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U.S. Supreme Court Reaffirms Arbitrators are Empowered to Determine Enforceability of Non-Compete Provisions

by Scott C Matasar

Nearly all registered representatives’ contracts with their broker/dealers require them to resolve disputes in arbitration—which are mandatorily arbitrable under FINRA Rules in any event.  And, many reps’ contracts also contain non-competition provisions of varying forms.  On November 26th, the U.S. Supreme Court issued a decision reaffirming that the arbitrators assigned to hear such disputes shall determine the validity and enforceability of such non-competition provisions, and that courts cannot interfere and usurp the arbitrator’s authority on this issue.

Nitro-Lift Technologies v. Howard, US SCT Case No. 11-1377, involved a dispute between Oklahoma corporation Nitro-Lift and two of its former employees over the employees’ alleged breaches of confidentiality and non-competition provisions in their employment contracts.  Those contracts required any disputes between the company and its employees to be decided in arbitration, and  Nitro-Lift accordingly filed an arbitration proceeding.  The former employees responded by filing an Oklahoma state court action arguing that the judge void their noncompetition agreements for being in violation of Oklahoma law.

The Oklahoma state court dismissed the former employees’ lawsuit,  finding that because the contracts contained valid arbitration provisions it was for the arbitrator to determine the validity and applicability of the parties’ noncompetition agreement.   However, when the employees appealed, the Oklahoma Supreme Court reversed, finding that the Oklahoma statute that limits the enforceability of noncompetition agreements took precedence over the Federal Arbitration Act, and that therefore courts are free to engage in judicial review of the validity of provisions in employment agreements notwithstanding the presence of a mandatory arbitration provision in the contract.

In reversing, the U.S. Supreme Court’s opinion strongly rebuked the decision of the Oklahoma Supreme Court and forcefully reaffirmed that where employment contracts contain mandatory arbitration provisions, it is the arbitrator—not a court—who has the authority to decide the validity of the parties’ contract.  As such, the U.S. Supreme Court determined that the Oklahoma Supreme Court had improperly usurped the arbitrator’s authority in ruling on the validity of the noncompetition agreement.

The Supreme Court’s decision Nitro-Lift again makes clear that when registered representatives get into disputes over restrictive covenants with their firms, the question of whether those restrictive covenants are valid and enforceable will be determined by the arbitrator.  It also makes clear that if associated persons attempt to use the court system to get out from under a restrictive covenant, they will not be permitted to do so.  Financial advisors should keep this in mind when weighing the pros and cons of changing firms, and when considering the potential impact of any restrictive covenants in their registered representative agreements.

Scott Matasar, a partner at Cleveland, Ohio-based Calfee, Halter, & Griswold LLP, regularly counsels brokers on the regulations and other legal issues surrounding a change of employment.  He also represents both corporate clients and individuals in all forms of securities litigation and regulatory matters, including customer arbitrations and enforcement/disciplinary proceedings brought by the SEC, FINRA and/or state securities regulators.  To learn more about Scott, please visit http://www.calfee.com/Scott_C__Matasar.bio

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