Brown v. TGS Management: Merits Review of Arbitration Decisions Impacting Statutory Rights

Broad immunity from judicial merits review is a fundamental tenet of arbitration practice. Nearly 30 years ago, interpreting and applying the California Arbitration Act (the “CAA”), the California Supreme Court enunciated the principle that “an arbitrator’s decision is 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. ”Moncharsh v. Heily & Blase, 3 Cal. 4th 1, 6 (1992). The Court allowed, however, for “limited exceptions” to this general rule (id.), including cases “in which granting finality to an arbitrator’s decision would be inconsistent with the protection of a party’s statutory rights” (id. at 32). See Richey v. AutoNation, Inc., 60 Cal. 4th 909, 916 (2015) (“Arbitrators may 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.”) The Fourth District Court of Appeals recent decision in Brown v. TGS Management Co., LLC, 2020 WL 6634990, Cal. Ct.App., 4th Dist., 10/13/20 (as modified on denial of rehearing 11/12/20) applied this exception aggressively, holding that the arbitrator exceeded his powers by failing to reach the merits of a statutory claim.

In Brown, TGS had terminated employee Brown. In an arbitration proceeding, Brown sought, among other things, declaratory relief concerning the confidentiality provisions of his employment agreement. Relying on Business and Professions Code § 16600, which provides that “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void,” Brown “sought a declaration which would enable him to practice his profession of statistical arbitrage without being subjected to unfounded claims that he used TGS’ ‘trade secrets’ and ‘confidential information[.]’” Brown, 2020 WL 6634990, at *4 (internal quotations omitted). The arbitrator denied this request for declaratory relief as unripe, finding that Brown “is seeking an order finding that the manner in which [he] conducts himself in the course of his anticipated future employment will not place him in violation of the confidentiality provisions of the Employment Agreement.” Id. [1]

Brown petitioned to vacate the award on the basis that the arbitrator had “‘exceeded his powers’” in issuing an award violating ‘fundamental public policy and California statutes.’” Id. at *6. The trial court denied Brown’s petition to vacate and granted TGS’s petition to confirm. It found that the arbitrator’s ruling did not implicate public policy because it did enforce the confidentiality provisions of the employment agreement, instead denying the request for declaratory relief as not ripe. Id.

The Fourth District Court of Appeal reversed and reached the merits, holding that “the Employment Agreement’s confidentiality provisions severely restrict Brown’s right to work in clear contravention of section 16600.” Id. at *11. In reaching the merits, it relied on the exception identified in Moncharsh for cases “in which granting finality to an arbitrator’s decision would be inconsistent with the protection of a party’s statutory rights.” Moncharsh, 3 Cal. 4th at 32. It held that because Brown mounted a facial challenge to the confidentiality provisions, the arbitrator had a duty to decide the merits of Brown’s claim. “Because the arbitration award is inconsistent with the protection of Brown’s rights under section 16600, the award exceeded the arbitrator’s powers.” Id. at *11.

In reaching this result, Brown relied on the California Supreme Court’s 2015 decision in Richey as well as on Moncharsh. In Richey, the Court upheld an arbitrator’s award that denied, based on an “honest belief” defense, an employee’s claim that the employer had violated his rights to reinstatement under the California Family Rights Act (“CFRA”). While not finding that the arbitrator had exceeded his authority, the Court did not reject application of the Moncharsh exception, relying instead on a harmless error analysis. See Richey, 60 Cal. 4th at 912 (“any error that may have occurred did not deprive the employee of an unwaivable statutory right because the arbitrator found he was dismissed for violating his employer’s written policy prohibiting outside employment while he was on medical leave”). [2]

Moncharsh and Richey, particularly as extended in Brown, beg the question of what are the limits of judicial review of arbitral awards in cases applying CAA procedural rules and involving statutory rights—put differently, how “limited” is this exception to the general rule that “an arbitrator’s decision is not .… reviewable for errors of fact or law.” Moncharsh, 3 Cal. 4th at 32. In Brown, would the arbitrator’s decision have been subject to judicial review if the arbitrator had reached the merits and held that the confidentiality provisions in Brown’s employment agreement did not “restrain [him] from engaging in a lawful profession” and therefore did not violate Section 16600? If the arbitrator had reached the merits and decided for Brown, would his employer have had a right to merits review? Or would the employer have no such right because the arbitrator’s decision held for the party asserting the statutory right?

[1] The arbitrator also found that Brown had unclean hands, having “stolen” TGS’s confidential information by copying it on to his cell phone and retaining it after his termination. Id. at **4-5.

[2] Brown rejected an argument that it should affirm the arbitrator’s decision on the alternative grounds of unclean hands, citing “case law holding the unclean hands doctrine does not apply where it would result in permitting an act declared by statute to be void or against public policy.” Brown, 2020 WL 6634990 at *11 (citation and internal quotations omitted).