In its latest ruling on the enforceability of arbitration agreements under the Federal Arbitration Act, the United States Supreme Court has determined that an Oklahoma state court had improperly enjoined an arbitration proceeding and decided a legal issue that should have been decided by the arbitrator in the first instance. Nitro-Lift Technologies, L.L.C. v. Howard, No. 11-1377 (Nov. 26, 2012).
While employed by Nitro-Lift Technologies, L.L.C., two employees signed non-competition agreements. The agreements contained an arbitration provision providing that “any dispute” between Nitro-Lift and the employee “shall be settled by arbitration.” A dispute arose when the employees resigned and began working for one of Nitro-Lift’s competitors. In response, Nitro-Lift filed a demand for arbitration, seeking to enforce the non-competition agreement. Rather than agreeing to arbitrate, the former employees filed a lawsuit in Oklahoma state court asking the court to declare the noncompetition agreement null and void and to enjoin the enforcement of the agreement. The state trial court dismissed the complaint, ruling that the arbitrator, and not a court, should determine whether the noncompetition agreement was valid.
On appeal, the Supreme Court of Oklahoma reversed the lower court, holding that the court and not the arbitrator could determine validity of the noncompetition agreement. Reaching the merits, the Supreme Court of Oklahoma ruled that the noncompetition agreement violated an Oklahoma statute and was therefore void and unenforceable as a matter of Oklahoma public policy.
Nitro-Lift then filed a petition for certiorari to the U.S. Supreme Court. The Supreme Court unanimously granted the petition and vacated the decision of the Supreme Court of Oklahoma, without further briefing and without holding oral argument.
The Supreme Court first noted that the FAA applies in both federal and state courts. In reviewing its prior decisions applying the FAA, the Court reiterated that it is appropriate for courts to determine in the first instance the validity of an arbitration clause in a contract, but that it is for the arbitrator to determine the validity of the contract itself.
In Nitro-Lift, the parties did not dispute the validity of the arbitration provision. The Supreme Court therefore applied well-established FAA precedent and held that the validity of the noncompetition agreement was properly to be decided in the first instance by the arbitrator, not by the state court. The Court further held that the refusal of the Supreme Court of Oklahoma to follow the controlling FAA precedent, in favor of applying the Oklahoma statute, violated the Supremacy Clause of the United States Constitution. Quoting another of its recent arbitration rulings from earlier this year, the Supreme Court stated, “When state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the FAA.”
Nitro-Lift illustrates a continuing, general trend in which the Supreme Court has upheld and enforced arbitration agreements according to their terms against attempts by some state and lower federal courts to limit the scope and application of arbitration agreements.