The U.S. Supreme Court has once again dealt a decisive blow to a state court’s effort to resist a valid arbitration agreement. In an unusual “summary reversal,” the Court unanimously held that a state supreme court violated the Federal Arbitration Act (“FAA”) by striking down an employee noncompetition agreement under state law, rather than allowing an arbitrator to decide the issue under a valid arbitration clause. Nitro-Lift Techs. LLC v. Howard, 568 U.S. __ (Nov. 26, 2012). In so holding, the Court rejected the state supreme court’s finding that despite the presence of a valid arbitration clause in the employment agreement, the state court could still rule on the legality of a noncompetition clause in that agreement.
Nitro-Lift, a provider of oil and natural gas well services, entered into confidentiality and noncompetition agreements with two employees. The agreements provided that any contractual disputes “shall be settled by arbitration.” After both employees quit and began working for a competitor, Nitro-Lift served the former employees with demands for arbitration, asserting breaches of the employees’ agreements. The former employees filed suit in Oklahoma state court, arguing that the noncompetition agreements were unenforceable.
The Oklahoma court dismissed the complaint, finding that the employees’ agreements contained valid arbitration clauses under which an arbitrator, not a court, must decide the validity of the noncompetition clauses in the first instance. On appeal, the Oklahoma Supreme Court reversed, holding that “the existence of an arbitration agreement in an employment contract does not prohibit judicial review of the underlying agreement.” Despite a valid arbitration clause in the employment agreements, the court held that it could still rule on the validity of the noncompetition clauses in those agreements. Relying on a state statute limiting the enforceability of noncompetition agreements, the court went on to find that the noncompetition agreements were “void and unenforceable as against Oklahoma public policy.”
The U.S. Supreme Court granted certiorari and summarily vacated the Oklahoma Supreme Court decision, issuing its per curiam ruling based only on the petition for certiorari, without full briefing and oral argument. According to the Court’s ruling, the FAA and Supreme Court precedent mandate that, where an agreement contains a valid arbitration clause, an arbitrator (and not the court) must decide whether a noncompetition clause contained in the agreement is valid. The Court emphasized that “it is a mainstay of the [FAA’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 court.” After a court has determined the validity of an arbitration clause, “the validity of the remainder of the contract . . . is for the arbitrator to decide.” Thus, “it is for the arbitrator to decide in the first instance whether the covenants not to compete are valid as a matter of applicable state law.” In so holding, the Court rejected the Oklahoma Supreme Court’s conclusion that the underlying contract’s validity is a matter for judicial determination.