In a terse per curium opinion issued today in Nitro-Lift Technologies v. Howard, the U.S. Supreme Court sent a very clear reminder to lower courts, and especially state courts, that once arbitration agreements are found enforceable, arbitrators, and not judges, are to decide everything else in the case involving interpretation of an arbitration agreement. In so holding the Court reasserted that the Federal Arbitration Act ("FAA") and any Court opinions interpreting that law preempt any conflicting state law rules that disfavor private arbitration, including in the employment context.
The Rub: Who Gets To Decide Legal Issues?
The case involved two employees who left Nitro-Lift, an oil company, to work for a competitor. Nitro-Lift invoked arbitration pursuant to an arbitration clause in the employees' employment contract, because it believed the employees had violated a noncompete agreement. The employees filed a lawsuit asking the trial court to declare the noncompete agreement invalid under Oklahoma law. The trial court dismissed the employees' case and referred the case to arbitration. On appeal, the Oklahoma Supreme Court agreed with the trial court that the arbitration agreement was enforceable, but then went on to find that the company's noncompete provision in the agreement was invalid under Oklahoma law. The Oklahoma Supreme Court specifically held that the arbitration agreement did not preclude it from deciding questions of state law, including interpreting the Oklahoma state statute that it believed invalidated the noncompete agreement.
The narrow question before the U.S. Supreme Court was about who gets to decide legal issues related to the underlying contract claims in the dispute, after it has already been determined that the case belongs in private arbitration per a valid arbitration clause in that agreement. Specifically, the issue was whether the judge, as opposed to the arbitrator, can can rule on the merits of the noncompete claim, including whether the noncompete provision in the agreement at issue was enforceable under state law. The Court answered that question with a very solid "no"--once a judge finds that an arbitration agreement is enforceable and refers the case to arbitration, under the FAA the arbitrator, and not the court, will decide all other legal issues related to interpretation of the agreement, including legal interpretations of state contract law.
In its brief opinion, the Court appeared to go out of its way to slap the Oklahoma Supreme Court on the wrist, and thereby send a message to all courts (but state courts in particular), admonishing them to pay attention to its cases interpreting procedural aspects of arbitration under the FAA. For example, in the opening sentences of the opinion the Court specifically noted that:
"State courts rather than federal courts are most frequently called upon to apply the [FAA], including the Act’s national policy favoring arbitration. It is a matter of great importance, therefore, that state supreme courts adhere to a correct interpretation of the legislation."
The Court went on to state that the FAA is the "supreme law of the land," and that state courts need to follow it. In this regard, Nitro-Lift is the latest in a series of U.S. Supreme Court cases rejecting attempts by state courts to use state law to limit the FAA. Its last major case was the 2011 case AT&T Mobility v. Concepcion, which held that California state laws specifically limiting the enforceability of arbitration agreements were invalid and preempted by the FAA. Nitro-Lift probably illustrates the Court's apparent impatience with the continued efforts of state courts to limit arbitration under the FAA. That impatience is probably highlighted by the fact that Nitro-Lift is a rare "per curiam" opinion (Latin for "by the court") issued by the Court as a whole and not attributed to particular justices like most opinions. Per curiam opinions are usually only for those rare situations where the Court actually accepts certiorari but then decides the issue without requesting oral argument or additional briefing from the parties. Essentially, a "duh!" from the U.S. Supreme Court.
What It All Means: So, Do You Want To Arbitrate Or Not?
Because it focuses exclusively on issues of litigation procedure and jurisdiction, the case is probably of more interest to employers' lawyers than to employers. It provides no guidance to employers on how to draft an enforceable arbitration agreement (or, for that matter, an enforceable noncompete agreement.) We have already blogged about the enforceability of arbitration agreements and related legal developments, such as the potential conflict between the FAA and federal labor law, and won't repeat those discussions here.
If anything, the Nitro-Lift case probably illustrates the importance of thinking through the fundamental question of whether you want to be in arbitration in the first place. For example, sometimes employers may wish to arbitrate claims to (hopefully) lower overall litigation costs and avoid the uncertainty of jury trials, but may also wish to have judges decide some threshold legal issues (judges are sometimes perceived, rightly or wrongly, to be better qualified than private arbitrators to decide complex legal questions). Nitro-Lift makes clear that probably won't happen, and that employers won't be able to have their cake and eat it too: if you decide to arbitrate, you will probably have to live with whatever the arbitrator decides with respect to interpretations of the agreement. That is particularly important considering that there is often a very limited, if any, right to appeal an arbitrator's findings.
At the very least today's decision serves as yet another reminder that the U.S. Supreme Court thinks that employer arbitration agreements under the FAA are generally a good thing, and that lower courts, especially state courts, need to enforce them where appropriate.