Monthly Archives: February 2012

OKLAHOMA SUPREME COURT HOLDS THAT COURT, NOT ARBITRATOR, IS TO DECIDE VALIDITY OF COVENANT NOT TO COMPETE, AND ALSO STRIKES DOWN OVERLY BROAD COVENANT NOT TO COMPETE.

10 Friday Feb 2012

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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

 

CLASS ACTION WAIVER IN AN EMPLOYMENT AGREEMENT CONSTITUTES UNFAIR LABOR PRACTICES, NLRB FINDS

10 Friday Feb 2012

Posted by in Class Action

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On January 6, 2012, the National Labor Relations Board (NLRB) announced a 2-0 decision  (one member recusing) finding that an employer’s attempt to preclude employees from pursuing joint, collective or class actions as part of an employment agreement violates Section 7 of the National Labor Relations Act (NLRA).

In D.R. Horton, Inc. and Michael Cuda, the employer required all new and current employees to sign a “Mutual Arbitration Agreement” that waived their rights to pursue claims in a judicial forum, and precluded employees from pursuing joint, collective or class claims in the chosen arbitral forum.  The NLRB found that in imposing this requirement, the employer engaged in an unfair labor practice.  The NLRB found, “Clearly, an individual who files a class or collective action regarding wages, hours, or working conditions, whether in court or before an arbitrator, seeks to initiate or induce group action and is engaged in conduct protected by Section 7″ of the National Labor Relations Act. “Such conduct is not peripheral but central to the act’s purposes.”

The claim at issue in D.R. Horton was that the employer had misclassified the claimant, Cudo, as exempt rather than non-exempt under the FLSA.  The claimant gave notice of an intent to initiate an arbitration and sought to represent a class of similarly situated employees who also claimed to have been misclassified. The employer rejected the claimant’s notice and claiming that it was ineffective since the agreement did not allow arbitration of collective or class claims. The claimant then filed an unfair labor practice charge.

The Board’s 14 page opinion emphasized that the agreement’s prohibition of collective activity among employees who wished to protest the employer’s workplace conduct through class or collective actions violated the NLRA.  The employer argued that such a finding would conflict with the Federal Arbitration Act (FAA), which favors enforcement of arbitration provisions, by treating arbitration clauses differently than other agreements. The Board stated that its decision was not directed at arbitration agreements, as the provision would be unenforceable even if it was not part of an arbitration clause. This was so because regardless of the forum in which a claim might be brought, the agreement’s preclusion of concerted or collective action would violate the NLRA.

The Board also distinguished the recent Supreme Court decision in AT & T Mobility v. Concepcion, 131 S. Ct. 1740 (2011) which found that a class action waiver included in a cell customer agreement’s arbitration clause was enforceable under the FAA.  The Board found that A T & T Mobility dealt with an agreement that precluded consumer class actions where there was no existing federal statute to the contrary, while in the case before the Board the employer attempted to restrict substantive workplace rights granted to employees under the NLRA. The Board further distinguished A T & T Mobility on the basis that it addressed a conflict between the FAA and state law, and that the state law was preempted by federal law, while the case before it addressed a potential conflict between two federal statutes, one of which granted substantive rights.

After rejecting other arguments offered by the employer, the Board concluded that the employer’s agreement would be enforceable if it left open the judicial forum for class or collective actions, even if it precluded such claims in the arbitral forum and required arbitration of individual employment-related claims.

The NLRB’s decision is reviewable by the United States Court of Appeals, and the case  eventually could make its way to the Supreme Court.

While this issue is by no means settled, in light of D.R. Horton employers would benefit from a review of their employment policies, employee handbooks and employment agreements to determine whether they include class or collective action waivers or similar alleged restrictions on concerted activities that may raise potential concerns under the NLRA and the possibility of unfair labor practices charges.  If so, it may be wise to consider revising the provisions to address the concerns raised by the NLRB.

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