In Nitro-Lift Technologies, L.L.C. v. Howard, the U.S. Supreme Court this week held that if a contract contains an arbitration provision and there is a challenge to the validity of the contract, it is for the arbitrator and not a court to hear that challenge. The case is important for employers because the challenge was to the validity of a non-competition agreement. More specifically, the Supreme Court held that if a contract contains an arbitration provision, it is up to an arbitrator, and not a court, to determine whether the non-competition provision of the contract runs afoul of a state law limiting the enforceability of such restrictive covenants. In so holding, the Court reaffirmed its earlier precedent that when a contract contains an arbitration provision, the Federal Arbitration Act. (“the FAA”), is the law of the land and that the FAA promotes a “national policy favoring arbitration.” So, the Supreme Court held, the Oklahoma Supreme Court erred when it held that a state law limiting the enforceability of non-competition agreements essentially negated the arbitration provision of the contract and allowed a court to declare the non-competition agreement void. Rejecting this judicial hostility towards arbitration, the U.S. Supreme Court held that pursuant to the arbitration provision, the validity of the contract as a whole, including the non-competition agreement, was a question for the arbitrator and not an Oklahoma state court.
Nitro-Lift Technologies, L.L.C. provides services to operators of oil and gas wells that enhance production of those natural resources. Nitro-Lift entered into confidentiality and non-competition agreements with two of its employees, Eddie Lee Howard and Shane Schneider. Each of those agreements also contained an arbitration clause providing in pertinent part: “Any dispute, difference, or unresolved question [between the parties] shall be settled by arbitration[.]” Howard and Schneider quit working for Nitro-Lift and began working for one of its competitors.
Nitro-Lift served a demand for arbitration on Howard and Schneider, claiming the former employees had violated the non-competition agreements. In response, the former employees filed suit in Oklahoma state court seeking a declaration that the non-competition agreements were null and void and to enjoin enforcement of the agreements. The trial court dismissed the complaint, finding the arbitration provision to be valid and controlling and, as such, it was for an arbitrator and not the court to resolve the parties’ dispute.
On appeal, the Oklahoma Supreme Court ordered the parties to show cause why an Oklahoma statute limiting the enforceability of non-competition agreements should not resolve the parties’ dispute. But what about the trial court’s holding that such questions should be resolved by an arbitrator and not a court? The state supreme court rejected that position, concluding that “the existence of an arbitration agreement in an employment contract does not prohibit judicial review of the underlying agreement.” In other words, the state supreme court effectively found that the state law limiting the enforceability of non-competition agreements trumped the parties’ agreement to arbitrate any disputes between them. Thus finding itself unshackled to address the validity of the non-competition agreements, the Oklahoma Supreme Court held those agreements were void and unenforceable pursuant to Oklahoma law.
In a per curiam opinion, the U.S. Supreme Court reversed. The Supreme Court held that the state supreme court’s decision ignored the Court’s precedents on the FAA. The substantive law the FAA created, the Supreme Court explained, applies equally in state and federal courts. A mainstay of the FAA’s substantive law is that attacks on the validity of a contract containing an arbitration provision are to be resolved by the arbitrator, not by a federal or state court. Accordingly, because there was no dispute that the arbitration provision was valid, it was the arbitrator’s role to determine whether Oklahoma law rendered the non-competition agreement null and void. The Oklahoma Supreme Court erred, therefore, when it assumed the arbitrator’s role and made that decision.
Many employment contracts contain arbitration provisions. Too often employees attempt to circumvent the requirement of arbitration by seeking a judicial declaration that the contract is void or that the non-competition or non-solicitation provision is void or unenforceable. This decision makes clear that such challenges must be made to the arbitrator, and not the courts. So, even in jurisdictions disfavoring or limiting restrictive covenants, if the employment contract contains an arbitration provision governing the parties’ disputes, it is for an arbitrator and not a court to determine the validity of the restrictive covenant.