At the risk of revisiting too soon a previous topic, we consider today yet another court decision that reminds us of the fact that, in most cases, an arbitrator's ruling will not be reviewed by the courts and will be allowed to stand even if it is based on errors of fact and misinterpretation of the law.
The court decision in the case of SingerLewak, LLP v. Gantman comes to us from California's Second Appellate District. The underlying case was not a real estate matter; it had to do with a non-compete agreement contained in an accountancy firm's partnership provisions.
In 2007, Andrew Gantman, previously an employee, became a partner in the SingerLewak firm. In 2011, Mr. Gantman left the company and subsequently provided services to several parties who had been clients of SingerLewak. The company demanded that Gantman pay the firm $260,000, pursuant to a formula contained in the non-compete provision within the partnership agreement.
The matter went to arbitration. Although California has very strong prohibitions against non-compete agreements (Business and Professions Code [B&P Code] 16600 et seq.), section 16602 of the Code does contain exceptions that apply to partners and partnerships. Based in good part on Section 16602, the arbitrator ruled in favor of the accountancy firm.
Gantman filed a petition to vacate the arbitrator's award. He argued that the partnership non-compete provision was illegal because it constituted an illegal restraint on competition. The partnership provision itself was void, he alleged, because it lacked any geographical limitation, which is specifically required by Section 16602.
The trial court agreed with Gantman and vacated the award. Naturally, the firm appealed.
In reviewing the arbitrator's award, the Appellate Court noted that, as one commentator put it, "the arbitrator made an interesting determination: that what was, for all purposes, a non-compete was not a non-compete..." The arbitrator had ruled that "...the provision was not a covenant not to compete, but was instead, ' a provision allowing competition but imposing a cost on departing partners who service clients of the firm.'" This would be something like saying that the California Vehicle Code does not prohibit running through stop signs, but rather allows that behavior and imposes a cost for doing so.
Also, the arbitrator ruled that, despite the requirement of a "specified geographic area" in B&P Code 16602, the SingerLewak agreement was not void because it contained an "implicit geographical limitation." That limitation, he reasoned, would necessarily be the areas where the firm's clients did business.
The Appellate Court noted that "The arbitrator may have erred in interpreting or applying section 16602." But that didn't matter. The court referred to an earlier California Supreme Court Ruling (in Moncharsh v. Heily & Blase) saying that "an arbitrator's decision is not generally reviewable for errors of fact of law, whether or not such error appears on the face of the award and causes substantial injustice to the parties."(my emphasis) Thus, the court determined that review was inappropriate and the arbitrator's award was upheld.
Real estate agents and their clients are often encouraged to make a commitment to arbitration in the event of some future dispute. They should think very carefully about doing so. One can always agree later to arbitrate; but it's not at all clear that the "it's quicker and cheaper" argument should prevail over the price of giving up your right to appeal when serious errors are made.