In a per curiam opinion issued yesterday in Nitro-Lift Technologies, L.L.C. v. Howard, the United States Supreme Court reversed a decision of the Oklahoma Supreme Court that had determined the enforceability of a non-compete agreement arising out of a contract that contained an arbitration provision. Despite the fact that the restraint at issue was found to violate Oklahoma law, the US Supreme Court determined that the Oklahoma Supreme Court overstepped its bounds and that under the Federal Arbitration Act enforceability of the non-compete should have been left to the Arbitrator.
The dispute arose from a contract between Nitro-Lift Technologies, L.L.C., and two of its former employees. Nitro-Lift contracts with operators of oil and gas wells to provide services that enhance production. The employees Eddie Lee Howard and Shane D. Schneider entered a confidentiality and noncompetition agreement with Nitro-Lift that contained the following arbitration clause: ” Any dispute, difference or unresolved question between Nitro-Lift and the Employee (collectively the “Disputing Parties”) shall be settled by arbitration by a single arbitrator mutually agreeable to the Disputing Parties in an arbitration proceeding conducted in Houston, Texas in accordance with the rules existing at the date hereof of the American Arbitration Association.”
The Supreme Court noted that state courts rather than federal courts are most frequently called upon to apply the Federal Arbitration Act (FAA), 9 U. S. C. §1 et seq., including the Act’s national policy favoring arbitration. It is a matter of great importance, therefore, that state supreme courts adhere to a correct interpretation of the legislation. Here, the Oklahoma Supreme Court failed to do so. By declaring the noncompetition agreements in two employment contracts null and void, rather than leaving that determination to the arbitrator in the first instance, the state court ignored a basic tenet of the Act’s substantive arbitration law and accordingly, the Supreme Court vacated the decision.
The lesson here is before going to state court to determine enforceability of any non-compete provision, make sure the agreement at issue doesn’t contain a broad arbitration provision. If it does, you may be better off arguing the applicability of the state law to the arbitrator rather than the Court.