A federal court has blunted one of the primary legal weapons deployed in some states against sexual abuse in the workplace by striking down a New York state law that had banned employee contracts that required arbitration of sexual harassment claims.
Federal district court Judge Denise Cote ruled that New York’s law, which went into effect in July 2018, is preempted by the Federal Arbitration Act (FAA), a law passed by Congress in 1925 that was designed to encourage the use of arbitration and reduce the number of lawsuits clogging America’s court systems.
This June, the New York State Senate and Assembly passed another bill, this time expanding the prohibition of arbitration involving sexual harassment disputes to include a ban on arbitration for any kind of discrimination or harassment claims.
“Although Judge Cote didn’t formally rule on the more general, brand-new bar on arbitration of all discrimination claims (harassment or not), she observed in a footnote that the more general bar suffers from the same problem and is probably preempted by federal law, too,” comment attorneys Steven Nevolis and Mark Konkel of the law firm of Kelley Drye & Warren.
The judge’s decision regarding the sexual harassment law is likely to result in a “failure-to-launch” of the arbitration prohibitions in this latest round of legislation as well, the lawyers say. “But for now, here’s the unsettling message for employers navigating the ever-shifting landscape of discrimination law obligations: the new provisions of New York law barring mandatory arbitration of all employment discrimination claims will be struck down, but for the time being, you can’t count on it.”
In the case decided by the federal district court, plaintiff Mahmoud Latif signed an arbitration agreement when he accepted a job with Morgan Stanley, the global investment bank and financial services company. The arbitration agreement specifically stated that it “shall be governed by and interpreted in accordance with” the FAA.
Latif alleged that he was subject to discrimination, a hostile work environment and retaliation, all in violation of federal, state and city law. Specifically, he alleged that he was the target of inappropriate comments regarding his sexual orientation, inappropriate touching and offensive comments about his religion.
He also claims retaliation by his employer because he was terminated shortly after reporting these events to the human resources department at Morgan Stanley. He filed claims under federal and state antidiscrimination laws and the company filed a motion to compel arbitration, per the arbitration clause in his employment agreement. Latif did not dispute that his other claims were subject to arbitration but he argued that the sexual harassment claim could not be subject to arbitration under New York law.
The judge disagreed, finding that the sexual harassment claims were subject to mandatory arbitration because state law was inconsistent with the FAA. She declared that the language of the federal law is clear: When a state law prohibits the arbitration of a specific type of claim (in this case, a sexual harassment claim), then that state law is “displaced by the FAA.”
In her decision Judge Cote took that argument one step further to suggest that New York’s recent legislative amendment passed in June that prohibits mandatory arbitration in regard to all discrimination claims will likely meet the same fate when it ends up being adjudicated under the FAA.
While her decision is good news for employers in New York State, Nevolis and Konkel say they shouldn’t take Judge Cote’s decision as final quite yet, especially since it is likely to be appealed to a higher court.
“No one can blame employers who want to rush to their arbitration agreement template and reinsert sexual harassment claims as a covered claim,” they note. “However, since the Latif decision is only a trial court decision, and there is likely to be an appeal to the Second Circuit [U.S. Court of Appeals], employers should exercise caution.”
Those employers who wish to revise their arbitration agreements should be prepared to engage in a similar court battle over the legal validity of arbitrating sexual harassment claims, the attorneys warn. “Depending on whether this battle will be in state or federal court, and depending on the judge who decides the matter, employers may not see the same result as Latif. In that case, the employer will then have to continue onto litigation in court.”
However, in the view of attorneys Joseph Cartafalsa and Christopher Murray of the Ogletree Deakins law firm, if Judge Cote’s decision eventually is upheld on review, it also could have ramifications beyond the borders of New York State by undermining similar arbitration bans that were adopted by other states in response to the #MeToo movement, including Maryland, New Jersey, New York and Washington State.
Although employers may want to review their arbitration agreements to ensure they specifically invoke the FAA, they also need to take into account that certain provisions of the law make it clear that it does not apply to certain kinds of workers, the attorneys point out.
In January, the U.S. Supreme Court in a unanimous decision confirmed that the FAA does not cover employees and independent contractors who qualify as transportation workers. The law specifically excludes arbitration clauses from “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.”
Cartafalsa and Murray stress, “Businesses using arbitration agreements with employees and/or independent contractors who could be classified as transportation workers may want to consider whether to invoke a state law and, if so, which state’s law.”