In June, a federal district court in New York ruled that the Federal Arbitration Act (FAA) preempts a recent state law prohibiting mandatory arbitration agreements in sexual harassment cases. Latif v. Morgan Stanley & Co. LLC marks the first time that a federal court has ruled on this issue.

New York State Law Responds to #MeToo

In the wake of the #MeToo movement, many states, including New York, adopted measures designed to curb sexual harassment in the workplace. These laws attempted to tackle this serious issue in different ways, including requiring employers to conduct anti-sexual harassment training, requiring female board members for public companies, prohibiting certain releases and non-disparagement agreements relating to sexual harassment, and creating restrictions on non-disclosure agreements as they relate to sexual harassment claims.

The #MeToo movement also spurred a backlash against employers’ use of mandatory arbitration of sexual harassment claims. Critics argue it is a mechanism to potentially shield serial harassers from the public eye and from court system. At the federal level, Senator Kirsten Gillibrand (D-NY) introduced a bill in late 2017 called “Ending Forced Arbitration of Sexual Harassment Act” that garnered bi-partisan support. Additionally, the attorney generals of Washington D.C. and all US states and territories wrote a letter urging Congressional leadership to end mandatory arbitration of sexual harassment claims in order to “help to put a stop to the culture of silence that protects perpetrators at the cost of their victims.”

Then several states, including New York, Maryland, New Jersey, Vermont and Washington State, passed laws prohibiting employers from imposing mandatory pre-dispute arbitration agreements related to sexual harassment claims. New York law (signed April 12, 2018) contained several new sexual harassment laws affecting employers in New York State.

  • One new law amended NY Civil Practice Law & Rules (CPLR), providing that “no written contract shall contain […] any clause or provision [requiring] 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 also provides, however, that it shall not apply “where inconsistent with federal law.”
    • Many observers at the time wondered whether this provision would withstand a challenge based on FAA preemption.
    • Notably, in late 2018, California Governor Jerry Brown vetoed a very similar law passed by the California legislature (AB 3080) for this very reason.

FAA Preemption

Section 2 of the FAA (9 USCS § 2) provides:

A written provision in any … contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.

The US Supreme Court consistently holds that Section 2 of the FAA reflects both a liberal federal policy favoring arbitration and the fundamental principle that arbitration is a matter of contract. (See AT&T Mobility LLC v. Concepcion.) The Supreme Court has also held that the “savings clause” (i.e., the last clause in 9 U.S.C. § 2) allows arbitration agreements to be declared unenforceable based on generally applicable contract defenses (such as fraud, duress, or unconscionability), but not by defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.

Following this reasoning, federal courts have frequently struck down state laws that seek to limit arbitration. But no federal court directly addressed the validity of state laws restricting arbitration of sexual harassment claims until Latif.

LATIF and FAA Preemption

In Latif, plaintiff signed an offer letter incorporating an arbitration agreement by reference. It provided that covered claims (including common law claims and statutory discrimination, harassment and retaliation claims) “shall be governed by and interpreted in accordance with” the FAA. In his lawsuit, plaintiff alleged he was subject to inappropriate comments regarding his sexual orientation, inappropriate touching, sexual advances, offensive comments about his religion, and that a female supervisor sexually assaulted him. Plaintiff further alleged that, after reporting the incidents to his employer, he was terminated. He sued in the US District Court for the Southern District of New York, alleging that his employer violated federal and state law.

The employer moved to compel arbitration of plaintiff’s claims. In opposition to the motion, plaintiff argued that the arbitration provision was void under New York law and that CPLR §7515 did not violate the FAA. To support his argument, he contended that, when read with the bundle of sexual harassment provisions passed in the same bill, CPLR §7515 reflects a general intent to protect victims of sexual harassment and not a specific intent to single out arbitration clauses for singular treatment, and also that CPLR §7515 does not disfavor all arbitration but instead only arbitration of sexual harassment claims. Plaintiff further argued that that, because clauses mandating arbitration of sexual harassment claims would interfere with New York’s substantial state interest in transparently addressing workplace sexual harassment, CPLR §7515 constitutes equitable grounds for the revocation of any contract and thus is not displaced by the FAA.

Relying heavily on the Supreme Court jurisprudence for FAA preemption, the Latif court rejected all of plaintiff’s arguments and granted the motion to compel arbitration.

  • The court confirmed that the FAA preempts not only a state law that “discriminat[es] on its face against arbitration,” but also a state law that “covertly accomplishes the same objective by disfavoring contracts that (oh so coincidentally) have the defining features of arbitration agreements.”
  • The Latif decision is not entirely surprising in light of the Supreme Court jurisprudence, but Latif is the first case to address the question head on with respect to a state law that precludes mandatory arbitration of sexual harassment claims.

While this decision is not binding on courts in federal circuits outside the Second Circuit or even other federal district courts in New York, and may yet be appealed to the Second Circuit, it will likely be considered persuasive by other federal courts.

What Employers Need to Know

Although Latif confirms that it is legally permissible to require employees in New York to arbitrate workplace sexual harassment claims despite New York state law to the contrary, employers should nevertheless consider whether arbitration of harassment claims is right for their workforce in light of the recent public perception change.

As a result of pressure from employees and from other stakeholders, several major US companies have ceased imposing mandatory arbitration on sexual harassment claims. It is conceivable that Congress will try again to amend the FAA, especially since two Democratic presidential candidates (Senator Gillibrand (D-NY) and Senator Kamala Harris (D-CA)) co-sponsored a bill to that end in 2017.

On the other hand, employers who do wish to avoid the vagaries of a jury trial and the time and expense of protracted civil litigation, especially in the charged atmosphere of sexual harassment allegations, through the use of arbitration agreements, should ensure that their agreements are governed by the FAA. The agreement should explicitly state it is governed by the FAA. Failure to do so may expose the arbitration agreements to state law attacks.