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New York Federal District Court Concludes That the Arbitration Act Preempts the State’s Ban on Arbit

In the wake of the #MeToo movement, New York passed legislation - Section 7515 - which is comprised of six subparts, all addressing sexual harassment. Specifically, Section 7515(b) prohibits contracts that require parties to submit to mandatory arbitration to resolve any allegation or claim of an unlawful discriminatory practice of sexual harassment. This prohibition, of course, applies only in so far as it is consistent with federal law. However, on June 26, 2019, the Southern District of New York in the case of Latif v. Morgan Stanley & Co. LLC, et al., No. 1:18-cv-11528 (S.D.N.Y. June 26, 2019), found that S7515’s prohibition on arbitration in sexual harassment cases contradicts the purpose of the Federal Arbitration Act (FAA) and is therefore inconsistent with and preempted by federal law.

In Latif, the plaintiff, a male employee of Morgan Stanley, signed an offer letter of employment which included an agreement that required that claims such as statutory discrimination, harassment and retaliation be resolved by final and binding arbitration. Plaintiff filed a complaint in federal court, alleging that during the term of his employment he was sexually harassed, assaulted and subjected to discrimination, retaliation, and a hostile work environment. The issue before the court was whether, in light of S7515, the arbitration agreement mandating arbitration of the plaintiff’ sexual harassment claim was enforceable.

The court began its analysis by noting that under Section 2 of the Federal Arbitration Act (“FAA”), “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.” The court held that this ‘savings clause’ generally requires courts to enforce arbitration agreements according to their terms.

However, the court held that the FAA preempts Section 7515 because Section 7515 only prohibits arbitration agreements relating to sexual harassment claims. It does not treat arbitration agreements of other types equally, and therefore is not a proper defense to overcome the savings clause. Put another way, the FAA requires that agreements to arbitrate be enforced, and a statute that carves out specific types of actions that may not proceed to arbitration is inconsistent with the FAA.

Notably, while the court’s decision was pending, New York passed Bill S6577, amending S7515 to ban mandatory arbitration of claims of discrimination generally, rather than sexual harassment claims specifically. The court noted in its decision that S7515 even so amended would not provide a defense to the enforcement of the arbitration agreement. The court in Latif has made it clear that where a state law only bans arbitration of a specific type of claim, even in the broadest sense (such as all discrimination claims), it is not a defense to arbitration agreements, and therefore will not overcome the FAA’s strong presumption in favor of enforcing arbitration agreements.

Against this backdrop, the recently enacted New Jersey Bill S121, which also prohibits mandatory arbitration “in any employment contract that waives any substantive or procedural right or remedy relating to a claim of discrimination, retaliation, or harassment.” S121 further provides that any such agreement, “shall be deemed against public policy and unenforceable.” In light of Latif, S121 is almost certain to face a similar legal challenge. While the decision in Latif is not binding on the New Jersey District Court, as a matter of first impression, the New Jersey District Court is likely to use the decision as guidance. It is anticipated that an argument will be made to distinguish Latif, asserting that S121 bans any and all employment contracts (excluding collective bargaining agreements) that waive the aforesaid rights, and is not just a ban on arbitration agreements. However, one could argue that this prohibition is similar to the one in Latif in large part, where the arbitration agreements only prohibited claims relating to sexual harassment. If the New Jersey District Court follows the reasoning provided in Latif, then in order to determine whether the FAA preempts S121, the court will only consider how arbitration agreements relating to claims of sexual harassment are being treated compared to arbitration agreements of other claims.

In sum, the growing #MeToo movement has pushed lawmakers nationwide to enact similar legislation prohibiting mandatory arbitration agreements relating to sexual harassment claims so as to protect the rights of victims of sexual harassment to their day in court. However, these state laws are facing challenges claiming that they are inconsistent with federal law. As additional developments unfold in this area of the law, the Zazzali Firm will continue to provide updates on those developments.

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