December 7, 2012

Nitro-Lift Technologies v. Howard: Forum Selection and the FAA Savings Clause

By Paul Kirgis

As I argued in a recent post, Nitro-Lift Technologies v. Howard, 568 U.S. ___ (2012), is another in an increasingly long line of cases that trample on state sovereignty in the name of the Supreme Court’s fabricated “federal policy favoring arbitration.” The question for state courts chafing under this regime is whether legal strategies exist to constrain that “federal policy” in the service of federalism.

The answer is, probably not. At least, not for the run of cases. But there may be strategies that could define some limits on the policy as a way to slow the arbitration locomotive down. In this post, I’ll talk about a possible brake from the Federal Arbitration Act’s section two, and in a follow-up post I’ll talk about judicial review under section ten.

Section two contains the FAA’s “savings clause,” which provides that arbitration agreements are “enforceable save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. This clause, on its face, seems to allow state courts to rely on generally-applicable contract defenses to decline enforcement of arbitration agreements. The problem is that the Supreme Court has all but eviscerated the savings clause by holding that even generally-applicable state contractual defenses are preempted whenever they “are applied in a fashion that disfavors arbitration” or “disproportionately impacts arbitration agreements.” See AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1747 (2011). The fact that a contract defense—unconscionability in Concepcion—applies to lots of contracts besides arbitration agreements does not inoculate it from the lethal federal policy favoring arbitration.

But the context of Nitro-Lift may expose one of the few areas in which the savings clause could provide room for a state court to decline enforcement of an arbitration agreement. At a minimum, a state court could force the Supreme Court to confront more directly than it has the extremism of its arbitration-uber-alles jurisprudence.

Assume that the Wisconsin Supreme Court is the next state high court to hear a case in which an employer seeks to enforce an arbitration clause in a covenant not to compete. Like Oklahoma, Wisconsin has a statute proscribing covenants not to compete. Wis. Stat. §103.465. But Wisconsin has gone further than Oklahoma in preserving the jurisdiction of its courts to enforce its statute. In Beilfuss v. Huffy Corp., 685 N.W.2d 373, 378 (Wis. Ct. App. 2004), the Wisconsin Court of Appeals refused to enforce a clause selecting Ohio as the exclusive forum for the resolution of a dispute involving a covenant not to compete. Citing the “reasonableness” exception in the test from M/S Bremen v. Zapata, 407 U.S. 1 (1972), the court held that “it is unreasonable to enforce the forum selection clause because it violates Wisconsin’s strong public policy governing covenants not to compete.”

When the Wisconsin Supreme Court gets its case seeking to compel arbitration of a covenant not to compete, it begins by citing Beilfuss (which, incidentally, the high court has cited with approval before for its rejection of the accompanying choice of law clause). It finds that, under Wisconsin law, parties to a covenant not to compete made in Wisconsin with a Wisconsin employee may not specify any forum or decision-maker for enforcement of that covenant other than the Wisconsin courts. Based on that holding, it refuses to enforce the arbitration agreement. Wisconsin law thus puts arbitration agreements on exactly the same footing with other forum-selection agreements. While the rule certainly favors litigation in Wisconsin courts over arbitration, it neither disfavors arbitration nor disproportionately impacts arbitration agreements in comparison with other private contracts specifying a dispute resolution forum.

How would the U.S. Supreme Court react to such a decision? If past is prologue, it would look for a way to reverse. It would have at least one precedent to lean on. In Lim v. Offshore Specialty Fabricators, Inc., 404 F.3d 898 (5th Cir. 2005), the Fifth Circuit enforced an international arbitration clause in a maritime employment agreement despite a Louisiana statute barring all forum selection clauses in employment contracts. As courts have grown accustomed to doing, the Fifth Circuit simply declared that the federal policy favoring arbitration trumped Louisiana law and brushed aside the statute.

The Supreme Court could do that, as well.  But the case that I have posited is not as easy as Lim, because the state policy is more narrowly tailored and the arbitration agreement is not backed up by the New York Convention, with all the international comity concerns that raises. This is a case in which enforcing the arbitration agreement means requiring state courts to accede to arbitration even in cases in which they would not bow to a sister state. The Supreme Court could follow Lim, then, but doing so would require it to proclaim greater deference toward private arbitrators than toward the courts of the several states.

In the age of Citizens United, with the public good repeatedly subjugated to the will of private economic power, would that shock us?

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