U.S. Supreme Court Orders State Court To Adhere To Federal Arbitration Act And Compel Arbitration

by Pepper Hamilton LLP
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[authors: Matthew H. Adler, Frank H. Griffin, IV, Brian A. Berkley  and  Ryan E. Peters]

The United States Supreme Court recently entered the latest of a series of opinions that prevent state courts from interfering with arbitration on state policy grounds. On November 26, 2012, the Court issued its per curiam decision in Nitro-Lift Technologies L.L.C. v. Howard,1 reversing the Oklahoma Supreme Court’s ruling that declared noncompetition agreements in two employment contracts null and void instead of leaving that determination to the arbitrator. This is one of 13 Supreme Court decisions related to arbitration in the last four years.2 The Court has also recently granted writ of certiorari for another arbitration-related case for the 2012-2013 term.3 The Court’s decision in Nitro-Lift Technologies and its recent focus on arbitration law demonstrates the Supreme Court’s continued vigilance over state law interference with federal arbitration policy.

The dispute arose from contracts between petitioner Nitro-Lift Technologies and two of its former employees. The former employees each entered into separate confidentiality and noncompetition agreements with Nitro-Lift, both of which contained the same arbitration clause. After the former employees quit, they began working for one of Nitro-Lift’s competitors. Claiming that the former employees breached their noncompetition agreements, Nitro-Lift demanded arbitration. The former employees filed suit in Oklahoma state court, seeking a declaration that the noncompetition agreements were null and void under an Oklahoma state statute. The trial court dismissed the complaint, finding that the agreements each contained a valid arbitration clause, and thus the validity of the noncompetition was the issue for the arbitrator. The Oklahoma Supreme Court reversed, finding that an Oklahoma state court was entitled to review the validity of an employment agreement containing a non-compete clause based upon an Oklahoma state statute restricting covenants not to compete. The Oklahoma Supreme Court declared its decision rested on adequate and independent state grounds, which outweighed the force of the arbitration clause.

The United States Supreme Court vacated this decision. It began its opinion with a recognition of the federalism questions inherent in this area, commenting that “[s]tate courts rather than federal courts are more frequently called upon to apply the Federal Arbitration Act (FAA), 9 U.S.C. § 1 et seq., including the Act’s national policy favoring arbitration.” With this nod to the frequency of this issue reaching state courts, the United States Supreme Court then set a firm marker: “[i]t is a matter of great importance, therefore, that state supreme courts adhere to a correct interpretation of the legislation.” The Court looked to the recent precedent cited below by Nitro-Lift holding that where the arbitration clause itself is valid, then the validity of the contract as a whole is a decision for the arbitrator, not the court. The Oklahoma Supreme Court “ignored” this basic tenet of the Federal Arbitration Act’s substantive law when it took it upon itself to rule on the validity of the underlying agreements.

The Court characterized the Oklahoma Supreme Court’s decision as “judicial hostility towards arbitration” that the FAA was designed to prohibit. Indeed, it found the Oklahoma Supreme Court improperly chose to discount its jurisprudence. The Court stated “it is well settled” that the FAA’s substantive law “is applicable in state and federal courts.” Because the trial court found the arbitration clause was valid and the Oklahoma Supreme Court did not hold otherwise, the United States Supreme Court held the arbitration clauses should be enforced. Thus, it vacated the state supreme court’s decision.

The Court used this case to resend the message it has uniformly with increasing consistency and frequency sent before: there is a strong national policy favoring arbitration, and state courts are not exempt from following it. This is good news for parties that want their arbitration clauses enforced.

For parties that do not, there is a practice pointer. Key to the Court’s ruling was the trial court’s finding that the arbitration clause was valid, a point not disturbed by the Oklahoma Supreme Court. Had the validity of the clause itself been put at issue, then the United States Supreme Court would likely not have disturbed the Oklahoma decision. While it is true that an arbitrator must determine the validity of an underlying agreement, it is equally true the court must first determine the validity of an arbitration clause. Accordingly, parties seeking to avoid an arbitration clause can still argue to the court that the arbitration clause is not valid. But attacking the agreement itself without also attacking the arbitration clause continues to be an issue for the arbitrator.

Endnotes

1 568 U.S. ___ (2012).

2 CompuCredit Corp. v. Greenwood, 132 S. Ct. 665 (2012); Marmet Health Care Ctr., Inc. v. Brown, 132 S. Ct. 1201 (2012); AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011); KPMG LLP v. Cocchi, 132 S. Ct. 23 (2011); Granite Rock Co. v. Int’l Bhd. of Teamsters, 130 S. Ct. 2847 (2010); Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758 (U.S. 2010); Rent-A-Center, W., Inc. v. Jackson, 130 S. Ct. 2772 (2010); 14 Penn Plaza LLC v. Pyett, 556 U.S. 247 (2009); Vaden v. Discover Bank, 556 U.S. 49 (2009); Arthur Andersen LLP v. Carlisle, 556 U.S. 624 (2009); Preston v. Ferrer, 552 U.S. 346 (2008); Hall St. Assocs., L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008).

3 Am. Express Co. v. Italian Colors Rest., 81 U.S.L.W. 3264 (2012).

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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