The U.S. Supreme Court reconvened after its Thanksgiving holiday to issue a terse five-page per curiam decision that reaffirmed the favored status of arbitration agreements in the employment context. The decision also served as a rebuke to state courts that attempt to void arbitration clauses in employment agreements on state public policy grounds. Nitro-Lift Technologies, LLC v. Howard, No. 11-1377 (S.Ct. Nov. 26, 2012).
Nitro-Lift Technologies contracts with operators of oil and gas wells to provide services that enhance production. Two Nitro-Lift employees resigned and began working for a competitor of Nitro-Lift. These employees had entered into confidentiality and non-competition agreements with Nitro-Lift that contained a provision requiring any dispute be resolved by arbitration. After Nitro-Lift served the runaway employees with a demand for arbitration, the employees initiated a lawsuit in Oklahoma state court seeking a declaratory judgment that the non-competition agreements were null and void and an injunction against their enforcement. The state trial court dismissed the complaint, holding the contracts contained valid arbitration clauses which required submission of the parties' dispute to an arbitrator.
The Oklahoma Supreme Court reversed, reasoning that despite U.S. Supreme Court cases to the contrary, the "existence of an arbitration agreement in an employment contract does not prohibit judicial review of the underlying agreement." Nitro-Lift, supra, at 2, citing 273 P.3d 20, 26, ns. 20, 27. The Oklahoma Supreme Court proceeded to determine the merits of the controversy, and held the non-competition agreements were void and unenforceable as contrary to Oklahoma public policy.
The U.S. Supreme Court reversed, observing that "It is a matter of great importance . . . that state supreme courts adhere to a correct interpretation of the [Federal Arbitration Act]." Id. at 1. Declaring that the Oklahoma Supreme Court "ignored a basic tenet" of the FAA, the U.S. Supreme Court rejected the Oklahoma court's statement that its decision rested on adequate and independent state law grounds; rather, the Court observed that the state grounds "necessarily depended upon a rejection of the federal law." Id. at 3. Reasoning that the FAA is the supreme law of the land and it is the duty of other courts to respect that understanding of the governing rule of law, the Court concluded that it was for the arbitrator to decide in the first instance whether the covenants not to compete were valid as a matter of applicable state law. The judgment of the Oklahoma Supreme Court was vacated and the case remanded, presumably for arbitration.
As we discussed this past January, the FAA enjoys unequivocal support from the U.S. Supreme Court. Since the Court's 2001 decision in Circuit City Stores, Inc. v. Adams, which upheld the validity of arbitration agreements between employers and employees, the Court has been solicitous of employers' right to enter into agreements mandating submission of employment disputes for resolution in an arbitral forum. Nitro-Lift Technologies underscores that states do not have the right to use the shibboleth of "state public policy" as a justification to impose limitations on the use and effectiveness of legitimate arbitration agreements.