Recently enacted state laws targeting arbitration provisions in employment agreements specifically related to sexual harassment have come into conflict with the Federal Arbitration Act (FAA), as illustrated by recent court decisions in New York and California.
In the shadow of the #MeToo movement, many states sought to strengthen their human rights laws to combat the prevalence of sexual harassment in the workplace. One of the tools put forth in state statutes was to prohibit the use of the arbitral forum for claims of sexual harassment. This has resulted in a predictable clash with the mandates of the FAA, which provide that arbitration provisions in contractual agreements shall be upheld and binding on the parties with limited exceptions.
For instance, in New York, the state passed legislation in 2018, N.Y. C.P.L.R. § 7515, prohibiting the use of arbitration agreements for claims of sexual harassment regardless of the FAA. As a result, in Latif v. Morgan Stanley & Co. LLC, 2019 WL 2610985 (S.D.N.Y., June 26, 2019), the opposing positions of the FAA and the state legislation resulted in District Court Judge Denise Cote holding that the state law ban on mandatory arbitration in sexual harassment cases was preempted by the FAA.
As a general proposition, Judge Cote noted that the FAA preempts any state law that discriminates on its face against the FAA. The New York statute specifically provided that any mandatory arbitration provision in an employment contract which provides that arbitration is the only and final remedy for such a claim is “null and void.” Latif went to the Second Circuit Court of Appeals, where an application for an en banc hearing was submitted. The Second Circuit dismissed the appeal on January 15, 2020, for lack of jurisdiction because the district court had stayed the federal action pending arbitration, citing Katz v. Cellco P’ship, 794 F.3d 341 (2d Cir. 2015), which provides for a stay of the federal action where an arbitration is compelled, as such, there is no final determination to appeal. It is this author’s sense, that but for this stay, that deference still would have been given to the FAA.
California recently passed legislation, Assembly Bill No. 51 (AB 51), banning employers from requiring the execution of an arbitration agreement as a condition of employment and prohibiting any discrimination or retaliation against employees who refuse to sign such an agreement. The legislation was scheduled to take effect on January 1, 2020, and it covered under its rubric not just sexual harassment claims, even though it was inspired by the #MeToo movement, but any employment-related disputes. On December 30, 2019, the federal district court in the Eastern District of California in the case of Chamber of Commerce of the United States of America, et al. v. Bacerra, et al., 2:19-cv-2456 (KJM) (DB), issued a TRO until a hearing could be held on a temporary injunction, and the court noted that this was due to the conflict between the state law and the FAA and the upheaval the law going into effect would have on employment agreements, even in the short term, where there is a serious question as to whether the law is preempted by the FAA. After hearing oral argument, the court temporarily enjoined the enforcement of the California statute on January 31, 2020.
Congressional action to amend the FAA would resolve this dispute. For instance, the Arbitration Fairness Act of 2017 was introduced in the 115th Congress to prohibit forced arbitration agreements for employment claims as well as civil rights and commercial claims. This legislation expired at the end of the 115th session without further action; however, similar legislation was introduced in the 116th Congress as the Forced Arbitration Injustice Repeal Act of 2019. It was approved by the House on September 20, 2019, by a vote of 225-186, but has not been acted upon by the Senate. In addition, there has been bi-partisan legislation specifically targeting sexual harassment arbitration. The legislation, Ending Forced Arbitration of Sexual Harassment Act of 2017, which expired with the 115th Congress before being acted upon, has been reintroduced as Ending Forced Arbitration of Sexual Harassment Act of 2019 in the 116th Congress and is still going through the legislative process. This bill would provide a carve-out in the FAA for sexual harassment claims and may be a compromise versus banning all employment-related arbitrations.
As of today, the inherent conflict between the FAA and the states’ attempts to take steps to combat sexual harassment by targeting arbitration clauses will continue to be fought in cases such as the ones discussed above until the question reaches the Supreme Court or Congress takes action.