For the third time in a year, the Supreme Court ruled that the Federal Arbitration Act (FAA) preempts state laws barring arbitration clause enforcement. The Court unanimously overturned an Oklahoma appellate court’s ruling that arbitration clauses in two noncompete employment agreements violated state law. (Nitro-Lift Techs. v. Howard, No. 11-1377 (U.S. Nov. 26, 2012).)
In a per curiam opinion, the Court held the Oklahoma Supreme Court disregarded the FAA when it ruled that the arbitration clauses were void, unenforceable, and against public policy.
Nitro-Lift Technologies (Nitro-Lift) is an Oklahoma company that contracts with oil and gas well operators to provide enhanced production services in several states, including Louisiana and Texas. In 2010, two employees, Eddie Howard and Shane Schneider, quit and began working for a competitor. They had signed noncompete agreements with Nitro-Lift prior to their departure.
The agreements provided that the plaintiffs could not work for any U.S. company that made at least 5 percent of its revenue from nitrogen generation, Nitro-Lift’s main business, for two years. Disputes would be arbitrated in Houston under Louisiana law, which gives more favorable treatment to noncompete agreements than Oklahoma law. Nitro-Lift demanded arbitration in July 2010. In October 2010, the plaintiffs filed a declaratory judgment in Oklahoma state court, requesting the agreements be nullified.
The trial court dismissed the complaint and concluded the arbitration clauses were valid and reasonable. The Oklahoma Supreme Court reversed, holding that the agreements were unenforceable, and that the “existence of an arbitration agreement in an employment contract does not prohibit judicial review of the underlying agreement.” Nitro-Lift petitioned for certiorari, arguing that an arbitrator should decide the contracts’ validity, and cited several prior Court decisions that held the FAA preempts state laws, including Buckeye Check Cashing v. Cardegna and AT&T Mobility v. Concepcion.
Citing Marmet Health Care v. Brown, the Court held that “when state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: the conflicting rule is displaced by the FAA.” In Marmet, the Court vacated a state appellate court ruling that barred arbitration clause enforcement in nursing home contracts where negligence results in personal injury or death, as previously reported in Trial News.
The decision marks the third time in a year the Court has vacated a state appellate court decision that did not enforce an arbitration clause. In KPMG v. Cocchi, a Florida appellate court refused to compel arbitration of investment fraud claims relating to the Bernard Madoff scandal. The action was brought by 19 investors against funds that invested with Madoff and against KPMG, the auditor. The appellate court held that two of the four causes of action—negligent misrepresentation and violation of Florida’s deceptive and unfair trade practices act—were not subject to arbitration. In a per curiam decision, the Court held that when a complaint contains both arbitrable and nonarbitrable claims, a court must compel arbitration even if this results in separate proceedings in different forums.
“The Supreme Court is sending a signal that the law about arbitration that is created is as important for the states to follow as were its constitutional rulings about desegregation,” said John Vail, vice president of the Center for Constitutional Litigation in Washington, D.C. “Not since that era has the Court indulged in this level of suspicion about the motives of state courts.”
Paul Bland, a senior attorney at Public Justice in Washington, D.C., also noted that the Supreme Court is focused on hearing arbitration cases. “A lot of what is driving the Supreme Court’s energy behind arbitration clauses is that it is replacing laws with contracts that companies can write for themselves,” said Bland. “The idea that a number of the justices feel that mandatory arbitration is the single most important area of the law in the entire legal system is remarkable.”