United States: Court Holds That NY's Prohibition Of Arbitration Agreements Is Preempted By Federal Law

Seyfarth Synopsis:

In April 2018, as part of a sweeping set of reforms to sexual harassment law, New York State enacted a provision to its civil procedure code stating that employers are prohibited from including, in any contracts with employees, provisions that require arbitration for allegations or claims of sexual harassment.  The law also declared such clauses in existing contracts null and void.

As we observed previously, the New York prohibition appeared to be at risk of preemption by the Federal Arbitration Act, which declares that arbitration agreements are generally enforceable and supersedes any state laws to the contrary.  In fact, the New York Legislature recognized the potential for preemption by stating that the prohibition of arbitration clauses applied "except where inconsistent with federal law."

Now, in the first reported decision addressing the preemption issue under the New York law, Judge Denise Cote of the Southern District of New York held that the statute is indeed preempted.

The Decision

The case before Judge Cote was a relatively straightforward claim by a former employee against his former employer and seven individual defendants, involving claims of discrimination, hostile work environment, and retaliation in violation of Title VII, the New York State Human Rights Law, and the New York City Human Rights Law.  The plaintiff claimed, among other things, that he was the target of inappropriate comments regarding his sexual orientation, inappropriate touching, and sexual advances.  He also claimed that a female supervisor sexually assaulted him.

In response to the lawsuit, the defendants filed a motion to compel arbitration, arguing that an arbitration agreement between the plaintiff and the employer required that the claims be arbitrated.  The plaintiff countered that, in light of the new State statute, codified as section 7515 of the Civil Practice Law and Rules, his arbitration agreement was void and unenforceable to the extent that it required him to arbitrate his sexual harassment claims. 

In granting the employer's motion, Judge Cote relied heavily on recent Supreme Court precedent.  Quoting from AT&T Mobility LLC v. Concepcion, she stated that "the FAA reflects both a liberal federal policy favoring arbitration and the fundamental principle that arbitration is a matter of contract."  Quoting next from the Court's most recent arbitration decision, Lamps Plus, Inc. v. Varela, she observed that "state law is preempted to the extent it stands as an obstacle to the accomplishment and execution of the full purposes and objective of the FAA."  She then concluded:  "when state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward:  The conflicting rule is displaced by the FAA."

Applying those principles, Judge Cote held that "application of Section 7515 to invalidate the parties' agreement to arbitrate . . . would be inconsistent with the FAA," and that "[t]he FAA sets forth a strong presumption that arbitration agreements are enforceable and this presumption is not displaced by § 7515."

In so holding, the court rejected the plaintiff's argument that § 7515 reflects a general intent to protect victims of sexual harassment and not a specific intent to single out arbitration for special treatment.  She also rejected the argument that the FAA's savings clause, which recognizes defenses "for the revocation of any contract," compels a different result, because "Section 7515 presents no generally applicable contract defense . . . and cannot overcome the FAA's command that the parties Arbitration Agreement be enforced."

Effect on Recent Amendments to § 7515

Just last week, the New York Legislature amended § 7515 to prohibit mandatory arbitration not only for sexual harassment claims, but all discrimination claims.  Governor Cuomo has not yet signed that amendment into law, but he is expected to do so soon.  In a footnote of the decision, Judge Cote observed that, "[f]or the same reasons described above, § 7515 as so amended would not provide a defense to the enforcement of the Arbitration Agreement."

Thus, even as newly amended, § 7515 is likely preempted by the FAA.  Absent some refinements to the statute to avoid the preemption issue, or an intervening change in federal law, New York employers with existing arbitration agreements that pertain to employment discrimination claims, or those that are considering rolling out an arbitration program for such claims, can rest assured that the existence of § 7515 will not likely pose a barrier to the full enforcement of their agreements.

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