SCOTUS confirms deference to arbitration, bench-slaps Oklahoma court

By Alison Frankel
November 27, 2012

Woe unto state jurists who think they know better than the U.S. Supreme Court. And woe unto everyone possessed of the notion that state courts have the power to undo arbitration clauses on public policy grounds.

That’s the message of a summary decision Monday by the U.S. Supreme Court, which overturned the Oklahoma Supreme Court’s 2011 ruling that a non-compete clause in an employment arbitration agreement was unconscionable and therefore unenforceable. Monday’s per curiam ruling marks the third time in the last two years that the U.S. justices have overturned state-court decisions undercutting arbitration agreements.

In the most recent case, a Louisiana oil well servicing company called Nitro-Lift Technologies served two former employees from Oklahoma with a demand for arbitration after they quit and went to work for a Nitro competitor. Nitro asserted that the two had violated a non-compete provision in their employment agreements, and that under those agreements, they were required to submit to arbitration on Nitro’s claims. The former employees, in turn, sued in Oklahoma state court for a declaratory judgment that the non-compete clauses were unenforceable.

The Oklahoma Supreme Court ultimately agreed with the former Nitro employees, ruling that Oklahoma precedent gives the state court jurisdiction over provisions in the arbitration agreement and that the Nitro non-compete clause violates Oklahoma’s public policy. “We hold that the existence of an arbitration agreement in an employment contract does not prohibit judicial review of the underlying agreement,” the state court’s opinion said. “As drafted, we determine that the noncompetition covenants are void and unenforceable.”

That ruling, according to Nitro’s counsel of record, Jay Walters of Fellers, Snider, Blankenship, Bailey & Tippens, was inconsistent with U.S. Supreme Court precedent on the primacy of arbitration under the Federal Arbitration Act. Nitro’s cert petition pointed to the court’s recent summary decisions in KPMG v. Cocchi, in which the justices reversed a Florida state court ruling that investors who lost money in a Ponzi scheme could litigate claims against the auditor; and in Marmet Health Care v. Brown, in which the Supreme Court ruled that the Federal Arbitration Act precludes West Virginia’s bar on arbitration of personal injury and wrongful death claims against nursing homes. The Marmet ruling was particularly helpful to Nitro because West Virginia’s bar on mandatory arbitration for nursing home personal injuries was based on public policy considerations, just like Oklahoma’s prohibition on non-compete employment clauses.

Walters encouraged the court to consider summary reversal of the state Supreme Court’s decision, since, according to Nitro’s cert petition, the Oklahoma ruling was contrary to U.S. Supreme Court precedent not only in the two recent summary decisions but also (and even more emphatically) in AT&T Mobility v. Concepcion andBuckeye Check Cashing v. Cardegna.

The justices obliged, in a ruling that makes clear, once again for everyone who wasn’t listening, that the Federal Arbitration Act enjoys the complete confidence of the U.S. Supreme Court. States do not have the right to impose their own reservations about public policy on legitimate arbitration agreements, according to the court. “The Oklahoma Supreme Court must abide by the FAA, which is ‘the supreme Law of the Land,’ and by the opinions of this court interpreting that law,” the justices wrote.

Nitro counsel Walters said that the Supreme Court’s ruling underlines the justices’ determination to enforce their previous support for mandatory arbitration, even when there’s no circuit split or clear constitutional issue. “It’s an example of the court using its regulatory power,” he said.

Oklahoma solo Micah Knight, who represents the former Nitro employees who must now travel to Houston to arbitrate their former employer’s non-compete claims, said the case demonstrates the need for Congress to amend the Federal Arbitration Act. Her clients, she said, are laborers who had no idea of the rights they were giving up when they signed the Nitro employment agreement. Their home state of Oklahoma, she said, deemed the non-compete clause unconscionable, but the arbitration agreement calls for Louisiana law to apply. Knight is hoping to persuade the arbitrator to nevertheless honor the Oklahoma court’s decision. “I was so totally disgusted” with the Supreme Court’s decision, she said. “I don’t think this is what Congress intended.”

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