In a recent decision, the U.S. Supreme Court confirmed that under the Supremacy Clause, the Federal Arbitration Act and the FAA’s “national policy favoring arbitration,” a state court, including Oklahoma’s highest court, must defer to decisions of the highest court of this country on the subject of arbitration.
In Nitro-Lift Technologies, L.L.C. v. Howard, No. 11-1377, a dispute arose from an employment contract between Nitro-Lift and two former employees. The employees had entered a confidentiality and noncompetition agreement with Nitro-Lift which included an arbitration clause: “Any dispute, difference or unresolved question between Nitro-Lite and the Employee (collectively “Disputing Parties”) shall be settled by arbitration by a single arbitrator mutually agreeable to the Disputing Parties in an arbitration proceeding conducted in Houston, Texas, in accordance with the rules existing at the date hereof of the American Arbitration Association.”
When the employees terminated and began working for a competitor, Nitro-Lift served them with a demand for arbitration. The employees filed suit in state court seeking to void and enjoin enforcement of the noncompetition agreements. The trial court dismissed the complaint, finding the arbitration clauses valid and holding that the arbitrator, and not the court, had to decide the dispute.
The Oklahoma Supreme Court ordered the parties to show cause why the matter should not be decided by application of a specific Oklahoma statute which limits the enforceability of noncompetition agreements. Although Nitro-Lite relied on several U.S. Supreme Court cases finding the FAA applicable in both state and federal courts, and holding that the arbitrator must decide the contracts’ enforceability, the Oklahoma Supreme Court found otherwise and held that “existence of an arbitration agreement in an employment contract does not prohibit judicial review of the underlying agreement.”
The court insisted it still had the right to review the employment agreements because the arbitration clauses did not bar their review and thereafter held the noncompetition agreements were void and unenforceable pursuant to the public policy enunciated in its statute.
The U.S. Supreme Court, in a slap on the wrist to the Oklahoma justices, questioned such reliance and held, “If that were so, we would have no jurisdiction over this case.” It held it was improper for the state court to reject the federal claim, which was “properly presented to” and “addressed by” the state court, and then rely on Oklahoma law as an independent ground. Nitro-Lift had properly raised a federal issue by relying on Supreme Court cases explaining the FAA. The Oklahoma court had recognized the federal cases yet nevertheless ignored those controlling decisions, inviting criticism from the Supreme Court: “Its conclusion that, despite this Court’s jurisprudence, the underlying contract’s validity is purely a matter of state law for state-court determination is all the more reason for this Court to assert jurisdiction.”
The U.S. Supreme Court continued the rebuke: “The Oklahoma Supreme Court’s decision disregards this Court’s precedents on the FAA.” These holdings had announced a national policy favoring arbitration and found that the substantive law of the act is applicable in state and federal courts. One of the most important aspects of that substantive law is that attacks on the validity of the contract are to be resolved by the arbitrator and not by a federal or state court. Attacks on the validity of the arbitration clause are left to the courts.
In this matter, the trial court had determined that the contract included a valid arbitration clause. The Oklahoma Supreme Court then overreached and declared the noncompetition agreement null and void, maintaining that its jurisprudence controlled and authorized review of a contract where one party claims it is unenforceable. The U.S. Supreme Court, citing Rivers v. Roadway Express, Inc., continued its criticism, “But the Oklahoma Supreme Court must bide by the FAA, which is ‘the supreme Law of the Land,’ U.S. Const., Art. VI, cl. 2, and by the opinions of this Court interpreting that law. ‘It is this Court’s responsibility to say what a statute means, and once the Court has spoken, it is the duty of other courts to respect that understanding of the governing rule of law.’”
The U.S. Supreme Court has again definitively ruled that the arbitrator decides the validity of the contract so that in this matter the arbitrator would decide whether the covenants not to compete are valid under state law. The Court granted the petition for certiorari, vacated the judgment of the Supreme Court of Oklahoma and remanded the case for further proceedings consistent with its opinion, while chastising a recalcitrant state court and criticizing its legal reasoning. In doing so, it continued its commitment to upholding and enforcing arbitration agreements in accordance with their terms despite attempts by some state and lower federal courts to limit their efficacy. The United States Supreme Court once again strengthened the policy in favor of alternative dispute resolution and, under these circumstances, we agree.