Another slap down of a state court for not honoring arbitration clauses
28 November 2012
National Law Journal
Outside Oklahoma, an unsigned five-page opinion released by the U.S. Supreme Court on November 26 drew little general attention.
But in the field of arbitration law, the decision in Nitro-Lift Technologies v. Howard represented a significant next step in a high court trend: slapping down state courts that get in the way of the Supreme Court's embrace of arbitration agreements in a broad range of transactions.
Twice before in the last year, the Supreme Court issued similar per curiam opinions—written without full briefing on the merits or oral argument—rejecting state court determinations in arbitration cases. The other decisions were Marmet Health Care Center v. Brown, involving arbitration of claims against nursing homes, and KPMG v. Cocchi, an arbitration dispute stemming from the Bernard Madoff scandal.
Monday's per curiam decision struck down an Oklahoma Supreme Court ruling that, in effect, placed state law ahead of the Federal Arbitration Act. Nitro-Lift, an oil industry services company, demanded to go into arbitration when two former employees went to work for competitors. The company invoked an arbitration clause in their employment contract, which also barred working for competitors. The employees instead filed suit in state court under state law, which limits enforcement of noncompete clauses. The Oklahoma high court nullified the noncompetition agreement as contrary to state public policy.
Supreme Court precedent enforcing arbitration clauses did not "inhibit our review of the underlying contract's validity," the Oklahoma court stated.
But the U.S. Supreme Court, invoking the U.S. Constitution, said, "The Oklahoma Supreme Court must abide by the FAA, which is 'the supreme law of the land'…and by the opinions of this court interpreting that law." The justices added, "Our cases hold that the FAA forecloses precisely this type of 'judicial hostility towards arbitration.'"
Echoing language from the two earlier per curiams, the court also asserted, "State courts rather than federal courts are most frequently called upon to apply the Federal Arbitration Act, 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. Here, the Oklahoma Supreme Court failed to do so."
The string of unsigned Supreme Court opinions striking down state court rulings on arbitration is a troubling trend, said John Vail, senior counsel at the pro-plaintiff Center for Constitutional Litigation. "The justices say the Supreme Court is not a court for correcting errors, but that is what these decisions are. It is not really the court's role, and its resources are better devoted elsewhere."
Deepak Gupta of the Gupta Beck firm in D.C. agrees. "Arbitration is turning out to be one of those issues where, like habeas cases from the Ninth Circuit, or capital cases from the Texas Court of Criminal Appeals, the Supreme Court is trying to send a message that 'we really mean it. We have you on our radar.' "
The trend, says Gupta, fits into a larger picture of the Supreme Court, on its own, strengthening the Federal Arbitration Act as companies try to divert a broad array of disputes into arbitration. "The court is telling state courts that, when it comes to arbitration, no case is too small to notice." Two years ago, Gupta argued on behalf of consumers in a major Supreme Court arbitration case, AT&T v. Concepcion.
But Andrew Pincus of Mayer Brown, who argued in favor of arbitration in the AT&T case, said the string of per curiam decisions was justified. "The cases in which the Court has acted summarily are limited to situations in which state courts have ignored or failed to apply clearly controlling Supreme Court precedent and/or exhibited active hostility to the Court's decisions," said Pincus. "The fact that these summary reversals have all been unanimous—when plenary review cases involving arbitration issues often are not—confirms that the Court's summary intervention has been limited to such egregious situations."
Pincus also said the court's actions don't represent improper "error correction," asserting that "all of them involved rulings on important legal issues that, in the absence of Supreme Court intervention, would have controlled subsequent cases in those states.…The FAA was enacted for the specific purpose of combating the very sort of judicial hostility that is reflected in these decisions."
On its Class Defense blog, Mayer Brown highlighted the Supreme Court's latest decision in the Oklahoma case and urged business defendants to "raise and preserve arguments under the FAA" when arbitration clauses are challenged in state courts. "Hopefully," the blog item stated, "state courts will honor the Supreme Court's precedents, but if they fail to do so, the U.S. Supreme Court has shown a willingness to push back when state courts engage in blatant disregard of federal law."
Reprinted with permission from the November 28, 2012 edition of The National Law Journal © 2012 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.