New York Ban on Arbitration of Discrimination Claims Repeatedly Struck Down as Inconsistent With Federal Law

Kramer Levin Naftalis & Frankel LLP

Kramer Levin Naftalis & Frankel LLP

[co-author: Kelly Schreiber]*

In April 2018, New York enacted Section 7515 of the New York Civil Practice Law and Rules (CPLR 7515), which invalidated pre-dispute agreements to arbitrate sexual harassment claims “except where inconsistent with federal law.” New York expanded the prohibition on pre-dispute arbitration agreements to all claims of discrimination in 2019. As outlined in our previous alert, the Southern District in Latif v. Morgan Stanley & Co. LLC, et al., No. 18-CV-11528 was the first court to address the validity of the purported prohibition and found that CPLR 7515 was preempted by the Federal Arbitration Act (FAA). This alert examines federal and state court cases in New York decided since Latif addressing the validity of Section 7515’s prohibition of pre-dispute arbitration agreements, and provides guidance for maximizing the enforceability of such agreements.

The Southern District in Whyte v. WeWork Cos., Inc., No. 20-cv-1800 (CM) (S.D.N.Y. June 11, 2020) explicitly followed Judge Denise Cote’s reasoning in Latif and granted the employer’s motion to compel arbitration. Under the FAA, grounds for setting aside an agreement to arbitrate are limited to those that “exist in law or in equity for the revocation of any contract.” 9 U.S.C. § 2. Like in Latif, the Whyte court focused on the text of the FAA’s savings clause, which the Supreme Court has interpreted to mean that agreements to arbitrate can be invalidated only by “generally applicable contract defenses, such as fraud, duress, or unconscionability.” AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011). Additionally, the Whyte decision noted that the Supreme Court specifically addressed the issue of state legislatures’ attempts to create exceptions to the FAA, and cautioned that the conflicting state rule “is displaced by the FAA.” Concepcion, 563 U.S. at 341.

Shortly after the Whyte decision, a New York state court in Newton v. LVMH Moët Hennessy Louis Vuitton Inc., No. 154179/2019 (N.Y. Sup. Ct. July 10, 2020) examined the same issue presented in Latif and Whyte, but rejected federal precedent and denied the employer’s motion to compel arbitration. The Newton court interpreted the text of the FAA to limit its application to “a transaction involving commerce” and found that sexual harassment claims involving purely intrastate activity cannot reasonably be viewed as economic in nature. Id. at 7. Since the FAA preceded CPLR 7515, the Newton court opined that the New York Legislature must have shared the same understanding in enacting CPLR 7515 and deferred to the Legislature’s intent in denying the motion to compel arbitration.

A few months after the Newton decision, another New York state court adopted the reasoning in Latif, granting a motion to compel arbitration of a sexual harassment claim and holding that the FAA preempted CPLR 7515. See Fuller v. Uber Tech. Inc., No. 150289/2020, 2020 NY Slip Op 33188(U) (N.Y. Sup. Ct. Sept. 25, 2020). The Court in Fuller did not address the Newton decision.

Most recently, on Jan. 19, 2021, Judge Lewis L. Liman ruled that CPLR 7515 was preempted by the FAA in Gilbert v. Indeed, No. 20-3826, 2021 WL 169111 (S.D.N.Y. Jan. 19, 2021). As with the earlier cases, the issue addressed by the court was whether CPLR 7515 could be applied to invalidate the parties’ earlier agreement to arbitrate. The court held that the New York provision was preempted by the FAA and granted the employer’s motion to compel arbitration. See also Decision and Order, Crawford v. Goldman Sachs Group, Inc., No. 159731/2020 (Sup. Ct. N.Y. Cnty. Feb. 23, 2021) NYSCEF No. 26 (compelling arbitration where claims fall within the scope of the arbitration clause, and enforcement of the arbitration clause is not barred by CPLR 7515 because the Federal Arbitration Act governs the dispute).

Judge Liman addressed the Newton decision and found it unpersuasive. In doing so, the court concluded that the Newton court erroneously focused on the Legislature’s intent in promulgating CPLR 7515, when the appropriate question is what Congress intended with respect to the preemption of state laws. Gilbert, 2021 WL 169111, at *43, 44.

Regarding the argument that the alleged sexual harassment occurred intrastate and was not economic in nature, Judge Liman noted that the Newton court asked the wrong question:

Under the plain language of Section 2 of the FAA, the relevant question is not whether the claim arises from a transaction involving commerce, but rather whether the contract containing the arbitration clause “evidenc[es] a transaction involving commerce.”

Id. at *45 (quoting 9 U.S.C. § 2) (emphasis in original).

The arbitration agreement in Gilbert included a fee-shifting provision that purported to entitle the employer to recover the costs incurred by it in connection with the motion to compel arbitration. Although the employer in Gilbert waived this provision, enforcement of the fee-shifting provision might have rendered the entire arbitration agreement unenforceable because it conflicts with the remedies available under Title VII, which permits the award of attorneys’ fees to prevailing defendants only if the plaintiff’s claim is found to be frivolous, unreasonable or groundless. While the FAA espouses a strong preference for arbitration, arbitration of statutory claims is available only if the agreement upholds the plaintiff’s ability to seek the same statutory remedies in arbitration that she would be permitted to pursue in court.

Practical Advice

The weight of authority clearly and correctly holds that CPLR 7515 is preempted by the FAA. In order to ensure the enforceability of arbitration agreements, employers should review their agreements to ensure that they provide that the employees’ statutory remedies are fully available in arbitration to the same extent they are available in a judicial forum. To the extent that any provision could potentially be found to be objectionable, it is prudent to include a clause allowing the offending provision to be severed from the main agreement.

*Law Clerk

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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