Contributed by Carly Zuba
On November 26, 2012, the U.S. Supreme Court once again endorsed the arbitration of employment-related agreements. The Court held that if a contract contains an arbitration provision and there is a subsequent challenge to the validity of the contract, the arbitrator – not a court – must hear that challenge. In so holding, the Court reaffirmed its earlier precedent that when a contract contains an arbitration provision, the Federal Arbitration Act (“FAA”) trumps state law.
Specifically, the Court vacated an Oklahoma Supreme Court decision that voided the noncompetition provisions in two employment contracts on the grounds that they were against state public policy. Both employment contracts 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.
After the employer served a demand for arbitration on two former employees, claiming that they had violated the noncompetition provisions, the former employees filed a lawsuit in Oklahoma state court seeking a declaration that the noncompetition provisions were void. The trial court dismissed the case, finding that the arbitration provisions were valid and controlling and thus it was an arbitrator’s job to resolve the parties’ dispute. On appeal, the Oklahoma Supreme Court rejected the trial court’s position, stating that “the existence of an arbitration agreement in an employment contract does not prohibit judicial review of the underlying agreement.” Subsequently, the Oklahoma Supreme Court held that the noncompetition provisions were void and unenforceable under state law.
Well, the U.S. Supreme Court did not like this particular move by the state supreme court, holding that the decision ignored the U.S. Supreme Court’s precedent on the FAA. The Court asserted that its string of decisions on the FAA forecloses this type of “judicial hostility towards arbitration.” A pillar of the FAA’s substantive law is that allegations regarding the validity of a contract containing an arbitration provision must be resolved by an arbitrator – not by a federal or state court.
Take-Away for Employers: This U.S. Supreme Court decision cements the fact that when employment contracts contain arbitration provisions, employees cannot evade arbitration by seeking a judicial declaration that the contract is somehow void. Arbitration clauses are alive, well and enforceable, folks – at least for the time being.