U.S. Supreme Court Rules That Arbitrators, Rather Than Courts, Determine The Enforceability Of Non-Compete Covenants In Arbitrable Agreements

Because non-compete agreements are governed by state law, it is rare that the U.S. Supreme Court issues a ruling affecting such contracts. This week’s decision in Nitro-Lift Technologies, L.L.C. v. Howard, 568 U.S. __ (2012)(decided Nov. 26, 2012), however, announces a rule of which non-compete disputants and their counsel nationwide must necessarily take notice.

The Court held that when a non-compete agreement contains an arbitration clause that is subject to the Federal Arbitration Act (FAA), 9 U.S.C. §1 et seq., “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.” Id. (citing Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 445-6 (2006)).  In so holding, the Court vacated an Oklahoma Supreme Court decision that declared the non-compete agreements to be against Oklahoma public policy and thus void and unenforceable.

The Court based its decision on the FAA’s “national policy favoring arbitration” and on the established rule of law that “when parties commit to arbitrate contractual disputes, . . . attacks on the validity of the contract, as distinct from attacks on the validity of the arbitration clause itself, are to be resolved ‘by the arbitrator in the first instance, not by a federal or state court.’” Id. (quoting Preston v. Ferrer, 552 U.S. 346,349(2008)).  The Court also cited the supremacy clause from the US. Constitution, Article VI, cl. 2.

BURR POINTThis decision goes in the “win” column for employers everywhere (except those who hire employees with non-competes), because it removes the ability of an employee to obtain relief in the court system when an employer seeks to avail itself of an arbitration clause in connection with the enforcement of a non-compete covenant.  The ruling makes a definite difference in jurisdictions in which the governing law often results in Courts voiding or modifying non-compete agreements for overbreadth.  Arbitrators have much more latitude than trial courts in how they apply the law (and arbitrator’s decisions are extremely difficult to get overturned) and are thus much less likely to void a non-compete covenant that was agreed upon by the parties.