SingerLewak LLP v. Gantman

Opinion

SingerLewak LLP appeals from a trial court order denying its petition to confirm an arbitration award. The arbitrator determined a non-compete agreement Andrew Gantman signed as a partner in SingerLewak was enforceable. The trial court concluded judicial review of the arbitration award was required and vacated the award. After a de novo review, the trial court found the non-compete agreement was unenforceable under California law. We conclude the general rule prohibiting review of an arbitration award applied in this case. We therefore reverse the trial court order.

The relevant underlying facts are largely undisputed. SingerLewak is an accounting firm. In 2007, Gantman became a partner in the firm; he had previously worked for the firm as an employee. In 2011, Gantman withdrew or was terminated from the partnership. Upon admission to the partnership, Gantman had agreed to be bound by the partnership agreement which contained the following provision (Paragraph 21A):

“In the event that a Withdrawing, Retired, Terminated, or Removed Partner breaches any of the covenants contained herein or is terminated by reason of default... or provides services at any time during a period of four (4) years from withdrawal as an individual or as an employee, agent, consultant, officer, director, member or shareholder of any entity and provides the same or similar type as that of the partnership to any then current clients of the partnership, then in addition to any other remedies the Partnership may have at law or in equity, the Partnership may, at its option, reduce the liquidation payments payable to said . . . Partner pursuant to Paragraph 14, above, by an amount equal to one hundred fifty percent (150%) of the greater of the gross fees billed in the twelve (12) months preceding the Termination Date to any client of the Partnership that the . . . Partner services within four (4) years after the Termination Date, or the gross fees billed to any such client in that client’s last twelve months as a client of the Partnership. In the case of any client who was a client of the Partnership for less than a twelve month period, the gross fees billed to that client shall be annualized at the same rate in order to estimate the amount of fees which the Partnership might have received for a full twelve month period. . . . [¶] Should the reduction in the liquidation payment, pursuant to the above, exceed the amount paid to the Withdrawing, Retired, Terminated or Removed Partner, said Partner shall pay the excess to the Partnership within sixty (60) days after the amount of excess has been determined.”

After his departure from the firm, Gantman provided services to several SingerLewak clients. SingerLewak demanded that Gantman pay the firm over $260,000, pursuant to Paragraph 21A. Gantman did not make the payment.

The parties submitted the dispute to arbitration, as required under the partnership agreement. Gantman argued Paragraph 21A was not enforceable under California law. He asserted Business and Professions Code section 16602 — providing an exception to the general prohibition against restraints on competition for certain agreements made by partners — did not apply

Yet, the Moncharsh court noted “there may be some limited and exceptional circumstances justifying judicial review of an arbitrator’s decision when a party claims illegality affects only a portion of the underlying contract. Such cases would include those in which granting finality to an arbitrator’s decision would be inconsistent with the protection of a party’s statutory rights. . . . [¶] Without an explicit legislative expression of public policy, however, courts should be reluctant to invalidate an arbitrator’s award on this ground. The reason is clear: the Legislature has already expressed its strong support for private arbitration and the finality of arbitral awards in title 9 of the Code of Civil Procedure. (§ 1280 et seq.) Absent a clear expression of illegality or public policy undermining this strong presumption in favor of private arbitration, an arbitral award should ordinarily stand immune from judicial scrutiny.” (Moncharsh, supra, 3 Cal.4th at p. 32.) The court summarized its conclusion: “[T]he normal rule of limited judicial review may not be avoided by a claim that a provision of the contract, construed or applied by

Our high court has subsequently applied this exception to review challenged arbitration awards. In Board of Education v. Round Valley Teachers Assn. (1996) 13 Cal.4th 269 [ 52 Cal.Rptr.2d 115 , 914 P.2d 193 ] (Round Valley), the underlying dispute concerned whether a school board could agree through collective bargaining to give probationary employees greater procedural protections than those set forth in the Education Code. (Id. at p. 272.) When a probationary teacher challenged his notice of non-renewal, arguing it did not comply with provisions in the collective bargaining agreement between the teachers association and the school district, the school district asserted the grievance was not arbitrable. The superior court, however, granted a motion to compel arbitration. The arbitrator found the school district had violated the collective bargaining agreement and ordered it to comply with the agreement’s provisions. The school district challenged the validity of the relevant collective bargaining agreement provisions, but the arbitrator “left that issue to judicial determination.” (Id. at p. 273.) The district then filed a petition to vacate the arbitration award. It argued the arbitrator exceeded his powers because provisions of the Education Code preempted any contradictory provisions in the collective bargaining agreement regarding procedures for reelection of probationary teachers. (Ibid.) Further, according to the district, pursuant to provisions of the Government Code, the reelection issue could not be the subject of collective bargaining. The district thus asserted the entire subject of reelection of probationary teachers was never properly subject to the arbitration provisions of the collective bargaining agreement. (Id. at p. 276.)

In its review, the court explained the threshold issue was whether it had authority to review the arbitrator’s award, and this question was independent of the issue of whether the award should be upheld. (Round Valley, supra, 13 Cal.4th at p. 276.) Judicial review was justified because if the school district was correct concerning the scope of its statutory rights under the Education and Government Codes, the case presented the “exceptional circumstance” allowing for judicial review of the arbitrator’s decision. The court reasoned: “Should District’s interpretation of the law prevail, we would be faced with an ‘explicit legislative expression of public policy’ that issues involving the reelection of probationary teachers not be subject to arbitration. [Citation.] This expression of public policy would thus conflict with the expressed legislative intent to limit private arbitration awards to statutory grounds for judicial review. Thus, rigidly insisting on arbitral finality here would be ‘inconsistent with the protection of a party’s [i.e., District’s] statutory rights.’ [Citations.]” (Id. at p. 277.)

The city challenged the arbitration award, arguing in part the award violated the public policy requiring employers to provide a safe workplace. (City of Palo Alto, supra, 77 Cal.App.4th at p. 334.) Although the court agreed there was such an express public policy, it found the arbitration award requiring reinstatement of an employee who had made violent threats did not necessarily violate that policy. The court reasoned the city had not established the public policy obligated the city to automatically fire any employee who makes a threat of violence, regardless of the circumstances. Further, the arbitrator had implicitly concluded the employee did not intend to carry out his threat. The court concluded reinstatement of an employee who had no intention of carrying out his or her threat of violence was “not necessarily precluded because there is no absolute public policy against employment of persons who make threats of violence, which operates regardless whether there is an actual risk of violence.” (Id. at p. 337.) However, the court vacated the arbitration award because it was irreconcilable with the public policy requiring obedience to court orders; the employee could not return to work without violating the injunction. (Id. at pp. 339-340.)

In Jordan v. Department of Motor Vehicles (2002) 100 Cal.App.4th 431 [ 123 Cal.Rptr.2d 122 ] (Jordan), the court reviewed and vacated an arbitration award the court determined was an unconstitutional gift of public funds. In that case, the Legislature had, by legislative enactment, authorized a certain maximum amount of attorney fees for a separate litigation. The arbitrator’s award exceeded the amount authorized by the Legislature. Likewise, in Department of Personnel Administration v. California Correctional Peace Officers Assn. (2007) 152 Cal.App.4th 1193 [ 62 Cal.Rptr.3d 110 ], the court reviewed and vacated an arbitration award reforming a memorandum of understanding between a state agency and public employee union. The Legislature had already approved the terms of the memorandum prior to the arbitration. The arbitrator’s award changing those terms violated the public policy of legislative oversight of state employee contracts. (Id. at pp. 1195, 1203.)

The Court of Appeal disagreed, reasoning that because “section 7031 constitutes an explicit legislative expression of public policy regarding unlicensed contractors, the general prohibition of judicial review of arbitration awards does not apply. . . . [Wjhere a public policy is articulated explicitly by the Legislature, as with section 7031, courts are vested with the final word on whether the provision applies.” (Ahdout, supra, 213 Cal.App.4th at pp. 38, 39.) While in Moncharsh, the court concluded nothing in the Rules of Professional Conduct suggested resolution by an arbitrator of what was “essentially an ordinary fee dispute would be inappropriate or would improperly protect the public interest” (Moncharsh, supra, 3 Cal.4th at p. 33). the Ahdout court indicated the contractor licensing laws are intended to protect the general public from shoddy construction work, “and thus judicial review of arbitration awards that allegedly fail to enforce [the law] is appropriate” (Ahdout, at p. 39). The court reversed the judgment and remanded to the trial court with directions to conduct a de novo review of the evidence to determine whether section 7031 was applicable. (Ahdout, at p. 40.)

However, courts have refused to apply the exception when no explicit legislative expression of public policy is involved, or where the sole issue is merely an alleged error in the interpretation or application of the law governing the claim properly subject to arbitration. Thus, in Jones v. Humanscale Corp. (2005) 130 Cal.App.4th 401 [ 29 Cal.Rptr.3d 881 ] (Jones), the plaintiff’s employment agreement with the defendant contained noncom-petition and arbitration clauses. The agreement expressly declared that its provisions were to be construed in accordance with New Jersey law. {Id. at pp. 405-406.) The arbitrator rejected the plaintiff’s argument that under New Jersey choice of law analysis, the noncompetition agreement should be interpreted under California law. {Id. at p. 406.) The arbitrator concluded the noncompetition agreement could be enforced against the plaintiff, and awarded the defendant damages for the plaintiff’s previous violation of the

The trial court reviewed and vacated the arbitration award. It concluded the arbitrator erred in failing to apply California law and the covenant not to compete was illegal on its face under section 16600. (Jones, supra, 130 Cal.App.4th at p. 407.) The Court of Appeal disagreed. The court acknowledged Moncharsh allows for judicial review of an arbitration award when granting finality to the arbitrator’s decision would be inconsistent with the protection of a party’s statutory right. But the Jones court concluded the issue before it was different because the parties’ agreement authorized the arbitrator to determine the applicable law and the enforceability of the covenant not to compete. (Jones, at p. 410.) The court further concluded the arbitrator’s findings were “not palpably erroneous” because some limits on a former employee’s right to pursue his or her occupation are permissible under California law. (Id. at p. 411.) Moreover, the alleged illegality of the covenant not to compete did not render the dispute non-arbitrable. Since the alleged illegality affected only a portion of the contract that did not include the arbitration agreement, the arbitrator had the authority to determine whether the covenant not to compete was enforceable. (Id. at p. 413.)

Likewise, in City of Richmond v. Service Employees Internat. Union, Local 1021 (2010) 189 Cal.App.4th 663 [ 118 Cal.Rptr.3d 315 ], the court rejected the public policy exception as a basis to review an arbitration award. The underlying case involved an employee who was terminated after being accused of sexual harassment and dishonesty. The employee challenged the termination in arbitration. The arbitrator concluded the sexual harassment claims were time-barred and the evidence did not support the dishonesty charges. The arbitrator accordingly found no cause for termination and ordered the employee reinstated. (Id. at pp. 667-668.) On appeal, the court concluded the arbitration award did not violate public policy. Although there is a strong public policy against sexual harassment in the workplace, the court concluded that policy did not preclude an arbitrator from ordering an accused harasser reinstated where the accusations were time-barred. (Id. at pp. 671-672.)

B. Judicial Review Is Not Appropriate in This Case

As the California Supreme Court summarized in Richey: “Arbitrators may exceed their powers by issuing an award that violates a party’s unwaivable statutory rights or that contravenes an explicit legislative expression

In light of this background, we do not find that the arbitration award, even if incorrect in its interpretation and application of section 16602, contravened an explicit legislative expression of public policy that undermined the presumption in favor of private arbitration. (Ahdout, supra, 213 Cal.App.4th at p. 38.) While there is undeniably an explicit legislative expression of public policy embodied in section 16600, section 16602 creates an exception to this policy, and that provision governed this case. There is no absolute public policy against the enforcement of a non-competition provision entered into by partners, consistent with section 16602. And the issue of whether or to what extent Paragraph 21A was enforceable under the section 16602 exception was the only question submitted to the arbitrator for a decision. This case is distinguishable from Round Valley or Aguilar, in that the arbitration award, even if legally erroneous, did not contravene a public policy indicating that certain issues not be subject to resolution by the arbitrator. (See Jones, supra, 130 Cal.App.4th at p. 410 [describing Round Valley and Aguilar as applying the exception “in circumstances where the court concluded legislative enactments expressly or impliedly created an impediment to the resolution of an issue by private contractual arbitration”].)

In addition, this case is unlike Pearson, in that the arbitrator’s error, if any, did not deprive Gantman of a hearing on the merits of his claim. In contrast to Pearson, any arbitrator error did not “[misconstrue] the procedural framework under which the parties agreed the arbitration was to be conducted, rather than misinterpreting the law governing the claim itself.” (Pearson, supra, 48 Cal.4th at pp. 679-680, fn. omitted.) Indeed, Gantman’s argument is precisely that the arbitrator misinterpreted the law governing the claim itself.

This case is also unlike Jordan and California Correctional Peace Officers, in that the award, even if based on errors of law, does not override or directly conflict with a legislative action which set explicit boundaries on the subject matter of the arbitration or the permissible scope of the award. Unlike the

This case is further unlike City of Palo Alto because the arbitration award, even if incorrect, does not require the violation of a separate court order. But the court’s reasoning in City of Palo Alto regarding the safe workplace public policy is applicable here. In City of Palo Alto, the court reasoned that under some circumstances, a city might reinstate an employee who had made threats of violence, without violating the public policy requiring employers to provide a safe workplace. There was no absolute public policy against reinstatement of an employee who had threatened violence. Similarly here, there is no absolute public policy against the enforcement of a restraint on competition agreed to among partners. The arbitrator’s award interpreting Paragraph 21A and finding it enforceable under section 16602 is not necessarily incompatible with the public policy in favor of open competition.

In Ahdout, the court concluded the arbitrators’ refusal to apply the prohibition on unlicensed contractor work mandated judicial review. The public policy intended to protect the public from the “hazards of shoddy construction work” was explicitly articulated by the Legislature, and courts had the final word on whether the provisions regarding unlicensed contractors applied. (Ah dout, supra, 213 Cal.App.4th at p. 39.) But here, while section 16600 embodies a similarly strict and well-established public policy, section 16602 is an exception to section 16600, and it was the provision at issue in this case.

The case before us therefore bears a closer resemblance to Moncharsh. As was the case in Moncharsh, we see nothing in section 16602 that suggests resolution by an arbitrator of the dispute between a partner and the partnership would improperly protect the public interest. As in Moncharsh, the validity and enforceability of Paragraph 21A under California law were contested issues submitted to the arbitrator for decision. His resolution of those issues is what the parties bargained for in the arbitration agreement. (Moncharsh, supra, 3 Cal.4th at p. 28; Jones, supra, 130 Cal.App.4th at p. 409.) The arbitrator was within his powers in resolving the questions presented to him. And, “[i]t is well settled that ‘arbitrators do not exceed their powers merely because they assign an erroneous reason for their decision.’ ” (Moncharsh, at p. 28; see Jones, at pp. 409-410.) The arbitrator may have erred in interpreting or applying section 16602. But he did not exceed his powers by acting in a manner “not authorized by the contract or by law.” (Jordan, supra, 100 Cal.4th at p. 443.)

The trial court order vacating the arbitration award is reversed. The matter is remanded to the superior court with directions to enter an order confirming the award. Appellant is awarded costs on appeal.

Flier, J., and Grimes, J., concurred.