©2023 Seyfarth Shaw LLP www.seyfarth.com 2023 Cal-Peculiarities | 95 so even after the U.S. Supreme Court, in 2008, held that parties cannot contract to supplement the grounds for vacating or modifying the award provided by the FAA.130 California courts, however, have refused to recognize this “manifest disregard” standard of review. Thus, for example, a California employer was denied meaningful judicial review of a wrongful termination arbitral award that granted $225,000 in emotional distress damages without evidence of severe mental injury and that imposed $1,000,000 in punitive damages without citing evidence to support the award. The Court of Appeal refused to review these legal outrages, because California law, unlike federal law, does not permit vacating an arbitration award merely because the arbitrator manifestly disregarded the law.131 (The result in California might differ, of course, if the arbitration agreement itself provides for broadened judicial review. See below.) By contrast, if an arbitrator legally errs in favor of an employer, that could be grounds for vacating the award. The California Supreme Court ruled in 2010 that an arbitrator makes “a clear error of law,” giving grounds to vacate the award, if the arbitrator made a procedural error that deprived an employee of a hearing on the merits of a statutory employment claim.132 Overturning awards not sufficiently protective of employee interests. Although arbitration awards can be upheld even when they get the law wrong, a 2020 Court of Appeal decision refused to confirm an arbitration award that prevented a former employee from competing with his former employer, a statistical arbitrage firm. The Court of Appeal held that the arbitrator exceeded his power in issuing an award enforcing contractual provisions that restricted the employee’s right to work, given the public policy against any contract that restrains anyone “from engaging in a lawful profession, trade, or business of any kind.” Despite the facial invalidity of the provisions, the arbitration award let them stand as a perpetual restriction on the employee’s right to compete. Because the award was inconsistent with the protection of employee rights to compete with a former employer, the trial court erred in entering judgment on the award.133 Negotiated review of arbitral awards. Employers have sought to hedge against run-away arbitral awards by bargaining for judicial review of arbitration awards for “clear error of law” and for “lack of substantial evidence” to sustain the award. That review would exceed the review provided by arbitration statutes, however, which very narrowly limit judicial scrutiny of an arbitration award to such matters as whether the arbitrator had a personal bias or clearly exceeded the arbitrator’s authority,134 and the Court of Appeal has held that extra-statutory judicial review of an arbitration award is forbidden.135 Surprisingly welcome news came in 2008, in a non-employment case, in which the California Supreme Court held that parties can contract for judicial review of legal error in arbitration awards.136 The high court reached this holding even though the U.S. Supreme Court had held that the FAA does not permit the parties to expand the scope of judicial review beyond those grounds specified by the FAA.137 The high court announced a special “California rule” held that the parties may agree to have expanded judicial review of an arbitration award. Support for this rule appears in a California statutory provision for vacating an arbitration award when “[t]he arbitrators exceeded their powers.”138 The high court thus enforced (as a matter of California, not federal, law) a provision in an arbitration agreement that “[t]he arbitrators shall not have the power to commit errors of law or legal reasoning, and the award may be vacated or corrected on appeal to a court of competent jurisdiction for any such error.”139 The demise of second-arbitrator provisions. The Court of Appeal once upheld, as not unconscionable, an arbitration agreement authorizing a second arbitrator to review an arbitration award in the same manner as an appellate court would review a trial court judgment.140 But the tide has turned against this attempt to guard against run-away arbitration awards. Plaintiffs have successfully argued that a second-arbitrator provision, while facially neutral, adds costs and time to arbitration to the advantage of the employer as the better-resourced party. In one 2003 case the Court of Appeal struck down a second-arbitrator provision that applied only to awards exceeding $50,000, on the ground that it gave an unfair advantage to the employer.141 And the Court of Appeal has found a
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