The 3rd U.S. Circuit Court of Appeals decided a franchise related case on Aug. 2 that addressed judicial review of arbitration awards. In Paul Green School of Rock v. Smith , the court of appeals was called upon to review the confirmation of an arbitration award by the district court. The arbitration award, among other things, imposed a covenant not to compete against a California franchisee, a remedy rarely imposed under California law.
Unlike Pennsylvania law, California law considers covenants not to compete to violate public policy. California federal courts seem to allow a “trade secret exception” to the prohibition against enforcement of non-competes, however, the trend of the state courts has been to conclude that no such exception exists. California state courts will enjoin competition only when necessary to protect trade secrets under the California Trade Secrets Act.
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