California Court Confirms No Absolute Public Policy Against Non-Competes Entered into by Partners
November 24 2015
California’s prohibition on non-competition agreements is less than absolute. For example, non-compete agreements may be enforced against partners or sellers of businesses. Additionally, in SingerLewak LLP v. Andrew Gantman (2015) 241 Cal.App.4th 610, a California Appellate Court affirmed an arbitration award that would be considered by most to be a misapplication of California’s non-competition law.
The underlying dispute arises from provision within a partnership agreement that imposed a cost on a departing partner (Gantman) who serviced clients of the firm after his departure. At arbitration, the former partner argued that:
- The provision was not enforceable under California law because it was a restraint on competition;
- The exception to the general prohibition of restraints on competition for agreements by partners did not apply because he was not a partner; and
- The provision was invalid because it did not contain a geographical restriction.
The arbiter disagreed and enforced the provision. The arbitrator concluded that Gantman was a partner for the purposes of Business and Professions Code section 16602 and that the provision was not a covenant not to compete but a provision allowing competition with the imposition of a cost on the departing partner. SingerLewak filed a petition to confirm the arbitration award. Gantman opposed and filed a petition to vacate the award. The trial court vacated the arbitration award after it concluded that de novo review of the evidence was required and that the provision was invalid and unenforceable because it did not contain any geographical restrictions.
The Appellate Court concluded that the general rule prohibiting review of an arbitration award applied and that the arbitrator’s award should be been affirmed. The Appellate court reasoned that judicial review of an arbitration award is only appropriate when the decision violates a party’s unwaivable statutory rights or the explicit legislative expression of public policy. The court held that while section 16600 evidences a settled legislative policy in favor of open competition and employee mobility, there is no absolute public policy against the enforcement of a covenant not to compete entered into by partners. As such, although the arbitrator may have erred in interpreting or applying section 16602, the decision did not violate an explicit legislative expression of public policy. Accordingly, the Appellate Court reversed the trial court’s order which had vacated an arbitration award.
The full implications of the decision are unknown, but as of October 21, 2015, the California Supreme Court has ordered the decision published. Businesses and employees using arbitration should ensure that they aggressively present arguments during the arbitration because it is unlikely they will have chance for review if they cannot meet this burden.