The opinion
Filed 10/13/20; Modified and Certified for Pub. 11/12/20 (order attached)
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FOURTH APPELLATE DISTRICT
DIVISION THREE
RICHARD HALE BROWN,
Plaintiff and Appellant, G058323
v. (Super. Ct. No. 30-2016-00881773)
TGS MANAGEMENT COMPANY, OPINION
LLC,
Defendant and Respondent.
Appeal from a judgment of the Superior Court of Orange County, John C.
Gastelum, Judge. Reversed and remanded.
SV Employment Law Firm, Steven L. Friedlander, Stacey Ann Zartler and
Julian Pardo de Zela for Plaintiff and Appellant.
Munger, Tolles & Olson and Terry E. Sanchez; Paul, Weiss, Rifkind,
Wharton & Garrison and Martin Flumenbaum for Defendant and Respondent.
* * *
This appeal is from a judgment confirming an arbitration award in favor of
defendant TGS Management Company (TGS) in an employment contract dispute with
TGS’s former employee, plaintiff Richard Hale Brown (Brown). Brown contends we
must vacate the judgment because the arbitration award exceeded the arbitrator’s powers
“and the award cannot be corrected without affecting the merits of the decision[.]” (Code
Civ. Proc., § 1286.2, subd. (a)(4).) Brown argues we may review the arbitration award
under Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1 (Moncharsh), because the award is
“inconsistent with the protection of a party’s statutory rights” and conflicts with “explicit
legislative expression of public policy[.]” (Id. at p. 32.)
The specific statutory right at issue in the underlying dispute is Brown’s
right to work in his chosen field free of contractual restraints on competition. The
Legislature expressed that right in the simple but sweeping language of Business and
Professions Code section 16600 (section 16600): “Except as provided in this chapter,
every contract by which anyone is restrained from engaging in a lawful profession, trade
or business of any kind is to that extent void.”
As we explain below, Brown’s appeal has merit. We conclude the
arbitrator exceeded his power in issuing an award enforcing provisions of an employment
agreement which illegally restrict Brown’s right to work. Consequently, we reverse the
judgment and remand the matter to the trial court for further proceedings consistent with
this opinion.
I
BACKGROUND
A. Brown’s Employment with TGS
TGS is a private limited liability company which engages in a highly
computerized form of equities trading known as statistical arbitrage. Brown began
working for TGS in 2005. As a condition of employment, he signed an agreement
bearing the title, “Confidentiality, Noncompetition, Assignment and Notice Agreement”
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(the Employment Agreement). The 12-page agreement contains numerous provisions
restricting Brown’s right to compete with TGS after leaving its employ, including a two-
year ban on engaging in “Directly Competitive Activity[.]”
We discuss these anticompetitive provisions in some detail below. In
particular, we note the “confidentiality” provisions of the Employment Agreement bar
Brown in perpetuity from disclosing or using “Confidential Information” for his own
benefit or the benefit of any party other than TGS or a TGS client. A key contention of
Brown’s appeal is the Employment Agreement defines “Confidential Information” so
broadly as to prevent him from ever working again in securities trading, much less in his
chosen specialty of statistical arbitrage.
The Employment Agreement also contains an arbitration clause requiring
the parties to engage in “Binding Dispute Resolution” of all disputes arising under or out
of the Employment Agreement.
Brown worked for TGS for over 10 years. During that time, a substantial
portion of Brown’s compensation was a yearly bonus which rewarded Brown’s
performance over the previous year with a sizable cash award to be paid over the next
two years. In June 2015, Brown executed the “2014 Bonus Agreement” (the Bonus
Agreement), which awarded Brown for his performance “for the period commencing on
December 1, 2013 and ending on November 30, 2014.” The Bonus Agreement is
discussed in greater detail below. We note section 4.3 of the Bonus Agreement made any
“vested” but “unpaid” bonus subject to forfeiture upon TGS’s posttermination discovery
of any “act which could have been the basis for a termination for Cause,” specifically
including breach of the Employment Agreement’s confidentiality provisions. The Bonus
Agreement contained an arbitration clause similar to that in the Employment Agreement.
In February 2016, TGS terminated Brown’s employment without cause
effective March 23, 2016. Over the next month, Brown and TGS attempted to negotiate a
confidential separation agreement. TGS prepared a settlement offer in the form of a draft
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separation and general release agreement (the Draft Separation Agreement), but Brown
rejected the offer.
TGS terminated Brown as planned, making the termination “without cause”
so Brown could keep two bonuses he had earned but not yet received (the deferred
bonuses), given the two-year bonus structure in place. At the time he was terminated,
Brown expected to receive in December 2016 the sum of $652,243 as the second
installment of his 2014 bonus (the deferred 2014 bonus), and another $300,000 in
December 2017 as the second installment of his 2015 bonus (the deferred 2015 bonus).
B. The Arbitration Proceedings
In October 2016, Brown filed a complaint against TGS stating claims for
declaratory relief, injunctive relief, and reformation of the arbitrator-selection process in
the Employment Agreement. The declaratory relief claim sought a declaration Brown
could compete with TGS without risking a damages claim for breaching the Employment
Agreement or jeopardizing his two deferred bonuses. Brown also sought an injunction
against enforcement of the covenant not to compete.
Ten days after filing the complaint, Brown filed a petition to compel
arbitration. Brown attached as an exhibit to the petition an unsigned copy of the Draft
Separation Agreement which contained confidential information about TGS’s profits and
bonus calculations.
TGS consented to arbitration and the trial court referred the matter to
arbitration with JAMS. Six months later, Brown filed his Demand in Arbitration,
significantly expanding his claims to include new allegations of wrongful termination,
whistleblowing, and regulatory compliance violations, including federal “Dodd-Frank”
and “Sarbanes-Oxley” claims.
TGS filed its answer and counterclaims in the arbitration. TGS stated in its
answer “that it will not seek to enforce the covenant not to compete contained in
paragraph 6 of the [Employment] Agreement[.]” TGS alleged claims against Brown for
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breach of contract and declaratory relief, seeking to recoup from Brown the deferred
2014 bonus of $652,243 TGS paid him in December 2016 under a reservation of rights,
and for relief from the obligation to pay Brown his deferred 2015 bonus of $300,000 due
to be paid in December 2017. Citing the terms of the Bonus Agreement, TGS alleged
Brown forfeited these two deferred bonuses when he violated the confidentiality
provisions of the Employment Agreement by filing a copy of the Draft Separation
Agreement which disclosed the identity of TGS’s clients and its “bonus formula” for
computing employee bonuses.
The parties engaged in substantial discovery. TGS moved for summary
disposition of claims, which the arbitrator granted to a large extent. The arbitrator
dismissed all but one of Brown’s whistleblower and wrongful termination claims.1 Just
four of Brown’s claims remained: declaratory relief “to invalidate, clarify or reform”
portions of the Employment Agreement to comport with section 16600; payment of the
$300,000 deferred 2015 bonus based on TGS’s acknowledged oral promise to pay the
bonus; violations of Business and Professions Code Section 17200 (based on the anti-
competitive provisions of the Employment Agreement); and violation of Labor Code
Section 1102.5(a), which outlaws employment policies that prevent whistleblowing
complaints.
1 The arbitrator’s final award provided the following explanation for missing these
claims in the final arbitration award: “Brown acted in bad faith and engaged in frivolous
conduct regarding the submission of his Demand in Arbitration and the prosecution of his
claims[.]” The arbitrator observed Brown acknowledged “either in discovery or during
his Hearing testimony” that as to “[a]ll but a few” of his claims, he “knowingly”
submitted claims “without merit[.]”
5
C. The Arbitration Award
After a five-day trial and posthearing briefing, the arbitrator denied all of
Brown’s claims and granted both of TGS’s counterclaims. 2
1. The Forfeiture of Brown’s Deferred Bonuses
The arbitrator ruled in favor of TGS on Brown’s claim for the $300,000
deferred 2015 bonus and on TGS’s counterclaim to recover the $652,243 deferred 2014
bonus it paid Brown in December 2016. Citing the terms of the Bonus Agreement, the
arbitrator found Brown forfeited his right to both deferred bonuses by breaching the
confidentiality provisions of the Employment Agreement.
The arbitrator explained that under section 4.3 and related provisions of the
Bonus Agreement, any “vested” but “unpaid” bonus due a departed employee is
2 In this appeal, TGS filed a respondent’s appendix comprised of excerpts from the
transcript of the arbitration hearing. Brown filed a motion to strike the respondent’s
appendix and parts of the respondent’s brief which refer to excerpts from that appendix.
The motion to strike argues the respondent’s appendix violates rule 8.124(g) of the Rules
of Court because the appendix comprises documents which were not filed in the trial
court. Brown also seeks sanctions against TGS for the rule violation.
In its opposition to the motion to strike, TGS argues these transcript excerpts,
though not part of the record, “were an underlying source material” for many of the facts
cited in the arbitrator’s final award. TGS explains “there was no reason” to file these
transcripts in the trial court because Brown’s motion to vacate the arbitration award did
not “attempt to mischaracterize his arbitration testimony or TGS’s questioning of him”
regarding the misconduct which led the arbitrator to find he forfeited two bonuses. “By
contrast, on appeal, Brown’s Opening Brief attempted to downplay his misconduct . . . .”
TGS contends it submitted the respondent’s appendix believing “it would be helpful to
provide the Court with the original source materials (the arbitration transcripts), to avoid
an accusation by Brown that it had mischaracterized the record or his testimony.”
TGS argues we should deny Brown’s motion to strike and request for sanctions
and take judicial notice of the arbitration transcripts comprising the respondent’s
appendix. (See Evid. Code, § 452 (d) & (h)); Greenspan v. LADT, LLC (2010)
191 Cal.App.4th 486, 525 [“trial court properly took judicial notice of” documents from
underlying arbitration proceeding].) We find TGS’s suggestion reasonable. We deem
TGS’s filing of the respondent’s appendix a request for judicial notice of the documents
in the appendix, and grant the request. We deny Brown’s motion to strike and his request
for sanctions against TGS.
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“immediately” forfeited if “subsequent to termination” TGS discovers the employee,
though terminated without cause, committed “an act which could have been the basis for
termination for Cause with Prejudice,” specifically including the breach of the
confidentiality provisions of the Employment Agreement. The arbitrator concluded,
“These violations of the confidentiality provisions of his Employment Agreement
triggered the forfeiture of any unpaid bonuses[.]”
The arbitrator ordered Brown to refund to TGS the $652,243 deferred 2014
bonus with interest, and he denied Brown’s claim for payment of the $300,000 deferred
2015 bonus.
2. Declaratory Relief Based on Section 16600
The arbitrator characterized Brown’s claim for declaratory relief as a
request for “a ruling by the Arbitrator that the non-competition and confidentiality
provisions of the Employment Agreement are illegal and unenforceable” under § 16600.
The arbitrator concluded Brown was “not entitled to the relief requested.”
Regarding the explicit noncompete provision in section 6 of the
Employment Agreement, the arbitrator noted, “The two[-]year period during which the
non-compete provision was to be in force has expired.” Moreover, “Brown’s testimony .
. . affirmatively established that he made no effort to become employed in statistical
arbitrage during that period, and instead devoted his efforts to the design of his own
statistical arbitrage system based on public knowledge ‘available on the internet.’ Under
these circumstances there is no predicate case or controversy as to which declaratory
relief can be awarded.”
The arbitrator also denied Brown’s request for declaratory relief as to the
confidentiality provisions of the Employment Agreement. Brown’s complaint alleged the
confidentiality provisions were “overbroad, vague and ambiguous,” and sought a
declaration which “would enable him to practice his profession of statistical arbitrage
without being subjected to unfounded claims that he has used TGS’ ‘trade secrets’ and
7
‘confidential information[.]’” The complaint asserted Brown intended “to compete fairly
with TGS by using only systems that he has independently developed using public
domain information,” and believed “matters of general knowledge within the securities
industry may not be classified as trade secrets or confidential information entitled to
protection[.]” Brown alleged both he “and TGS have a direct interest in obtaining a
judicial determination as to whether or not [he] may fairly compete with TGS . . . without
exposure to claims by TGS for damages for breach of the Employment Agreement . . .
and without impacting his right to receive the remainder of his bonus under the Bonus []
Agreement.”
The arbitrator concluded Brown’s request for declaratory relief as to the
confidentiality provisions of the Employment Agreement was “without merit.” The
arbitrator explained his reasoning as follows: “There has been no showing that the
confidentiality provisions of the Employment Agreement are unreasonably restrictive in
the context of the nature of Brown’s employment and the business in which TGS was
engaged. Claimant, in effect, is not asking the Arbitrator to confirm his right to seek and
engage in future employment, but is seeking an order finding that the manner in which
Claimant conducts himself in the course of his anticipated future employment will not
place him in violation of the confidentiality provisions of the Employment Agreement.
The arbitrator, not being able to foresee the nature of Claimant[’]s conduct in the context
of his anticipated future employment, cannot make such a finding.” (Italics added.)
As will be seen, Brown attacks this ruling as a refusal to decide his facial
challenge to the legality of the confidentiality provisions under section 16600; TGS
supports this ruling as a proper finding Brown’s challenge was not “ripe” because it
concerned only “anticipated future employment.”
The arbitrator also identified “[a]s a separate and distinct ground[] for
denying the equitable relief requested by Brown” the fact Brown had stolen TGS’s
confidential information about its “historical earnings” by copying the electronically-
8
stored information onto his cell phone and retaining the information “after his
employment was terminated[.]” The arbitrator ruled this act “disqualifies [Brown] from
receiving the equitable relief requested[,]” as does Brown’s “intentionally” false
testimony at the hearing regarding how he obtained this confidential information.
3. The Derivative Claim for Unfair Business Practices
The arbitrator found “no factual basis” for Brown’s claim of unfair business
practices under Business and Professions Code section 17000, given the claim “is a
derivative of” the failed declaratory relief claim.
4. The Labor Code section 1102.5 Claim
The arbitrator wrote: “Labor Code Section 1102.5(a) makes it unlawful for
an employer to make and enforce any rule, regulation, or policy that would prevent an
employee from disclosing to a local, state, or federal agency information concerning a
perceived violation of local, state, or federal laws, rules or regulations.”
The arbitrator found no merit to Brown’s claim TGS violated this statute
because “Brown never became personally aware of any perceived violations by TGS” of
such law, rules or regulations and the confidentiality provisions of the Employment
Agreement “did not prevent the reporting of perceived violations to governmental
agencies and regulators because such violations were expressly excluded from the
prohibition on disclosing confidential information contained in the Employment
Agreement.”
5. The Discretionary Award of Attorney Fees and Costs
The arbitration clause of the Employment Agreement contained a fee-
shifting provision authorizing the arbitrator to “order any Party acting in bad faith” to pay
the legal fees and costs “of the other Party.” The arbitrator awarded TGS its attorney fees
and costs based on the finding Brown acted in bad faith.
The arbitrator cited the following incidents of bad faith on Brown’s part:
“Brown acted in bad faith and engaged in frivolous conduct” in filing and prosecuting
9
claims Brown knew were “without merit at the time they were first submitted.” Brown
“abused the discovery process by knowingly failing to disclose material and relevant
information and documents that would have exposed his theft of TGS documents and
data and resulted in an earlier disposition of his claims.” Finally, the arbitrator found
Brown acted in bad faith when he “knowingly testified falsely under oath as to the
manner in which he obtained [that] information[.]”
The arbitrator ordered Brown to pay TGS $2,462,721 for its attorney fees
and $172,682 for its costs, in addition to $652,243 for the refund of the deferred 2014
bonus, plus interest from December 24, 2016 through the date of the award in the amount
of $134,031, and interest on the entire award from the date of the award until paid.
D. The Order Confirming the Arbitration Award and the Judgment
TGS petitioned the trial court for confirmation of the arbitration award and
a judgment in its favor. Brown filed a petition to vacate the award, seeking review of the
award solely under Code of Civil Procedure section 1286.2, subdivision (a)(4),
contending the arbitrator “exceeded his powers” in issuing an award violating
“fundamental public policy and California statutes.”
Brown argued the award violated the following statutory employment
rights: the right to be free from anticompetitive contracts under section 16600; the right
to be paid for earned wages and to be free from the claw back of earned wages under
Labor Code sections 200 and 221; and the right to assert employment claims in
arbitration “as if the claims were asserted in court, as guaranteed by Armendariz v.
Found[ation] Health Psychcare Serv[ices], Inc. (2000) 24 Cal.4th 83, 100-101
[(Armendariz)],” with access to the same remedies in court and without risking having to
pay the employer’s “exorbitant” attorney fees and costs.
The trial court denied Brown’s petition to vacate the arbitration award and
granted TGS’s petition to confirm the award. The court concluded the arbitrator did not
exceed his power by issuing an award that violated any public policy. The court
10
explained that because the arbitrator denied Brown’s request for declaratory relief on
grounds the controversy was not “ripe” and Brown had unclean hands, the arbitrator did
not “enforce” the confidentiality provisions of the Employment Agreement and therefore
his ruling did not implicate public policy. The court stated: “There is no explicit
legislative expression of public policy that prevents arbitrators from declining to issue
declaratory relief on mootness or ripeness grounds or based on the claimant’s unclean
hands.”
The trial court also upheld the arbitrator’s rulings on the two deferred
bonuses, based on the arbitrator’s finding Brown forfeited the bonuses due to
“misconduct.” Finally, the court upheld the substantial attorney fees award, rejecting
Brown’s challenge to the Employment Agreement’s fees shifting provision. Brown
argued the provision violated Armendariz by requiring Brown to prove TGS’s bad faith
before he could recover his attorney fees and costs, a burden he would not have faced had
he prevailed on his public policy claims in court. The court dismissed Brown’s argument
as purely “hypothetical,” noting “there was never any basis to consider whether Plaintiff
should recover fees or costs,” given the arbitrator’s finding all of Brown’s claims lacked
merit and he had acted in bad faith.
II
DISCUSSION
A. Judicial Review of Arbitration Awards Which Conflict With Statutory Rights
In ruling on a petition to vacate an arbitration award, “the court shall vacate
the award if the court determines . . . [t]he arbitrators exceeded their powers and the
award cannot be corrected without affecting the merits of the decision upon the
controversy submitted.” (Code Civ. Proc., § 1286.2, subd. (a)(4).) We review de novo
“the question whether the arbitrator exceeded his powers and thus whether we should
vacate his award on that basis[.]” (Richey v. AutoNation, Inc. (2015) 60 Cal.4th 909, 918,
fn. 1 (Richey); Code Civ. Proc., § 1286.2, subd. (a)(4).)
11
In seeking to vacate the arbitration award here, Brown invokes the
substantial body of case law holding arbitrators 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. [Citations.]” (Richey, supra, 60 Cal.4th at
p. 916.) That case law emanates from Moncharsh, supra, 3 Cal.4th 1, which declared an
arbitration award is subject to judicial review if inconsistent with the protection of a
party’s statutory rights.
In Moncharsh, our Supreme Court famously articulated the rule that the
merits of an arbitrator’s decision are “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.” Importantly, however, the Supreme Court also noted there are
“limited exceptions to this general rule[.]” (Id. at p. 6.)
Moncharsh discussed two of the “limited exceptions” in which judicial
review of an arbitrator’s award is warranted. The first of these exceptions is “where a
party claim[s] the entire contract or transaction was illegal.” (Moncharsh, supra,
3 Cal.4th at p. 32, citing Loving & Evans v Blick (1949) 33 Cal.2d 603, 609 [reversing
arbitration award under construction contract because state law bars enforcement of
contract with unlicensed contractor] and All Points Traders, Inc. v. Barrington Associates
(1989) 211 Cal.App.3d 723, 738 [reversing arbitrator’s award of commission to
unlicensed real estate broker where enforcement of commission contract “‘would be in
direct contravention of the statute and against public policy’”].) Moncharsh recognized
another “exceptional circumstance[] justifying judicial review of an arbitrator’s decision”
arises where, though a contract is not entirely illegal, “granting finality to an arbitrator’s
decision would be inconsistent with the protection of a party’s statutory rights.”
(Moncharsh, supra, 3 Cal.4th at p. 32.)
As the court of appeal observed in Ahdout v. Hekmatjah (2013)
213 Cal.App.4th 21 (Ahdout), “Numerous courts have since construed Moncharsh to
12
stand for the proposition that an arbitrator exceeds its powers within the meaning of Code
of Civil Procedure section 1286.2 by issuing an award that violates a party’s statutory
rights or ‘an explicit legislative expression of public policy.’ [Citations.]” (Id. at p. 37
[“‘courts may, indeed must, vacate an arbitrator’s award when it violates a party’s
statutory rights’”].)
Brown contends we must reverse the judgment because the trial court’s
confirmation of the arbitration award conflicts with Brown’s right under section 16600 to
pursue lawful employment. As we explain below, the contention has merit.
B. The Arbitrator’s Decision Was Inconsistent With Protecting Brown’s Section 16600
Right to Work in His Chosen Profession
1. Applicable Law
Dowell v. Biosense Webster, Inc. (2009) 179 Cal.App.4th 564 (Dowell)
provides a comprehensive overview of the public policies underlying section 16600,
which declares “every contract” that restrains “anyone . . . from engaging in a lawful
profession, trade, or business of any kind is to that extent void.”3 (§ 16600.)
The Dowell opinion states: “Section 16600 expresses California’s strong
public policy of protecting the right of its citizens to pursue any lawful employment and
enterprise of their choice. [Citations.] California courts ‘have consistently affirmed that
3 “There are only three statutory exceptions to this prohibition on noncompete
agreements: One who sells the goodwill of a business, or all of one’s ownership interest
in a business entity (which includes partnerships or corporations), or substantially all of
its operating assets and goodwill, to a buyer who will carry on the business may agree
with the buyer not to carry on a similar business within a specified geographic area, if the
business will be carried on by the buyer (§ 16601); upon dissolution of a partnership or
dissociation of a partner, such partner may agree not to carry on a similar business within
a specified geographic area, if the business will be carried on by remaining partners or
anyone deriving title to the business or its goodwill (§ 16602); and a member of a limited
liability company may agree not to carry on a similar business within a specified
geographic area, so long as other members or anyone deriving title to the business or its
goodwill carries on a like business (§ 16602.5).” (Dowell, supra, 179 Cal.App.4th at
p. 574.)
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section 16600 evinces a settled legislative policy in favor of open competition and
employee mobility.’ (Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937, 946
(Edwards).) ‘The interests of the employee in his own mobility and betterment are
deemed paramount to the competitive business interests of the employers, where neither
the employee nor his new employer has committed any illegal act accompanying the
employment change.’ [Citations.] An employer’s use of an illegal noncompete
agreement also violates the UCL (§ 17200 [‘unfair competition shall mean and include
any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or
misleading advertising’].) [Citations.]” (Dowell, supra, 179 Cal.App.4th at p. 575.)
In Dowell, the appellate court affirmed the trial court’s ruling on summary
adjudication that the noncompete and nonsolicitation provisions in an employment
agreement the plaintiffs signed as a condition of employment violated section 16600 and,
accordingly, were void ab initio and unenforceable. (Dowell, supra, 179 Cal.App.4th at
p. 575.) The opinion noted the “broadly worded noncompete clause” prevented the
plaintiffs for a period of 18 months after leaving defendant Biosense’s employ “from
rendering services, directly or indirectly, to any competitor in which the services they
may provide could enhance the use or marketability of a conflicting product by
application of confidential information to which the employees had access during
employment.” (Ibid.) Similarly, the nonsolicitation clause prevented the employees
during the same 18-month postemployment period “from soliciting any business from,
selling to, or rendering any service directly or indirectly to any of the accounts, customers
or clients with whom they had contact during their last 12 months of employment.”
(Ibid.) The court held these provisions were void under section 16600 because they
“restrain the employees from practicing their chosen profession.” (Ibid.)
Importantly for the present appeal, the court in Dowell rejected the
defendant’s contention it was improper for the trial court to determine the validity of the
anticompetitive clauses by summary adjudication. Notwithstanding Biosense’s assertion
14
the trial court “failed to consider Biosense’s evidence that trade secrets existed and that
the clauses were necessary to protect them[,]” the appellate court held the trial court
properly could determine the clauses’ validity under section 16600 as a matter of law.
“Having properly determined that the clauses were facially void under section 16600, the
trial court was not required to undertake any further analysis.” (Dowell, supra,
179 Cal.App.4th at p. 579, italics added; accord, Edwards, supra, 44 Cal.4th at p. 948
[finding covenant not to compete invalid as a matter of law where trial court “took no
evidence”]; Kolani v. Gluska (1998) 64 Cal.App.4th 402, 407 [finding covenant not to
compete invalid as a matter of law on demurrer]; Kelton v. Stravinski (2006)
138 Cal.App.4th 941, 946-949 [finding covenant not to compete invalid as a matter of
law on summary judgment]; Latona v. Aetna U.S. Healthcare Inc. (C.D. Cal.1999)
82 F.Supp.2d 1089, 1093 [factual analysis of trade secret issues is “secondary” to
determination of “facial validity” of covenant not to compete].)
2. The Arbitrator Should Have Declared the Anticompetitive Provisions of
the Employment Agreement Void Under Section 16600
Brown argues several provisions of the Employment Agreement illegally
restrained him from working in statistical arbitrage after leaving TGS, rendering these
provisions void ab intio and unenforceable under section 16600. (Dowell, supra,
179 Cal.App.4th at p. 575.) Brown asserts the arbitration award, which denied Brown’s
declaratory relief claim and left these illegal, anti-competitive provisions in effect,
exceeded the arbitrator’s powers. (Moncharsh, supra, 3 Cal.4th at p. 32.) Accordingly,
Brown contends, the trial court erred in denying his petition to vacate the arbitration
award. (Ibid.; Code Civ. Proc., § 1286.2, subd. (a)(4) [court shall vacate award if
“arbitrators exceeded their powers”]; Ahdout, supra, 213 Cal.App.4th at p. 37 [courts
must vacate arbitrator’s award which violates party’s statutory rights].) For the reasons
explained below, we agree.
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Brown contends the most significant anticompetitive provisions in the
Employment Agreement, and the ones central to this appeal, are the extremely broad
“confidentiality” provisions in section 4 of the Employment Agreement.4 These
confidentiality provisions set forth in detail the employee’s duty to “keep all Confidential
Information in strictest confidence and trust” during and after employment with TGS.
We agree the definition of “Confidential Information” in the Employment
Agreement is strikingly broad. The term “means information, in whatever form, used or
usable in, or originated, developed or acquired for use in, or about or relating to, the
Business[.]” “The Business,” in turn, is defined to include “without limitation analyzing,
executing, trading and/or hedging in securities and financial instruments and derivatives
thereon, securities-related research, and trade processing and related administration . . . .”
In effect, as Brown points out, “TGS is claiming for itself, without
limitation, all information that is ‘usable in’ or that ‘relates to’ the securities industry.”
So defined, the “Business” means not just statistical arbitrage––the actual business of
TGS––but, instead, refers to all aspects of working in the securities industry at large.
Brown asserts these confidentiality provisions effectively bar Brown from ever using
TGS’s “Confidential Information” for the benefit of any party other than TGS; he
contends the provisions are so expansive as to “prevent[] Brown from trading in
securities at all––even if just for his own benefit––for the remainder of his life.”
4 Brown argues the following additional provisions in the Employment Agreement
also violate section 16600: the two-year ban on engaging in “Directly Competitive
Activity” in section 6; the “notice” provision in section 2(b)(iii) which requires a
departing employee to give TGS written notice anytime he accepts a job or undertakes
self-employment in the securities industry and to provide proof he has “notified any
prospective employer” of the confidentiality restrictions in the Employment Agreement,
and the “invention assignment” provision in section 3, which prohibits the employee
from disclosing at any time, during or after employment with TGS, to anyone other than
TGS or its clients, or using for the benefit of anyone other than TGS or its clients, the
employee’s “Inventions,” defined as including “concepts, ideas, improvements, . . .
strategies, methods, systems, know-how . . . .”
16
The vast scope of the prohibition becomes clear in light of the two
“exceptions” to what TGS claims as “Confidential Information.” The first is for
“information which is or becomes generally known in the securities industry through
legal means without fault by” Brown. As Brown explains, this exception is worthless to
one desiring to work in statistical arbitrage “because statistical arbitrage is profitable only
if the variables and methods behind it are not ‘generally known[.]’” In other words,
Brown asserts he will be unable to work profitably in statistical arbitrage if restricted to
using only securities-related information that is generally known.
The second exception even more sharply illustrates TGS’s overreach in
identifying “Confidential Information” Brown never may use or disclose in future
employment. This exclusion comprises information which “was known by Employee on
a non-confidential basis prior to his initial engagement or employment by Employer, as
evidenced by Employee’s written records.” Brown points out the absurdity of this
exception: “In other words, securities-related information that was not confidential
before Brown’s employment with TGS metamorphoses into TGS’s ‘Confidential
Information’ unless Brown has written records proving his prior knowledge of the
information.”
In its respondent’s brief, TGS does not attempt to defend the legality of
these confidentiality provisions. Instead, TGS simply argues the arbitration award did
not exceed the arbitrator’s powers under Moncharsh because the award did not enforce
the confidentiality provisions of the Employment Agreement. TGS asserts the arbitrator
declined to decide the validity of these provisions because he concluded Brown’s
declaratory relief claim was not “justiciable.” TGS argues Brown’s “challenge to the
confidentiality provision was unripe and lacked any factual predicate because it sought a
determination only as to the legality of Brown’s unknowable future conduct.” The
assertion lacks merit.
17
Brown mounted a facial challenge to the confidentiality provisions. He
argued the provisions were so broadly written as to prevent him from ever again working
in his chosen profession. Under Dowell, supra, 179 Cal.App.4th 564, that facial
challenge was a sufficient basis for determining whether the confidentiality provisions
violated section 16600. (Id. at p. 579 [“Having properly determined that the clauses were
facially void under section 16600, the trial court was not required to undertake any
further analysis”].) Indeed, a court must decide the merits of a facial challenge to
contracts allegedly containing provisions that violate section 16600. Consequently, the
arbitrator erred here in concluding he “cannot make a finding” on the legality of the
confidentiality provisions because the arbitrator is unable to “foresee the nature of
[Brown’s] conduct in the context of his anticipated future employment[.]”5 The factual
details of Brown’s future employment were irrelevant. Brown’s facial challenge to the
provisions argued they were invalid ab initio; no “as applied” analysis of the provisions
was in order.
In fact, the arbitrator did make a finding of sorts on the merits. The
arbitrator observed Brown made “no showing that the confidentiality provisions . . . are
unreasonably restrictive in the context of the nature of Brown’s employment and the
business in which TGS was engaged.” But it is difficult to square this finding the
provisions were not “unreasonably restrictive” with the sweeping definition of
“Confidential Information” examined above. In any event, in Edwards, supra, 44 Cal.4th
at p. 955, the Supreme Court rejected the notion a “narrowly drawn” restraint on trade is
legal under section 16600. “Noncompetition agreements are invalid under section 16600
5 An arbitrator’s legal error is reviewable if the error prevented the plaintiff from
getting a hearing on the merits of his claim for violation of unwaivable statutory rights.
(See Ritchey, supra, 60 Cal.4th at pp. 917-918, discussing Pearson Dental Supplies, Inc.
v. Superior Court (2010) 48 Cal.4th 665, 680 [trial court properly reversed arbitrator’s
award for failure to reach FEHA issue]).
18
in California, even if narrowly drawn, unless they fall within the applicable statutory
exceptions of section 16601, 16602, or 16602.5.” (Edwards, supra, 44 Cal.4th at p. 955.)
Brown’s facial challenge to the legality of the confidentiality provisions is a
legal issue we decide de novo. (See Condon-Johnson & Associates, Inc. v. Sacramento
Municipal Utility Dist. (2007) 149 Cal.App.4th 1384, 1392 [“when the issue is one of
law, we exercise de novo review”]; Fassberg Construction Co. v. Housing Authority of
City of Los Angeles (2007) 152 Cal.App.4th 720, 741 [application of statute to undisputed
facts is question of law, reviewed de novo].) Based on our analysis of these provisions,
set forth in detail above, we conclude the confidentiality provisions in the Employment
Agreement on their face patently violate section 16600.6 Collectively, these overly
restrictive provisions operate as a de facto noncompete provision; they plainly bar Brown
in perpetuity from doing any work in the securities field, much less in his chosen
profession of statistical arbitrage. Consequently, we conclude the confidentiality
provisions are void ab initio and unenforceable. (Dowell, supra, 179 Cal.App.4th at
p. 575; see also AMN Healthcare, Inc. v. Aya Healthcare Services, Inc. (2018)
28 Cal.App.5th 923, 940, 948 [finding confidentiality provisions illegal under section
16600 where confidential information defined in way that interferes with employee’s
right to compete].)
In reaching this conclusion, we reject the arbitrator’s “alternative” ground
for denying declaratory relief based on Brown’s “unclean hands.” The issue was not easy
to resolve, however. On the one hand, TGS rightly points out equity “demands that a
plaintiff . . . come into court with clean hands, and keep them clean, or he will be denied
relief, regardless of the merits of his claim.” (Kendall-Jackson Winery, Ltd. v. Superior
6 The two-year noncompete provision in section 6 of the Employment Agreement
also was void under section 16600. (See, Edwards, supra, 44 Cal.4th at p. 955
[“Noncompetition agreements are invalid under section 16600 in California, even if
narrowly drawn”].)
19
Court (1999) 76 Cal.App.4th 970, 978.) The arbitrator certainly had grounds for
concluding Brown’s hands were unclean, given his theft of TGS’s confidential
information before being terminated, and then lying about those circumstances in his
testimony at the hearing.
On the other hand, the weighing of the equities is complicated here because
of the importance of the public policies at stake in the declaratory relief claim. We are
cognizant of the oppressive, potentially career-ending confidentiality provisions Brown
agreed to as a condition of employment, and the fact his theft of the information
apparently caused no harm to TGS.
The Dowell court faced the same dilemma. (Dowell, supra,
179 Cal.App.4th 564.) There, the court approvingly noted “the trial court found that
Biosense’s unclean hands defense was irrelevant to the question of whether the
noncompete and nonsolicitation clauses were enforceable under section 16600 . . .
because [the bad conduct ] would be wholly unrelated to the transaction to which
plaintiffs sought relief.” (Id. at p. 571; see also Kofsky v. Smart & Final Iris Co. (1955)
131 Cal.App.2d 530, 532 [“the equitable rule that ‘he who comes into equity must come
with clean hands,’ has no application where the failure to restrain an act because the
parties are in pari delicto would result in permitting an act declared by statute to be void
or against public policy”].) We follow the court’s lead in Dowell and conclude the
unclean hands defense here was irrelevant to the question of whether the confidentiality
provision was enforceable under section 16600.
In conclusion, the confidentiality provisions in section 4 of the
Employment Agreement severely restricted Brown’s right to work in clear contravention
of section 16600. Despite the facial invalidity of these provisions, the arbitrator did not
declare them void and unenforceable. Instead, the arbitration award allowed the
provisions to stand as a perpetual restriction on Brown’s right to compete with TGS.
Because the arbitration award is inconsistent with the protection of Brown’s rights under
20
section 16600, the award exceeded the arbitrator’s powers. (Moncharsh, supra, 3 Cal.4th
at p. 32.) Consequently, the trial court erred in denying the petition to vacate the
arbitration award and in entering judgment on the award. (Ibid.; Code Civ. Proc.,
§ 1286.2, subd. (a)(4).)
3. The Arbitrator Erred in Finding Brown Forfeited the Deferred Bonuses
Brown also challenges the arbitrator’s ruling Brown forfeited his deferred
bonuses by violating the confidentiality provisions of the Employment Agreement.
Brown makes several arguments on this point, but we find one compelling: Brown
persuasively asserts that because the arbitrator explicitly based his finding of forfeiture on
Brown’s breach of confidentiality provisions which violate section 16600,7 the forfeiture
ruling enforces those illegal provisions and is itself inconsistent with the protection of
Brown’s statutory rights. Accordingly, the forfeiture ruling in the arbitration award is
also subject to reversal under Moncharsch, supra, 3 Cal.4th at page 32.
TGS tries to avoid the ineluctable logic of this argument by contending the
arbitrator’s forfeiture finding may be sustained on an alternative ground: TGS contends
Brown’s act of secretly copying to his cell phone TGS’s confidential financial
information was a “deliberately deceptive act in the course of employment,” a separate
ground for bonus forfeiture under section 1(c)(i) of the Bonus Agreement.8 The
argument fails, however, for the simple reason the arbitration award identifies the breach
7 The arbitration award states Brown’s violations of the confidentiality provisions in
the Employment Agreement “triggered” the forfeiture of the two deferred bonuses.
8 Section 1(c) of the Bonus Agreement identifies three categories of employee
conduct that qualify as a “Cause with Prejudice” which, if TGS discovers the employee
has committed postemployment, results in immediate forfeiture under section 4.3 of any
earned but unpaid bonuses. The three categories of “Cause with Prejudice” identified in
section 1(c) are: “(i) the commission by Employee of a fraudulent, illegal or deliberately
deceptive act in connection with Employee’s employment . . .”; “(ii) the breach by
Employee in any material respect of any covenant in any written agreement to which
TGS and Employee are parties . . . , including without limitation any confidentiality
agreement . . .”; and “(iii) any material misrepresentation by Employee to TGS . . . .”
21
of the confidentiality provisions as the cause of the forfeiture. In doing so, the forfeiture
ruling enforces illegal anticompetitive provisions in the Employment Agreement.
Moncharsh and its progeny make clear such an arbitration award cannot stand.9
On remand, TGS can attempt to prove Brown forfeited the deferred bonuses by
committing “a fraudulent, illegal or deliberately deceptive act in connection with [his]
employment” as set forth in the Bonus Agreement (see fn. 8, above). Brown, for his part,
may assert, as he does on appeal, forfeiture based on the conduct in question would
constitute the improper enforcement of an invalid liquidated damages provision. (See
Graylee v. Castro (2020) 52 Cal.App.5th 1107, 1115 (Graylee) [under Civ. Code § 1671,
subd. (b), “‘a liquidated damages clause becomes an unenforceable penalty “if it bears no
reasonable relationship to the range of actual damages that the parties could have
anticipated would flow from a breach”’”].)
C. The Discretionary Award of Attorney Fees and Costs
Brown contests the fees award on multiple grounds. We need not resolve
these arguments, however, because we are reversing the judgment and remanding the
matter for further proceedings. The arbitrator may revisit the issue of entitlement to fees
on remand.
9 In light of this holding, we need not address Brown’s alternative argument the
forfeiture ruling constituted a “claw back” of earned wages and denial of payment due an
employee in violation of Labor Code sections 201 and 202.
22
III
DISPOSITION
The judgment is reversed. The matter is remanded to the trial court for
further proceedings consistent with this opinion. Brown is entitled to his costs on appeal.
ARONSON, J.
WE CONCUR:
MOORE, ACTING P. J.
GOETHALS, J.
23
Filed 11/12/20
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FOURTH APPELLATE DISTRICT
DIVISION THREE
RICHARD HALE BROWN,
G058323
Plaintiff and Appellant,
(Super. Ct. No. 30-2016-00881773)
v.
ORDER DENYING REHEARING;
TGS MANAGEMENT COMPANY, MODIFYING OPINION AND
LLC, CERTIFYING OPINION FOR
PUBLICATION; NO CHANGE IN
Defendant and Respondent. JUDGMENT
The petition for rehearing filed by respondent TGS Management Company,
LLC, is DENIED.
It is ordered that the opinion filed on October 13, 2020, is hereby
MODIFIED as follows:
1. On page 5, change the first sentence of footnote 1 to read as follows:
The arbitrator’s final award provided the following explanation for dismissing
these claims:
2. On page 16, in footnote 4, at the end of the sixth line and following the
words “Employment Agreement,” change the comma to a semicolon.
3. On page 18, in the first paragraph, modify the fourth full sentence to
read as follows:
Indeed, the arbitrator had a duty to decide the merits of Brown’s facial challenge
to the confidentiality provisions under section 16600.
Move footnote 5 to the end of that modified sentence. Modify footnote 5
by deleting the text of the footnote and replacing it with the following text:
In Ritchey, supra, 60 Cal.4th 909, the Supreme Court affirmed the rule that
in an arbitration arising from a mandatory arbitration employment agreement, the
employee is entitled to a hearing on the merits of his claim of violation of
unwaivable statutory rights. (Id. at pp. 917-918, citing Pearson Dental Supplies,
Inc. v. Superior Court (2010) 48 Cal.4th 665, 680 [arbitrator’s legal error
reviewable if error deprived employee of “‘a hearing on the merits of his FEHA
claims, or claims based on other unwaivable statutory rights”].)
4. On page 19, following the first full paragraph which ends with “employee’s
right to compete].),” delete the next three paragraphs, beginning with the words “In
reaching this conclusion” and ending with the words “under section 16600.” In place of
those three paragraphs, insert the following text:
Arguing against this result, TGS warns voiding the Employment
Agreement’s confidentiality provisions under section 16600 will strip TGS of the
ability to protect its confidential information, including trade secrets. We
disagree. Our conclusion these particular provisions are void does not prevent
TGS from enforcing a properly drawn confidentiality agreement which preserves
an employee’s right to compete after leaving TGS’s employ. The confidentiality
provisions at issue here simply do not meet that test. Moreover, TGS can prevent
former employees from disclosing trade secrets and other confidential information
by pursuing injunctive relief and tort remedies under the Uniform Trade Secrets
Act (Civ. Code, §§ 3426 et seq.) and the Unfair Competition Law (Bus. & Prof.
Code, § 17200 et seq.). (See The Retirement Group v. Galante (2009)
2
176 Cal.App.4th 1226, 1238 [“section 16600 bars a court from specifically
enforcing (by way of injunctive relief) a contractual clause purporting to ban a
former employee from soliciting former customers . . ., but a court may enjoin
tortious conduct (as violative of either the Uniform Trade Secrets Act and/or the
Unfair Competition Law) by banning the former employee from using trade secret
information to identify existing customers, to facilitate the solicitation of such
customers, or to otherwise unfairly compete with the former employer”].)
TGS also argues we should affirm the arbitrator’s decision to deny Brown’s
declaratory relief claim on the “alternative ground” of unclean hands. While we
do not quarrel with the arbitrator’s finding Brown had unclean hands, the
existence of an alternative ground for denying declaratory relief is irrelevant.
Regardless of the reasoning, the arbitrator’s decision to deny declaratory relief
allows TGS to use illegal contractual provisions to restrict in perpetuity Brown’s
right to work. Accordingly, the decision is inconsistent with the protection of
Brown’s rights under section 16600 and exceeds the arbitrator’s powers.
(Moncharsh, supra, 3 Cal.4th at p. 32.)
Our conclusion is consistent with 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.” (Kofsky v. Smart & Final Iris Co.
(1955) 131 Cal.App.2d 530, 532 (Kofsky).) In Kofsky, the court affirmed an order
granting a preliminary injunction restraining a cigarette vendor from violating the
Unfair Practices Act (Bus & Prof. Code, §§ 1700 et seq.) by selling cigarettes
below cost with the intent to destroy competition. The opinion specifically
rejected defendant’s contention the unclean hands doctrine applied and foreclosed
plaintiff’s claim for relief because plaintiff had engaged in the exact same conduct
and was equally “guilty of violating the Unfair Practices Act.” (Kofsky, supra,
131 Cal.App.2d 530.)
The court stated: “It is settled that the equitable rule that ‘he who comes
into equity must come with clean hands,’ has no application where the failure to
restrain an act because the parties are in pari delicto would result in permitting an
act declared by statute to be void or against public policy. [Citations.] [¶] . .
.[S]ince . . . the acts which defendant was restrained from doing were against
public policy, . . . it is immaterial . . . whether plaintiff had unclean hands or not.”
(Id. at p. 532; Page v. Bakersfield Uniform & Towel Supply Co. (1966)
239 Cal.App.2d 762, 770.)
5. In the last paragraph on page 20 which begins with “In conclusion,” modify
the first sentence of that paragraph to read as follows:
3
In conclusion, the Employment Agreement’s confidentiality provisions severely
restrict Brown’s right to work in clear contravention of section 16600.
These modifications do not change the judgment.
Appellant, Richard Hale Brown, and nonparty, Gabriela Bunea, have
requested that our opinion filed on October 13, 2020, be certified for publication. It
appears that our opinion meets the standards set forth in California Rules of Court, rule
8.1105(c). The request is GRANTED.
ARONSON, J.
WE CONCUR:
MOORE, ACTING P. J.
GOETHALS, J.
4