California's famous ban on non-competition agreements, at first glance, seems insurmountable. In 2008, the California Supreme Court ostensibly declared California's ban of non-competes absolute when it rejected the "narrow restraint" exception, which had been fashioned by the federal courts to allow employers to enforce non-competes against former employees. However, exceptions exist to California's general stance against enforcement of non-competes. For example, California's non-compete statute specifically permits non-competes to be enforced against departing partners or sellers of businesses. See Business and Professions Code section 16602. Moreover, a recent California Court of Appeal decision in SingerLewak LLP v. Gantman, case no. B259722, 2015 Cal. App. LEXIS 929 (Cal. App. Jul. 29, 2015) highlighted the reach of one of the exceptions to the ban on non-competes.
In Gantman, the Court of Appeal found that there was no public policy basis to disregard an arbitrator's decision to enforce a non-compete against a departing partner. In Gantman, Gantman, a departing partner, argued at arbitration that a non-compete provision did not apply to him because he did not fall under the definition of "partner" contemplated by Business and Professions Code section 16602. The arbitrator was unconvinced by the partner's argument, stating that the partner did, in fact, fall under the definition of "partner" under section 16602. Further, the arbitrator made an interesting determination: that what was, for all purposes, a non-compete was not a non-compete, but, instead, "a provision allowing competition but imposing a cost on departing partners who service clients of the firm." The arbitrator stated that section 16602 was not aimed at such provisions, and, thus, the provision "imposing a cost" on the partner was enforceable. The partner appealed the arbitrator's decision to the California Court of Appeal.
The Gantman court noted that evaluating a challenge to an arbitration award required two steps: "first, the court must determine whether the award is reviewable" and, second, "if review is appropriate…the court consider[s] whether the award should be upheld." The threshold question in determining whether the arbitration award inGantman was reviewable was, the court observed, whether "the arbitration award…would be inconsistent with protecting Gantman's statutory rights." In evaluating the reviewability of the award, the Gantman court relied on a California Supreme Court case decided earlier this year in which the Supreme Court stated that "arbitrator's may exceed their powers by issuing an award that violates a party's unwaivable statutory rights or that contravenes an explicit expression of public policy." The Gantman court, noting that the "public policy in favor of open competition is not absolute" in the context of a partnership or a dissociation of a partner from a partnership, stated that "there is no absolute public policy against the enforcement of a non-competition provision entered into by partners, consistent with section 16602.
In a 2009 case, the Ninth Circuit Court of Appeals had concluded that enforcement by an arbitrator of a non-compete provision subject to California law constituted "manifest disregard of the law," sufficient to overturn the arbitral decision. The Gantman decision highlights that arbitrators' enforcement of non-compete provisions against former business owners or partners will not be subject to judicial review under a "manifest disregard" theory.
It is not clear that this kind of deference will extend to cases involving the enforcement of non-competes against departing employees. There is no statutory exception to the non-compete ban for former employees, as opposed to former business owners or partners. Thus, a case of post-employment non-competition restraints against a former employee admittedly deals directly with an "absolute public policy" restriction thatGantman conceded would likely warrant judicial review. While California has not specifically recognized a "manifest disregard" basis to overturn arbitral awards, the "absolute public policy" implications of the California's non-compete ban may nevertheless require a similar outcome in the event that employers seek to rely on arbitrators to enforce non-competes against former employees.