Individuals Lose Once Again At The Hands Of Mandatory Arbitration

When two Oklahoma oil field workers left Nitro-Lift Technologies over a wage and hour dispute to work for a competitor, they weren’t expecting a notice from Nitro-Lift challenging their new employment. They learned that their employment contracts contained an agreement not to work for competitors for two years, even though they possessed no secret knowledge about the company or special certification – the types of factors that typically justify non-compete clauses. In fact, non-compete agreements of the type contained in their contracts are explicitly prohibited under Oklahoma law. But an attempt by the Oklahoma Supreme Court to enforce that law has been slapped down by the U.S. Supreme Court, which ruled Monday in a summary decision that the court was not permitted to intervene in the case.

This is because the contract they signed also contained another provision — a mandatory arbitration clause that requires all claims to go before a private arbitrator, rather than before a court of law. Although the state court, interpreting state arbitration law, determined that it had the authority to invalidate the non-compete agreement in spite of the arbitration clause, the U.S. Supreme Court said federal arbitration law applies. And under the Federal Arbitration Act, arbitration clauses rein supreme:

The Oklahoma Supreme Court’s decision disregards this Court’s precedents on the FAA … , which “declare[s] a national policy favoring arbitration” […]

The state court insisted that its “[own] jurisprudence controls this issue” and permits review of a “contract submitted to arbitration where one party assert[s] that the underlying agreement [is] void and unenforceable.” But the Oklahoma Supreme Court must abide by the FAA, which is “the supreme Law of the Land,” and by the opinions of this Court interpreting that law. … Our cases hold that the FAA forecloses precisely this type of “judicial hostility towards arbitration.”

The U.S. Supreme Court’s decision marks the third time in two years that the court has put state judges in their place for seeking to soften the impact of harsh mandatory arbitration agreements. This decision was unanimous, and it is not particularly surprising. As Reuters’ Allison Frankel notes, the ruling “makes clear, once again for everyone who wasn’t listening, that the Federal Arbitration Act enjoys the complete confidence of the U.S. Supreme Court.” What’s more, the state court never decided whether the mandatory arbitration provision was unenforceable, instead holding that it could rule on the non-compete clause regardless. It was this failure to invalidate the arbitration agreement that proved fatal.

But what the Supreme Court calls “judicial hostility towards arbitration” reflects the practice’s unjust impact on individuals going up against corporations in a forum rigged against them. Monday’s ruling and others like it lead to the following perverse scenario:

  • Even though the employees both lived and worked in Oklahoma, their arbitration agreement subjects them to the laws of Louisiana (the state where the company is based).
  • To face the allegations against them, these hourly wage workers must now take off time and travel from Oklahoma to Houston, Texas – the forum selected by the arbitration clause, to argue that their behavior does not violate the agreement under Louisiana law.
  • Even though non-compete clauses of the type employed by Nitro-Lift Technologies were deemed unlawful under Oklahoma law by Oklahoma’s highest court, that ruling is now irrelevant.
  • Instead, this issue will be decided by an arbitrator, whose decisions are not subject to appeal. What’s more, as Public Citizen has pointed out, arbitrators are “not legally accountable for errors they make. Arbitrators are accountable only to the market, and the market for arbitrator services is dominated by ‘repeat players’ – litigants that are likely to hire arbitrators in the future. This creates a subtle incentive to rule in favor of companies that impose mandatory arbitration clauses.” In credit card arbitrations, for example, a Public Citizen study in California found that consumers lost 94 percent of the time.

Unfortunately, this is one of the more minor cases the U.S. Supreme Court will decide this term on access to the courts and corporate accountability — areas in which individuals and consumers have already suffered one loss after another.