Southern District of New York Rules Federal Law Preempts New York State Law Banning Arbitration of Sexual Harassment Claims
Many retail employers require their employees to agree to arbitrate employment-related disputes as a condition of employment. The United States Supreme Court has repeatedly emphasized that workplace arbitration agreements are enforceable according to their terms, and state law that restricts such enforcement is preempted by the Federal Arbitration Act (“FAA”). Notwithstanding those pronouncements, states, such as New York and New Jersey, have crafted legislation designed to nullify an employee’s agreement to arbitrate certain employment-related claims.
In response to the #MeToo movement, New York and New Jersey have enacted legislation banning workplace arbitration agreements covering sexual harassment and discrimination claims. On April 12, 2018, New York State, as part of its 2018-2019 budget, amended § 7515 of the New York Civil Practice Law and Rules (“CPLR”) to prohibit employers with four or more employees from incorporating mandatory, pre-dispute arbitration clauses in written employment contracts requiring the resolution of allegations of claims of sexual harassment. Additionally, any such clause in a contract entered into after the effective date of the law would be rendered null and void.
On June 19, 2019, the New York legislature passed a bill (which, as of the date of this post, has yet to be signed into law) that makes sweeping changes to New York’s harassment and discrimination laws. Among other things, the bill again amends § 7515 of the CPLR to ban mandatory pre-dispute arbitration clauses in written employment contracts requiring the resolution of allegations of claims of workplace discrimination generally, not just sexual harassment claims and renders any such clause null and void.
On March 18, 2019, New Jersey Governor Murphy signed legislation that declares unenforceable any “provision in any employment contract that waives any substantive or procedural right or remedy relating to a claim of discrimination, retaliation, or harassment.” N.J.S.A. 10:5-12.7(1)(a). The law further provides that “[n]o right or remedy under the [Law Against Discrimination], or any other statute or case law shall be prospectively waived.” N.J.S.A. 10:5-12.7(1)(b). Both provisions can be construed to prohibit the waiver of a right to a jury trial as required by an arbitration agreement.
Many observers have questioned whether these laws restricting arbitration would be preempted by the FAA. A recent decision in the Southern District of New York, Mahmoud Latif v. Morgan Stanley & Co. LLC, No. 18cv11528 (DLC), 2019 U.S. Dist. LEXIS 107020 (S.D.N.Y. June 26, 2019), confirms that state laws targeting enforcement of arbitration agreements are vulnerable to attack on FAA preemption grounds.
As discussed below, in Latif, the court held that New York’s ban on the arbitration of sexual harassment claims was unenforceable as preempted by the FAA. The court also stated, in a footnote, that the as yet unsigned June 19, 2019 New York legislation would be preempted by the FAA for the same reasons. Latif suggests that employers covered by the FAA can be more confident that their agreements seeking to arbitrate employment-related claims will be enforceable.
In June 2017, Mahmoud Latif (“Latif”) was hired by Morgan Stanley and signed an offer letter that incorporated Morgan Stanley’s CARE Arbitration Program Arbitration Agreement (“Arbitration Agreement”). Id. at *1. The Arbitration Agreement provided that any claim involving, inter alia, “statutory discrimination, harassment and retaliation” would be subject to arbitration. Id. at *1-2. The Arbitration Agreement further stated that it “shall be governed by and interpreted in accordance with the Federal Arbitration Act (“FAA”).” Id. at *2.
Latif alleges that, starting in the autumn of 2017, he was subjected to, inter alia, improper comments regarding his sexual orientation, inappropriate touching, and sexual advances. Id. He also claims that around February 2018, he was sexually assaulted by a female supervisor. Id. Latif reported these incidents to Human Resources in February 2018. Id. at *2-3. On August 1, 2018, Latif’s employment was terminated. Id. at *3.
On December 10, 2018, Latif filed a lawsuit alleging, inter alia, discrimination, a hostile work environment, and retaliation. Id. The parties disputed whether the Arbitration Agreement was enforceable as to Latif’s sexual harassment claims “in light of the recently enacted New York Law, N.Y. C.P.L.R. § 7515.” Id. at *4. Morgan Stanley and the individually named defendants moved to compel arbitration. Id.
In granting the motion to compel, the court reviewed United States Supreme Court cases interpreting the FAA and quoted Section 2 of the FAA which provides, in relevant part:
[A] written provision in . . . a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.
Id. at *5 (quoting 9 U.S.C. § 2). The court emphasized that the FAA’s “saving clause” only allows for “‘defenses that apply to “any” contract,’” thereby ensuring that arbitration contracts are afforded equal treatment. Id. at *5 (quoting Epic Sys. Corp. v. Lewis, 138 S. Ct. 1612, 1622 (2018)). Accordingly, “arbitration agreements may be ‘invalidated by generally applicable contract defenses, such as fraud, duress, or unconscionability.’” Id. at *5-6 (quoting AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011)). However, “‘defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue’ will not invalidate such an agreement.” Id. at *6 (quoting Concepcion, 563 U.S. at 339). Further, the saving clause does not preserve defenses that “‘target arbitration either by name or by more subtle methods.’” Id.(quoting Epic Sys., 138 S. Ct. at 1622).
The court also opined that any state law which “‘stands as an obstacle to the accomplishment and execution of the full purposes and objectives of the FAA’” is preempted. Id. at *6 (quoting Lamps Plus, Inc. v. Varela, 139 S. Ct. 1407, 1415 (2019)). Therefore, “‘[w]hen a state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the FAA.’” Id. (quoting Concepcion, 563 U.S. at 341).
The court next summarized the New York State law at issue, § 7515 of the CPLR, titled “Mandatory arbitration clauses; prohibited,” which restricts the arbitration of sexual harassment claims. Id. at *7-8. Section 7515(b) consists of three subparts. “Except where inconsistent with federal law,” subpart one prohibits a written contract entered into on or after the effective date from containing a “prohibited clause.” CPLR § 7515(b)(i) (emphasis added). A “prohibited clause” is defined as “any clause or provision in any contract which requires as a condition of the enforcement of the contract or obtaining remedies under the contract that the parties submit to mandatory arbitration to resolve any allegation or claim of an unlawful discriminatory practice of sexual harassment.” CPLR § 7515(a)(2).
Subpart two makes clear that § 7515 does not “impair or prohibit an employer from incorporating a non-prohibited clause or other mandatory arbitration provision” in a contract agreed upon by the parties. CPLR § 7515(b)(ii). Subpart three provides that, “[e]xcept where inconsistent with federal law,” the provisions of a “prohibited clause” as defined by the law “shall be null and void,” and the inclusion of such a clause “shall not serve to impair the enforceability of any other provision of such contract.” CPLR § 7515(b)(iii) (emphasis added).
The court concluded that Latif’s sexual harassment claims were subject to mandatory arbitration under the Arbitration Agreement. Latif, 2019 U.S. Dist. LEXIS 107020, at *8. The law did not render the agreement to arbitrate sexual harassment claims null and void because the outcome would be inconsistent with federal law, specifically, the FAA. Id. at *8-9. The court made clear that the FAA’s “strong presumption that arbitration agreements are enforceable” was “not displaced by § 7515.” Id. at *9.
In addition, the FAA’s saving clause did not allow for the application of § 7515 to invalidate the agreement, because § 7515(a)(2) singles out “contract provisions that require ‘mandatory arbitration to resolve any allegation or claim of an unlawful discriminatory practice of sexual harassment.’” Id. (quoting CPLR § 7515(a)(2)). In this way, § 7515(b) is a “‘state law prohibit[ing] outright the arbitration of a particular type of claim,’” which the Supreme Court has made clear is “‘displaced by the FAA.’” Id. (quoting Concepcion, 563 U.S. at 341).
Latif argued that § 7515 was part of a bundle of sexual harassment provisions in a single bill that reflected “a general intent to protect victims of sexual harassment,” and was not specifically intended to single out arbitration clauses for special treatment because the section “affects a number of different types of contracts and contract provisions.” Id. at *9-10. Latif also argued that because § 7515 does not apply to all arbitration, but only to sexual harassment claims, it was “not inconsistent with the FAA.” Id. at *10. The court dismissed these arguments and focused instead on the plain language of the law which is targeted specifically to sexual harassment and does not create a general contract defense. Id.
Latif further asserted that New York’s substantial interest in “transparently addressing workplace sexual harassment” was a “ground ‘in equity for the revocation of any contract’ and thus not displaced by the FAA.” Id. (quoting 9 U.S.C. § 2). The court responded that to take advantage of the saving clause the basis for providing an exception to arbitration must be generally applicable to all contracts. Id. at *10-11.
In a footnote, the court addressed the June 19, 2019 legislation passed by the New York legislature that would amend § 7515 “to encompass mandatory arbitration of claims of discrimination generally, rather than specifically of sexual harassment.” Id. at *9 n.2. The court stated, without further elaboration, that “[f]or the same reasons described above, § 7515 as so amended would not provide a defense to the enforcement of the Arbitration Agreement.” Id.
The court’s holding in Latif overturns New York State’s attempt to prohibit mandatory arbitration of sexual harassment and discrimination claims. Although the reasoning in Latif is well-grounded, the decision may still be appealed to the Second Circuit, so employers should continue to exercise caution. Employers are encouraged to review their agreements to ensure that they explicitly state that they are governed by the FAA.
The Latif decision does not apply in New Jersey; however, a similar analysis may likely lead to a similar conclusion in New Jersey. A court may find that the restrictions single out the arbitration of certain disputes for different treatment and do not create a defense applicable to all contracts.