[author: Michael C. Jacobson, XpertHR Legal Editor]
Employers that utilize arbitration agreements just received a major vote of confidence from the Supreme Court of the United States (SCOTUS).
In Nitro-Lift Technologies, LLC v. Eddie Lee Howard, et al., +2012 U.S. LEXIS 8897 (2012), the SCOTUS ruled on November 26, 2012 that valid arbitration agreements may trump conflicting state law.
This is a significant ruling for employers nationwide, many of which have gravitated toward arbitration agreements to reduce their exposure to costly and time-consuming employment litigation. With this decision on the books, valid and enforceable arbitration agreements may carry the full weight and impact of the Federal Arbitration Act (FAA) itself, even if they might otherwise conflict with state law.
The SCOTUS decision concerned a ruling by the Oklahoma Supreme Court, which declared arbitration agreements contained within noncompete clauses as null and void. Specifically, Nitro-Lift, an operator of oil and gas wells, had entered into confidentiality and noncompete agreements with two employees, Howard and Schneider. Both individuals ultimately left Nitro-Lift and began working for one of its competitors.
Nitro-Lift then served both with a demand for arbitration to resolve the perceived violation of the noncompete agreements. Both individuals then filed suit in Oklahoma, asking the state court system to declare the noncompete agreements null and void.
The Oklahoma Supreme Court ruled that the noncompete agreements violated Oklahoma state law in that they restricted the employees' ability to pursue employment beyond that of +15 Okl. St. §219A. This section restricts the enforceability of such agreements only to situations where former employees directly solicit business from established customers of the former employer, as opposed to merely operating within the same industry and/or conducting the same type of business. Nitro-Lift then petitioned the SCOTUS for review.
In overturning the Oklahoma Supreme Court's decision, the SCOTUS found that since the arbitration agreement (contained within the noncompete agreement) was itself valid, the question of whether the noncompete agreement was violated should have been left to an arbitrator, not to a state or federal court. Specifically, the SCOTUS stated that "when parties commit to arbitrate contractual disputes, it is a mainstay of the [FAA]'s substantive law that attacks on the validity of the contract...are to be resolved 'by the arbitrator in the first instance,'" meaning that such disputes are not initially appropriate for a state or federal court.
Importantly, an arbitration agreement itself could be subject to initial state or federal court review as to the question of whether the arbitration agreement is enforceable. However, questions as to whether terms of the employment contract (or, in this case, a noncompete agreement) are violated, when subject to an arbitration agreement, are suited for an arbitrator.
Guidance for Employers
Arbitration agreements are an extremely effective way for employers to reduce their exposure to employment litigation. In many cases, the final decision of the arbitrator is binding on both the employer and the employee, eliminating the costly and time-consuming nature of employment litigation and its seemingly never-ending motions and appeals.
In order to benefit from arbitration agreements, however, employers need to take steps to ensure that such agreements are valid and enforceable. Employers can accomplish this by:
Ensuring that employees enter into such agreements knowingly, meaning that they understand the terms of the agreement, which disputes are to be settled by an arbitrator and exactly what rights they give up by agreeing to arbitrate disputes;
Choosing arbitrators carefully to ensure they are not biased in favor of the employer;
Crafting arbitration programs to ensure that the process of arbitration itself is not unfairly weighted toward the employer's financial capabilities; and
Monitoring some other common defects in arbitration programs which could undermine the validity and enforceability of the agreement.
When employers do craft valid and enforceable arbitration agreements, these agreements can be tremendously effective in handling employment-related disputes expeditiously and cost-effectively.
Participate in Arbitration/Mediation to Resolve a Pending Legal Dispute with a Former Employee
Alternative Dispute Resolution > Arbitration
Investigations and Litigation > Arbitration
Employee Management > Employee Communications > Noncompete Agreements
Recruiting and Hiring > Terms of Employment > Restrictive Covenants in Employment