Last year, New York joined a growing number of states that have banned mandatory arbitration agreements for sexual harassment claims. On June 26, 2019, the Southern District of New York said, "not so fast." In a case of first impression for New York, United States District Judge, Denise Cote, ruled that the Federal Arbitration Action (FAA) preempted New York's law.
Preemption is a child of the U.S. Constitution's supremacy clause. Essentially, it means that federal law controls in the event of a conflict between a federal law and a state law. The preemption doctrine was front and center in the case before Judge Cote, Latif v. Morgan Stanley, 18-CV-11528 (S.D.N.Y.).
Congress enacted the FAA to promote the enforceability of arbitration agreements. Pursuant to the FAA, courts are duty-bound to enforce arbitration agreements except for reasons that exist at law or in equity for the revocation of any contract, such as fraud, duress, or unconscionability. See 9 U.S.C. § 2.
The plaintiff in Latif signed a mandatory arbitration agreement when he began employment with two of the defendants. By its terms, the mandatory arbitration agreement covered a swath of claims arising from the plaintiff's employment, including sexual harassment claims. After his employment ended, the plaintiff filed a lawsuit for, among other things, sexual harassment. The defendants later filed a motion to compel arbitration. The plaintiff opposed the motion, claiming that New York's prohibition against mandatory arbitration agreements for sexual harassment claims allowed him to pursue his claim in court.
The court determined the FAA preempted New York's law. Judge Cote explained that voiding the parties' agreement to arbitrate sexual harassment claims "would be inconsistent with the FAA." Accordingly, she granted the defendants' motion and ordered the parties to arbitrate.
So what should New York employers take away from the Latif decision?
First, employers that recently carved out sexual harassment claims from their mandatory arbitration agreements may want to consider removing the carve-out. Of course, all employers should first evaluate whether arbitration is the preferred forum for resolving disputes with their employees.
Second, employers should still be wary of New York's prohibitions against confidentiality agreements. The New York legislature recently passed a bill that, if signed by Governor Cuomo, will limit the enforceability of confidentiality agreements that apply to allegations of harassment (discussed in more detail here). There is no federal preemption issue for state law limitations on confidentiality agreements. Therefore, some employers may want to forego arbitration for harassment claims if employees are not required to maintain the confidentiality of the proceedings.
Last, while the Latif decision is a win for employers that prefer arbitration, employers must still address sexual harassment issues in the workplace. A well-drafted anti-harassment policy and frequent anti-harassment training programs are some of the best ways to curb the risk of an expensive and potentially embarrassing sexual harassment claim. Savvy employers will proactively speak with their employees about how to report and prevent harassment.