December 17, 2012

Another Employer-Friendly Arbitration Decision From The U.S. Supreme Court

The U. S. Supreme Court continued its trend of pro-employer arbitration decisions in Nitro Lift Technologies, LLC v. Eddie Lee Howard, finding that the federal policy favoring arbitration trumped a state law disfavoring the enforcement of non-compete agreements.  Nitro-Lift brought a demand for arbitration against two of its former employees, located in Oklahoma, who went to work for a competitor.  Both had entered into confidentiality and non-compete agreements that contained an arbitration clause.  The former employees responded by suing Nitro-Lift in Oklahoma state court for a declaratory judgment that the non-compete agreements were unenforceable and void. The trial court dismissed the complaint in light of the valid arbitration clauses, but the Oklahoma Supreme Court reversed, finding that an Oklahoma statute which limits the enforceability of non-compete agreements required judicial review of the agreement – not an arbitral review.

The U.S. Supreme Court vacated that decision and forced all matters related to the non-compete agreements to be arbitrated. It found that “the validity of [a] contract, as distinct from attacks on the validity of the arbitration clause itself, are to be resolved ‘by the arbitrator in the first instance, not by a federal or state court.’”  It vacated the decision because the Oklahoma courts decided the validity of the non-compete agreements when the only issue properly before it was the enforceability of the arbitration clause.

The Court went one step further, however.  It re-affirmed the notion that “when state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by [federal law].”

What is the impact for California employers?  It was just over a year ago that the Supreme Court vacated the California Supreme Court’s decision holding that class action waivers in arbitration agreements were unenforceable.  At least two California courts have taken that lead and have upheld class action arbitration waivers, but in one other decision, a California court found that a claim under the Private Attorney’s General Act could not be compelled to arbitration.  This decision raises the stakes on all of those courts and signals the courts willingness to strike down any decision which