It is no secret that litigation can be time-consuming and expensive. In an effort to contain potential litigation costs, many California employers have entered into arbitration agreements with their employees in which both sides agree that a private arbitrator, rather than a public court, will resolve employment related disputes. Compared to litigation, arbitration is often (but not always) quicker and less expensive. Thus, a well-drafted and legally enforceable arbitration agreement can be a useful, resource saving tool.

The trick is to make certain that the arbitration agreement is drafted in compliance with California law and, therefore, enforceable as a binding contract. In the recent decision of Jones v. Humanscale Corp., No. G034387 (Cal. 4th App. Dist.), the Court of Appeal discussed the enforceability of one employer’s arbitration agreement and ultimately determined that it should be enforced.

In Jones, a California employee signed an agreement to arbitrate with his New Jersey employer. The particular agreement also contained a provision entitled “covenant not to compete,” in which the employee – a sales consultant – agreed not to sell to the employer’s customers for a period of two years following his separation from the company.

A few months after the employee signed this agreement, his employment was terminated and he began selling to his former customers. The employer initiated arbitration against the employee and eventually received a favorable award in which the ex-employee was ordered to pay $17,500 in damages and 50% of the arbitrator’s fees, or about $12,000.

The employee challenged the arbitrator’s decision in court, arguing that his arbitration agreement was illegal under California law and, as such, the arbitrator’s award should be voided. The employee had two primary arguments. First, the covenant not to compete contained in his arbitration agreement was unlawful and, therefore, the entire agreement was “infected” and should be considered unenforceable. Second, he should not have been required to pay for half of the arbitrator’s fees. Accepting both arguments, the trial court overturned the arbitrator’s decision. The employer appealed.

The Court of Appeal found that the trial court’s decision was incorrect. It began by noting that California public policy supports the use of private arbitration to resolve disputes and that, pursuant to the doctrine of “arbitral finality,” trial courts should not disturb an arbitrator’s decision unless it is clear that the arbitrator exceeded his or her authority under the agreement. Indeed, a trial court should not void an arbitrator’s decision even if, in the court’s opinion, it is legally or factually wrong.

Here, the Court of Appeal found that the arbitrator’s decision was not “palpably erroneous” and, therefore, it should have been upheld. Although the appellate court acknowledged that California law generally prohibits covenants not to compete, it reasoned that the arbitrator’s decision merely acted to protect the employer’s customer lists, which can be permissible when necessary to protect an employer’s trade secrets. Because the arbitrator’s decision concerning the covenant in question could have been correct under at least one interpretation of the law, the trial court should not have overturned that portion of the arbitrator’s decision.

The Court of Appeal also recognized that, under California law, an employee cannot typically be required to pay for any of the arbitrator’s fees. The reasoning is that an employee would not have to pay for a judge if the employee sued in court, so it would be unfair for the employee to pay for the arbitrator. Therefore, the Court of Appeal found that the arbitrator was wrong to require the employee to pay half of the fees. However, instead of voiding the entire arbitration award because one portion of it was flawed, the Court of Appeal found that the trial court simply should have reversed the fee award and allowed the rest of the decision to stand.

Bottom line: If found to be enforceable, an arbitration agreement can save significant resources by permitting the private resolution of disputes. However, care must be taken to ensure that the agreement complies with current California law.