A recent opinion from the U.S. Supreme Court shows that arbitration agreements are favored and will be enforced, even over the objection of one of the parties, unless the objecting party can prove a defense to the arbitration clause itself.
In Nitro-Lift Technologies, L.L.C. v Howard, the U.S. Supreme Court took on an issue that often arises when one party objects to being kicked out of a lawsuit and into arbitration. The question is: who gets to decide whether the matter goes forward in court or in arbitration? Sometimes a party opposes arbitration by attacking the arbitration clause itself, and in those cases, it is well-established that the court must determine if there is a valid agreement to arbitrate. If the arbitration agreement was procured through fraud, or if there is some other defense to the enforcement of the arbitration clause itself, the court keep the case rather than ordering it to arbitration. Such findings are relatively few and far between, so in most cases the parties are sent packing out of court and into the arbitration. Other times a party has a defense to the enforcement of the contract as a whole. In this latter situation, the courts will likewise send the matter to arbitration.
Nitro-Lift fell into this latter category. After two employees went to work for a competing business, the employer commenced an arbitration proceeding seeking to (among other things) enforce covenants not to compete contained in the agreements. The former employees filed suit in an Oklahoma state court claiming that the agreements in question were themselves unenforceable. The case made it to Oklahoma’s Supreme Court, which contravened the rules stated above by ignoring the arbitration clauses and ruling the contracts as a whole were unenforceable. The U.S. Supreme Court reversed, once again affirming the general rule that attacks on the validity of the contract, as opposed to attacks on the validity of the arbitration clause itself, should be presented to and decided by the arbitrator and not the courts.
Employers often include arbitration agreements in employment contracts, and when disputes arise employees often seek to avoid arbitration thinking they will fare better in a state court. These efforts fail more often than not, and even routine disputes over the enforceability of arbitration clauses can result in delay and greater expense. Employees should therefore object at the time of negotiating the terms of employment if they do not wish to arbitrate. The employer may insist, which puts the employee to the choice of agreeing to arbitrate or not taking the job. It’s all a matter of negotiating leverage, and in today’s economy that favors the employers. But if you don’t object up front, you probably won’t get out of the agreement later.