U.S. Supreme Court Holds that Arbitrator, Not State Court, Must Determine Enforceability of Noncompetition Agreement

In a per curiam opinion, the U.S. Supreme Court held that under the Federal Arbitration Act arbitrators, not courts,must determine the enforceability of covenants not to compete when the parties are subject to agreements that call for the mandatory arbitration of disputes.

In Nitro-Lift Technologies v. Howard, two employees left their employment with Nitro-Lift and began working for a competitor. During their employment with Nitro-Lift, the employees parties to employment agreements containing covenants not to compete and provisions requiring the mandatory arbitration of all disputes between the parties. Nitro-Lift served a demand for arbitration on the employees and they responding by commencing a declaratory judgment action in state court seeking to declare the noncompetition provisions unenforceable under state law.

The trial court dismissed the complaint based on the existence of a valid arbitration provision. The Oklahoma Supreme Court, however, issued a show cause order requesting briefing on why the restrictive statutory provisions of Oklahoma state law on the enforcement of noncompete agreements did not dispose of the issues. The Oklahoma high court determined that it had adequate and independent state law grounds to consider the enforceability of the agreement notwithstanding the arbitration provision, and held the agreement unenforceable under Oklahoma law.

On appeal to the U.S. Supreme Court, the Court reversed the Oklahoma Supreme Court. The Court explained that when an arbitration provision is governed by the Federal Arbitration Act, the court has jurisdiction to consider challenges to the arbitration provision, but it is the arbitrator’s jurisdiction to consider all other challenges to the validity of the contract (if the arbitration provision is valid). Because the Oklahoma court assumed the role of the arbitrator in determining that the noncompetition agreements at issue violated state law, the U.S. Supreme Court vacated the decision and remanded the case for further proceedings consistent with its opinion.

You can download a complete copy of Nitro-Lift Technologies v. Howard here.

Follow me on Twitter @RussellCawyer.

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