California Court Confirms Arbitration Award Enforcing Non-Compete Agreement

A California Court of Appeal recently handed employers a major victory in the areas of non-competition, choice of law, and arbitration in its decision in Jones v. Humanscale Corporation. The decision issued on Friday, June 17, involved an employer’s attempt to specify in its employment contracts with its employees that the law of its home state, New Jersey, would control instead of that of California. The employment contract also provided for arbitration through the American Arbitration Association and specified that any dispute would be heard in New Jersey.

The arbitrator ruled in favor of the employer, determined that New Jersey law should apply, and enforced the contractual non-compete agreement.

Following the arbitration, the company brought suit in Orange County, California Superior Court seeking to enforce the arbitration award. The trial judge granted the worker’s request to vacate the award on two grounds.  First, the judge held that California’s public policy against non-compete agreements prevented an arbitrator from enforcing a non-compete agreement even if the employee agreed to apply the law of another state. In addition, the judge held that the provision of the arbitration agreement requiring the employee to pay half of the costs of the arbitration was unlawful and, therefore, the arbitration agreement was unenforceable under the California Supreme Court’s Armendariz decision.

The Court of Appeal disagreed, reasoning that once the arbitrator decided the choice of law issues, it was not for the trial judge to substitute his judgment for that of the arbitrator and apply California law with respect to the non-compete issue.  In addition, the court ruled that although the arbitrator’s order that the employee pay half of the costs of the arbitration violated California law, the remedy should have been simply to order the refund of that portion of the costs to the employee (rather than invalidate the entire arbitration agreement).

According to Scott Witlin, a shareholder in Ogletree Deakins’ Los Angeles office: “While this case indicates that California’s hostility to arbitration agreements and non-competition agreements is alive and well, it significantly has shown that limits on such agreements do exist.  The decision likely will be appealed to the California Supreme Court, so clients are cautioned to monitor developments in these areas before adopting similar policies.”

Should you have any questions about this ruling and its ramifications, please contact the Ogletree Deakins attorney with whom you normally work or the Client Services Department at 800-603-1252 or via e-mail at clientservices@ogletreedeakins.com.

Note: This article was published in the June 21, 2005 issue of the California eAuthority.