U.S. Chamber of Commerce in Washington, D.C. Photo by Diego M. Radzinschi/ALM

A state law restricting arbitration agreements in employment contracts in the wake of the #MeToo movement is facing a challenge in federal court.

The U.S. Chamber of Commerce and the New Jersey Civil Justice Institute claim in their suit that the Federal Arbitration Act preempts N.J.S.A. 10:5-12.7, which was signed into law in March. The New Jersey law deems unenforceable any employment contract "that waives any substantive or procedural right or remedy relating to a claim of discrimination, retaliation, or harassment," and also provides that "no right or remedy under the Law Against Discrimination or any other statute or case law may be prospectively waived."

While the statute does not use the word "arbitration," it has been read to bar enforcement of arbitration agreements in employment contracts. The complaint refers to the measure as "a complete ban on pre-dispute employment arbitration agreements."

The disputed language was enacted as part of S-121, which was adopted by overwhelming majorities in the Senate and Assembly and signed by Gov. Phil Murphy on March 18. Another part of S-121, which is not a focus of the lawsuit, restricts nondisclosure agreements in sexual harassment and discrimination suits.

Supporters of the bill argued that nondisclosure agreements were often used to silence and intimidate survivors of sexual assault and harassment.

A measure similar to New Jersey's law was enacted in New York in 2018, but a judge in the Southern District of New York ruled on June 26 that the measure is preempted by the FAA.

The suit, filed Aug. 30, cited several other cases in which the Supreme Court struck down state laws restricting arbitration clauses in employment.

"Time and time again, the Supreme Court has explained that the Federal Arbitration Act 'forecloses state legislative attempts to undercut the enforceability of arbitration agreements' by preempting state laws that frustrate the Act's purpose," the suit states, citing Southland v. Keating, a 1984 U.S. Supreme Court case.

The practical effect of N.J.S.A. 10:5-12.7 is to prohibit all predispute arbitration agreements in new or revised employment contracts, the suit says. The attorney general has the right to enforce the statute against employers by bringing suit against them in Superior Court.

Attorney General Gurbir Grewal is the sole defendant in the case. The suit notes that Grewal joined a multistate coalition in 2018 urging Congress to pass a federal ban on certain predispute arbitration agreements, and that Grewal said in a public statement that his office intends to "step up its efforts" to enforce New Jersey's anti-discrimination laws.

The plaintiffs are represented by Andrew Pincus and Archis Parasharami of Mayer Brown in Washington, along with Shalom Stone of Stone Conroy in Florham Park. Alida Kass of the Civil Justice Institute and Steven Lehotsky of the Chamber of Commerce also represent the plaintiffs. Stone did not immediately respond to a request for comment.

A spokesman for the attorney general, Lee Moore, declined to comment on the suit.

Assemblyman Jon Bramnick, R-Union, a prime sponsor of the bill, declined to comment on the lawsuit, but said "there are many bills discussed in Trenton where there is the treat of litigation or the argument that it is preempted by federal law."