STATE COURTS: BE HOSTILE TO ARBITRATION CLAUSES AT YOUR PERIL

For a long time now, employers have engaged in the practice of entering into arbitration agreements with their employees to arbitrate disputes that may arise during the employment relationship, including wrongful discharge claims stemming from the end of an employment relationship.  Although several state courts continue to be hostile towards arbitration agreements, the Supreme Court of the United States has issued a handful of significant decisions in the last few years reminding the states that the Federal Arbitration Act (“FAA”) “declares a national policy favoring arbitration” which will preempt state laws inconsistent with this policy. 

The latest of these decisions is Nitro-Lift Technologies, L. L. C. v. Howard.  Nitro-Lift provided services to operators of oil and gas wells.  When it hired employees, it required them to enter into a confidentiality and non-competition agreement which 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.”  

After working for Nitro-Lift in Oklahoma, Texas, and Arkansas, two employees quit and began working for a competitor.  Seeking to enforce the provisions of the non-competition agreement, Nitro-Lift served the employees with a demand for arbitration.  The employees balked at arbitration and, instead, filed suit in a state court in Oklahoma asking the court to render the non-competition agreements null and void.  Recognizing the U.S. Supreme Court’s clear jurisprudence in this area, the trial court dismissed the employees’ case and held that the contracts contained valid arbitration agreements that required an arbitrator, not the court, to resolve the parties’ differences.  

Surprisingly, on appeal, the Oklahoma Supreme Court reversed the decision of the lower court and held that the court could review the agreement notwithstanding the arbitration provision.  The Oklahoma Supreme Court relied on an Oklahoma statute that limits the enforceability of non-competition agreements.  The Court held that because the arbitration clauses contained in the agreements were an obstacle to judicial review, the non-competition agreements were “void and unenforceable as against Oklahoma’s public policy” expressed in the Oklahoma statute restricting the use of non-competition agreements.  

Perhaps not surprisingly – given its recent history in this area of the law – the United States Supreme Court decided to hear this case on further appeal.  When it did, it reversed the Oklahoma Supreme Court and held that the determination of the enforceability of the non-competition agreements under Oklahoma law is for an arbitrator to decide.  

Specifically, the U.S. Supreme Court held that the Oklahoma Supreme Court’s decision disregarded the high court’s precedent on the FAA, which has long required that attacks on the validity of the contract are to be resolved “by the arbitrator in the first instance, not by a federal or state court.”  In other words, it is for an arbitrator to determine even if the arbitration provision itself is valid.  Essentially, it held that the Oklahoma Supreme Court assumed the arbitrator’s role by declaring the non-competition agreements null and void, and even though Oklahoma may have a statute regulating non-competition agreements, the FAA preempts that.  

The Nitro-Lift decision is significant because it extends the United States Supreme Court’s recent favorable treatment of arbitration agreements to the employment context.  In the process, the Court gave employers some comfort in knowing that the arbitration clauses many of them prefer to use in their employment agreements with employees continue to be favored by the high court.  Don’t expect this trend to dissipate anytime soon.

 

Joseph Leonoro concentrates his practice in matters involving labor and employment law.
 
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