U.S. Court Rejects NY Law Against Mandatory Arbitration of Sexual Harassment Claims

July 1, 2019Alerts

A federal court in Manhattan has invalidated New York's statewide prohibition against provisions in employment agreements that require the mandatory arbitration of sexual harassment claims.

In its June 26, 2019 decision in Latif v. Morgan Stanley & Co. LLC, the court refused to enforce the New York law after finding that it is preempted by the Federal Arbitration Act (FAA).

U.S. District Judge Denise Cote of the Southern District of New York became the first judge to hold that Section 7515 of New York’s Civil Practice Law and Rules is indeed preempted by the FAA and thus is unenforceable.

Impact of the Decision

Judge Cote used a “straightforward” analysis to easily find that the FAA trumps New York’s arbitration ban. After Latif, employers who have entered into arbitration agreements with their employees can be more confident that such agreements will be enforced, even with respect to sexual harassment claims.

Further, in June 2019, New York expanded its mandatory arbitration ban to apply to all claims of discrimination and harassment and not just to claims of sexual harassment. Following Latif, it is almost certain that federal courts are going to find this expansion to be preempted by the FAA and thus unenforceable. Accordingly, as a result of Latif, employers can have increased confidence that their arbitration agreements will likely be enforced provided the agreement would not be invalidated by generally applicable contract defenses such as fraud, duress, or unconscionability.

Background

Enacted in April 2018, Section 7515 was part of sweeping New York legislation that fundamentally altered the legal landscape for employers with respect to their responsibility to combat sexual harassment and their rights and obligations to resolve sexual harassment claims.

Many employers require their employees to sign arbitration agreements in which the parties (i.e., the employer and the employee) agree to submit most claims to binding arbitration. These agreements have many benefits compared to traditional litigation, including confidentiality, expediency, simplicity and decreased costs. At times, these arbitration agreements also contain class action waivers, which require that any arbitration between the parties be conducted on an individualized basis rather than on a class, collective or multi-employee basis.

Under the FAA and following Supreme Court precedent, courts have enforced such arbitration agreements (including those containing class action waivers) unless the arbitration agreement itself was unenforceable under “generally applicable contract defenses, such as fraud, duress, or unconscionability.” Indeed, over the past twenty years, the Supreme Court has issued a number of rulings overturning state laws and court decisions that tried to restrict mandatory arbitration between employers and employees. The Supreme Court time and again has held that the FAA requires states (and courts) to treat arbitration agreements in the same manner as any other contracts. To the extent a state tries to treat arbitration agreements less favorably than other contracts, the FAA would preempt and supersede state law.

Latif v. Morgan Stanley

On June 5, 2017, Morgan Stanley hired Mahmoud Latif to work in one of its New York City offices. As part of the hiring process, Latif signed a written offer letter of employment. The offer letter incorporated Morgan Stanley’s CARE Arbitration Program Arbitration Agreement (“Arbitration Agreement”) into its terms and a copy of the Arbitration Agreement was attached to the offer letter. The Arbitration Agreement required Latif and Morgan Stanley to submit to final and binding arbitration any “covered claim” and that the Arbitration Agreement would be governed by and interpreted in accordance with the FAA. The Arbitration Agreement defined a “covered claim” to include, among other things, any claim of discrimination or harassment.

Soon after Latif commenced employment, in the fall of 2017, he alleged that he became the target of inappropriate comments regarding his sexual orientation, inappropriate touching and sexual advances. He also claimed that in February 2018, his female supervisor sexually assaulted him. Latif reported these allegations to Morgan Stanley’s Human Resources Department. Six months later, in August 2018, Morgan Stanley terminated Latif’s employment.

On December 10, 2018, Latif filed a complaint in the United States District Court for the Southern District of New York alleging, among other things, that he had been the victim of sexual harassment and sex discrimination while employed at Morgan Stanley in violation of Title VII of the Civil Rights Act of 1964, the New York State Human Rights Law and the New York City Human Rights Law. Rather than answering the complaint, Morgan Stanley moved to compel arbitration of Latif’s claims.

The District Court’s Decision

Latif conceded that all of his claims other than his claims for sexual harassment were subject to arbitration. However, he contended that Section 7515 precluded the arbitration of his sexual harassment claim. To avoid FAA preemption, Latif argued that Section 7515 was part of a comprehensive bill that amended a number of different statutes and therefore the legislation was not aimed at arbitration specifically and not preempted by the FAA.

Judge Cote disagreed, easily rejecting Latif’s arguments, and compelling arbitration of his sexual harassment claim. Relying on a number of U.S. Supreme Court decisions, she noted that the FAA requires arbitration agreements to be treated in the same manner as any other contract and that a state could not subject an arbitration agreement to more scrutiny than other contracts. She noted that Section 7515 prohibits the mandatory arbitration of sexual harassment claims. As such, the statute treats an arbitration agreement less favorably than other contracts, which violates the plain language of the FAA. This “straightforward” analysis clarifies that Section 7515 is preempted by the FAA, and is therefore unenforceable. Accordingly, the court granted Morgan Stanley’s motion to compel arbitration.

For more information about this Alert, please contact Glenn S. Grindlinger at 212.905.2305 or [email protected], or any member of the firm’s Labor & Employment Department.