Written By: Roger Brothers, Esq.
Buchman Provine Brothers Smith LLP
San Francisco, California
On November 26, 2012, the United States Supreme Court reaffirmed the breadth and enforceability of mandatory arbitration clauses under federal law. In Nitro-Lift Technologies, LLC v. Howard, 133 S. Ct. 500 (2012) (“Nitro-Lift“), the Supreme Court held that under the Federal Arbitration Act (“FAA”), any “attack on the validity of the contract, as distinct from attacks on the validity of the arbitration clause itself, are to be resolved by the arbitrator in the first instance, not by a federal or state court.” The Supreme Court thereby reaffirmed FAA policy requiring all disputes arising under contracts that have enforceable arbitration clauses to be submitted to arbitration.
The dispute in Nitro-Lift arose when two employees of Nitro-Lift Technologies left the company and began working for a competitor. Nitro-Lift Technologies claimed that this was a violation of the former employees’ confidentiality and noncompetition contracts, both of which contained an arbitration clause. Nitro-Lift Technologies demanded that the former employees arbitrate the dispute in accordance with the arbitration clause in the contract.
The employees wanted to avoid arbitration, and filed suit in Oklahoma state court. The employees sought a declaration from the Court that that the contractual noncompetition agreements were null and void under Oklahoma law as a matter of public policy. The employees were attempting to avoid arbitration by arguing in state Court that the contracts were unenforceable.
The trial court ruled against the employees, and held that the contracts each contained valid arbitration provisions, which meant that the dispute must be arbitrated and dismissed from state court.
The trial court’s decision was reversed by the Oklahoma Supreme Court, which held that a state court was permitted to review the enforceability of a contract, even if the contract contains a mandatory arbitration clause. The Oklahoma Supreme Court explained that because Oklahoma state law prohibits non-competition provisions in contracts, the state’s interest in hearing challenges to the enforceability of the contracts was sufficient to outweigh the force of the arbitration provision in the agreements.
The United States Supreme Court disagreed, and in a per curiam decision held that the existence of an arbitration clause in a contract requires that the entire dispute, including any challenges to the enforceability of the contract itself, be arbitrated. The Supreme Court explained that “…when parties commit to arbitrate contractual disputes, it is a mainstay of the [FAA's] substantive law that attacks on the validity of the contract, as distinct from attacks on the validity of the arbitration clause itself, are to be resolved ‘by the arbitrator in the first instance, not by a federal or state court.’”
The Supreme Court’s holding in Nitro-Lift reaffirms that while a party may attack the validity of an arbitration clause in state court, any issues which relate to the enforceability or interpretation of the underlying contract itself must be arbitrated. When a contract contains an enforceable arbitration clause, the arbitrator alone has the jurisdiction to address the enforceability of the underlying contract.
Nitro-Lift is good news for any employer who includes arbitration clauses in its contracts, as the decision provides greater assurance that properly drafted arbitration clauses will be enforced. The Supreme Court’s opinion in Nitro-Lift also demonstrates the importance of ensuring that arbitration clauses are drafted carefully, and in compliance with Federal and state law. A properly drafted arbitration clause can limit the ability of adverse parties to avoid arbitration, and attack the merits of the contract in court. By reducing the likelihood of such a collateral attack, employers may be able to significantly reduce the cost and risk of a jury trial and streamline the resolution process via arbitration.