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SCOTUS Slaps Sooners With Severability Doctrine

By Liz Kramer | November 27, 2012 in Validity of Arbitration Agreement

On Monday, the United States Supreme Court reminded the Oklahoma Supreme Court who is boss when it comes to the Federal Arbitration Act.  In Nitro-Lift Technologies, LLC v. Howard, 2012 WL 5895686 (U.S. Nov. 26, 2012), SCOTUS declared “It is a matter of great importance [] that state supreme courts adhere to a correct interpretation of the [FAA].  Here, the Oklahoma Supreme Court failed to do so.”

The issue at hand was the severability doctrine.  This is the counterintuitive doctrine that most often vexes parties, litigators, and courts in arbitration cases.  Stemming from the 1967 Prima Paint decision, the doctrine says that when the parties have an arbitration agreement in a fully formed contract, courts may only address arguments about whether the arbitration agreement itself is invalid, not any arguments that attack the contract as a whole or that attack provisions outside the arbitration agreement.  If the arbitration agreement is valid, those broader arguments will be addressed by the arbitrator.  For example, even when Florida state courts determined that the underlying contracts at issue were illegal, SCOTUS said that because the arbitration agreement within those illegal contracts was valid, the issues must be arbitrated.  That was six years ago.  Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 446 (2006).

Now enter Oklahoma, which appears not to have received the memo from Buckeye.  [Had to make one snarky comment about Oklahoma here since my husband is a die-hard member of the Burnt Orange Nation.]  Last November, its highest court found that employees with admittedly valid arbitration clauses in their non-compete agreements did not have to arbitrate disputes with their former employers, because the non-competes as a whole were void under a state statute.  Oklahoma tossed the severability doctrine out the window without much analysis.  It declared: “We hold that the existence of an arbitration agreement in an employment contract does not prohibit judicial review of the underlying agreement.”  Howard v. Nitro-Lift Technologies, 273 P.3d 20, 27 (Okla. 2011).  Reading between the lines, the Oklahoma court thought that the non-compete agreements at issue were so egregious (precluding the employee from working in their industry anywhere in the U.S. for a period of two years), that it refused to enforce one iota of those agreements.

SCOTUS is a big fan of its severability doctrine, though, and it vacated the Oklahoma Supreme Court’s decision.  In doing so, it took the opportunity to issue two major reminders to other state supreme courts.  First, the FAA and the federal case law interpreting it are applicable in state and federal courts.  Specifically, the Court said “the Oklahoma Supreme Court must abide by the FAA, which is ‘the supreme Law of the Land,’” citing the Constitution.  Second, attacks on the validity of the contract as a whole are for the arbitrator to resolve. (“An arbitration provision is severable from the remainder of the contract”).  If all state supreme courts would keep those concepts (plus preemption) in mind, the Supreme Court promises to stop reminding them of the their place in the court hierarchy.

 

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