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.