The U.S. Supreme Court has once again taken a position favoring the arbitration of employment-related agreements. In a summary ruling (pdf) issued on November 26, 2012, the Court vacated a decision issued by the Oklahoma Supreme Court that voided the noncompetition agreements in two employment contracts on the grounds that they were against state public policy. Applying the Federal Arbitration Act (FAA) and Supreme Court precedent interpreting the FAA, the Court found that the Oklahoma court “ignored a basic tenet” of arbitration law by not deferring the question of contract interpretation to an arbitrator.
The dispute involved a confidentiality and noncompetition agreement entered into between the employer Nitro-Lift Technologies, L. L. C., and two former employees. Both agreements contained the following arbitration clause:
Any dispute, difference or unresolved question between Nitro-Lift and the Employee (collectively the “Disputing Parties”) shall be settled by arbitration by a single arbitrator mutually agreeable to the Disputing Parties in an arbitration proceeding conducted in Houston, Texas in accordance with the rules existing at the date hereof of the American Arbitration Association.
When the employer had reason to believe the employees had breached the agreements, it served them with a demand for arbitration pursuant to the aforementioned clause. The employees subsequently asked a district court to declare the noncompetition agreements null and void and to enjoin their enforcement. This request was initially dismissed on the grounds that the arbitration clauses were valid, and therefore it was the job of an arbitrator, not the court, to settle the dispute.
The employees appealed the matter to the Oklahoma Supreme Court, which asked the parties why a state statute limiting the enforceability of noncompetition agreements should not govern. Notably, the Oklahoma Supreme Court did not question the lower court’s finding that the arbitration clause was valid, only whether enforcing it would run contrary to state law.
In response, Nitro-Lift reasserted its argument that a disagreement regarding contract enforceability is a question for the arbitrator. The employer cited several cases in support of this position, which – according to the Supreme Court ruling – the state court acknowledged yet disregarded. The Court writes: “Its conclusion that, despite this Court’s jurisprudence, the underlying contract’s validity is purely a matter of state law for state-court determination is all the more reason for this Court to assert jurisdiction.” Citing its prior opinions on the FAA’s interpretation, the Court explained that “when parties commit to arbitrate contractual disputes, it is a mainstay of the Act’s substantive law that attacks on the validity of the contract, as distinct from attacks on the validity of the arbitration clause itself, are to be resolved by the arbitrator in the first instance, not by a federal or state court.”
The Court stated further that once it has exercised its authority to interpret the meaning of a statute, “it is the duty of other courts to respect that understanding of the governing rule of law.” The Court averred that its string of decisions on the FAA’s applicability “forecloses precisely” this type of “judicial hostility towards arbitration.” Citing another of its recent rulings in an arbitration case, Marmet Health Care Center, Inc. v. Brown, (pdf) the Court recapped: “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.”
While this summary disposition does not create any new law, it reaffirms the Court’s support of arbitration, particularly in the employment arena. Moreover, the Court justified its decision to issue a ruling on this case because “it is a matter of great importance . . . that state supreme courts adhere to a correct interpretation” of the FAA.