In the past few years there has been a rash of arbitration decisions coming from the U.S. Supreme Court. The court has decided five cases, and all “have swung strongly in favor of enforcing arbitration clauses in contracts,” Michael Droke, the head of the labor and employment division at Dorsey & Whitney, told SHRM Online.

This has quite an impact on employers, Droke noted. It’s very unusual for the high court to take up the same issue more often than every five or 10 years. “This is like having a glacier melt in two days,” he said.

These decisions have changed the law, particularly in California, where the courts have been hostile to arbitration agreements, he continued. The high court has ruled that the Federal Arbitration Act (FAA) can pre-empt state law and lead to the enforcement of arbitration clauses. These agreements allow the employer to choose the forum and the decision-maker in these often hotly contested cases.

Arbitrating Enforceability of Noncompete Agreements

Many of the cases the Supreme Court decided were not employment cases, but the rulings apply to arbitration clauses in employment contracts. The most recent case was employment related. In Nitro-Lift Technologies v. Howard, No. 11- 1377 (Nov. 26, 2012), the high court overturned a ruling by the Oklahoma Supreme Court permitting judicial review of a noncompete provision despite the contract’s arbitration clause. The Oklahoma Supreme Court held that the noncompete provision was void and unenforceable because it was against Oklahoma’s public policy.

The U.S. Supreme Court reasoned that the FAA applied, and, therefore, under the Supremacy Clause of the U.S. Constitution, the Oklahoma Supreme Court was bound by the FAA and federal law interpreting it. The court reaffirmed “It is a mainstay of the [FAA]’s substantive law 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 … not by a federal or state court.” By finding the noncompete provision unenforceable, the Oklahoma Supreme Court improperly assumed the role of the arbitrator and contravened the FAA.

According to Joe Virene and Jonathan Hyman, attorneys at Texas law firm Looper Reed & McGraw, the Nitro-Lift opinion is “worthy of note because it binds all state and federal courts to FAA arbitration clauses, regardless of whether the contract at issue contains a noncompete provision."

Practical Impact

The real effect of these decisions, culminating in the Nitro-Lift case, is “to tell you that if you want to use arbitration, the chances of it being enforced are much greater than they were five years ago,” Droke said.

And arbitration may have several advantages, depending on the nature of your business and your company culture, he continued.

“Arbitration means that you have things go to a neutral decision-maker who was selected by the parties,” Droke said. The arbitrator is a retired judge or lawyer, and there is no jury. This takes some of the emotion out of the case.

Arbitration is also more confidential than litigation.

In addition, arbitration is less formal than litigation and may be cheaper. For example, sometimes certain aspects of a case, such as discovery, may be worked out at a lower cost than with litigation. For a while, Droke said, arbitration was always seen as being more cost-effective. But now, arbitration follows civil procedure rules and allows broad discovery, including electronic discovery, so it is no longer as much of a money saver.

Arbitration generally proceeds more rapidly than litigation, but not always, Droke cautioned. Cases can sometimes drag on for years.

An arbitrator’s decision is a final decision; parties usually don’t get to appeal. “That is sometimes good and sometimes bad,” Droke said. But “certainty has its own value,” he added.

There are also caveats if you choose to rely on arbitration to settle workplace disputes.

Obtaining injunctive relief in an arbitration proceeding may be difficult, according to Virene and Hyman. For example, if you are seeking an injunction, rather than or in addition to monetary damages, in the case of the breach of a noncompete clause, such relief usually takes much longer to obtain than it would in court, where parties can seek immediate relief via a temporary restraining order. What’s more, arbitrators lack contempt power to enforce the injunctive relief they grant.

Virene and Hyman suggested that employers and other parties who wish to arbitrate noncompete claims draft an exception allowing them to pursue injunctive relief through the courts. Court have held that a failure to include such language deprives a court of jurisdiction to enter injunctive relief, they noted.

In addition, you often get less discovery in an arbitration proceeding than you would in litigation, Droke said. This means, as an advocate, you may go into more hearings with less certainty about what the facts are.

Droke also cautioned that deciding to arbitrate disputes must be a thoughtful process that takes into account your company and your company culture. But, “on balance it is a wise choice for a lot of employers,” he concluded.

Originally published as “Supreme Court Supports Enforcement of Arbitration Clauses” by Joanne Deschenaux in SHRM Online, January, 2013. Copyright 2013, Society for Human Resource Management, Alexandria, VA. Used with permission. All rights reserved.