Categories: Financial Services

On June 19, 2019, the New York State Senate and Assembly passed legislation that would, if signed into law, broaden the scope of last year’s ban on clauses requiring employees to arbitrate sexual harassment claims so as to prohibit such clauses with respect to all types of discrimination claims. As reported on this blog, this ban on mandatory arbitration clauses was deemed invalid, as contrary to federal law, by the June 26, 2019 decision of the U.S. District Court for the Southern District of New York in Latif v. Morgan Stanley & Co. LLC, et al. (S.D.N.Y. No. 18-11528). It is too early, however, to declare the death of New York’s ban on mandatory arbitration clauses in harassment and discrimination claims. Absent diversity of citizenship, plaintiffs’ counsel may choose to assert only state-law claims in an effort to eliminate federal court jurisdiction over an employer’s petition to compel arbitration. As motions to compel arbitration will continue to be decided by New York state courts, employers should be mindful of the relevant New York decisions when drafting arbitration agreements and dispute resolution programs.

Like federal law, New York state law generally favors the enforcement of arbitration agreements. But there are important caveats. Initially, Section 7503 of the CPLR requires courts to decide certain threshold issues before compelling arbitration, including: whether there is an agreement to arbitrate; whether the agreement has been followed; and whether the underlying claim is barred by the statute of limitations. In addition, the New York Court of Appeals has held that certain issues are so “interlaced with strong public policy considerations that they have been placed beyond the reach of an arbitrator’s discretion.” Assoc’d. Teachers v. Board of Ed., 33 N.Y.2d 229, 335 (1973); accord City of NY v. Uniformed Fire Off. Ass’n., 95 N.Y.2d 273, 281 (2000); see also Merrill Lynch Pierce Fenner & Smith v. Benjamin, 1 A.D.3d 39, 44 (1st Dep’t. 2003).

In Brady v. Williams Capital Group, LP, 14 N.Y.3d 459, 467 (2010), which involved claims of race and gender discrimination, the Court of Appeals recognized that the policy favoring arbitration must sometimes yield to “an equally strong policy requiring the invalidation of such agreements when they contain terms that could preclude a litigant from vindicating his/her statutory rights in the arbitral forum.” The Brady court observed that arbitrator fees may “preclude a litigant from effectively vindicating her federal statutory rights.” Therefore, the Court of Appeals concluded that New York courts must evaluate whether the cost of arbitration is prohibitive on a case-by-case basis and consider: (1) the litigant’s ability to pay the fees; (2) the cost differential between arbitration and court litigation; and (3) whether the costs of arbitration might deter a party from bringing claims.

Employees may try to invoke these cases to argue that, regardless of what the federal district courts have said on the matter, their discrimination claims should not be arbitrated because New York has a strong public policy—as evidenced by the recent legislation—favoring judicial resolution of discrimination claims, and/or because arbitration is purportedly an ineffective means of vindicating their right to a discrimination-free workplace. The first contention, though, is belied by the fact that New York’s statutory nullification of mandatory arbitration clauses is expressly qualified: it applies “[e]xcept where inconsistent with federal law.” As explained here, the Latif opinion expressly rejected the arbitration ban as inconsistent with federal law. Further, under the rules of statutory construction, the New York legislature is presumed to be aware of the federal cases invalidating state legislation that purports to ban arbitration agreements. Thus, it will be difficult to argue that New York has a strong public policy against arbitrating claims of employment discrimination.

In light of the Court of Appeals precedent referenced above, however, employers doing business in New York should review arbitration agreements and dispute resolution programs to ensure that they provide employees with an effective means to vindicate their statutory rights. Employers should carefully evaluate any provision that requires employees to share arbitration costs, or requires an unsuccessful employee to pay costs or attorney’s fees. Likewise, employers should review any choice-of-venue provision that might require an employee to arbitrate in a distant forum, which may increase costs. Employers should also evaluate any choice-of-law provision that subjects New York-based employees to the laws of other states. Employers may also wish to emphasize that they engage in interstate commerce, as this may support arguments that arbitration agreements should be reviewed under the Federal Arbitration Act, even in state court. Finally, employers should review any procedural rules that restrict the employee’s right to participate in the arbitrator selection process, and should evaluate whether any permitted arbitral forum offers a diverse roster of neutrals.

Furthermore, employers should consider disclosures that remind employees of the benefits of arbitration. Arbitration agreements often advise employees that discovery is limited in arbitration and that they are forfeiting their right to a jury trial, without also noting the reasons why an employee might prefer arbitration—e.g., it is generally faster than traditional litigation and provides employees with the option of resolving claims confidentially. Indeed, in Latif, the plaintiff sought unsuccessfully to keep his identity confidential. And the recent New York legislation allows nondisclosure clauses in settlement agreements if requested by the employee, recognizing that some employees may value confidentiality. Of course, given the sensitivity around nondisclosure agreements, employers need to careful when discussing the benefits of confidentiality.

In sum, the Latif decision is a welcome development for many, and provides support for enforcing arbitration agreements. Nevertheless, until New York courts review the soon-to-be-expanded ban on mandatory arbitration clauses, employers should draft arbitration agreements and dispute resolution programs with the expectation that they will be challenged in state court.

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