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Validity of Noncompete Agreement Was for Arbitrator to Decide, High Court Rules

By Joanne Deschenaux  11/28/2012
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The Oklahoma Supreme Court violated the Federal Arbitration Act (FAA) by striking down an employee noncompete agreement as invalid under state law, the U.S. Supreme Court held. The dispute should have been heard by an arbitrator, under a valid arbitration agreement between the parties, the high court unanimously ruled Nov. 26, 2012 (Nitro-Lift Techs. LLC v. Howard, U.S., No. 11-1377).

Nitro-Lift Technologies LLC, an oil and natural gas services company, entered into noncompete agreements with employees Eddie Lee Howard and Shane Schneider. The agreements included a clause providing that any disputes regarding the contracts “shall be settled by arbitration.”

After the two employees quit Nitro-Lift and began working for a competitor, Nitro-Lift served them with demands for arbitration regarding their alleged breaches of the noncompete agreement. The former employees sued in Oklahoma state court, asking the court to declare the noncompete agreements null and void and enjoin their enforcement.

A state district court dismissed the complaint, finding the contracts contained valid arbitration clauses under which an arbitrator, not the court, must resolve the parties’ disagreement.

On appeal, however, the Oklahoma Supreme Court ruled that Oklahoma public policy, based on a state statute that limits the enforceability of noncompete agreements, barred Nitro-Lift from enforcing the clause.

Simultaneously granting Nitro-Lift’s request for review and vacating the state supreme court’s ruling, the justices said that under the FAA and relevant Supreme Court precedent, an arbitrator, not the court, must decide whether the agreements are valid.

“The Oklahoma Supreme Court’s decision disregards this Court’s precedents on the FAA,” the court said. Among other things, “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 or state court,’ ” the court said.

Although a court may initially decide an arbitration provision’s validity, “the validity of the remainder of the contract (if the arbitration provision is valid) is for the arbitrator to decide,” the court said.

In this case, an Oklahoma trial court found the parties’ noncompete agreements contained a valid arbitration clause and the state supreme court did not rule otherwise, the justices stressed.

The Oklahoma Supreme Court “nevertheless assumed the arbitrator’s role by declaring the noncompetition agreements null and void,” the court said. The state court reasoned “its own jurisprudence controls this issue” and permits review of a “contract submitted to arbitration where one party assert[s] that the underlying agreement [is] void and unenforceable.”

The justices said that the Constitution’s supremacy clause requires the Oklahoma Supreme Court to abide by the FAA and U.S. Supreme Court decisions interpreting the FAA.

The justices vacated the state supreme court ruling and remanded for proceedings “not inconsistent with this opinion.”

Joanne Deschenaux, J.D., is SHRM’s senior legal editor.

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