The Supreme Court Blesses Arbitration Clauses in Non-Competes

December 19, 2012

Litigants Can Arbitrate Non-Competes under the Federal Arbitration Act
But is it Always a Good Idea?


By Joe Virene and Jonathan Hyman, Looper Reed & McGraw

Non-competes are governed by different rules from other contracts.  Courts limit non-competes to certain circumstances, such as when an individual has received confidential information, goodwill, or specialized training.  Even in such circumstances, the restrictions on competition must be reasonable.

However, when it comes to determining the applicability of the Federal Arbitration Act, non-competes are treated in the same fashion as any other contract.  In Nitro-Lift Technologies, L.L.C. v. Howard, the United States Supreme Court, overturned a ruling by the Oklahoma Supreme Court permitting judicial review of a non-compete provision despite the contract’s arbitration clause.  The Oklahoma Supreme Court held the non-compete void and unenforceable because it was against Oklahoma’s public policy. 

The United States Supreme Court reasoned the FAA applied and therefore, under the Supremacy Clause of the Constitution, the Oklahoma Supreme Court was bound by the FAA and federal law interpreting the FAA.  The Court reaffirmed “it is a mainstay of the [FAA]’s substantive law that 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…not by a federal or state court.”  By finding the non-compete unenforceable, the Oklahoma Supreme Court improperly assumed the role of the arbitrator and contravened the FAA.

The Nitro-Lift opinion is worthy of note because it binds all state and federal courts to FAA arbitration clauses regardless of whether the contract at issue contains a non-compete provision.  However, arbitrating a non-compete raises unique concerns.

Arbitrating a claim for money damages arising out of a breach of a non-compete may be preferable because (1) arbitration is typically faster and less expensive (though costs are rising) than a trial at the courthouse; and (2) arbitrations are private proceedings.  However, seeking injunctive relief in an arbitration proceeding is a horse of a different color. Obtaining injunctive relief (such as a TRO or TI) in an arbitration proceeding is often problematic.  Injunctive relief typically takes far longer to obtain in arbitration than it would at the courthouse where parties can seek immediate relief in the form of a temporary restraining order and a temporary injunction shortly thereafter.  In addition, arbitrators lack contempt power to enforce the injunctive relief they grant.  Therefore, employers and other parties who wish to arbitrate non-compete claims should draft an exception allowing them to pursue injunctive relief through the courts.  Many courts hold that a failure to include such language will deprive a court of jurisdiction to enter injunctive relief. 

If you have any questions concerning this new case, drafting non-competes or, enforcing or defending non-compete claims, please contact Looper Reed attorneys Joe Virene and Jonathan Hyman.

About Looper Reed & McGraw

Founded in 1985, Looper Reed & McGraw is a full-service, Texas based law firm with more than 120 lawyers practicing in Dallas, Houston and Tyler. Looper Reed & McGraw offers a wide range of legal services including business litigation, corporate transactions, oil & gas, tax planning and litigation, real estate, healthcare, trusts and estates, employment law, family law, intellectual property, and bankruptcy. For more information, visit www.lrmlaw.com.

This Looper Reed & McGraw Alert is issued for informational purposes only and is not intended to be construed or used as general legal advice.

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