In the wake of the #MeToo movement, various provisions were added to New York state’s 2018-19 budget bill to address the “scourge of sexual harassment” and shine a public spotlight on such claims. N.Y. State Senate, Stenographic Rec., 241st Leg., Reg. Sess., at 1855. A new section of Article 75 of the Civil Practice Law and Rules (CPLR) was included to prohibit employers from mandating arbitration of sexual harassment claims, thereby affording accusers the option of a public trial. See CPLR §7515. On June 26, 2019, less than a year after §7515 became effective, the U.S. District Court for the Southern District of New York held that this prohibition was preempted by the Federal Arbitration Act (FAA) and its strong policy of enforcing arbitration agreements. See Latif v. Morgan Stanley & Co., 18-cv-11528 (DLC), 2019 U.S. Dist. LEXIS 107020 (S.D.N.Y. June 26, 2019). The decision is significant but is not likely to be the last word on the subject.

‘Latif’ and Its Impact

The plaintiff in Latif was a former employee of Morgan Stanley. Prior to starting his job, he had signed an offer letter incorporating Morgan Stanley’s arbitration agreement. Latif, at *2. The arbitration agreement provided that any “covered claim” arising between the parties “will be resolved by final and binding arbitration.” Id. at *2-3. “Covered claims” were defined to include “statutory discrimination, harassment and retaliation claims.” Id. at *3.

After the enactment of §7515, the plaintiff filed an action in federal court alleging several claims under Title VII of the Civil Rights Act of 1964, New York State Human Rights Law, and New York City Human Rights Law, including claims for sexual harassment. The parties subsequently stipulated to arbitrate all claims except those for sexual harassment. Morgan Stanley moved to compel arbitration of the sexual harassment claims pursuant to the arbitration agreement.

In granting the employer’s motion to compel arbitration, the court analyzed the text of the FAA. Under the savings clause in §2 of the FAA, a written arbitration provision “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. §2. The savings clause has been interpreted to mean that arbitration provisions may only be invalidated by “generally applicable contract defenses, such as fraud, duress, or unconscionability.” AT&T Mobility v. Concepcion, 563 U.S. 333, 339 (2011). In other words, the savings clause covers “defenses that apply to ‘any’ contract …, establishing sort of ‘equal treatment’ rule for arbitration contracts.” Epic Sys. v. Lewis, 138 S. Ct. 1612, 1622 (2018). However, a state law that “prohibits outright the arbitration of a particular type of claim” is not a defense that applies to any contract and is preempted by the FAA. Latif, at *7, 9-10 (quoting Concepcion, 563 U.S. at 341).

The court also analyzed the language of the CPLR, which provides that, “[e]xcept where inconsistent with federal law, the provisions of such prohibited clause … shall be null and void.” CPLR 7515(b)(iii). A “prohibited clause” is defined as a contractual provision “which requires as a condition of 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(a)(2).

The plaintiff argued that §7515 was not at odds with the FAA because it was part of a package of laws intended to address sexual harassment and it did not focus on prohibiting arbitration agreements generally or otherwise disfavor arbitration. According to the plaintiff, §7515 was different from the California State rule struck down by the Supreme Court in Concepcion because that rule was directed at arbitration, i.e., it barred class action waivers in arbitration agreements. The court rejected these arguments and held that the plain language of §7515 serves to invalidate the parties’ agreement to arbitrate and therefore is inconsistent with the FAA. Latif, at *9. The court emphasized that the FAA has a “strong presumption that arbitration agreements are enforceable,” a presumption that “is not displaced by §7515.” Id. at *9. Thus, the court in Latif compelled the former employee of Morgan Stanley to arbitrate his sexual harassment claims.

As a consequence of FAA preemption as articulated in Latif, most employers may currently continue to mandate arbitration of sexual harassment claims despite §7515. Nevertheless, the decision does not invalidate §7515 altogether. There are limited classes of employees who are excluded from the FAA. See 9 U.S.C. §1 (excluding transportation workers). It is also possible that there are wholly local employers such that their agreements do not affect “commerce” within the meaning of the FAA and therefore are not subject to its reach. 9 U.S.C. §§1, 2. Such employers would be few in light of the Supreme Court’s expansive view of “commerce.” See Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 277 (1995) (holding that the FAA’s phrase “‘involving commerce’ signals an intent to exercise Congress’ commerce power to the full”).

It is likely that Latif will also impact recently enacted legislation. As the court noted, the New York legislature passed a bill on June 19, 2019 to extend §7515’s prohibition against mandatory arbitration to all discrimination claims, not just sexual harassment claims. Latif, at n.2. The bill, which was pending at the time of the Latif decision, was signed into law by Governor Cuomo on August 12, 2019 and becomes effective on Oct. 11, 2019. The court noted, in dicta, that §7515, as expanded, also would “not provide a defense to the enforcement of the [parties’ arbitration agreement],” thereby calling into question its compatibility with the FAA. Id.

The Future of Mandatory Arbitration

On July 25, 2019, the plaintiff in Latif filed a notice of appeal. The Second Circuit will decide the fate of §7515 and whether the FAA’s policy in favor of arbitration trumps New York’s prohibition against forced arbitration when it comes to sexual harassment claims.

The New York state legislature could certainly take up the matter again as well. In the course of enacting §7515, there were questions on the Senate floor as to whether it might be preempted by the FAA. See N.Y. State Senate, Stenographic Rec., 241st Leg., Reg. Sess., at 1851. Section 7515 was included in the budget bill at the eleventh hour, and there was no opportunity for public hearings. Id. at 1867. The legislature left open the possibility of returning to the package of anti-sexual harassment laws and revising them if its goals were not achieved. Id.

Other states have recently attempted to curb mandatory arbitration of sexual harassment claims in different ways, which may also be instructive. For example, Washington prohibits arbitration clauses in which an employee is required to waive his or her right to pursue a claim publicly. See Wash. Rev. Code §49.44.085 (2018). This leaves open the possibility of arbitrations that are not confidential, which may be enough to withstand FAA preemption. Maryland, Vermont, and New Jersey prohibit provisions that waive substantive or procedural rights for sexual harassment claims and also prohibit retaliation against any employee who refuses to sign such provisions. See N.J. Rev. Stat. §10:5-12.7 (2019); Md. Code Ann. Labor and Employment §3-715 (2018); Vt. Stat. Ann. 21 §495h (2018). While the prohibition against waiver of rights could invalidate mandatory arbitration agreements and thus be preempted by the FAA, the prohibitions on retaliation are arguably enforceable. From time to time, the New York Assembly and Senate have introduced bills with an approach similar to the one taken by Maryland, Vermont, and New Jersey, but these bills have not been enacted.

On the federal level, several bills have recently been introduced that would prohibit mandatory arbitration of sexual harassment claims. These include the Ending Forced Arbitration of Sexual Harassment Act in December 2017, the Restoring Justice for Workers Act in October 2018, and the Forced Arbitration Injustice Repeal Act in February 2019. While none of these bills have made significant progress to date, they do reflect an intention by some members of Congress to bring sexual harassment claims into the open and afford employees the option of resolving them in court.

Conclusion

The New York State legislature plainly intended that mandatory arbitration of sexual harassment be eliminated. However, to paraphrase Mark Twain, “The report of its death was an exaggeration.” The District Court in Latif rendered §7515 unenforceable where the agreement is subject to the FAA—a holding that applies to the overwhelming majority of employment agreements. The issue will be taken up by the Second Circuit. New legislation on the federal and state level is also possible. Accordingly, the future of mandatory arbitration is far from settled.

Frances Kulka Browne is a partner in the law firm of Brody & Browne and an adjunct professor at Fordham Law School. Erika Ghaly is an associate at the firm.