United States: NY Law Doesn't Prevent Arbitration Of Sexual Harassment Claims

Recent New York legislation in reaction to the #MeToo movement has sought to limit or foreclose arbitration of employment-related disputes. See N.Y. C.P.L.R. § 7515 ("§ 7515") and its June 19, 2019, amendment, bill S6577/A842. The bill, initially signed into law in April 2018, was to "deal[] with the scourge of sexual harassment." See N.Y. State Senate, Stenographic Rec., 241st Leg., Reg. Sess., at 1855 (Mar. 20, 2018). But some believed that the Federal Arbitration Act (FAA) would likely preempt the legislation, especially when § 7515(b) expressly provided "[e]xcept where inconsistent with federal law."

Now, one district court has found the legislation is preempted by the FAA. See Mahmoud Latif v. Morgan Stanley & Co., LLC, et al., Case No. 1:18-cv-11528 (S.D. New York 6-26-19). On June 26, 2019, District Judge Denise Cote found provisions of New York law impacting arbitration preempted by the FAA. In reaching that conclusion, Judge Cote applied an analytical approach consistent with recent U.S. Supreme Court decisions.

The Underlying Facts

Latif was brought by a former Morgan Stanley & Co. employee, who is Muslim and gay, against the company and seven individual employees, claiming a variety of work-related violations, including sexual harassment. Mr. Latif was covered by Morgan Stanley's CARE Arbitration Program Agreement.

The parties did not contest the enforceability of the arbitration agreement, except as to Latif's sexual harassment claims. Indeed, they stipulated to that fact on March 21, 2019. After an amended complaint was filed, defendants brought a motion to compel arbitration and stay the proceedings.

The Court's Legal Analysis

The sole dispute between the parties was whether Latif's sex harassment claims were excluded from arbitration by the recently enacted § 7515. And the parties agreed that the issue was for the court to decide.

Based on Lamps Plus, Inc. v. Varela, 139 S. Ct. 1407 (2019), and AT&T Mobility, LLC v. Concepcion, 563 U.S. 333 (2011), the district court decided a party "seeking to avoid arbitration generally bears the burden of showing the agreement to be inapplicable or invalid," citing Harrington v. Atl. Sounding Co., 602 F. 3d 113, 124 (2d Cir. 2010). Moreover, the "savings clause" of the FAA, Section 2, only covers defenses that apply to "any contract," not those defenses that "target arbitration either by name or by more subtle methods." Epic Sys. Corp. v. Lewis, 138 S. Ct. 1612, 1622 (2018). Following Concepcion, the court confirmed that "when state law prohibits the arbitration of a particular type of claim . . . [t]he conflicting rule is displaced by the FAA." See 563 U.S. at 341.

With that analytical framework, the court reviewed § 7515, which became effective on July 11, 2018, and specifically prohibited clauses requiring arbitration "to resolve any allegation or claim of an unlawful discriminatory practice of sexual harassment." See N.Y. C.P.L.R. § 7515(a)(2). Given that language, use of § 7515 to nullify the parties' arbitration agreement would conflict with the FAA. And, the FAA's savings clause had no impact, because the new law was not a ground in law or equity "for the revocation of any contract." See 9 U.S.C. § 2. Interestingly, the district court noted in footnote 2 that on June 19 the New York legislature passed a bill that prohibited mandatory arbitration of any discrimination claim. But this new amendment didn't provide a defense to the arbitration, or change the outcome of the case.

Plainly, § 7515 was initially focused on sexual harassment claims, but its application in a multifaceted claim case would be more difficult. Some claims could be arbitrated and some tried to a jury. Here, Latif brought claims for discrimination, retaliation, assault and battery, and infliction of emotional distress. The parties' March 21, 2019, stipulation provision provided:

Plaintiff agrees that the Arbitration Agreement would be enforceable . . . except that Plaintiff contends that the Arbitration Agreement has been declared null and void or unenforceable as to his claims of sexual harassment by NY CPLR § 7515, as of July 11, 2018. Plaintiff does not otherwise challenge the enforceability of the Arbitration Agreement.

If the claims went forward in both venues, would collateral estoppel or issue preclusion, based on the first claim resolved, impact the others? A potentially complex and expensive dispute resolution procedure. Perhaps that's why the law was amended in June 2019 to exclude arbitration of all discrimination claims. But as the district court noted, that change would not save the new law from FAA preemption.

BOTTOM LINE

The Latif case illustrates that state laws targeting enforcement of arbitration agreements cannot escape FAA preemption regardless of whether they only seek to exclude certain types of claims – such as those for sexual harassment.

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