The California Court of Appeal recently ruled that a confidentiality provision in an employment agreement that restrains competition violates California’s non-compete statute (California Business & Professions Code § 16600) and, when an arbitrator does not address this violation of public policy, it is grounds to overturn an arbitration award.
TGS Management Company LLC v. Brown (“TGS”) involved a confidentiality agreement imposed by a statistical arbitrage company on a former employee. (Statistical arbitrage is a highly computerized form of equity trading.) In TGS, the employer imposed a “strikingly broad” definition of “confidential information” when binding its employees. As a result, per the Court of Appeal, “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.”
While a confidentiality provision can be properly drawn such that it preserves an employee’s right to compete after leaving employment, the confidentiality provision at issue in TGS did not meet that test. In its decision the Court of Appeal also noted that, separate from any contractual confidentiality provisions, a former employer can properly 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.).
Normally, the scope of review of an arbitration award is severely circumscribed. However, where a plaintiff’s statutory rights or important public policies are at stake, a court can and will strike down improper awards. In TGS, the court concluded that the employee had a right to have his facial challenge to the confidentiality provisions addressed.
We were appellate counsel in the TGS matter and have substantial experience addressing confidentiality, trade secret, and restrictive covenant issues. If you are interested in discussing these issues, or have any questions about this blog, please feel free to contact us.