Supreme Court Reaffirms Enforceability of Arbitration Agreement in Noncompetition Dispute

Orrick - Employment Law and Litigation

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In a succinct opinion issued on November 26, 2012, the Supreme Court delivered a stern warning to state courts that fail to enforce arbitration clauses accompanying noncompetition agreements. In Nitro-Lift Technologies, L.L.C. v. Howard, 568 U.S. ____ (2012), the employment contracts between two energy-sector employees and their employer contained a two-year noncompetition provision and a mandatory arbitration clause. After the employees joined a competitor, the employer commenced an arbitration proceeding, prompting the employees to bring suit in Oklahoma state court seeking an injunction preventing enforcement of the noncompetition agreements. Despite the mandatory arbitration clauses, Oklahoma’s highest court declared the noncompetition agreements unenforceable under a state law prohibiting restraints on an employee’s ability to work in the same industry.

In a strong rebuke, the Supreme Court found that, by assuming the role of the arbitrator and evaluating the validity of the noncompetition agreements, the Oklahoma court violated a basic principle of the Federal Arbitration Act, which requires federal and state courts to rigorously enforce written arbitration agreements except in certain limited circumstances. The Supreme Court reiterated that a court’s only function in this context is to determine whether the arbitration clause is valid. If it is, challenges to the underlying contract must be left to the arbitrator. In this case, because the Oklahoma court never found the arbitration clauses to be invalid, it was for the arbitrator, and not the court, to decide whether the noncompetition agreements were enforceable.

The decision reaffirms that employers (and employees) can rely on valid arbitration agreements when litigating noncompetition disputes. Absent an express carve-out for injunctive relief, or a basis for challenging the arbitration clause itself, efforts to take such disputes to the courts to determine the enforceability of a noncompetition agreement are unlikely to succeed.


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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