Does FAA Prevent States from Barring Mandatory Arbitration?

In response to the #MeToo movement, several states have enacted laws that prohibit employers from requiring prospective employees to arbitrate sexual harassment claims, asserting that mandatory arbitration effectively forces employees to give up their right to a jury trial. California, Maryland, New Jersey, New York, Vermont and Washington are among the states that have banned mandatory arbitration clauses in employment contracts for sexual harassment claims, despite the U.S. Supreme Court’s confirmation of the enforceability of arbitration agreements under federal law.

Critics of mandatory arbitration agreements argue that they discourage employees from pursuing claims of sexual harassment and conceal alleged employer misconduct from the public. Supporters of mandatory arbitration agreements, on the other hand, assert that they protect parties from wasting time, money and resources in class actions. Proponents of mandatory arbitration agreements have successfully argued that the Federal Arbitration Act (FAA) preempts states from enacting laws that ban arbitration agreements. Courts continue to grapple with this conflict.

The following is a compilation of relevant case law and an overview of the pertinent arguments regarding mandatory arbitration prohibitions throughout the country.

Conflict Between Mandatory Arbitration Prohibitions and the FAA

The Supreme Court recently affirmed the enforceability of arbitration agreements under federal law – and in its decisions, the Court acknowledged the value of using arbitration agreements as a deterrent to class action litigation.1 The Court has concluded that the FAA preempts state laws that “stand as an obstacle to the accomplishment of the FAA’s objectives,” while acknowledging that the FAA preserves traditional state law defenses to arbitration such as duress, unconscionability or fraud.2 Despite the Supreme Court’s position on this issue, many states have enacted statutes that preclude employers from requiring current employees and applicants to agree to arbitrate future claims of sexual harassment.

New York’s Attempt to Ban Arbitration

In Latif v. Morgan Stanley & Co. LLC, the Southern District of New York had to decide whether Article 75 of New York’s Civil Practice Law and Rules (CPLR 7515) conflicted with the goals and objectives of the FAA, in violation of the Supremacy Clause of the United States Constitution.3 New York enacted this statute in an attempt to address sexual harassment in the workplace by prohibiting employers from requiring employees to arbitrate sexual harassment claims and by affording accusers the option of a public trial.

Shortly after CPLR 7515 took effect, a former employee filed suit in federal court alleging claims of sexual harassment against his former employer. The employer moved to compel arbitration. The former employee argued that CPLR 7515 prevented the defendant from compelling arbitration.4 The court ultimately granted the employer’s motion to compel.

In its decision, the court focused on the plain language of the FAA, which states that 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.”5 In other words, an arbitration agreement is enforceable unless the plaintiff can prove a defense based on fraud, duress or unconscionability.6 Conversely, CPLR 7515 created an outright prohibition against the formation or enforcement of arbitration agreements in cases involving sexual harassment, without the need to show fraud, duress or unconscionability.7 As a result, the court held that CPLR 7515’s prohibition against arbitration agreements was preempted by the FAA and granted the employer’s motion to compel arbitration.

The Supreme Court affirmed the enforceability of arbitration agreements under federal law – and acknowledged the value of using arbitration as a deterrent to class action litigation.

California’s Attempt to Ban Arbitration

California also recently enacted a similar statute, AB 51, which precludes employers from requiring any applicant or employee “to waive any right, forum, or procedure” for a violation of the Fair Employment and Housing Act or the Labor Code as a condition of their employment, continued employment, or the receipt of any employment-related benefit.8 Employers who violate AB 51 could be subject to misdemeanor criminal liability.9

On December 6, 2019, the U.S. Chamber of Commerce challenged AB 51 in the U.S. District Court for the Eastern District of California.10 The challenge stems from the theory that AB 51 unconstitutionally violates the Supremacy Clause of the United States Constitution because it conflicts with the FAA. The suit seeks not only a declaration that the FAA preempts AB 51 but also a declaration that the FAA’s express language protects both the formation and enforcement of arbitration agreements, an argument that is consistent with prior case law.11

On January 31, 2020, the Eastern District of California issued a preliminary injunction against the state of California, enjoining the state from enforcing AB 51.12 The state of California is able to file an immediate appeal of the order granting the preliminary injunction.13 However, the injunction will likely remain in place until the court makes a permanent ruling on the preemption issue.

These two decisions illustrate the uncertainty in this area of law. Although employers in New York and California may currently be able to require employees to sign arbitration agreements as a condition of employment, the U.S. Court of Appeals for the Second and Ninth Circuits could decide otherwise. Ultimately, the Supreme Court may have to make a ruling on the validity of these laws, which could have widespread implications on the status of arbitration throughout the nation.

Employers in Maryland, New Jersey, Vermont and Washington should also keep a watchful eye on the following laws, which are not currently being challenged in the federal courts, but could be challenged under similar theories as the above-referenced cases.

Maryland H.B. 159614

  • Maryland’s anti-arbitration law renders null and void all agreements or provisions in employment contracts requiring arbitration of prospective sexual harassment claims and claims of retaliation arising therefrom.
  • Employers are prohibited from taking “adverse action” against employees who fail or refuse to enter into agreements prohibited by the law. An “adverse action” includes discharge, suspension, demotion or discrimination in the terms, conditions or privileges of employment, or any retaliatory acts that result in a change to the terms and conditions of employment that would dissuade employees from asserting their rights under the law, or discourage others from testifying in an action involving violations of the law.

New Jersey S12115

  • Employers are prohibited from entering provisions in employment contracts that waive an employee’s substantive and procedural rights or remedies relating to a claim of discrimination, retaliation or harassment.
  • The amendment further provides that “no person shall take any retaliatory action, including but not limited to failure to hire, discharge, suspension, demotion, discrimination in the terms, conditions or privileges of employment, or other adverse action, against a person, on grounds that the person does not enter into an agreement or contract that contains a provision deemed against public policy.”

Ultimately, the Supreme Court may have to make a ruling on the validity of these laws, which could have widespread implications on the status of arbitration throughout the nation.

Vermont H.70716

  • Prohibits employers from requiring any employee or prospective employee, as a condition of employment, to sign an agreement that waives “a substantive or procedural right or remedy available to the employee with respect to a claim of sexual harassment.”
  • Employers are required to adopt a policy against sexual harassment that includes a statement that it is unlawful to retaliate against an employee for bringing a complaint of sexual harassment or for cooperating in an investigation of sexual harassment.

Washington S.B. 599617

  • An employer may not require an employee, as a condition of employment, to sign a nondisclosure agreement, waiver or other document that prevents the employee from disclosing sexual harassment or sexual assault occurring in the workplace, at work-related events coordinated by or through the employer, or between employees, or between an employer and an employee, off the employment premises.

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