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Supreme Court Says Arbitrator and Not Court Must Decide Enforceability of Non-Compete

    Client Alerts
  • December 21, 2012

Last month, the U.S. Supreme Court released a decision upholding the ability of arbitrators to make threshold decisions about the enforceability of non-competition agreements in employment contracts. This decision is of interest to employers that include mandatory arbitration clauses in their employment agreements.

Nitro-Lift Technologies v. Howard involved the appeal of an Oklahoma Supreme Court decision on the enforceability of a non-competition agreement. The agreement provided that any dispute would be subject to mandatory arbitration. The former employer sued the defendants for breach of the non-compete, and included a notice of arbitration. The employees then filed a declaratory judgment action in state court, seeking to have the non-competes nullified.

The Oklahoma Supreme Court concluded that despite the arbitration clause, courts are not prohibited from deciding the underlying validity of the agreement itself under state law. In a unanimous decision, the U.S. Supreme Court quickly dismissed this reasoning and reversed the state court decision. The Court stated that the Federal Arbitration Act overrides any state law challenge to the validity of the contract. Federal law requires that the agreement be subjected to mandatory arbitration regardless of the nature of the legal dispute. The only exception would involve a challenge to the enforceability of the arbitration provision.

The Court's perfunctory dismissal of the Oklahoma decision reflects its long-standing position that the FAA reflects a strong federal policy in favor of arbitration. The Court has resisted attempts to limit the scope of the FAA, concluding that the parties to an agreement are free to limit legal disputes to arbitration. In many employment agreements, the parties specifically carve out non-competes from the arbitration mandate, usually because the employer wants the option of seeking injunctive relief from the courts. However, this case makes clear that nothing prevents the parties from leaving the question of validity of the non-compete to binding arbitration.