Overly Broad Employee Confidentiality Provisions Violated California Law

By Joanne Deschenaux December 9, 2020
man signing documents

Confidentiality provisions in an employment agreement were so broad that they acted as a noncompete clause, barring an employee from ever doing any work in his field after he left his job. Therefore, the provisions violated California law, a state appellate court ruled.

An arbitrator exceeded his power in issuing an award enforcing the confidentiality provisions, the court concluded.

Section 16600 of the California Business & Professions Code voids any contract that restrains former employees from engaging in a lawful profession, trade or business.

The employer in this case engages in a highly computerized form of equities trading known as statistical arbitrage. The employee began working for the company in 2005. As a condition of employment, he signed a 12-page agreement with numerous provisions that restricted his right to compete with the employer after leaving his job, including a two-year ban on engaging in "directly competitive activity."  

The confidentiality provisions in the agreement barred the employee from ever disclosing or using confidential information for his own benefit or the benefit of any party, other than the employer or a client of the employer. The employee claimed that the agreement defined "confidential information" so broadly as to prevent him from ever working again in securities trading, much less in his chosen specialty of statistical arbitrage.

The employment agreement also contained an arbitration clause requiring the parties to engage in binding resolution of all disputes arising under the agreement.

The employee worked for the company for 10 years, before he was terminated without cause effective March 23, 2016. In October 2016, the employee filed a complaint against the employer, seeking a declaration that he could compete with the company without risking a damages claim for breaching the employment agreement, and without forfeiting outstanding compensation that the company owed him. He also sought an injunction against enforcement of the covenant not to compete.

Ten days after filing the complaint, the employee filed a petition to compel arbitration, which, in addition to the claims filed in court, included allegations of wrongful termination, whistleblowing and regulatory compliance violations. The employer claimed that the employee had breached the confidentiality provisions of his employment agreement and so was not entitled to his outstanding compensation and, in fact, owed the company money he had already been paid.

The arbitrator ruled in favor of the employer on all counts and dismissed the employee's claims. Regarding the explicit noncompete provision in the agreement, the arbitrator noted that the two-year period during which the noncompete provision was to be in force had expired.

The arbitrator also denied the employee's request to declare that the confidentiality provisions of the employment agreement were unlawful and concluded that the employee had failed to show that those provisions were unreasonably restrictive.

The employee went to the trial court, seeking to have the arbitration award thrown out, but the court affirmed the award. The employee appealed.

'Strikingly Broad' Confidentiality Provisions

Although the merits of an arbitrator's decision are not generally reviewable for errors of fact or law, a court may overturn an arbitration award if the court determines that the arbitrator exceeded his or her powers, the appeals court first noted. Arbitrators exceed their powers when they issue awards that violate a party's statutory rights or that contravene an explicit legislative expression of public policy, the court explained.  

The appeals court found that the trial court's confirmation of the arbitration award conflicted with the employee's right under Section 16600 to pursue lawful employment.

The court found that the confidentiality provisions in the agreement were "strikingly broad." They prohibited former employees from disclosing any information relating to the securities industry, unless that information was generally known.

This meant that the employee was prohibited from disclosing not only information that was derived from private company sources, but also any information that the employee learned in the course of his employment. In effect, this blocked the employee from working in his chosen field, in violation of Section 16600, the court said.

Because the arbitration award was inconsistent with the employee's rights under Section 16600, the award exceeded the arbitrator's powers, the court said. Therefore, the trial court erred in refusing to throw out the arbitration award.

Brown v. TGS Management Co. LLC, Calif. Ct. App., No. G058323 (Nov. 12, 2020).

Professional Pointer: Employers generally can enforce narrowly drawn confidentiality provisions that prohibit employees from disclosing trade secrets. The provisions at issue here, however, were so broad that the court concluded that they barred the employee from working in his chosen field.

Joanne Deschenaux, J.D. is a freelance writer in Annapolis, Md. 



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