Rare Reversal of a $3.4MM Arbitration Award: Overbroad Employee Confidentiality Ruled a De Facto Noncompete and Thus Void

Timothy Kowal, Esq.
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January 22, 2021

I tell clients arbitration awards are virtually unassailable on appeal. After this $3.4 million award in an employment dispute was reversed on appeal in Brown v. TGS Mgm't Co., LLC (D4d3 Nov. 12, 2020) No. G058323, that may technically still be true: but, I am not going to say it anymore.

Employee Brown works in the very specialized, and very lucrative, field of statistical arbitrage. Brown enjoyed highly remunerative employment with TGS. But Brown's employment agreement had a restrictive non-compete, and a very broad confidentiality requirement.

When Brown left his employment, he took some information from TGS. He did not take employment elsewhere. Brown received a $650,000 deferred 2014 bonus from TGS. Brown still expected to receive a $300,000 deferred 2015 bonus when he filed suit.

The matter was compelled to arbitration. TGS claimed Brown had violated the confidentiality agreement, and thus sought to recover the $650,000 bonus it had paid him. Brown sought declaratory relief that the entire confidentiality agreement amounted to a covenant not to compete, void ab initio under Business & Professions Code § 16600.

The arbitration was a disaster for Brown. The arbitrator ruled that Brown's declaratory relief claim was not "ripe" because he had not taken a new job. The arbitrator also denied Brown's § 16600 argument because of Brown's "unclean hands."

The arbitrator awarded TGS $650,000 for the bonus it had paid Brown, a staggering $2.46 million in attorney fees (read that again, slowly), $170,000 in costs, and $134,000 in prejudgment interest.

After an award like that, if there is an exception to the usual rule that arbitration awards are largely unassailable, you are likely motivated to find it.

Brown petitioned the trial court to vacate the award. Of the few and narrow grounds to vacate an arbitration award, one 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).) Brown argued that.

But the trial court denied Brown's petition to vacate the award. The trial court agreed with the arbitrator that the section 16600 argument challenging the confidentiality and non-compete clauses was not "ripe," and thus this ruling could not be said to "exceed" the arbitrator's powers. The trial court also agreed that the arbitrator's finding of Brown's bad faith defeated his section 16600 challenge.

Brown appealed.

Of some appellate procedural interest on the topic of the respondent's role in designating the record: Respondent TGS submitted a Respondent's Appendix along with its Respondent's Brief. The Respondent's Appendix included the arbitration transcripts. Brown noted those transcripts were not provided to the trial court in the petition to confirm the award, and thus were not part of the record on appeal. Brown moved to strike the Respondent's Appendix and for sanctions against TGS.

The Court of Appeal apparently agreed with Brown as a technical matter, but nonetheless allowed the transcripts to come into the record via judicial notice, and refused to impose sanctions. Judicial notice strikes me as an end run around the rules of proper record designation. But, if you are in a pinch, cite Brown v. TGS Mgmt as grounds to include arbitration transcripts or court transcripts into the appellate record.

Back to the issues on appeal: The Fourth District, Division Three, of the Court of Appeal reversed the judgment on the arbitration award. The court relied on "the substantial body of case law holding arbitrators exceed their powers 'by issuing an award that violates a party's unwaivable statutory rights or that contravenes an explicit legislative expression of public policy," quoting Richey v. Autonation, Inc. (2015) 60 Cal.4th 909, 916.

The court went on to rely heavily upon the key California Supreme Court case of Moncharsh v. Heily Blase (1992) 3 Cal.4th 1, which declared an arbitration award is subject to judicial review if inconsistent with the protection of a party's statutory rights. Moncharsh discussed two of the "limited exceptions" in which judicial review of an arbitrator's award is warranted. The first of these exceptions is "where a party claim[s] the entire contract or transaction was illegal."

The court concluded that TGS's extremely broad confidentiality clause – which even swept in information unrelated to the statistical arbitrage business, and information predating Brown's employment – operated as a de facto non-compete. It could not survive under section 16600.

TGS, for its part, did not attempt to defend its confidentiality clauses. Instead, it stood on the argument that Brown's declaratory relief claim was not "justiciable" because it was not ripe.

This was incorrect, the court held, because here, Brown was making a facial challenge to the provisions, not an as-applied challenge. "The factual details of Brown's future employment," the court held, "were irrelevant."

The unclean hands defense, too, was irrelevant to a facial challenge.

The matter was remanded. The arbitration will reconvene for proceedings consistent with the Court's opinion – including on the issue of the monumental amount of fees.

(H/t to Michael Shipley, who wrote about this case here.)

Tim Kowal helps trial attorneys and clients win their cases and avoid error on appeal. He co-hosts the Cal. Appellate Law Podcast at www.CALPodcast.com, and publishes a newsletter of appellate tips for trial attorneys at www.tvalaw.com/articles. Contact Tim at tkowal@tvalaw.com or (714) 641-1232.