Federal Court Rules that the FAA Preempts New York Law Prohibiting Mandatory Arbitration of Sexual Harassment Claims
In response to the #MeToo movement, New York State has led the way in enacting legislation to expand employee rights to file and recover for sexual harassment claims.
In 2018, New York enacted sweeping changes to the New York State Human Rights Law (NYSHRL) that included barring the use of mandatory arbitration agreements “to resolve any allegation or claim of an unlawful discriminatory practice of sexual harassment.” The statute further provided that, “[e]xcept where inconsistent with federal law,” no written contract shall include a mandatory arbitration provision to resolve sexual harassment claims.
The U.S. District Court for the Southern District of New York recently held that state laws, such as this one, which prohibits arbitration, are preempted by the Federal Arbitration Act (FAA). In Latif v. Morgan Stanley & Co. LLC., plaintiff signed an offer letter that included an agreement requiring arbitration of any discrimination, harassment, and retaliation claims. After termination, plaintiff filed a lawsuit, which included allegations of sexual harassment. In response, the defendant filed a motion to compel arbitration.
Relying on U.S. Supreme Court precedent, the court held that the FAA “sets forth a strong presumption that arbitration agreements are enforceable and this presumption is not displaced” by the state law in question. Section 2 of the FAA, the “savings clause,” invalidates arbitration agreements “upon such grounds as exist at law or in equity for the revocation of any contract.” The court reasoned that this caveat to enforcement is not applicable to the state law at issue, adding that the FAA only recognizes defenses such as fraud or duress, which would apply in any contract litigation. Further, the court explained that the FAA strongly favors enforcement of arbitration agreements, reiterating that the federal statute “is not easily displaced by state law.”
The amendments to the NYSHRL created significant uncertainty for employers with arbitration protocols to resolve these types of cases. This decision provides much-needed clarity in limiting the scope of the new law.
The decision in Latif also casts doubt on more recent New York legislation, passed in June 2019, which sought to expand the prohibition on the use of mandatory arbitration agreements for all discrimination, harassment, or retaliation claims. According to the court, this legislation also is likely preempted by the FAA.