Ruling on the enforceability of an arbitration clause contained within a confidentiality and noncompetition agreement signed as a condition of employment, the U.S. Supreme Court once again reiterated its position that the Federal Arbitration Act (“FAA”) is the supreme law of the land, giving it priority over any conflicting state law or policy.
In Nitro-Lift Technologies, LLC v. Howard, two employees entered into confidentiality and noncompetition agreements as conditions of their employment. The agreements each contained a provision that mandated that any dispute between Nitro-Lift and its employees be resolved through arbitration. After the two employees quit their employment with Nitro-Lift, they both went to work for one of Nitro-Lift’s competitors, thereby breaching their noncompetition agreements. Nitro-Lift filed an arbitration claim alleging breach of contract. The employees filed suit in an Oklahoma state court, seeking to have the agreements deemed unenforceable under state law.
The trial court ordered the to case to arbitration, finding that since the agreements contained valid arbitration clauses, an arbitrator, not the court, had to determine the enforceability of the noncompetition agreements. However, the Oklahoma Supreme Court reversed, holding that the existence of an arbitration clause does not prohibit judicial review of the underlying agreement. The court then found that the enforceability of a noncompetition is a matter of state law, ultimately determining that the noncompetition agreements were “unenforceable as against Oklahoma’s public policy.”
The U.S. Supreme Court granted review and vacated the Oklahoma’s Supreme Court decision, finding that the Oklahoma Supreme Court’s decision plainly “disregard[ed] this Court’s precedent on the FAA.” Notably, the court cited to a previous U.S. Supreme Court case that affirmed that the FAA “declares a national policy favoring arbitration” and that the substantive law created by the FAA is applicable in both state and federal courts.
In a per curiam decision, the U.S. Supreme Court asked the key question: did the Oklahoma Supreme Court err in preventing an arbitrator from making a determination about the enforceability of the noncompetition agreements under state law? Noting that the Oklahoma Supreme Court had disregarded the U.S. Supreme Court’s precedents on the FAA, the U.S. Supreme Court found that the Oklahoma Supreme Court had erred, and should have allowed an arbitrator to decide whether the noncompetition agreements were indeed enforceable.
Additionally, the U.S. Supreme Court made clear that the FAA is the law of the land, and as such, Oklahoma’s laws against enforcement of noncompetition clauses must yield to the federal law on enforcement of arbitration agreements. Specifically, the Court ruled that “[b]y declaring the noncompetition agreements in two employment contracts null and void, rather than leaving that determination to the arbitrator in the first instance, the state court ignored a basic tenet of the Act’s substantive arbitration law.” Finally, reaffirming the application of the FAA in state court, the court emphasized that “when parties commit to arbitrate contractual disputes,” it is a “mainstay” of the FAA that “attacks on the validity of the contract, as distinct from attacks on the validity of the arbitration clause itself” should be resolved by the arbitrator.
As this case established, the FAA is binding on all states, including California. Since the threshold question under the FAA is whether an arbitration provision or clause is itself valid, this case highlights the need for all California businesses and employers to carefully draft the arbitration clauses contained within in their agreements. If you have any questions about this case or the enforceability of any arbitration provisions contained within any of your California business’s contracts, our Pleasanton business litigation attorneys can help. You can contact one of our business litigation lawyers who can assist you in protecting your interests in business disputes using our online contact form, or by calling us at (925) 463-1073.