Yesterday the U.S. Supreme Court vacated a decision by the Oklahoma Supreme Court, which held that the “existence of an arbitration agreement in an employment contract does not prohibit judicial review of the underlying agreement.” The Supreme Court disagreed and held that a dispute as to a contract’s enforceability was a question for the arbitrator, not a court.
The case, Nitro-Lift Technologies, L.L.C. (2012), involved two employment contracts that contained binding arbitration provisions. Alleging that two of its former employees had breached the confidentiality and noncompetition agreements they had signed, Nitro-Lift Technologies served a demand for arbitration on them. The employees filed suit in Oklahoma, asking the court to declare the restrictive covenants null and void. On review of the trial court’s dismissal of the case, the Oklahoma Supreme Court held that enforceability of the contracts was an issue for a court to decide, and it further held that the restrictive covenants violated Oklahoma’s public policy.
The Supreme Court was not impressed with the Oklahoma Supreme Court’s treatment of its arbitration precedent. The Court stated:
It is a matter of great importance … that state supreme courts adhere to a correct interpretation of the [Federal Arbitration Act]. Here, the Oklahoma Supreme Court failed to do so. By 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. The decision must be vacated.
The Court further criticized the state court decision:
The Oklahoma Supreme Court acknowledged the cases on which Nitro-Lift relied, as well as their relevant holdings, but chose to discount these controlling decisions. 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 Oklahoma Supreme Court’s decision disregards this Court’s precedents on the FAA.
Rather, “[W]hen parties commit to arbitrate contractual disputes, it is a mainstay of the Act’s substantive law that attacks on the validity of the 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’.”