CURRENT MONTH (August 2019)

Dispute Resolution

A Federal Judge Has Rejected a New York Law Prohibiting Mandatory Pre-Dispute Arbitration of Sexual Harassment Claims

By Leslie A. Berkoff

In a decision from the United States District Court for the Southern District of New York, U.S. District Judge Denise Cote has held, in Latif v. Morgan Stanley & Co. LLC, that Section 7515 of New York's Civil Practice Law and Rules (CPLR), which prohibits mandatory arbitration of sexual harassment claims, is inconsistent with the Federal Arbitration Act ("FAA"), and therefore, is invalid and unenforceable.

In April of 2018, New York State enacted several laws in an effort to address workplace sexual harassment including a prohibition on pre-dispute agreements to arbitrate sexual harassment claims.  In Latif, the plaintiff was hired to work in the New York office of Morgan Stanley and signed an offer letter which included an agreement that all claims against Morgan Stanley (including sexual harassment claims) were subject to mandatory arbitration. Shortly after the employment commenced, plaintiff complained to Human Resources that he had become a target of inappropriate comments concerning his sexual orientation and his religion, and received certain unwanted sexual advances. After a lengthy email discourse concerning these allegations, plaintiff’s employment was terminated.

Plaintiff then commenced a lawsuit alleging discrimination, hostile work environment and retaliation claims in violation of Title VII of the Civil Rights Act of 1964.  Morgan Stanley filed a motion to compel arbitration. Plaintiff opposed the motion solely with respect to the  sexual harassment claims, which, he contended, could not be compelled to arbitration because of CPLR 7515.

Relying heavily on U.S. Supreme Court precedent, Judge Cote rejected the plaintiff’s argument that CPLR 7515 rendered invalid the agreement to arbitrate his sexual harassment claims. Citing the Supreme Court's decision in AT&T Mobility LLC v. Concepcion, Judge Cote recognized a principal enunciated by the Court that “[w]hen state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: the conflicting rule is displaced by the FAA.” Thus, Judge Cote held that the FAA preempted New York’s ban on precluding mandatory arbitration of sexual harassment claims.

Judge Cote addressed in a footnote the New York legislature’s passage on June 19, 2019 of a bill, which would, among other things, expand CPLR 7515 to encompass a ban on mandatory arbitration of claims of discrimination generally, rather than specifically sexual harassment claims. However Judge Cote indicated that the amended law would likely also be found invalid and therefore “would not provide a defense to the enforcement of the Arbitration Agreement.”

The decision in Latif highlights the strong presumption by Courts in favor of arbitration, and certainly provides support for New York employers who wish to enter into mandatory arbitration agreements for these kinds of claims.  Given that the Ending Forced Arbitration of Sexual Harassment Act, which would amend the FAA to prohibit arbitration of sexual harassment claims, is pending in Congress, it is possible this may change in the future; however so far this proposed legislation has not appeared to receive traction.  Lawyers advising businesses should of course continue to keep apprised of these potential changes.

Business Litigation

Blue Bell Creameries:  Delaware Court of Chancery Finds Zapata v. Maldonado Special Litigation Committee Process to address Derivative Claims is not Available to Conflicted General Partner 

By K. Tyler O’Connell 

IZapata v. Maldonado, 430 A.2d 779 (Del. 1981), the Delaware Supreme Court established that a Delaware corporation with a majority conflicted board may retain control over derivative claims by delegating authority to a special litigation committee of independent directors.  In Wenske v. Blue Bell Creameries, Inc., 2019 WL 4051007 (Del. Ch. Aug. 28, 2019), Vice Chancellor Joseph R. Slights, III, of the Delaware Court of Chancery applied principles of agency law to hold that a conflicted corporate general partner generally may not make a similar delegation of authority, because the general partner is a “principal” who inherently retains control over the committee-agent. 

This is the most recent decision arising from the 2015 listeria outbreak that caused several deaths and devastated Blue Bell Creameries’ business, resulting in it recalling all products and ceasing operations.  Blue Bell’s operations were conducted through Blue Bell Creameries, L.P., a Delaware limited partnership, whose general partner was Blue Bell Creameries, Inc. (“BBGP”). 

In an earlier decision, the Court denied BBGP’s motion to dismiss limited partners’ claim that it breached partnership agreement provision requiring it to conduct Blue Bell’s business “in accordance with sound business practices in the industry.”  The Court also held that the plaintiffs adequately alleged that a demand upon BBGP would be futile because it faced a substantial likelihood of liability. 

BBGP’s board of directors subsequently appointed two new directors, whom it authorized to form a special litigation committee to investigate derivative claims and determine whether pursuing them would be in the best interests of Blue Bell and its limited partners.  They in turn formed a special committee of putatively independent, non-board members.  The special committee moved to stay the litigation pursuant to Zapata and its progeny to allow time to investigate and make that determination. 

Although such stays often are granted in the corporate context, the Court of Chancery denied this stay request because the committee was not independent.  The Court reasoned that the issue of whether a corporate general partner is conflicted does not turn on the independence of its corporate board members, and it had already determined that BBGP the entity was conflicted.  The Court then reasoned broadly that, at least where a partnership agreement does not provide otherwise, in partnerships with a sole conflicted general partner, the conflicted “principal” (i.e., the general partner) cannot delegate its authority to a purportedly independent “agent.”  Rather, as a matter of agency law, a principal inherently retains control over its agent.  The Court reasoned that in the corporate context, by contrast, the delegation is from a set of principals, some of whom are conflicted (i.e., a majority conflicted board) to a set of non-conflicted principals (i.e., independent board members), so the problem of a conflicted principal retaining control does not arise.  The Court thus concluded that, while the delegation at-issue “likely would be effective” in the corporate context, the “Court’s finding that BBGP is disabled from considering a demand ends the inquiry.”  Accordingly, the Court held the plaintiff limited-partners were permitted to continue to prosecute the litigation on behalf of Blue Bell and its limited partners.

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