A recent California Court of Appeal case examined the question of whether an arbitrator's
upholding of a potentially unenforceable non-competition agreement was subject to judicial review.

In SingerLewak LLP v. Gantman[1], an accounting firm's partnership agreement contained a provision
requiring a dissociated partner to pay the firm a share of the billings derived by the dissociated partner
from work performed by the dissociated partner for firm clients after the dissociation (withdrawal) from
the partnership. The partnership agreement also provided that any dispute would be subject to
mandatory binding arbitration.

The firm commenced an arbitration against the dissociated partner, contending that he owed the firm
over $260,000 under the aforementioned partnership agreement provision. The dissociated partner
claimed that the provision amounted to an unenforceable non-competition covenant under California
Bus. & Prof. §16600 ("Section 16600")[2]; and that the exception for non-competition covenants
applicable to partners in a partnership contained in Bus & Prof. Code §16602 ("Section 16602")[3]
did not apply for two reasons. First, he argued that "he was not a partner within the meaning of the
provision"[4]; and, second, he argued that the provision contained no geographic limitation as
required by Section 16602.

The arbitrator accepted the argument of the accounting firm that the provision was not a covenant
not to compete, but rather "a provision allowing competition but imposing a cost on departing partners
who service clients of the firm". This part of the arbitrator's ruling appeared to be clearly erroneous,
since the California Supreme Court held in Edwards v. Arthur Andersen LLP[5] that Section 16600 is
not subject to a rule of reason and that any limitation (other than the enumerated statutory exceptions)
on a person's ability to compete is subject to and unenforceable under Section 16660.

Even if the arbitrator was wrong on that point, however, the arbitrator found that the partnership
agreement provision was enforceable under the exception afforded by Section 16602. First, the
arbitrator found that the dissociating partner had been a partner. Second, the arbitrator found that the
partnership agreement provision contained an "implicit geographical limitation".

The accounting firm then filed a lawsuit to confirm the arbitration award, which the dissociated partner

The Court noted that judicial review of arbitration awards is "extremely limited", and that such an award
is not generally reviewable even if the arbitrator makes a mistake of fact or law, since the parties accept
arbitral finality in agreeing to arbitration in the first place; and there is a public policy in favor of resolving
disputes efficiently and with finality. An exception to this general rule exists where a party seeks to enforce
via arbitration a contract or transaction where the contract or transaction is itself entirely illegal.

However, where, as here, only one provision of the contract was arguably illegal, judicial review is only
appropriate where the arbitrator's decision would be incompatible with the protection of a statutory right.
So the threshold issue that the Court considered (before any analysis of whether the arbitrator was in fact
correct) was whether the arbitration award was subject finality and not subject to judicial review. The Court
could only grant such finality if the award was not inconsistent with a statutory right.

While the Court acknowledged that Section 16600 evidences a strong public policy in California in favor of
open competition, this case involved an interpretation of the exception provided by Section 16602. In view of
the fact that the law provides for some exceptions to the general rule of Section 16600, the arbitrator's ruling in
upholding the provision under Section 16602 (even assuming for the sake of argument that the ruling was
erroneous) did not violate an non-waivable right, or contravene an express legislative expression of public policy.

The Court therefore did not review the arbitration award on the merits, and confirmed it, even though it could
have been erroneous.

In light of this decision, in drafting contracts parties need to consider carefully whether they want to provide for
arbitration of disputes where one of the statutory exceptions to Section 16600 applies[6]. The arbitrator may
decide the case wrongly, but under SingerLewak the award will not be not subject to judicial review.

[1] 241 Cal. App. 4th 610 (2015).

[2] Cal. Bus. & Prof. Code §16600 provides that any contract which restrains a person from engaging in a lawful
business "is to that extent void".

[3] Cal. Bus. & Prof. Code §16602 provides that a partner may agree, in anticipation of a partnership dissolution or
a dissociation from the partnership, not to compete with the partnership within a specified geographic area where
the partnership business was conducted.

[4] The appeal did not really address the dissociated partner's contention that he was not really a partner. However,
there is a good likelihood that the dissociated partner was a 'contract partner' and therefore he contended that
he was not a 'real' partner for purposes of having a capital account and sharing in partnership profits and losses.

[5] 44 Cal. 4th 937 (2008).

[6] The primary exceptions to Section 16600 are Section 16602; Section 16602.5, which is a similar provision
applicable to limited liability companies and members of a limited liability company; and Section 16601, which is
applicable to a sale of a business.