After just one year on the books, the New York law banning mandatory arbitration clauses for sexual harassment claims (New York Civil Rights Practice Law and Rules Section 7515) was found by a New York Federal Court to be preempted by the Federal Arbitration Act (“FAA”). Section 7515, enacted in April 2018 in the wake of the #MeToo movement, barring arbitration agreements for harassment claims, and amended in June 2019 to extend the bar to any claims of discrimination (not just those for sexual harassment), may be considered struck down for the moment. The ruling, which is the first case to construe Section 7515 against the powerful FAA backdrop, will have a significant effect on the enforcement of arbitration clauses and agreements for sexual harassment and discrimination claims until the ruling is reviewed on appeal, which was just filed.

In Latif v. Morgan Stanley et al., plaintiff Mahmoud Latif signed an arbitration agreement as a condition of his employment by which he agreed to arbitration employment claims. The agreement also provided that the FAA governed. After Latif was terminated, he sued Morgan Stanley claiming discrimination and sexual harassment. Specifically, Latif alleged he was the target of discrimination based on his religion and sexual orientation and the victim of sexual assault by his supervisor. In response, Morgan Stanley moved to compel arbitration related to the sexual harassment claim since the parties already stipulated that his other claims should be arbitrated. The Court was asked to decide whether the harassment claim could be litigated in court or must be sent to arbitration pursuant to the parties’ agreement.

In Latif, Judge Denise Cote of the Southern District of New York focused on Section 7515’s carveout to not affect mandatory arbitration clauses “inconsistent with federal law.” Judge Cote also relied heavily on more recent United States Supreme Court precedent in Epic Systems v. Lewis, 138 S. Ct. 1612 (2018) declaring that the FAA preempts state law in conflict with it, as well as the notion that arbitration agreements are generally enforceable. Since Section 7515 is inconsistent with the FAA, Judge Cote ruled for Morgan Stanley in what is viewed as a victory for employers who utilize arbitration agreements. This ruling is especially significant for employers given New York’s recent expansion of Section 7515 to apply to all discrimination claims. Recently, Nelson Mullins blogged on this development in it’s The HR Minute.