U.S. Supreme Court Enforces Arbitration Clause in Non-Compete Agreement


[author: Mike Warner]

In the latest of a long line of decisions favoring arbitration, the United States Supreme Court has overturned a decision of the Oklahoma Supreme Court invalidating a non-compete agreement that contained a binding arbitration clause. The United States Supreme Court reasoned that by declaring the non-competition agreements null and void, rather than leaving that decision to a private arbitrator in the first instance, the Oklahoma Court ignored the basic tenets of the Federal Arbitration Act (FAA) that expresses a national policy favoring arbitration.

In Nitro-Lift Technologies, L.L.C. v. Lee, the employer, Nitro-Lift, sought to enforce the terms of a confidentiality and non-competition agreement against two of its former employees that went to work for a direct competitor. Nitro-Lift served the former employees with a demand for arbitration in accordance with a provision in the agreement that provided that any dispute between Nitro-Lift and the employees would be settled by arbitration. The employees then sued in Oklahoma state court, asking the court to declare the non-competition agreements null and void under Oklahoma law. The Oklahoma trial court initially dismissed the lawsuit, holding that an arbitrator, not a court, must settle the parties’ disagreement, but the Oklahoma Supreme Court reversed this decision. The Oklahoma Supreme Court found that the non-compete agreement was not enforceable under Oklahoma state law and that the existence of an arbitration agreement in an employment contract did not prohibit judicial review of the underlying agreement. In so holding, the Oklahoma Court purported to rely on an “exhaustive overview of United Supreme Court decisions construing the Federal Arbitration Act.”

In its per curiam decision the United States Supreme Court rejected the Oklahoma Court’s analysis and held that the state court’s decision disregarded prior federal precedent interpreting the FAA. The United States Supreme Court held that under the FAA, when a contract contains an arbitration clause, attacks on the validity of the contract, as distinct from attacks on the arbitration clause itself, are to be resolved by the arbitrator, not by a federal or state court. The Court further rejected the Oklahoma Court’s reasoning that Oklahoma’s statute addressing the validity of non-compete agreements took precedence over the more general statute favoring arbitration. The United States Supreme Court held that the FAA, as federal law, trumped any conflicting state law under the Supremacy Clause of the United States Constitution.

This decision re-affirms the longstanding federal policy favoring the arbitration of private contractual disputes. When drafting non-compete agreements and other employment related agreements, an employer should carefully consider whether future disputes arising with the employee are best resolved through the court system or in binding arbitration. If arbitration is likely to provide a more favorable forum, the employer should strongly consider including a binding arbitration clause in the agreement.   

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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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