United States: FAA Preempts NJLAD's Prohibition On Mandatory Arbitration, With A Catch

Newark, N.J. (March 29, 2022) -  The New Jersey Appellate Division's recent decision in Gilbert Antonucci v. Curvature Newco, Inc., et al., Docket No. A-1983-20 (February 15, 2022), confirms what was understood to be the law: a properly drafted and consented-to employer-employee arbitration agreement is binding notwithstanding the prohibition on mandatory arbitration for discrimination claims set forth in the New Jersey Law Against Discrimination (NJLAD) because the Federal Arbitration Act (FAA) preempts that prohibition as to arbitration agreements governed by the FAA.

The decision is significant because it is the first published (and therefore precedential) decision at the state level to so rule. The United States District Court for the District of New Jersey had previously ruled in the same manner in N.J. Civil Justice Institute v. Grewal, Civ. No. 19-17518, 2021 U.S. Dist. LEXIS 57437 (D.N.J. Mar. 25, 2021), which similarly held that the FAA preempted the NJLAD provision. It is unknown whether this decision will be appealed to the New Jersey Supreme Court, and it is uncertain how that court would rule if the case comes before it.

The issue presented arises from the enactment of Section 12.7 of the NJLAD on March 18, 2019. Section 12.7 provides:

N.J.S.A. 10:5-12.7(a)-(b).

The NJLAD also provides that any person claiming "an unlawful employment practice" or "unlawful discrimination" has "the right to file a complaint in Superior Court to be heard before a jury". N.J.S.A. 10:5-13(a)(1)-(2). Thus, Section 12.7 purports to preclude employers from requiring employees to arbitrate any claims arising under the NJLAD.

The Antonucci decision expressly holds that an arbitration agreement is binding and that the NJLAD's prohibition on compelled arbitration is preempted when applied to an arbitration agreement governed by the FAA. This holding is based on the Supremacy Clause of the United States Constitution (art. VII, cl. 2) and binding precedent from the United States Supreme Court holding that state law that conflicts with a federal statute is preempted. Volt Info. Scis., Inc. v. Bd. of Trs. of Leland Stanford Junior Univ., 489 U.S. 568, 478 (1989). The High Court held there that the FAA preempts state laws that limit the availability of arbitration.

The Appellate Division's decision was aided by the express reference in the subject arbitration agreement to the FAA: it stated that it was "enforceable under and subject to the Federal Arbitration Act, 9 U.S.C. Sec. 1, et seq." The court's decision makes clear that it "do[es] not address whether Section 12.7 is enforceable when applied to an arbitration agreement governed by the New Jersey Arbitration Act (NJAA), N.J.S.A. 2A:23B-1 to -36." The issue that remains to be determined is what agreements will be held to be governed by the NJAA as opposed to the FAA.

The Appellate Division's reliance on the arbitration agreement's reference to the FAA underscores that doing so will enhance the prospects of the arbitration agreement being held to be enforceable. However, as the Appellate Division noted, the FAA prohibition applies only to arbitration agreements that involve interstate commerce. It is anticipated that plaintiffs will argue that arbitration agreements adopted by smaller, local businesses do not involve interstate commerce.

Finally, as the Antonucci court pointed out, arbitration agreements will not be enforced where the evidence shows they were not consented to (in this case, the plaintiff spent one hour and 33 minutes reviewing the handbook, including the arbitration agreement). Also, the New Jersey Supreme Court has made clear that the courts will not enforce agreements that purport to waive substantive or procedural rights, such as including a time-limitation provision that shortens the statutory limitation period for bringing NJLAD claims via arbitration. In fact, such a limitation may invalidate the entire arbitration scheme if the scheme is intertwined with the shortening of the statute of limitations.

Takeaway: One-Size-Fits-All Arbitration Agreements May Require Tailoring

In view of the foregoing and the inevitability of further challenges to mandatory arbitration agreements, New Jersey employers should consider regular reevaluation of their employee arbitration agreements to make sure they do not contain provisions that will wind up invalidating the entire arbitration scheme, such as shortened limitations periods. Employers may also want to consider adding references to the FAA. Specifically, employers with operations in multiple states should review the standard language in their arbitration agreements to make sure they pass muster in New Jersey, and they may want to consider using different forms of agreement for states such as New Jersey.

Finally, please recall that, as a previous Lewis Brisbois alert advised, arbitration agreements are no longer enforceable anywhere in the United States as to sexual harassment and assault claims based on the federal Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act, effective March 3, 2022.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.