Nitro-Lift Technologies v. Howard: SCOTUS Holds That Trial Court Erred In Declaring Employees' Non-Competition Agreements Void, Should Have Allowed Arbitrator To Rule

Nitro-Lift Technologies, L.L.C. v. Howard (11/26/12) may be the only per curiam arbitration case that we see out of the United States Supreme Court this term or at any time in the near future.

Two employees entered into a confidentiality and noncompetition agreement with Nitro-Lift that contained an arbitration clause. The employees quit and went to work for a competitor. Nitro-Lift demanded arbitration, and the employees filed suit in court, seeking declaratory relief and an injunction to prevent enforcement of the agreement. The trial court dismissed the complaint, finding that the con­tract contained a valid arbitration clause, under which an arbitrator, and not the court, must settle the dispute.

The Oklahoma Supreme Court reversed, holding that despite the “[U. S.] Supreme Court cases on which the employers rely,” the “existence of an arbitration agreement in an employment contract does not prohibit judicial review of the underlying agreement.” Slip op. at 2. The Court then held the agreements void as contrary to Oklahoma public policy. Slip op. at 3.  The U.S. Supreme Court reversed, holding:

1. The Court had jurisdiction because Nitro-Lift relied on Supreme Court authority construing the Federal Arbitration Act ("FAA"). Slip op. at 3. 
2. The Oklahoma Supreme Court's decision misconstrued the FAA: "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.'" Slip op. at 4. The trial court found the arbitration clause enforceable, and it was for the arbitrator to decide whether the contract as a whole was valid. Ibid. 
3. The Court also should have allowed the arbitrator to decide whether the noncompetition agreement was enforceable. Ibid. Oklahoma's laws against enforcement of noncompetition clauses must yield to federal law on enforcement of arbitration agreements. Slip op. at 5. "Hence, 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." Ibid. 

I know that some people reacted very strongly to this decision when it came down, but I do not find it surprising. The Court did not overturn Oklahoma's public policy against noncompetition agreements. The Court simply held that the arbitrator, rather than the courts, should determine the validity of the noncompetition agreements in the first instance.  

The opinion is available here.