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SCOTUS: Federal Arbitration Act (“FAA”) Displaces Outright State Prohibition against Arbitration of a Particular Type of Claim.

November 26
2012

Prior to consideration by the Supreme Court of the United States, the Oklahoma Supreme Court held noncompetition agreements in employment contracts were void and unenforceable under an Oklahoma statute which limits the enforceability of noncompetition agreements. The U.S. Supreme Court rebuked the Oklahoma Supreme Court, stating: “It is a matter of great importance, therefore, that state supreme courts adhere to a correct interpretation of [the Federal Arbitration Act].”

Where a Contract Contains an Arbitration Clause, Attacks on the Validity of a Contract Are Determined by the Arbitrator, Not the Court.

The Court noted the distinction between attacks on the contract compared to attacks on the arbitration clause. The court must determine in the first instance if an attack on the arbitration clause itself is valid; however, an attack on the validity of the contract must be determined by the arbitrator. As the challenge in this case is to the validity of the noncompetition agreement, the issue had to be submitted to the arbitrator to decide.

Where a Contract Subject to the Federal Arbitration Act (“FAA”) Contains Provisions Which May Be Invalid under State Law, the Arbitrator Decides the Validity of the Provision, Not the State Court.

The Supreme Court then addressed the argument that the Oklahoma statute, which specifically addressed covenants not to compete, should govern over the more general federal statute with its national policy in favor of arbitration. The Court again rejected the analysis of the Oklahoma Supreme Court and stated that the rule that “the specific governs the general” is only applicable to laws of equivalent dignity. That is not the case between federal law and state law because of the Supremacy Clause in the Constitution. The Court again lectured the Oklahoma court: “There is no general-specific exception to the Supremacy Clause.” The Court reasoned: “[W]hen state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the [Federal Arbitration Act].” Consequently, it is for the arbitrator, not the court “to decide in the first instance whether the covenants not to compete are valid as a matter of applicable state law.”

Nitro-Lift Technologies, LLC v. Eddie Lee Howard, et al., 586 U.S. _____ (2012).

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