U.S. Supreme Court: Arbitrator Must Decide on Validity of Noncompete Agreement

WASHINGTON, D.C. - (Mealey's) The Oklahoma Supreme Court failed to properly apply a basic tenet of the Federal Arbitration Act (FAA) when it declared the noncompete agreement in two employment contracts null and void rather than leaving the determination up to an arbitrator, the U.S. Supreme Court ruled Nov. 26 in a per curiam opinion (Nitro-Lift Technologies, L.L.C. v. Eddie Lee Howard, et al., No. 11-1377, U.S. Sup.).

"The trial court found that the contract contained a valid arbitration clause, and the Oklahoma Supreme Court did not hold otherwise.  It nonetheless assumed the arbitrator's role by declaring the noncompetition agreements null and void.  The state court insisted that its '[own] jurisprudence controls this issue' and permits review of a 'contract submitted to arbitration where one party assert[s] that the underlying agreement [is] void and unenforceable.'  . . .  But the Oklahoma Supreme Court must abide by the FAA, which is 'the supreme Law of the Land,' U.S. Const. Art. VI, cl. 2, and by the opinions of this Court interpreting that law.  . . .  The state court reasoned that Oklahoma's statute 'addressing the validity of covenants not to compete, must govern over the more general statute favoring arbitration.'  . . .  But the ancient interpretive principle that the specific governs the general (generalia specialibus non derogant) applies only to conflict between laws of equivalent dignity.  Where a specific statute, for example, conflicts with a general constitutional provision, the latter governs.  And the same is true where a specific state statute conflicts with a general federal statute.  There is no general-specific exception to the Supremacy Clause, U.S. Const. Art. VI, cl. 2.  . . .  Hence, it is for the arbitrator to decide in the first instance whether the covenants not to compete are valid as a matter of applicable state law," the high court wrote.

Working For A Competitor

The case arose from a dispute between Nitro-Lift Technologies LLC and two of its former employees.  Nitro-Lift contracts with operators of oil and gas wells to provide services that enhance production.  Two of Nitro-Lift's employees who had signed a confidentiality and noncompetition agreement with Nitro-Lift, Eddie Howard and Shane Schneider, quit and began working for one of Nitro-Lift's competitors.  

Nitro-Lift served Howard and Schneider with a demand for arbitration, claiming that they had breached their noncompetition agreements.  Howard and Schneider then filed suit in the Johnston, County, Okla., District Court asking the court to declare the noncompetition agreements null and void and to enjoin their enforcement.  The District Court dismissed the complaint after determining that the contracts contained valid arbitration clauses under which an arbitrator, and not the court, must settle the parties' disagreement. 

Howard and Schneider appealed.  The Oklahoma Supreme Court ruled in favor of the employees, and Nitro-Lift petitioned the U.S. Supreme Court.

Jay P. Walters of Fellers, Snider, Blankenship, Bailey & Tippens in Oklahoma City represents Nitro-Lift.  Micah D. Knight of Durant, Okla., represents Howard and Schneider.

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