Preempted! New Jersey Courts Hold Ban on Pre-Dispute Arbitration of Employment Claims Preempted by Federal Arbitration Act

Seyfarth Shaw LLP

Seyfarth Synopsis: Last week, the U.S. District Court for The District of New Jersey held that the state’s ban on pre-dispute arbitration of employment claims is preempted by the Federal Arbitration Act, following a January 2021 decision in N.J. Superior Court with a similar finding. The courts’ holdings come after much speculation of potential preemption since the law’s passage in 2019.

The Ban on Pre-Dispute Arbitration Agreements and Procedural Waivers

As we previously discussed here, on January 31, 2019, the New Jersey Legislature passed Senate Bill 121, later signed into law on March 18, 2019, as discussed here.  The law sets forth several substantive and procedural protections for employees who bring employment claims, and in part prohibits employers from enforcing mandatory pre-dispute arbitration provisions for all claims of discrimination, retaliation, and harassment under the New Jersey Law Against Discrimination (“NJ LAD”).

N.J. Stat. § 10:5-12.7 renders any provision which “waives any substantive or procedural right or remedy” relating to a claim of discrimination, retaliation, or harassment in an employment contract “against public policy and unenforceable.”  As written, the law vitiates mandatory pre-dispute arbitration agreements, class action waivers, and jury trial waivers. The law prohibits prospective waivers of any right or remedy under the NJ LAD or any other statute or case law.

In addition, the law provides that an employer may not retaliate because an employee will not enter into a prohibited agreement.  The bill creates a private right of action for “[a]ny person claiming to be aggrieved by a violation” of the law, with a statute of limitations of two years.  A prevailing plaintiff is entitled to reasonable attorneys’ fees and costs.

Preemption Under the Federal Arbitration Act

At the time of the law’s passage, many speculated that the prohibition on pre-dispute arbitration agreements may be subject to preemption by the Federal Arbitration Act (“FAA”). Now, two recent court decisions, one in New Jersey Superior Court, and one in the District of New Jersey, have clarified that the provision of the law banning pre-dispute arbitration agreements, Section 12.7, is preempted by the FAA.

New Jersey Civil Institute and Chamber of Commerce of the United States of America v. Gurbir Grewal, 19-17518 (D. N.J. Mar. 25, 2021)

According to Judge Anne Thompson of the District of New Jersey, Section 12.7 created an “uncommon barrier” for arbitration agreements and “fails to put them on an equal plane with other contracts.” As such, the provision is preempted by the FAA. 

The court spent the majority of its decision discussing whether the N.J. Civil Institute and U.S. Chamber of Commerce have standing to bring such a claim, and whether the claim is ripe for adjudication, without a present enforcement action before the court. The court ultimately found that it could decide the matter on the merits. 

The court noted that Gurbir Grewal, New Jersey’s Attorney General, “has not argued at any point throughout the litigation that Section 12.7 survives a preemption challenge.” 

The court laid out the standard for the preemption analysis under the FAA, in sum that any state law which “conflicts with it or frustrates its purpose violates the Supremacy Clause.”  Despite the fact that Section 12.7 did not specifically name arbitration agreements, since it prohibits the waiver of substantive or procedural rights or remedies, the court found this provision was aimed at a waiver of a jury trial, which is a “defining trait” of arbitration agreements.  Thus, the court held that Section 12.7 is preempted by the FAA and therefore violates the Supremacy Clause of the United States Constitution.

Finally, the court granted plaintiffs’ motion for a permanent injunction enjoining the New Jersey Attorney General from enforcing Section 12.7 with respect to arbitration agreements between employers and employees that are governed by the FAA, finding plaintiffs demonstrated “irreparable harm,” despite there being no current enforcement action against them. The court further held there is no adequate remedy at law and monetary damages would not suffice since A.G. Grewal is protected by sovereign immunity and would not be required to pay such damages. It remains to be seen whether the decision will be appealed.

Janco v. Bay Ridge Automotive Mgmt. Corp., et al., MON-L-1967-20 (N.J. Super. Jan. 22, 2021)

This decision is further supported by a New Jersey Superior Court decision from January 2021 that came to the same conclusion. In Janco, the court granted the defendants’ motion to compel arbitration of a NJ LAD claim, finding the plaintiff clearly and unambiguously agreed to the terms of her pre-dispute arbitration agreement at the start of her employment, pointing to bold-faced language explaining the waiver of her right to a jury trial, and the agreement’s explanation of the applicable arbitration procedures. The court held the agreement was neither procedurally nor substantively unconscionable.

On the issue of preemption, Judge Henry Butehorn held that Section 12.7 is preempted by the FAA, likening it to a 2003 amendment of the Nursing Home Rights Act which was also found to be preempted by the FAA, and citing cases in numerous courts outside of New Jersey which held similarly. To date, it does not appear the decision has been appealed to the Appellate Division.

What’s Next?

New Jersey was not alone in its efforts to stamp out pre-dispute arbitration agreements for employment claims, with similar laws passed in New York (prohibiting mandatory pre-dispute arbitration of discrimination and harassment claims), as well as Vermont, Maryland, and Washington (prohibiting mandatory pre-dispute arbitration of sexual harassment claims). Several recent decisions coming out of New York have held that the FAA preempts New York’s law, one of which is discussed here.

However, employers should be aware that this may not be the end of the story.  In 2017, Kirsten Gillibrand (D-New York) and Lindsey Graham (R-South Carolina) co-sponsored bipartisan legislation (the Ending Forced Arbitration of Sexual Harassment Act of 2017), which would have voided forced arbitration agreements of sexual harassment claims, but it failed to pass.  Given the Biden administration’s commitment to progressive action and that the Democrats are in control of Congress, it is more likely than ever that similar legislation could be introduced again and this time -- become law.

Employers should also keep in mind that New Jersey’s restrictions on non-disclosure provisions in settlement agreements and other prohibitions on prospective waivers of substantive or procedural rights relating to claims of discrimination, harassment, or retaliation, including class action and jury trial waivers (when not in the context of a mandatory arbitration) remain in force. The law provides a private right of action for employees, with a two year statute of limitations, that employers should continue to heed with respect to the other provisions of the law included in S.B. 121.

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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