Supreme Court Action: The Federal Arbitration Act Applies To The States

Federal Arbitration Act (FAA) is an act of Congress that provides for judicial facilitation of private dispute resolution through arbitration. The act applies in both state courts and federal courts and also applies when the parties are involved in interstate commerce. FAA provides for contractually based compulsory and binding arbitration and is undertaken so that an arbitrator or arbitration panel issue a judgment. The arbitration decision can be appealed in court by the parties if they have substantial ground. This form of arbitration is done in lieu of going to court but the arbitration award, once decided, must be confirmed in a court of law within one year. Any objection to the award must be challenged by the losing party within three months.

The FAA is usually applied by state courts rather than federal courts and it is usually considered extremely important that the state supreme courts adhere to the correct implementation of the legislation. However, in a recent case Nitro-Lift Technologies, L.L.C. v. Howard (11-1377), two former employees of Nitro-Lift left their company to work for a competitor. Nitro-Lift served them with a demand to arbitrate but the employees filed a lawsuit in Oklahoma claiming that the noncompetition agreements should be considered null and void. The District Court found the arbitration clause to be valid and issued the ruling that the dispute over the non-compete clauses should be settled by the arbitrator.

However, the Oklahoma court issued a contrary decision and ruled that a state statue limits the enforcement of non-compete clauses and also indicated that the decision made by the Oklahoma Court was under adequate and independent grounds and deprived the US Supreme Court of jurisdiction. Earlier opinions were also cited where the Federal Arbitration Act (FAA) was applied to the states and no exceptions were found under the Supremacy Clause between a state and federal law conflict. While the trial court and the Oklahoma Supreme Court both did not find the arbitration clause invalid, it was determined that the arbitrator would be the one to decide whether the clause survives Oklahoma statutory law.

However, the Supreme Court has criticized the Oklahoma Supreme Court for ignoring its precedent and writing its opinion to evade review. The Supreme Court has also reinforced its opinion that the application of the FAA in state courts is controlling over state statutes and court decisions.