The Supreme Court Blesses Arbitration Clauses In Covenants Not To Compete, But Is Arbitrating A Non-Compete Always A Good Idea?

by Gray Reed & McGraw
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Non-competes are governed by different rules from other contracts.  Courts limit non-competes to certain circumstances, such as when an individual has received confidential information, goodwill, or specialized training; even then, the restrictions on competition must be “reasonable.”  However, when it comes to determining the applicability of the Federal Arbitration Act, the United States Supreme Court recently held non-competes should be treated the same as any other contract

The Nitro-Lift Decision

In Nitro-Lift Technologies, L.L.C. v. Howard, the United States Supreme Court, overturned a ruling by the Oklahoma Supreme Court permitting judicial review of a non-compete provision despite the contract’s arbitration clause.  The Oklahoma Supreme Court held the non-compete void and unenforceable because it was against Oklahoma’s public policy.

The United States Supreme Court reasoned the FAA applied and, therefore, under the Supremacy Clause of the Constitution, the Oklahoma Supreme Court was bound by the FAA and federal law interpreting the FAA.  The Court reaffirmed “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…not by a federal or state court.”  By finding the non-compete unenforceable, the Oklahoma Supreme Court improperly assumed the role of the arbitrator and contravened the FAA.

The Nitro-Lift opinion is worthy of note because it requires all state and federal courts to enforce FAA arbitration clauses contained in covenants not to compete or other similar agreements.

Should You Arbitrate a Covenant Not to Compete?  

As previously discussed in my blog posts available here and here, arbitration has its pros and cons.  Arbitrating a non-compete raises additional unique considerations.

Arbitrating a claim for money damages arising out of a breach of a non-compete may be preferable because (1) arbitration is typically faster and less expensive (though costs are rising) than a trial at the courthouse; and (2) arbitrations are private proceedings.

However, seeking injunctive relief in an arbitration proceeding is a horse of a different color. Obtaining injunctive relief (such as a TRO or TI) in an arbitration proceeding is often problematic.  Injunctive relief typically takes far longer to obtain in arbitration than it would at the courthouse where parties can seek immediate relief in the form of a temporary restraining order and a temporary injunction shortly thereafter.  In addition, arbitrators lack contempt power to enforce the injunctive relief they grant.  Therefore, employers and other parties who wish to arbitrate non-compete claims should draft an exception in the arbitration clause allowing them to pursue injunctive relief through the courts.  Many courts hold that a failure to include such language will deprive a court of jurisdiction to enter injunctive relief.

This blog is based on a web alert co-authored with Jonathan Hyman available at: http://www.lrmlaw.com/NewsResources/Legal-Updates/29502/The-Supreme-Court-Blesses-Arbitration-Clauses-in-Non-Competes

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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