Tuesday, December 18, 2012

Arbitrating the Noncompete Case: The Supreme Court Speaks

The Supreme Court recently ruled that arbitration agreements in non-compete clauses are matters of federal law under the Federal Arbitration Act, notwithstanding the relatively transparent efforts by a state supreme court to deprive federal courts of jurisdiction.

The case arose out of the typical non-compete situation. Two former employees of Nitrolift, having previously signed an agreement with provisions containing confidentiality, noncompetition, and arbitration requirements, went to work for a competitor of Nitrolift. The former employer demanded arbitration in consonance with the terms of the non-compete provision, and the former employees filed suit in state court, asking the court to declare the non-competition agreements invalid. When the state trial court found the contracts arbitration clauses were valid and that an arbitrator was the proper fact finder to resolve the dispute, the former employees appealed to the Oklahoma Supreme Court. That court determined first that it had jurisdiction over the Federal Arbitration Act issue because there was a state statute in effect regarding covenants not to compete. The Oklahoma justices then found adequate and independent state grounds to justify assertion of jurisdiction.

Of course, these two initial findings by the Oklahoma court were simply an attempt to dodge the fact that it has no jurisdiction over these claims because it is a state court. And the U.S. Supreme Court stepped directly into that discussion by noting that the state court could only get jurisdiction by rejecting the federal act requirement that arbitrators should decide a contract's validity. In other words, there was a federal law basis present in the initial court decision, and the Oklahoma Supreme Court could not get around that federal basis.

So the U.S. Supreme Court gets the case, voids the Oklahoma determination, and then finds that the Federal Arbitration Act specifically holds that attacks on the validity of a contract, which are distinct from attacks on the validity of the arbitration clause, are to be resolved by the arbitrator and not a court.

While this was ultimately a win for the employer, and for proponents of arbitration, the lesson here is that non-compete, arbitration and non-confidentiality agreements should not be included in one  employment contract. State law varies dramatically on the enforceability of all three of these types of agreements and the confusion that was generated here (and the basis for state court mistakenly asserting jurisdiction) could have been avoided with better drafting. In other words, at a minimum, consider writing out separate employment contracts for confidentiality, non-compete provisions, and arbitration, especially if you are engaged in multistate operations.

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