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Federal Court Applies Mandatory Arbitration Clause to Sexual Harassment Claims in Spite of Recent State Law Prohibition

Published by and on August 27, 2019

In response to the wave of #MeToo sexual harassment claims, New York passed New York Law, N.Y. C.P.L.R. § 7515 (“Section 7515”), which prohibits the use of mandatory arbitration clauses to resolve any allegation or claim of an unlawful discriminatory practice of sexual harassment.

In response to the wave of #MeToo sexual harassment claims, New York passed New York Law, N.Y. C.P.L.R. § 7515 (“Section 7515”), which prohibits the use of mandatory arbitration clauses to resolve any allegation or claim of an unlawful discriminatory practice of sexual harassment. Section 7515 was signed into law in April 2018 and became effective on July 11, 2018. In June 2019, New York expanded this prohibition on mandatory arbitration clauses regarding all claims of discrimination and harassment—not just sexual harassment.

Plaintiff Mahmoud Latif brought a discrimination, hostile work environment, and retaliation suit against his former employer, Morgan Stanley. Latif alleged that he had been harassed about his sexual orientation and religion, sexual assaulted by a supervisor, and the subject of sexual advances and inappropriate touching. Latif alleged he complained to the human resources department and, after many months of back and forth communication with HR, was terminated just over a year after accepting the position.

The defendants moved to compel arbitration of Latif’s claims. When Latif was hired by Morgan Stanley, he signed an offer letter that referenced Morgan Stanley’s arbitration program/agreement, which covered statutory discrimination, harassment, and retaliation claims, among other employment-related claims. The arbitration agreement stated that it was governed and interpreted with the Federal Arbitration Act (“FAA”). The parties agreed that the agreement was binding as to all Latif’s claims except the sexual harassment claim. Latif argued the arbitration agreement did not apply in light of the recently enacted New York Law, N.Y. C.P.L.R. § 7515, which prohibits use of a mandatory arbitration clause or provision to resolve any allegation or claim of an unlawful discriminatory practice of sexual harassment.

In its opinion, the U.S. District Court for the Southern District of New York court cited the FAA’s policy in favor of the enforcement of arbitration agreements, emphasizing how the FAA’s policy is not easily displaced by state law. The court acknowledged that state law is preempted “to the extent it stands as an obstacle to the accomplishment and execution of the full purposes and objectives of the FAA.” If a state law directly conflicts with the arbitration of a particular type of claim, the FAA displaces the conflicting rule. Section 7515 states that it does not apply where inconsistent with federal law and that employers are not prohibited from incorporating a non-prohibited clause or other mandatory arbitration provision within a contract upon which the parties agree.

The court also held that the FAA’s saving clause did not apply here. The savings clause provides that a mandatory arbitration agreement is valid and enforceable unless “a ground as exists at law or in equity for the revocation of any contract” (e.g. fraud, duress, unconscionability, etc.). Section 7515, however, is a state law prohibiting the arbitration of a particular type of claim, which discriminates against arbitration agreements in particular, as opposed to creating a new general contract defense. Such a provision, according to the court, does not fall within the FAA’s savings clause.

Welter Insight

Following the Latif decision, it is likely that federal courts will uphold the enforceability of mandatory arbitration clauses in discrimination and harassment claims in New York, despite Section 7515 and its subsequent expansion. Therefore, employers will likely have success enforcing these agreements in federal court as long as they are not invalidated by the courts on other grounds such as fraud, duress, or unconscionability. Notably, there is a proposed bi-partisan Senate bill called the Ending Forced Arbitration of Sexual Harassment Act, which would amend the FAA to prohibit pre-dispute mandatory arbitration clauses for sexual harassment claims. If the Act passes, it would significantly impact the legal landscape on this issue.

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