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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. 

Copyright © by Ballard Spahr LLP

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Mark Levin, Ballard Spahr Law Firm, Litigation Attorney
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Mark J. Levin is known for his work in complex commercial, insurance, and class-action litigation, with particular experience in consumer finance litigation, the structuring and enforcement of consumer arbitration clauses, and the defense of insurance companies in class actions. He testified in 2007 for the lending industry before a subcommittee of the U.S. House Judiciary Committee at an oversight hearing on whether mandatory arbitration in consumer contracts is fair to consumers.

Mr. Levin has represented banks in defending against the first...

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Steven W. Suflas is Managing Partner of the Denver and Boulder offices and a nationally recognized thought leader on labor and employment issues. He represents management in all phases of labor and employment matters — from preventative counseling and strategic guidance to collective bargaining, appearances before regulatory agencies, and litigation before courts and administrative agencies. He works closely with employers — both large and small, national, regional, and local — in responding to the daily challenges of the workplace.

Mr. Suflas is known for his litigation work, defending companies in federal and state courts nationwide in both individual and class action lawsuits. He has first chair jury trial experience and has argued cases before federal and state appellate courts. He also has decades of experience litigating unfair labor practice and representation cases before the National Labor Relations Board. Mr. Suflas has represented management at scores of union negotiations and labor arbitrations.

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Elliot I. Griffin, Ballard Spahr, Litigation lawyer
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Elliot Imani Griffin is an associate in the Litigation Department who focuses her practice on labor and employment matters. During law school, Elliot interned with Exelon Corporation, a Fortune 100 energy company, where she researched recent National Labor Relations Board decisions to assess how they would impact Exelon's policies. She also wrote demand letters to address fake websites that were allegedly infringing upon the mark of Exelon and its subsidiaries, drafted motions, and assisted in the preparation for Pennsylvania Utility Commission hearings.

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Marjoree Peerce Litigator  Criminal Defense Ballard Law FIrm
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Marjorie J. Peerce is a litigator, with a practice focus on white collar criminal defense, regulatory matters, and complex civil litigation. In her more than 30 years of practice, she has handled matters across the criminal and regulatory spectrum. She is Co-Managing Partner of the firm's New York Office.

Ms. Peerce appears in New York state and federal courts, as well as in federal districts around the country. She has handled criminal and regulatory investigations concerning, for example, violations of the Internal Revenue Code, securities...

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