Supreme Court Enforces Arbitration Clause so Arbitrator Can Rule on Validity of Non-Compete

On Monday, the Supreme Court issued a per curiam decision reversing the Oklahoma Supreme Court in a dispute over arbitration and non-competition clauses in an employment agreement. Nitro-Lift Technologies LLC v. Howard, 568 U.S. __,  No. 11-1377 (U.S. 11-26-12).  In Howard, the employer served a demand for arbitration on former employees who had gone to work for a competitor in violation of the non-competition clause.  Rather than comply, the employees brought a declaratory judgment action in state court seeking to void the agreement on the grounds that the non-competition clause was unenforceable under state law.  While the trial court referred the matter to arbitration in compliance with the Federal Arbitration Act, the employees appealed and the state supreme court ruled the non-competition agreement was a matter of a specific state law – not a general federal law – and was unenforceable under state law. The Supreme Court concluded that the validity of the non-competition clause was for the arbitrator to decide, not a state court, because the parties had a valid arbitration clause in the contract.

The Court repeated its years of jurisprudence that the enforceability of arbitration agreement is governed by the FAA.  Unless the party attacks the validity of the arbitration clause (rather than the validity of the contract itself), the dispute must be resolved by the arbitrator instead of a state or federal court:

For these purposes, an “arbitration provision is severable from the remainder of the contract,” Buckeye, supra, at 445, and its validity is subject to initial court determination; but the validity of the remainder of the contract (if the arbitration provision is valid) is for the arbitrator to decide.

This principle requires that the decision below be vacated. The trial court found that the contract contained a valid arbitration clause, and the Oklahoma Supreme Court did not hold otherwise. It nonetheless assumed the arbitrator’s role by declaring the noncompetition agreements null and void.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.