Last week, the High Court handed another victory to employers, holding that where an arbitration agreement is contained in a non-compete clause, the arbitrator – not the court – must determine, consistent with the Federal Arbitration Act (FAA), 9 U.S.C. § 1 et seq., the substance of the dispute. By so holding, the U.S. Supreme Court made it clear that state supreme courts cannot circumvent the FAA by purporting to decide matters involving arbitration agreements purely on state law grounds.
In Nitro-Lift Technologies, L.L.C. v. Eddie Lee Howard, et al. (2012) 568 U.S. ___, the dispute arose when Nitro-Lift demanded arbitration against two of its former employees, who had signed a confidentiality and non-compete clause with Nitro-Lift before going to work for a competitor, for breach of their noncompetition agreements. In response, Nitro-Lift’s former employees filed suit in District Court in Oklahoma, asking the court to declare the noncompetition agreements null and void and to enjoin their enforcement. The court dismissed the complaint, finding that the contracts contained valid arbitration clauses under which an arbitrator, and not the court, must settle the parties’ disagreement. The employees appealed.
Oklahoma’s Title 15 §219A limits the enforceability of noncompetition agreements. The Oklahoma Supreme Court held that the “existence of an arbitration agreement in an employment contract does not prohibit judicial review of the underlying agreement.” Finding the arbitration clauses no obstacle to its review, the court held that the noncompetition agreements were “void and unenforceable as against Oklahoma’s public policy,” expressed in Okla. Stat., Tit. 15, § 219A.
Interestingly, perhaps in an effort to deprive the High Court of jurisdiction, the Oklahoma Supreme Court declared that its decision rests on adequate and independent state grounds. But the U.S. Supreme Court found that the court “necessarily depended upon a rejection of the federal claim, which was both ‘properly presented to’ and ‘addressed by’ the state court.” (citations omitted) Specifically, Nitro-Lift claimed that the arbitrator should decide the contract’s validity, and raised a federal-law basis for that claim by relying on Supreme Court cases construing the FAA.
The Oklahoma court also justified its holding by reasoning that Oklahoma’s specific statute addressing covenants not to compete must govern over the more general statute favoring arbitration. But the High Court rejected that argument holding that there is no general-specific exception to the Supremacy Clause, U.S. Const. Art. VI, cl. 2.
Relying on the fundamental principle of the FAA 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, not the court, the High Court vacated the decision of the Oklahoma Supreme Court and remanded the matter for further proceedings consistent with the opinion.
While this is a victory for employers and the FAA, care must still be taken in drafting non-compete, arbitration and confidentiality agreements, particularly for companies with employees in more than one state. This expensive, years long litigation could have been avoided had Nitro-Lift not included all three of these agreements in one clause of an employment contract. State law varies on the enforceability of all three of these types of agreements and, while some states will “blue-pencil” offensive clauses, counsel should be consulted before implementing any of them in an employment contract.