Supreme Court Upholds Mandatory Arbitration in Employment Contract

The dispute arose when two former employees of Nitro-Lift, which serves operators of oil and gas wells, left the company and began to work for competitors. The employees had signed confidentiality and noncompetition agreements with Nitro-Lift that 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.”

Claiming that respondents had breached their noncompetition agreements, Nitro-Lift served them with a demand for arbitration. The former employees then filed suit in Oklahoma district court, which found the arbitration clauses to be invalid under state employment contract laws. Nitro-Lift appealed to the Oklahoma Supreme Court, and the company argued that any dispute about the contracts' enforceability was a question for the arbitrator, referencing Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 446 (2006) and other decisions. The Oklahoma Supreme Court upheld the district court's ruling and stated that “the existence of an arbitration agreement in an employment contract does not prohibit judicial review of the underlying agreement.” Then the state supreme court found the noncompetition agreements in the Nitro-Lift contract were “against Oklahoma's public policy,” and declared them to be “void and unenforceable.”

In rejecting that analysis, the U.S. Supreme Court referenced Southland Corp. v. Keating, 465 U.S. 1, 10 (1984), which found that the FAA “declares a national policy favoring arbitration.”

In other words, said Seltzer, the U.S. Supreme Court stated that Oklahoma cannot carve out a state exemption from the FAA. “The Court made clear that an arbitration provision, enforceable by federal law, will be given effect even in cases where that means a dispute concerning a non-compete provision disfavored by state law will be kept out of the state courts,” he said.

The Court added further weight to its decision by rejecting a particular statutory-construction argument advanced by the Oklahoma Supreme Court opinion, Seltzer added. “The Oklahoma court had reasoned that because Oklahoma had a specific state-law provision concerning non-compete agreements, that specific provision ought to trump the general provisions of the Federal Arbitration Act, which apply to arbitration clauses generally,” he said. “The Supreme Court agreed that specific statutes generally do trump general ones, but that principle only applies only to conflicts of 'laws of equivalent dignity.' Oklahoma's state law, disfavoring non-compete provisions, is an inferior law to Congress's supreme law of the land favoring the enforcement of arbitration clauses.”

Kevin Adler is associate editor of LJN's Franchising Business & Law Alert.

Proponents of mandatory arbitration clauses were given a victory in November when the U.S. Supreme Court vacated a decision by the Oklahoma Supreme Court in which the Oklahoma court had ruled that an employment non-compete agreement could be reviewed by a state court, despite an arbitration requirement in an employment contract. In Nitro-Lift Technologies, L.L.C. v. Howard, No. 11-1377, the Court issued a per curiam opinion on Nov. 26, 2012 and remanded the case back to Oklahoma.

“State courts rather than federal courts are most frequently called on to apply the Federal Arbitration Act (“FAA”), 9 U.S.C. 1 et seq. , including the Act's national policy favoring arbitration. It is a matter of great importance, therefore, that state supreme courts adhere to a correct interpretation of the legislation,” wrote the Court. “Here, the Oklahoma Supreme Court failed to do so. By declaring the noncompetition agreements in two employment contracts null and void, rather than leaving that determination to the arbitrator in the first instance, the state court ignored a basic tenet of the act's substantive arbitration law. The decision must be vacated.”

“The ruling affirms other rulings pertaining to the FAA,” said Cullen Seltzer, partner, Sands Anderson. “It affirms that the FAA applies nationally, even though some people think that it is limited to cases in federal court or affecting interstate commerce. The FAA favors enforcement of arbitration agreements when they are [required] in contracts; if the contract is enforceable, then the arbitration clause is enforceable.”

The dispute arose when two former employees of Nitro-Lift, which serves operators of oil and gas wells, left the company and began to work for competitors. The employees had signed confidentiality and noncompetition agreements with Nitro-Lift that 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.”

Claiming that respondents had breached their noncompetition agreements, Nitro-Lift served them with a demand for arbitration. The former employees then filed suit in Oklahoma district court, which found the arbitration clauses to be invalid under state employment contract laws. Nitro-Lift appealed to the Oklahoma Supreme Court, and the company argued that any dispute about the contracts' enforceability was a question for the arbitrator, referencing Buckeye Check Cashing, Inc. v. Cardegna , 546 U.S. 440, 446 (2006) and other decisions. The Oklahoma Supreme Court upheld the district court's ruling and stated that “the existence of an arbitration agreement in an employment contract does not prohibit judicial review of the underlying agreement.” Then the state supreme court found the noncompetition agreements in the Nitro-Lift contract were “against Oklahoma's public policy,” and declared them to be “void and unenforceable.”

In rejecting that analysis, the U.S. Supreme Court referenced Southland Corp. v. Keating , 465 U.S. 1, 10 (1984), which found that the FAA “declares a national policy favoring arbitration.”

In other words, said Seltzer, the U.S. Supreme Court stated that Oklahoma cannot carve out a state exemption from the FAA. “The Court made clear that an arbitration provision, enforceable by federal law, will be given effect even in cases where that means a dispute concerning a non-compete provision disfavored by state law will be kept out of the state courts,” he said.

The Court added further weight to its decision by rejecting a particular statutory-construction argument advanced by the Oklahoma Supreme Court opinion, Seltzer added. “The Oklahoma court had reasoned that because Oklahoma had a specific state-law provision concerning non-compete agreements, that specific provision ought to trump the general provisions of the Federal Arbitration Act, which apply to arbitration clauses generally,” he said. “The Supreme Court agreed that specific statutes generally do trump general ones, but that principle only applies only to conflicts of 'laws of equivalent dignity.' Oklahoma's state law, disfavoring non-compete provisions, is an inferior law to Congress's supreme law of the land favoring the enforcement of arbitration clauses.”

Kevin Adler is associate editor of LJN's Franchising Business & Law Alert.