Limited Judicial Review of Arbitration Awards

Limited Judicial Review of Arbitration Awards

On October 21, 2015, pursuant to order of the California Supreme Court, the opinion in SingerLewak LLP v. Gantman, 2015 Cal. App. LEXIS 929 (2nd Dist., 7/29/15) was published in the official reports. The case is important because it affirms the general rule that absent a contrary provision in the arbitration agreement the award is final and binding. (Moncharsh v. Heily & Blasé (1992) 3 Cal.4th 1.)  Of course, the parties are free to draft terms that limit the power of the arbitrator or provide for judicial review of the merits. (Cable Connection, Inc. v. DIRECTV, Inc. (2008) 44 Cal.4th 1334, 1361.) Absent those terms, and only in rare cases, the arbitration decision cannot be reversed on appeal even if it contains clear errors of fact or law that substantially prejudice the losing party.

SingerLewak involved a common dispute when partners leave: the right to compete for current and future business.  Andrew Gantman, a CPA, believed he had the right to leave and conduct business with several existing clients without penalty.  His employer thought differently.  The firm demanded Gantman pay over $260,000 pursuant to a formula in the partnership agreement.  When Gantman refused, the dispute was submitted to private arbitration.  The arbitrator ruled in favor of the firm.  Gantman filed a petition to vacate on grounds the award violated public policy: it was an illegal restraint on competition.  He also argued the clause was unenforceable under Bus. & Prof. Code, § 16602 because it did not contain any territorial restrictions.  The trial court agreed with the latter point, and vacated the award.  The Court of Appeal reversed, and ordered the trial court to confirm the award.

The trial court committed error because it had no right or authority to review the merits of the award.  The law allows a court to vacate when the arbitration award was obtained “by corruption, fraud, or undue means,” the rights of the party “were substantially prejudiced by misconduct” of the arbitrator, or the arbitrator exceeded his or her 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)(1)-(4).)  Other than evaluating the statutory grounds for vacating (or correcting an award), the court is not authorized by law to review the merits.

Gantman claimed the arbitrator had exceeded his powers. The Court of Appeal disagreed. An arbitrator exceeds his or her powers “by issuing an award that violates a party’s unwaivable statutory rights or that contravenes an explicit legislative expression of public policy.”  (Richey v. AutoNation, Inc. (2015) 60 Cal.4th 909, 916.)  In the case of Section 16600 and the policy which favors open competition, the rights of partners are not absolute or unwaivable. The statute itself contains exceptions and courts have invoked the ‘rule of reasonableness’ to enforce covenants not to compete.

When the arbitration agreement does not limit the powers of the arbitrator or provide for judicial review, there are limited, narrow exceptions that justify review of legal errors in the award.

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