This latest monkey-wrench was thrown into the gears just last week by federal district court Judge Denise Cote when she held that New York’s arbitration law prohibiting arbitration of sexual harassment claims (effective as of July 2018 and reported on by this blog last year) is preempted by the Federal Arbitration Act (“FAA”), and is therefore invalid. This is the first case deciding the merits of this arbitration exclusion. And although Judge Cote didn’t formally rule on the more general, brand-new bar on arbitration of all discrimination claims (harassment or not), she observed in a footnote that the more general bar suffers from the same problem and is probably preempted by federal law, too.

This decision will likely result in a failure-to-launch of the arbitration prohibitions in this latest round of legislation. But for now, here’s the unsettling message for employers navigating the ever-shifting landscape of discrimination law obligations: the new provisions of New York law barring mandatory arbitration of all employment discrimination claims will be struck down, but for the time being, you can’t count on it.

The Facts

In Latif v. Morgan Stanley, et al., the plaintiff alleged that he was subject to discrimination, a hostile work environment, and retaliation, all in violation of federal, state, and city law. Specifically, Mr. Latif alleged that he was the target of inappropriate comments regarding his sexual orientation, inappropriate touching, and offensive comments about his religion. Mr. Latif also alleges he reported these events to human resources, and was terminated shortly thereafter.

As part of his onboarding documentation at hire, Mr. Latif executed a Morgan Stanley Offer Letter. The Offer Letter incorporated Morgan Stanley’s CARE Arbitration Program Arbitration Agreement. This arbitration agreement set forth that any “covered claim” between Mr. Latif and Morgan Stanley would be resolved by binding arbitration. “Covered claims” included “statutory discrimination, harassment and retaliation claims.” The agreement was to be construed in accordance with the FAA.

The Holding

Morgan Stanley moved to compel arbitration of all Mr. Latif’s claims. Mr. Latif did not dispute that his other claims were subject to arbitration, but specifically argued that the sexual harassment claim could not be sent to arbitration due to the New York law prohibiting arbitration of these claims.

To the contrary, Judge Cote found that Mr. Latif’s sexual harassment claims were subject to mandatory arbitration since New York’s law was inconsistent with the FAA. She found that the FAA is clear: when a state law prohibits the arbitration of a specific type of claim (in this case, a sexual harassment claim), then that state law is “displaced by the FAA.” In other words, the FAA’s strong presumption of favoring the enforcement of arbitration agreements overrides New York’s attempt to prohibit arbitration of sexual harassment claims.

Judge Cote went even further to suggest that New York’s recent legislative amendment of prohibiting mandatory arbitration for all discrimination claims would likely meet the same fate.

What This Means for Employers

No one can blame employers who want to rush to their arbitration agreement template and reinsert sexual harassment claims as a covered claim. However, since the Latif decision is only a trial court decision, and there is likely to be an appeal to the Second Circuit, employers should exercise caution.

For those employers that wish to revise their arbitration agreements, they should be prepared to engage in a similar court battle over the validity of arbitrating sexual harassment claims. Depending the whether this battle will be in state or federal court, and depending on the judge who decides the matter, employers may not see the same result as Latif. In that case, the employer will then have to continue onto litigation in court.

For those employers who don’t wish to revise their arbitration agreements, they should closely watch the legal news regarding this topic to see if additional trial courts, or better yet, an appellate court, reinforce Judge Cote’s decision in Latif. This may take a few months to a few years.

The United States Supreme Court in AT&T Mobility v. Concepcion made clear that class waivers are enforceable under the Federal Arbitration Act (“FAA”), at least in the context of consumer class actions, and that state laws that inhibit the full effectuation of the FAA are void. The NLRB, however, in its continuing bid to establish its relevance in the contemporary workplace, has challenged class waivers executed by employees; in D.R. Horton, Inc. v. NLRB, the NLRB held in 2012 that employees’ Section 7 rights are violated by such waivers, and that the FAA does not override this right. The NLRB’s ruling in D.R. Horton spawned a great deal of commentary and litigation – the NLRB’s ruling that class waivers are unenforceable was itself rejected by an appellate court in the Fifth Circuit. A host of federal appellate courts, as well as lower courts, have also criticized the NLRB’s ruling and refused to adopt its reasoning. Notably, the Fifth Circuit decision emphasized that the use of class action litigation is a procedural, rather than a substantive right, and that prohibiting class action waivers would discourage arbitration and, thus, violate the spirit and purpose of the FAA.

In Morris v. Ernst & Young, 9th U.S. Circuit Court of Appeals, No. 13-16599, the three-judge panel held 2-1 that Ernst & Young’s arbitration agreement containing a class action waiver violated the NLRA. In doing so, the court summarily rejected the employer’s argument that the FAA effectively supersedes the NLRA. Instead, the court reasoned that the FAA’s “saving clause”, which validates arbitration agreements save for instances in which grounds exist for their revocation, is rendered moot due to the fact that the contract requires employees to waive their substantive federal right to pursue legal claims together. Judge Sidney R. Thomas wrote for the majority: “The problem with the contract at issue is not that it requires arbitration…it is that the contract term defeats a substantive federal right to pursue concerted work-related legal claims.”

In a pointed dissent, Judge Sandra S. Ikuta cited U.S. Supreme Court precedent in support of her position, setting the stage for the Highest Court to weigh in and clarify what, until today, appeared to be settled law. Per Judge Ikuta’s dissent, Supreme Court precedent unequivocally requires that, when a party claims that a federal statute precludes the enforcement of an arbitration agreement, the courts should examine whether the cited federal statute includes a “contrary congressional command” that the regulation supersedes the FAA. Judge Ikuta further reasons that, after applying the requisite analysis, the Supreme Court has upheld the validity of every arbitration agreement it has addressed. Judge Ikuta’s strongly-worded dissent describes the Ninth Circuit’s reasoning as “specious because it is based on the erroneous assumption that the waiver of the right to use a collective mechanism in arbitration or litigation is ‘illegal,’…but such a waiver would be illegal only if it were precluded by a ‘contrary congressional command’ in the NLRA, and here there is no such command.”

The Morris ruling does not change the law in most jurisdictions, including the Second, Fifth, Eighth, and Eleventh Circuits, which have rejected the NLRB’s D.R. Horton decision and maintain that arbitration agreements with a waiver of class/collective actions are enforceable. In the states within the Ninth and similarly dissident Seventh Circuit, on the other hand, employers should assume that arbitration agreements that contain a waiver of class or collective actions are likely to be held to be invalid. Because the circuit split has widened regarding the impact of the NLRA on arbitration agreements in the employment context, the open question seems to when, and in what context, the issue will reach the United States Supreme Court. The uncertainty regarding the current makeup of the Supreme Court, in light of the death of Justice Scalia, only adds to the intrigue.

Upon review, the Court of Appeal reversed the trial court, holding that the arbitrator, not the trial court, must determine whether an arbitration agreement permits class arbitration. The California Supreme Court granted review and, on July 28, 2016, a narrowly divided Court affirmed the Court of Appeal, holding that the question of whether a court or an arbitrator decides if an arbitration agreement permits class claims should be determined on a case-by-case basis, specifically focusing on the agreement's terms and resolving any ambiguities in favor of the non-drafting party. By its decision, the Court placed itself at odds with numerous federal appellate courts that have held that such questions are for a court, not an arbitrator, to decide.

In examining the language of the instant arbitration agreement, the majority found that class arbitration was available to the plaintiff because the agreement broadly allowed for any employment-related disputes to be resolved by an arbitrator, and the agreement did not include an express waiver of class claims. Moreover, the agreement did not make clear whether the court or an arbitrator must resolve questions of arbitrability. As such, the Court held that this ambiguity be resolved in favor of arbitration and against the employer’s interpretation as the drafting party.

The takeaway? In the vast majority of scenarios, the employer is the drafting party of the arbitration agreement, meaning that any ambiguities in the agreement will likely be resolved in employees’ favor. As such, employers contemplating the use of an arbitration agreement that precludes class action litigation should include narrowly-tailored waiver language that places the interpretation of the arbitration agreement in the hands of the court, not the arbitrator.

Employers, especially those in California, who foresee utilizing an arbitration agreement with a class action waiver should consider the following:

• Review your current arbitration agreements. If you currently employ an arbitration agreement, it is worthwhile to have the language reviewed by qualified employment counsel to ensure that the relevant provisions are clear and unambiguous.
• Revise your current agreement to include additional language expressly prohibiting cases brought on a class basis, and making clear that the court, not an arbitrator, should resolve any disputes regarding the agreement. In Sandquist, the Court found that while the employer “could have prepared an arbitration provision that explicitly addressed any unstated desire to have the availability of class arbitration resolved by a court,” it chose not to do so. If you revise your arbitration agreement, we recommend consulting with qualified employment counsel to discuss how the new agreement should be “rolled out” to employees.
• Understand the risks associated with litigating before an arbitrator. Although many benefits are generally associated with arbitration as a dispute resolution mechanism, such as expediency and confidentiality, it can also be costly for an employer. This is especially so in California, where employers are responsible for paying for all of the arbitration costs, including the arbitrator fees. Moreover, given the limited judicial review available for arbitration awards, employers often face higher risks in arbitration should the arbitrator decide that employment claims can be arbitrated on a class basis.

In sum, the Court’s endorsement of evaluating the enforceability of class waivers in arbitration agreements on a case-by-case basis means that the totality of the agreement, and the context in which it was presented to employees, will be scrutinized. Such an individualized inquiry reinforces the import of including precise language in arbitration agreements and remaining cognizant of the circumstances under which those agreements are presented to employees. Kelley Drye's Labor and Employment Group routinely assists employers in the review, drafting, and “rolling out” of arbitration agreements. Please feel free to contact our team if you need assistance in preparing, reviewing, or defending the enforceability of employment and arbitration agreements.