Academic journal article Northwestern University Law Review

A New Strategy for Regulating Arbitration

Academic journal article Northwestern University Law Review

A New Strategy for Regulating Arbitration

Article excerpt

Introduction

In Tishomingo, a small town in southern Oklahoma, Eddie Lee Howard entered into a seemingly unenforceable contract.3 Howard had agreed to work for Nitro-Lift, a company that supplies nitrogen to oil and gas extractors. He also agreed not to work for any competing business for two years after leaving Nitro-Lift.4 This last provision-a standard covenant not to compete-is valid and enforceable in nearly every state.

But not in oklahoma. under oklahoma law,

[a] person who makes an agreement with an employer . . . not to compete with the employer after the employment relationship has been terminated, shall be permitted to engage in the same business as that conducted by the former employer [and] . . . any provision in a contract between an employer and an employee [to the contrary] shall be void and unenforceable.5

Howard put this law to the test. He left Nitro-Lift and immediately went to work for a competing business. He also filed suit in the District court of Johnston county, oklahoma, seeking a declaratory judgment that the covenant not to compete was void and unenforceable. As a matter of law, the noncompete was indeed void. But Howard had a problem: his contract also contained a broad arbitration agreement that required him to submit any dispute to an arbitrator. The Federal Arbitration Act (FAA), along with a mountain of Supreme Court precedent, left no doubt that this provision must be specifically enforced.6 Recognizing this, the trial court dutifully applied federal law and dismissed Howard's claim.7

The Oklahoma Supreme Court, however, had other ideas. It reversed the trial court and declared that "the existence of an arbitration agreement in an employment contract does not prohibit judicial review of the underlying agreement."8 The Oklahoma court must have known that it was clearly disregarding federal law, which unambiguously provides that an arbitration agreement in an employment contract does prohibit judicial review.9 Nevertheless, the Oklahoma Supreme Court issued a judgment in favor of Howard and voided the noncompete. Nitro-Lift appealed.

The U.S. Supreme Court summarily reversed. In a terse per curiam opinion, it admonished the Oklahoma Supreme Court for "disregarding] this Court's precedents on the FAA"10 and "insisting] that its own jurisprudence controlled] this issue."11 It also reminded Oklahoma of what should have been obvious: "[T]he FAA . . . is 'the supreme Law of the Land,'"12 and "once the Court has spoken, it is the duty of other courts to respect that understanding of the governing rule of law."13

The U.S. Supreme Court was correct. Yet the Oklahoma court had its reasons. The problem in Nitro-Lift v. Howard was that arbitration might have led to enforcement of the noncompete-in contravention of (seemingly) mandatory state law. Why? Because Howard's contract provided not only that arbitration would take place outside of Oklahoma (in Houston, Texas) but also, crucially, that the arbitrator would apply Louisiana law. Under Louisiana law, Howard's noncompete would be valid and enforceable.14

The result thus hinged on the forum. An Oklahoma court would disregard the choice of Louisiana law and void the noncompete.15 What is not clear, however, is whether an arbitrator would conduct the same conflict of laws analysis. In fact, the U.S. Supreme Court has all but encouraged arbitrators to ignore the "complexity and uncertainty" of conflict of laws and simply apply the law that the parties chose.16 If an arbitrator were to heed the U.S. Supreme Court's advice, apply Louisiana law, and issue an award upholding the noncompete, then the FAA would leave Oklahoma state courts no choice but to enforce that award, even if it clearly erred in its conflict of law analysis, and even if enforcement would contravene Oklahoma policy.17 Nitro-Lift teaches us what most sophisticated parties already know: contracts can bootstrap their way out of mandatory state law by pairing an arbitration provision with a choice of law clause. …

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