New York’s Ban on Arbitration of Sexual Harassment Claims: Can it Survive Federal Preemption?

Seyfarth Synopsis: New York’s recently enacted prohibition on arbitration agreements of sexual harassment claims is likely to be preempted by federal law.  But will such clauses effectively vanish in response to other legislative enactments or societal pressure?

Employers with operations in New York are surely aware of their new obligations to issue a detailed anti-harassment policy and conduct interactive employee training.  Those with employees in New York City should also be gearing up to comply with additional anti-harassment obligations.

These requirements are part of a series of enactments by the State and City governments in the wake of the #MeToo movement, which brought workplace sexual harassment issues to the forefront of public attention, with legislators not far behind.

Amid these high-profile enactments and the scramble by employers to comply by the effective dates, one provision of the State law has been overshadowed:  a prohibition on pre-dispute agreements that mandate arbitration of sexual harassment claims.

That provision added a new section to the CPLR stating that, “except where inconsistent with federal law,” employers are prohibited from including, in any contracts with employees, provisions that mandate arbitration for allegations or claims of sexual harassment.  The law also declares null and void clauses in existing contracts that mandate arbitration of sexual harassment claims.

The key phrase in the law is not the prohibition itself but the preface:  “except where inconsistent with federal law.”  With that language, the Legislature recognized that the prohibition of arbitration of harassment claims was potentially superseded by the Federal Arbitration Act (“FAA”) and might not withstand a court challenge.

As federal courts have said again and again, the FAA reflects a “liberal policy” favoring enforcement of arbitration agreements, notwithstanding state procedural or substantive rules to the contrary.  Courts have frequently struck down state laws that seek to curtail arbitration in some manner.  For example, in AT&T Mobility LLC v. Concepcion, the Supreme Court held that a California rule barring class action waivers in arbitration agreements was pre-empted by the FAA.  It said:  “when state law prohibits outright the arbitration of a particular type of claim…the conflicting rule is displaced by the FAA.”

In one recent New York case, an appellate court applied FAA pre-emption to strike a provision of the State’s General Business Law that prohibited mandatory arbitration clauses in consumer contracts.  That rule, it said, was a categorical prohibition on arbitration and was therefore “displaced by the FAA.”

In light of these precedents, the new CPLR provision concerning harassment claims appears to have little chance of surviving FAA pre-emption.  It is a categorical prohibition of arbitration of a certain type of claim, and is precisely the type of state law that courts have deemed preempted in the past.

But there are three possible outs:

First, the FAA applies only to arbitration agreements “affecting commerce.”  To the extent an employer-employee arbitration agreement did not affect commerce, it would not be covered by the FAA.

However, this should offer little solace to the proponents of the arbitration ban, since courts have regularly affirmed that, in enacting the FAA, Congress exercised its commerce power “to the full” and that the statute’s coverage language should be given “the broadest possible reading.”  In the modern economy, there are few if any employment relationships that do not “affect commerce” to a degree contemplated by the FAA.  The only possible exceptions would likely be in very small establishments with an entirely local focus and few employees.

Second, employment relationships involving transportation workers are explicitly excluded from the coverage of the FAA.  So to the extent that an arbitration agreement falls within that exception, pre-emption would not apply and the New York statute could make the targeted arbitration agreements unenforceable.  (The Supreme Court is currently considering whether contracts with independent contractors in the transportation industry fall within the FAA exception.)

Third, and potentially most far-reaching:  a bill pending in Congress would amend the FAA to prohibit arbitration of sexual harassment claims.  If enacted, this amendment would effectively federalize the New York statute, and make the question of pre-emption moot.

The bill, called the Ending Forced Arbitration of Sexual Harassment Act, has some bipartisan support – the two lead sponsors are Senators Kirsten Gillibrand (D-N.Y.) and Lindsey Graham (R-S.C.) – but the bill has been pending for almost a year with no substantive progress, so its prospects at this point are uncertain, at best.

Barring passage of the new federal law, or some other federal enactment, or a fundamental revision to the jurisprudence of FAA preemption, the New York prohibition on arbitration of sexual harassment claims will almost surely be preempted.  But until a court actually weighs in – presumably by deciding an employer’s motion to compel arbitration in response to a lawsuit asserting harassment claims – practitioners cannot know for certain.

Aside from the legal nuances of federal preemption, there is a larger issue at play: a backlash to arbitration in the context of the #MeToo movement.  Starting in 2017, as allegations of harassment felled high-profile figures in business and media, many commentators have argued that arbitration clauses have enabled serial harassers to avoid detection by keeping their cases out of the court system in favor of a confidential dispute resolution system.

Those arguments have had traction.  In February 2018, the Attorneys General of all 50 states co-signed a letter to the Congressional Leadership calling for legislation to allow victims of sexual harassment to have “access to the courts,” free from “the secrecy requirements of arbitration clauses.”  A few months earlier, Brad Smith, the Chief Legal Officer of Microsoft, announced that the company would no longer enforce arbitration agreements with employees with respect to sexual harassment claims.  He said:  “Because the silencing of voices has helped perpetuate sexual harassment, the country should guarantee that people can go to court to ensure these concerns can always be heard.”

Seen in this broader political and socioeconomic context, the goal of the New York prohibition – abolition of forced arbitration of sexual harassment claims – may survive, even if the legal provision itself goes down to preemptive defeat.  In the end, New York employers that now have, or are considering adopting, mandatory arbitration provisions for sexual harassment claims can take comfort that federal preemption will likely rescue their agreements.  But that comfort may be short-lived in light of other changes that could undermine their agreements nonetheless.