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Trading Secrets A Law Blog on Trade Secrets, Non-Competes, and Computer Fraud

Oklahoma Supreme Court Nixes Overly Broad Non-Compete Agreement

Posted in Non-Compete Enforceability

By Rebecca Woods

The Oklahoma Supreme Court recenty held that noncompete agreements are reviewable by a court, even if the agreement contains an arbitration clause and there is no claim as to the validity or enforceability of the arbitration clause. The Howard ruling is consistent with prior rulings by the court that evidence a hostility to the U.S. Supreme Court’s broad interpretation of the Federal Arbitration Act (“FAA”). The court also found the non-compete agreement at issue was in such serious violation of Oklahoma’s statutory limitations on non-compete agreements, see Title 15 O.S. 2001 § 219A, that it refused to blue pencil the agreement and struck it in its entirety.

An employer, Nitro-Lift Technologies, LLC (“Nitro-Lift”) sought to enforce against two former employees non-compete agreements that prohibited the former employees from, in relevant part, (1) owning, managing, operating, joining, controlling, participating, being connected with (as an officer, director, employee, consultant, etc.), loaning money to, or selling or leasing equipment to any business or person engaged in the nitrogen generation business in the oil and gas industry in the U.S; (2) canvassing, soliciting, approaching, or enticing away any past or present Nitro-Lift customers or suppliers; and (3) engaging, employing, soliciting, inducing, or attempting to influence any Nitro-Lift officer or employee to terminate their employment. This non-compete was to apply for a period of two years post employment. After Nitro-Lift served the employees with a demand for arbitration for allegedly violating the non-compete, the employees filed a motion for declaratory judgment, seeking a determination that the non-competes were null and void. The trial court held that the arbitration agreement was valid and enforceable and dismissed the employees’ complaint. On appeal, the Oklahoma Supreme Court reversed the dismissal and held that the employees were entitled to permanent relief.

The Howard ruling rebukes the U.S. Supreme Court’s broad application of the FAA and concludes that state courts should determine, in the first instance, whether a contract is valid and enforceable, even if the validity of the arbitration clause is not at issue. Combined with the court’s prior rulings, and with the court’s unwillingness to blue pencil the contract, the Howard ruling also indicates an apparent hostility by the court to arbitration clauses in employment contracts. 

The Howard court quickly dispatched U.S. Supreme court precedent by invoking its own ruling in Bruner v. Timberlane Manor Ltd. Partnership, 2006 OK 90, 155 P.3d 16, which contained an “exhaustive review” of U.S. Supreme Court decisions that “were found not to inhibit our review of the underlying contract’s validity.” Without analysis, the Howard court then broadly declared that “the existence of an arbitration agreement in an employment contract does not prohibit judicial review of the underlying agreement.” At issue in the Bruner decision was whether a nursing home agreement, which required arbitration of all disputes, was enforceable when Oklahoma law had an anti-arbitration statute with respect to claims against nursing homes. The Bruner court concluded that the nursing home contract did not involve interstate commerce and thus, Oklahoma’s anti-arbitration statute for nursing home contracts was not preempted by the FAA. The Howard court engaged in no analysis of interstate commerce. If it had, it would have been difficult to conclude that interstate commerce was not involved, as the multi-state employer at issue also sought to enforce the non-compete across state lines. Nor was there any issue in the Howard case of a direct conflict between state law and the FAA. The issue in Howard was simply whether a non-compete was enforceable under Oklahoma law and whether that determination should be made by a court or an arbitrator. The Howard decision makes clear that, in Oklahoma, the enforceability of a contractual provision is for courts, not arbitrators.

This ruling is directly at odds with the U.S. Supreme Court’s rulings with respect to the broad application of the FAA. For example, in Buckeye Check Cashing, Inc. v. Cardenga, 546 U.S. 440 (2006), the Supreme Court held that a challenge to a check-cashing contract as illegal under various Florida lending and consumer protection laws was improper, and that such challenges, even as to void contracts, should be heard in the first instance by an arbitrator. Id. at 5 (“[U]nless the challenge is to the arbitration clause itself, the issue of the contract’s validity is considered by the arbitrator in the first instance.”) The Supreme Court rejected the Florida Supreme Court’s conclusion that “enforceability of the arbitration agreement should turn on ‘Florida public policy and contract law.’” Id. at 6 (citation omitted). It is difficult to see a ready, and material, distinction between the Cardenga ruling and the Howard facts: in Howard, there was no contest as to the arbitration clause itself, and the employer was merely seeking to enforce a statutorily impermissible (as opposed to illegal) contract.

With respect to the non-compete agreement, it was plainly at odds with Oklahoma law. Oklahoma law provides, in relevant part, that employees “shall be permitted to engage in the same business as that conducted by the former employer or in a similar business as that conducted by the former employer as long as that former employee does not directly solicit the sale of goods [or] services . . . from the established customers of the former employer.” 20 Title O.S. 2001 § 219A. Any provision at odds with this section “shall be void and unenforceable.” The court concluded that Oklahoma allows an employer to bar a former employee from soliciting goods or services from the employer’s established customers only. The court then readily found all three prongs of Nitro-Lift’s non-compete agreement to be in violation of the statute. The court then declined to modify the agreement, characterizing the agreement as “offensive” and concluding that revising the agreement to comply with Oklahoma law would require the court to “decimate its provisions.”

Lessons for employers with contracts to which Oklahoma law applies? (1) Do not rely upon an arbitration clause to avoid litigation of any non-compete agreement; and (2) limit the agreement to the statutory limitations or it may be voided in its entirety.