arbitrator should have declared the non-compete provisions of the Agreement void on their face because the definition of “Confidential Information” was grossly overbroad, and that the trial court erred by denying the petition to vacate the award on the grounds that the arbitrator had exceeded his authority by violating Plaintiff’s statutory rights. The appellate court found that declaring the confidentiality provisions of the Agreement outweighed Plaintiff’s unclean hands, declaring the unclean hands defense irrelevant to the Section 16600 analysis. The Court further found the arbitrator erred in finding Plaintiff had forfeited his deferred bonuses.

[i] See Cal. Code Civ. Proc. § 1286.2(a)(4).

[ii]Moncharsh, supra, 3 Cal.4th at 6.

[iii]Id. at 32.

[iv] Id.; see also Ahdout v. Hekmatjah (2013) 213 Cal.App.4th 21, 37 (“Numerous courts have since construed Moncharsh to stand for the proposition that an arbitrator exceeds its powers within the meaning of Code of Civil Procedure section 1286.2 by issuing an award that violates a party’s statutory rights or ‘an explicit legislative expression of public policy.’ [Citations.]”)

[v]Dowell v. Biosense Webster, Inc. (2009) 179 Cal.App.4th 564, 575 (affirming the trial court’s ruling on summary adjudication that the non-compete and non-solicitation provisions in an employment agreement were unenforceable and void ab initio as a matter of law because they restrained employees from practicing their profession, notwithstanding whether the company could offer evidence that it needed to protect its trade secrets) (“Section 16600 expresses California’s strong public policy of protecting the right of its citizens to pursue any lawful employment and enterprise of their choice. [Citations.] California courts ‘have consistently affirmed that section 16600 evinces a settled legislative policy in favor of open competition and employee mobility.’ (Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937, 946 (Edwards).) ‘The interests of the employee in his own mobility and betterment are deemed paramount to the competitive business interests of the employers, where neither the employee nor his new employer has committed any illegal act accompanying the employment change.’ [Citations.] An employer’s use of an illegal noncompete agreement also violates the UCL (§ 17200 [‘unfair competition shall mean and include any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising’].) [Citations.]”)

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