In A Blow To Registered Reps With Non-Compete Agreements With Their BDs, U.S. Supreme Court Reaffirms That Arbitrators—Not The Courts—Determine Enforceability Of Non-Compete Provisions Hot

 

Nitro-Lift Technologies v. Howard (US SCT Case No. 11-1377) involved a dispute between Nitro-Lift and two of its former employees for their 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.  Nitro-Lift accordingly filed an arbitration proceeding, after which the former employees filed a state court action in Oklahoma (where they were located) asking the judge to declare their noncompetition agreements null and void in accordance with an applicable state statute.

 

The state court dismissed the employees’ lawsuit attempting to block the arbitration, finding that the contracts contained valid arbitration provisions, and that therefore it was for the arbitrator not the courts to settle the parties’ disagreements—including the validity and applicability of the noncompetition provisions in the contracts.  On appeal, the Oklahoma Supreme Court reversed, and found that an Oklahoma statute that limits the enforceability of noncompetition agreements took precedence, and that notwithstanding U.S. Supreme Court cases construing the Federal Arbitration Act, arbitration provisions in employment contracts do not prevent courts from engaging in judicial review of the underlying agreement.

 

The U.S. Supreme Court’s opinion strongly rebuked the decision of the Oklahoma Supreme Court.  In its opinion, the U.S. Supreme Court 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, and that the Oklahoma Supreme Court had improperly assumed the arbitrator’s role by determining that the noncompetition agreement was null and void.

 

The Supreme Court’s decision Nitro-Lift again makes clear that if registered representatives get into disputes over restrictive covenants with their former firms, those disputes will be resolved in arbitration.  It also makes clear that attempting to resort to the court system to get out from under restrictive covenants will not work. 

 

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 when transition their practice to a new firm.