Earlier this week the U.S. Supreme Court decided Nitro-Lift Technologies, L.L.C. v. Eddie Lee Howard et al. in a per curiam opinion. In the opinion the court resoundingly denied the Oklahoma Supreme Court’s attempt to dispense justice to its citizens and enforce Oklahoma law that explicitly prohibits particular types of non-compete clauses in employment contracts. Instead, the Court found Oklahoma’s law was preempted by the Federal Arbitration Act (“FAA”).
You might be wondering, how does the FAA pre-empt a state law on non-compete clauses in employment contracts? These two are widely different areas of contract law. Well, the problem is that the contract, invalid under state law because it contained the prohibited form of non-compete clause, also contained an arbitration clause. The Oklahoma Supreme Court said the underlying contract itself was invalid – case closed. Under the U.S. Supreme Court’s view the two parties must instead go to arbitration, to decide if the underlying contract is valid.
So wait, if the underlying contract is invalid under state law, then how can a court, or any body for that matter, enforce the other provisions – such as the arbitration provision? Good question. The U.S. Supreme Court made clear that: “Where a specific state statute conflicts with a general federal statute[,]” the latter governs.” Nitro-Lift Technologies, L.L.C. v. Howard, 568 U.S. __, 5 (2012). Here we have Supremacy Clause jurisprudence.
Let me give you a little more factual background. Two former Nitro-Lift employees left the company to work for a competitor. Nitro-Lift filed for arbitration, claiming these employees violated the non-compete clause of their contract. The employees filed suit in Federal District Court in Oklahoma, asking the court to declare that the noncompetition clauses violated Oklahoma state law. The court ruled in favor of Nitro-Lift, holding that the arbitration clause was valid and therefore the contract’s overall validity must be determined by the arbitrator. The employees appealed to the Oklahoma Supreme Court, which found that the contract itself, including the arbitration clause, is unenforceable because it violated Oklahoma state law. Of course we know what happened next, the U.S. Supreme Court over turned the Oklahoma Supreme Court’s decision and held that because the arbitration clause was valid, the validity of the contract as a whole must be determined by the arbitrator – not by a judicial court. So if you have a valid arbitration clause on an invalid contract, you still can’t go to court. Only the arbitrator can say the contract is invalid.
This leads to a perverse outcome. Even though Oklahoma state law clearly states that the type of non-compete clauses contained in the employees’ contracts are unlawful, now the employees must travel to Houston Texas, the forum imposed by the arbitration clause, to argue to the arbitrators about Louisiana law (the controlling law selected by the contract). This is a good time to remind you that arbitrator decisions are not reviewed by a court, are not subject to appeal and are not legally accountable for errors. In fact, if arbitrators want to keep their jobs the only person they need to keep happy is the one paying the bills – the company.
When the FAA was enacted in February 12, 1925 (YES, almost 100 years ago) the world was a very different place. Back in the day arbitration was a “gentlemanly” alternative for businesses to resolve disputes. Parties that agreed to arbitration clauses were doing so knowingly, indeed businesses viewed arbitration as a less expensive and quicker alternative than the court system. It was these businesses that initially pushed to allow arbitration as an alternative to judicial resolution, since the early American judiciary was intensely hostile toward arbitration in general and refused to enforce arbitration awards. While there is little legislative history from the FAA’s passage, history suggests that it was intended to settle business disputes between parties of equal bargaining power.
Today, it is something much different. The U.S. Supreme Court, beginning in the 1980s, has slowly expanded the FAA’s reach to its current state. Now, powerful corporation can force individuals into a expensive forum that is pre-rigged against them. This most recent decision, Nitro-Lift Technologies, now expands the FAA’s scope to pre-empt specific state laws that declare certain types of contract clauses unlawful. This case makes one thing crystal clear to me, the FAA has been expanded by the U.S. Supreme Court such that it is now a monster much larger than Congress ever intended. It is time we start the discussion: the Federal Arbitration Act must be repealed or, at the least, amended.