SingerLewak LLP v. Gantman Contains Excellent Discussion Of The “Public Policy Exception” That Sometimes Permits Judicial Review Of An Arbitrator’s Decision – But Not Here.
It is well-established that arbitrators do not exceed their powers just because they assign an erroneous reason for their decision. Therefore, the vast majority of arbitrator’s awards are immune to judicial review and easily get confirmed as judgments. Sometimes, however, an arbitrator’s award clearly violates public policy, resulting in judicial review and vacatur. Our next case, SingerLewak, LLP v. Gantman, B259722 (2/8 July 29, 2015) (Bigelow, Flier, Grimes) (unpublished) has an excellent discussion of the public interest exception.
SingerLewak, an accounting firm, and its employee, Gantman, were parties to a partnership agreement containing an arbitration provision. The partnership agreement included a provision that if a partner left the firm and competed, then a cost was imposed on the departing partner who serviced partners of the firm. The arbitrator concluded that Gantman was a partner, that the provision was not a true covenant not to compete, and that the restriction was not void for lack of an express geographical limitation, because there was an implied limitation – locations accessible to the firm’s client’s locations. In other words, the arbitrator “blue-penciled” a geographic limitation. Ordinarily, that would be the end of the matter, because whether the arbitrator was right or wrong could not be second-guessed by the courts.
The trial court, however, concluded judicial review of the arbitration award was required because it violated California non-compete policy, and vacated the award, leading to SingerLewak’s appeal.
Though unpublished, the case addresses an issue of first impression. Because California Bus. & Prof. Code section 16602 allows for an agreement that a departing partner “not carry on a similar business within a specified geographic area where the partnership business has been transacted . . . “, does an arbitrator who implies a geographic limitation run afoul of an important public policy, exposing the arbitral award to judicial review?
No, says the Court of Appeal. Unlike Bus. & Prof. Code section 16600, the general non-compete provision that draws a bright line in California, section 16602, applying to partnerships, applies a “rule of reason.” That rule of reason, which is not a bright line, allows the arbitrator to imply a geographic limit. Therefore, by implying a geographic limit, the arbitrator does not fall within the “public policy exception” that would open up the award to judicial review.
This case discusses in detail the public interest exception, carefully distinguishing many other cases that address the public interest exception. For example, on one side of the spectrum is Ahdout v. Hekmatjah, 213 Cal.App.4th 21 (2013), in which the Court concluded judicial review of an arbitration award was required because the award implicated “the explicit legislative expression of public policy embodied in section 7031 regarding unlicensed contractors.” On the other side of the spectrum is the SingerLewak case, involving no explicit legislative expression of public policy prohibiting an arbitrator (or the courts, for the matter), from implying a geographic limitation on business activities under section 16602.
One important takeaway is that the public policy exception will not be lightly applied. Absent a clear expression of illegality or public policy, the strong presumption in favor of arbitration means that the award will generally be immune from judicial scrutiny.
Congratulations to my colleagues at AlvaradoSmith, Ted Bacon, Mike Hensley, and Matt Hansen, who successfully briefed this matter in the Court of Appeal and obtained the reversal. Mike Hensley, my co-contributor to the California Attorney’s Fees blawg, argued the case for Appellant SingerLewak.