Brown v. TGS Management Co., 57 Cal. App. 5th 303 (2020) [click for opinion]

TGS Management Co., Ltd. (“TGS”) was a private limited liability company that engaged in a highly computerized form of equities trading known as statistical arbitrage. Richard Hale Brown was an employee of TGS, who signed an employment agreement containing confidentiality and non-compete provisions when he commenced work there in 2005.

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. When Brown rejected a proposed separation agreement prepared by TGS (the “Draft Separation Agreement”), TGS terminated Brown as planned, permitting Brown to retain two bonuses he had earned but not yet received.

In October 2016, Brown filed a complaint against TGS, seeking a declaration that Brown could compete against TGS without risking a damages claim 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, attaching the Draft Separation Agreement, which contained confidential information about TGS’s clients, profits and bonus calculations.

TGS consented to arbitration and the trial court referred the matter to arbitration with JAMS. Brown’s demand in arbitration significantly expanded his claims to include new allegations of wrongful termination, whistleblowing, and regulatory compliance violations. TGS stated in its answer that it would not seek to enforce the covenant not to compete, but TGS counterclaimed for breach of contract based on Brown’s violation of the confidentiality provisions of his employment agreement by publicly filing the Draft Separation Agreement.

The arbitrator determined that Brown violated the confidentiality provisions of his employment agreement when he attached and filed confidential information regarding his employer with his petition to compel arbitration. Because the bonus agreement provided that any vested but unpaid bonus due to a departed employee is immediately forfeited if TGS discovers the employee committed an act which could have been the basis for termination for cause, the arbitrator ordered Brown to refund the portions of the deferred bonus that had been paid since he commenced the case.

The arbitrator then denied Brown’s request for declaratory relief. Brown contented that the confidentiality provisions were so broad as to prevent him from practicing his profession of statistical arbitrage without being subjected to unfounded claims that he had used TGS’s trade secrets and confidential information. The arbitrator determined that any such claim was not ripe, as it required consideration of whether Brown’s anticipated manner of conduct in his anticipated future employment would place him in violation of the confidentiality provisions.

TGS petitioned the trial court to confirm the award and Brown petitioned the court to vacate. The trial court granted TGS’s petition and denied Brown’s. Brown appealed, and the appellate court reversed. The court explained that, in California, unlike most states, post-employment covenants are statutorily banned. Specifically, under California’s Business & Professions Code Section 16600, “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”

The court agreed with Brown that the confidentiality provisions of the employment agreement were so broad that they would have illegally restrained him from working in statistical arbitrage after leaving TGS. The arbitrator therefore exceeded his powers by issuing an award “that violates a party’s unwaivable statutory rights or that contravenes an explicit legislative expression of public policy,” when the arbitrator left those illegal anti-competitive provisions in effect by denying Brown’s claim for declaratory relief. Because the arbitrator explicitly based his ruling that Brown forfeited his deferred bonuses by violating these illegal confidentiality provisions, the forfeiture ruling in the award was also subject to reversal.

The court therefore reversed the judgment and remanded the matter to the arbitrator to determine whether Brown had forfeited his deferred bonuses by secretly copying to his cell phone TGS’s confidential financial information, which could constitute a “deliberately deceptive act in the course of employment” and a separate ground for forfeiture under the bonus agreement.