Why Adding an Arbitration Clause to a Non-Compete Agreement Is a Good Idea.

In Nitro-Lift Techs., L.L.C. v. Eddie Lee Howard, et al.the U.S. Supreme Court once again expressed its strong support of the Federal Arbitration Act (FAA), in finding that where an arbitration clause in a non-competition agreement is valid, all other disputes related to the non-compete agreement, including its enforceability, should be decided by an arbitrator rather than the court.

In Nitro-Lift, the dispute arose from an employment contract between Nitro-Lift Technologies, L.L.C., and two of its former employees, which contained a non-compete clause and 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.”

When the two employees went to work for the Nitro-Lift’s competitor, the company served them with a demand for arbitration, claiming that they breached their non-compete agreement.  Instead of arbitrating the dispute, the employees filed a lawsuit in a state court alleging that the non-compete agreement violated the state law and was null and void.  The state court dismissed their case after determining that the arbitration clause in their employment agreement was valid, but the Oklahoma Supreme Court reversed the lower court and declared that the FAA arbitration clause gave way to Oklahoma’s public policy regarding non-compete agreements and, without addressing validity of the arbitration clause, declared the non-compete “void and unenforceable” under the Oklahoma state law.

The U.S. Supreme Court reversed the Oklahoma Supreme Court and held that under the FAA, it is for the arbitrator – and not the state court – to decide whether a covenant not to compete violates the applicable state law.

PRACTICAL IMPLICATIONS:

The Nitro-Lift decision is a significant ruling for employers, many of which have gravitated toward arbitration agreements to reduce their exposure to costly and time-consuming employment litigation.

The employers can now feel confident that placing an arbitration clause in an employment agreement will allow them to avoid often-messy litigation of the non-compete provisions.

For more information, contact Leiza Dolghih.

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