A recent Supreme Court Decision looked at the intersection
to two hot legal topics: noncompete agreements and arbitration clauses. The
case, Nitro-Lift Technologies LLC v.
Howard, examined whether an
arbitration clause was enforceable when the underlying noncompete clause would
be invalid under the law of the state where the contract was being enforced.
In the case, two employees worked at Nitro-Lift Technologies
in Oklahoma, and signed noncompete agreements when they left the company. The
employees went to work for a competitor, and Nitro-Lift served a demand for
arbitration. In Oklahoma, noncompete agreements are traditionally invalid, so
the employees filed suit asking the court to declare the agreements void. After
the trial court and the Oklahoma Supreme Court differed about whether the
validity of the noncompete agreements was an issue for the arbitration panel or
the court, the Supreme Court decided to hear the case.
The Court held that the arbitration panel could determine
the validity of the noncompete agreement. Basing the decision around the
Federal Arbitration Act (FAA), the Court upheld its existing arbitration
precedents by stating that when parties agree to arbitrate contractual
disputes, attacks on the validity of the underlying contract need to be
resolved through arbitration, rather than by challenges in state or federal
court. The only way parties can get to court is by challenging the validity of
the arbitration agreement itself, rather than an underlying contractual
Where there is a valid arbitration agreement, attacks on the
underlying contact must be resolved by arbitration, rather than through court
proceedings. Commentators have taken issue with the Supreme Court’s reading of
the FAA, arguing that the Court is adding in Congressional intent where none
existed at the time of the Act’s drafting in order to further the majority’s
pro-business agenda. Regardless of the rationale, the Court’s arbitration decisions
have made it so that state laws banning
certain types of contracts (such as the noncompete agreement here along with
other unconscionable consumer contracts) are preempted by the FAA’s arbitration
requirement, making it very difficult to for unprepared litigants to challenge
the validity of contracts between parties with uneven bargaining power.
As such, this case continues the Court’s broad
reading of the FAA as a device that promotes arbitration and reduces
litigation, a reading that makes it very difficult for ordinary consumers and
employees to be protected by state laws.