Nitro-Lift Technologies, L. L. C. v. Howard

Background

A company that provides services to oil and gas wells (Nitro‑Lift) had confidentiality and noncompetition agreements with two former employees who later went to work for a competitor. Nitro‑Lift demanded arbitration under written arbitration clauses in those employment contracts. The employees sued in an Oklahoma county court asking a judge to declare the noncompetition clauses void. The trial court sent the dispute to arbitration, but the Oklahoma Supreme Court reviewed the contracts, applied a state statute limiting noncompetition agreements, and declared those clauses void and unenforceable.

Reasoning

The central question was who should decide whether the noncompetition clauses are valid: an arbitrator or the state courts. The United States Supreme Court explained that the Federal Arbitration Act establishes a national policy favoring arbitration and that questions about the validity of the broader contract (not the arbitration clause itself) are for the arbitrator to decide first if the arbitration clause is valid. The Court found that the Oklahoma court had ignored binding federal precedent and could not rely on state law as an independent ground when that state-law ruling rejected established federal arbitration rules. The Supreme Court therefore vacated the Oklahoma decision and sent the case back for further proceedings consistent with federal arbitration law.

Real world impact

Employers and employees who signed arbitration agreements can expect arbitrators, not state judges, to address whether the rest of a contract (including noncompetition clauses) is valid in the first instance. The ruling removes a state-court shortcut that had let judges invalidate such clauses before arbitration, and returns the parties to the arbitration process for resolution.