U.S. Supreme Court Holds That State Courts Must Not Assume The Arbitrator’s Role By Declaring Non-Compete Agreements Null And Void

by Allen Matkins
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A short per curiam opinion issued yesterday by the United States Supreme Court concerning an employment dispute in Oklahoma is likely to result in consternation in California.

Nitro-Lift Technologies, L.L.C. v. Howard, 568 U.S. ___ (2012) involved a dispute between an employer and two of its former employees. The employees had signed confidentiality and noncompetition agreements that included arbitration clauses. When the employees quit and began working for a competitor, the employer served a demand for arbitration. The employees responded by filing suit in Oklahoma state court for a declaration that the noncompetition agreements were null and void. The U.S. Supreme Court picks up the tale:

The trial court found that the contract contained a valid arbitration clause, and the Oklahoma Supreme Court did not hold otherwise. It nonetheless assumed the arbitrator’s role by declaring the noncompetition agreements null and void. The state court insisted that 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.” 273 P. 3d, at 26. But the Oklahoma Supreme Court must abide by the FAA [Federal Arbitration Act], which is “the supreme Law of the Land,” U. S. Const., Art. VI, cl. 2, and by the opinions of this Court interpreting that law. “It is this Court’s responsibility to say what a statute means, and once the Court has spoken, it is the duty of other courts to respect that understanding of the governing rule of law.” Rivers v. Roadway Express, Inc., 511 U. S. 298, 312 (1994). Our cases hold that the FAA forecloses precisely this type of “judicial hostility towards arbitration.” AT&T Mobility LLC v. Concepcion, 563 U. S. ___, ___ (2011) (slip op., at 8).

As I’ve discussed in numerous posts, California has maintained an historic antipathy to covenants not to compete. See, e.g., California’s Hostility To Non-Compete Agreements Does Not Vitiate Forum Selection Clause“; “Classifying A Coterie Of Covenants“; “No Surprises Here – California Court Won’t Enforce Non-Compete“. According to the Supreme Court, “it is for the arbitrator to decide in the first instance whether the covenants not to compete are valid as a matter of applicable state law”. Implicit in this statement is the assumption that arbitrators are required to follow the law, an assumption that the California Supreme Court doesn’t appear to share:

Private arbitration is a process in which parties voluntarily trade the safeguards and formalities of court litigation for an expeditious, sometimes roughshod means of resolving their dispute. The traditional rule is that “`arbitrators, unless specifically required to act in conformity with rules of law, may base their decision upon broad principles of justice and equity, and in doing so may expressly or impliedly reject a claim that a party might successfully have asserted in a judicial action.’ [Citations.] As early as 1852, this court recognized that, `The arbitrators are not bound to award on principles of dry law, but may decide on principles of equity and good conscience, and make their award ex aequo et bono [according to what is just and good].’ [Citation.] `As a consequence, . .. “parties who stipulate in an agreement that controversies … shall be settled by arbitration, may expect not only to reap the advantages that flow from the use of that nontechnical, summary procedure, but also to find themselves bound by an award reached by paths neither marked nor traceable and not subject to judicial review.” [Citation.]‘” (Moncharsh, supra, 3 Cal.4th 1, 10-11, 10 Cal.Rptr.2d 183, 832 P.2d 899, quoting Nogueiro v. Kaiser Foundation Hospitals (1988) 203 Cal. App.3d 1192, 1195, 250 Cal.Rptr. 478, (italics added) .

Vandenberg v. Superior Court, 21 Cal.4th 815, 831-32 (1999)

 

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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