The Oklahoma Supreme Court recently held that an arbitration clause in an employment contract did not preclude judicial review of the validity and enforceability of a covenant not to compete contained in the contract. In Howard v. Nitro-Lift Technologies, LLC, 2011 OK 98 (Nov. 22, 2011), two employees who had executed employment contracts with the defendant-employer that included a non-compete clause challenged the validity of that clause in court after the employer had served a demand for arbitration of the dispute. The district court granted the employer’s motion to dismiss the suit, finding the arbitration clause enforceable. The employees appealed the decision.
The Court relied upon several of its prior decisions to conclude that Oklahoma’s Uniform Arbitration Act did not prohibit judicial review of a contract that included an arbitration clause where a party asserted that the underlying contract was void and unenforceable. The Court, quoting from a prior case, found that, “A void provision provides no legal basis for enforcement whether through arbitration or judicial pronouncement.” The Court distinguished contrary US Supreme Court precedent that holds that an arbitration clause can require arbitration of whether the underlying contract is void, noting that its ruling was based solely upon Oklahoma, and not federal, law.
The Court then went on to hold that the non-compete clause was void and unenforceable, as it went well beyond the permissible scope allowed under 15 Okla. Stat. sec. 219A, which governs covenants not to compete. The Court found that rather than restricting the employees from soliciting goods or services from “the established customers of the former employer,” as allowed under the statute, the covenant at issue could be construed to prohibit the employees from engaging in any competitive employment anywhere in the United States, or even employment with a competitor in a capacity that would not directly relate to the part of the business in which the employees were engaged. Also, the agreement prohibited the employees from soliciting even past customers of the former employer, which again was beyond the scope permitted by statute.
The Court also refused to modify or reform the covenant to conform to Oklahoma law, despite the existence of a severability clause, finding that to attempt to reform the clause would require that the provision be “substantially excised, leaving only a shell of the original agreement, and would require the addition of at least one additional term.” Because the Court would be required to practically rewrite the entire agreement, reformation was not an appropriate exercise of judicial power.
Employers should review their employment agreements to determine whether and to what extent they may need to modify any arbitration clauses or non-compete covenants in order to meet these requirements.
Tags: arbitrate arbitration covenant non-compete solicit void unenforceable employment contract agreement reform