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Supreme Court ruling in Oklahoma case encourages use of arbitration clauses

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Supreme Court ruling in Oklahoma case encourages use of arbitration clauses

The U.S. Supreme Court's ruling last week in an Oklahoma case may encourage employers to add arbitration clauses to their noncompete agreements, attorneys say.

Furthermore, the ruling in Nitro-Lift Technologies L.L.C. v. Eddie Lee Howard is expected to be helpful in enforcing such clauses nationally, legal observers say.

The U.S. high court's unanimous ruling that overturned the Oklahoma Supreme Court's invalidation of the noncompete agreement involved two former employers of the Lafayette, La.-based firm, which contracts with oil and gas well operators for production-enhancing services.

Mr. Howard and Shane D. Schneider entered into a confidentiality and noncompete agreement with Nitro-Lift that contained an arbitration clause. They subsequently left Nitro-Lift and began working for a competitor, and Nitro-Lift served them with a demand for arbitration.

Messrs. Howard and Schneider filed suit in state court in Oklahoma, asking the court to declare their noncompete agreements invalid. The state court dismissed the complaint, but the Oklahoma Supreme Court held in 2011 that the noncompete agreements were “void and unenforceable as against Oklahoma's public policy,” according to court records.

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“The Oklahoma Supreme Court declared that its decision rests on adequate and independent state grounds,” the U.S. Supreme Court said in its ruling, which affirmed its stance that federal law prevails on the issue. “The Oklahoma Supreme Court's decision disregards this court's precedents on the” Federal Arbitration Act, the high court ruled.

“Attacks on the validity of the contract, as distinct from attacks on the validity of the arbitration clause itself” should be resolved by the arbitrator, the U.S. Supreme Court said in remanding the case to the Oklahoma Supreme Court.

Michael A. Warner Jr., a partner with law firm Franczek Radelet P.C. in Chicago, said the ruling will be particularly helpful in states — most notably California — that may be less favorably inclined to enforce noncompete agreements.

Henry D. Lederman, a shareholder with Littler Mendelson P.C. in Walnut Creek, Calif., said that as a result of this ruling, “if someone attacks the agreement in which the clause is contained ... then the employer certainly can rely on its right to insist that the arbitrator decide the contract validity issue rather than the court.”

However, Kenneth J. Vanko, a member of Clingen Callow & McLean L.L.C. in Wheaton, Ill., said the Supreme Court ruling does leave open the possibility of litigation if there is a problem with the arbitration clause itself, such as if the employee did not consent to it.