Even Deference to Arbitration Can’t Save a Void Covenant

Brown v. TGS Mgm’t Co., LLC, No. G058323 (D4d3 Nov. 12, 2020)

Arbitration rulings are generally subject to subject to very limited review by courts. One such ground is that the “arbitrators exceeded their powers and the award cannot be corrected without affecting the merits of the decision upon the controversy submitted.” Code Civ. Proc. § 1286.2(a)(4). And, as a gloss on that standard, courts will not confirm arbitral awards that are inconsistent with certain statutory rights or legislative expressions of public policy. 

One such public policy is the policy protecting an employee’s right to work in his chose profession. That is embodied by Business and Professions Code § 16600, which invalidates many post-employment restrictive covenants. Here, Plaintiff sought declaratory relief invalidating a number of post-employment anti-competitive covenants in his employment contract. In particular, Plaintiff sought to invalidate certain confidentiality obligations that were so broad as to “operate as a de facto noncompete provision” that would bar Plaintiff “in perpetuity from doing any work in” his chosen field. 

The Arbitrator, however, declined to award declaratory relief. He found the challenge not to be “ripe” because Plaintiff had not yet gone to work for a competitor. And because the evidence showed Plaintiff did, in fact take some confidential material upon his departure, the Arbitrator also denied relief based on unclean hands. 

But, as the Court of Appeal explains, those reasons aren’t good enough. An employee subject to invalid restrictive covenants has the right, under § 16600, to make a facial challenge the covenants are invalid as a matter of law. He needs not violate the covenants to show a ripe controversy. Nor do the factual particulars do not save the enforceability of a facially void provision. The Arbitrator thus exceeded his power by declining to award declaratory relief.

The Arbitrator also ruled that Plaintiff forfeited some deferred compensation due to his violation of the confidentiality provisions. The Employer, for its part, argues that the forfeiture was due to violation of different provisions permitting a retroactive for-cause termination, which provisions don’t implicate § 16600. The Court of Appeal, however, notes that the award specifically referenced the confidentiality breaches and thus vacates the award on that ground too. But on remand, Employer can have an opportunity prove that the forfeiture is justified by the alternative grounds, and Plaintiff can argue that the forfeiture is an invalid form of liquidated damages. 

Reversed.