News & Events

Crossing The Arbitration Rubicon

Arbitration can be a better option than litigating through the courts. Among the perceived advantages, speedier resolution, reduced expense, and confidentiality are most frequently cited. However, arbitration also has notable disadvantages, such as the lack of either a right to appeal or comprehensive rules governing the procedures the arbitrator must follow, and depending on the nature of the matter and the number of parties involved, arbitration can be just as lengthy and costly as litigation. Consequently, a decision to resolve all disputes through arbitration should come only after careful consideration. This is especially true given that a valid agreement to arbitrate is irrevocable, a point reiterated in the past few days by the United States Supreme Court.

On November 26, 2012, the Court vacated a decision of the Oklahoma Supreme Court that bypassed arbitration and declared the noncompetition covenants in two employment contracts with arbitration clauses null and void. Nitro-Lift Technologies, L.L.C. v. Howard, No. 11-1377, 2012 U.S. LEXIS 8897 (Nov. 26, 2012). Nitro-Lift Technologies had entered into employment contracts with two of its employees. In addition to containing confidentiality and noncompetition provisions, the employment contracts specified that any dispute between the employer and employee would be settled by arbitration. When the employees quit and went to work for a competitor, Nitro-Life demanded arbitration, claiming breach of the noncompetition provisions of the employment contracts. The former employees responded by filing suit in state court seeking a determination that the noncompetition provisions were null and void under state law and an injunction against enforcement. The Oklahoma Supreme Court sided with the former employees, ruling that the noncompetition provisions violated state statute. The state court reasoned that, because the validity of the underlying agreements was a matter of state law, it, as opposed to the arbitrator, could make that determination.

The United States Supreme Court, relying on the Federal Arbitration Act (“FAA”), vacated and remanded the decision, holding that only the arbitration provision was subject to court review. Once an arbitration provision is determined to be valid, the validity of the remainder of the contract was a matter for the arbitrator to decide. Even had state law explicitly prohibited the arbitration of the claims raised by Nitro-Lift, the state law would be preempted by the FAA. In other words, like Caesar crossing the Rubicon, if you have validly agreed to arbitrate, the die is cast.

— W. Neal McBrayer