United States: Supreme Court Decision Alert - November 26, 2012

Keywords: Federal Arbitration Act, FAA, pre-emption, state law

On November 26, 2012 the Supreme Court issued one decision, described below, of interest to the business community.

Federal Arbitration Act—Preemption of State Law

Nitro-Lift Technologies, L.L.C. v. Howard – No. 11-1377

For the third time in two Terms, the U.S. Supreme Court has summarily reversed a state-court decision that disregarded its precedents construing the Federal Arbitration Act ("FAA"). It is settled law that the FAA is applicable in both state and federal courts, and that under the FAA, an arbitration provision is "severable" from the remainder of the contract containing it. Thus, the U.S. Supreme Court has repeatedly held that "unless the challenge is to the arbitration clause itself, the issue of the contract's validity is considered by the arbitrator in the first instance." E.g., Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 445-446 (2006).

Despite the U.S. Supreme Court's clear instruction, the Oklahoma Supreme Court held that the "existence of an arbitration agreement in an employment contract does not prohibit judicial review of the underlying agreement." The court therefore deemed itself free to apply an Oklahoma statute limiting the enforceability of noncompetition agreements and, on that basis, invalidated the entire employment contract—including its arbitration provision—as void under Oklahoma public policy.

On November 26, 2012, in Nitro-Lift Technologies, L.L.C. v. Howard, No. 11-1377, the U.S. Supreme Court reversed the Oklahoma court in a unanimous per curiam opinion. The Court held that the decision below "ignored a basic tenet of the [FAA's] substantive arbitration law"—namely, 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 in the first instance, not by a federal or state court.'" Slip op. 1, 4.

The per curiam opinion pointedly observed that the state court had "acknowledged" the Supreme Court's prior cases setting forth the FAA's severability principle, "but nonetheless chose to discount these controlling decisions." Slip op. 3. The Court held that this disregard of its precedents was forbidden by the Supremacy Clause. As the Court reaffirmed, "state courts must abide by the FAA," as well as "the opinions of this Court interpreting that law." Id. at 5. It is especially important in the arbitration context that state courts faithfully implement the controlling, "correct interpretation" of federal law because, the Court explained, "State courts rather than federal courts are most frequently called upon to apply the FAA," including its "national policy favoring arbitration." Id. at 1.

Because there was no dispute that the employment contract at issue here contained a valid arbitration provision, the U.S. Supreme Court's FAA jurisprudence required the arbitrator, not the Oklahoma court, to determine the validity of the rest of the contract. Slip op. 4. To the extent that the Oklahoma court interpreted the state statute specifically limiting the enforceability of noncompetition agreements to invalidate the arbitration agreement contained in the employment contract, that holding conflicted with, and therefore was preempted by, the FAA. Id. at 5.

November 26, 2012's summary reversal—which follows on the heels of summary reversals in Marmet Health Care Center, Inc. v. Brown, 132 S. Ct. 1201 (2012) (in which Mayer Brown represented one of the petitioners), and KPMG LLP v. Cocchi, 132 S. Ct. 23 (2011)—signals that the Court will not tolerate defiance of its FAA precedents by state courts. The Court's decision is a powerful reminder that federal law favors arbitration; that under federal law, the validity of the remainder of a contract containing a valid arbitration provision is for the arbitrator to decide; and that this rule applies in both state and federal courts.

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