NY court refuses to enforce arbitration clause in sexual harassment case | Katz Melinger PLLC
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NY court refuses to enforce arbitration clause in sexual harassment case

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Shocking allegations of sexual harassment and gender discrimination in the workplace created the #MeToo movement, raising collective consciousness of this all-too-common phenomenon. Historically, many victims have been prevented from getting justice due to the widespread employer practice of forcing employees to sign employment agreements containing arbitration clauses, which require employees to arbitrate legal claims against their employers, rather than filing complaints with government agencies or courts.

Arbitration may not be friendly to victims

Arbitration is a private trial before a hired decisionmaker called an arbitrator. A victim of sexual harassment or discrimination has fewer rights in arbitration. For example, there is no jury and, depending on the rules, likely no rules of evidence and no right of appeal - the arbitrator's decision is final and binding. Because of the prevalence of arbitration clauses in employment contracts, many victims of sexual harassment have been unable to publicly tell their stories, ensuring that such workplace misconduct remained secret.

State law forbids arbitration clauses for workplace discrimination, harassment claims

On July 11, 2018, a New York state law took effect that prohibited clauses requiring arbitration of sexual harassment claims in employment contracts. The legislature expanded the prohibition in late 2019 to all kinds of discrimination and harassment claims. Since the state law's enactment, New York's federal courts have held that it is unenforceable under the Federal Arbitration Act (FAA),

New York State Court interprets new law broadly

However, on July 10, 2020, Judge Louis Nock of the New York Supreme Court in New York County issued an opinion ruling otherwise in Newton v. LVMH Moët Hennessy Louis Vuitton Inc. The court held that plaintiff Andowah Newton, a vice president at defendant's company, could litigate her sexual harassment and retaliation claims against her employer in court because a mandatory arbitration clause in her employment contract was unenforceable in New York.

The parties signed the employment agreement before the ban took effect. The contract required arbitration of "any disputes of any nature" between the parties, including employment discrimination. Therefore, LVMH asked the court to send the dispute to arbitration, but the judge refused.

First, the court explained that the mandatory arbitration clause in the contract was void as applied to the employment discrimination dispute, interpreting the statutory language as nullifying arbitration clauses in contracts already in existence when the law took effect. Further, the state's "profound" public policy interest in addressing sexual harassment also justified keeping the claim in court and out of arbitration.

Second, the court held that the FAA, which makes arbitration agreements enforceable when they concern "transaction[s] involving commerce," was not inconsistent with this state law. The judge wrote that an allegation of sexual harassment does not concern a commercial transaction. Citing U.S. Supreme Court precedent, the court explained that federal regulation of intrastate (within one state exclusively) activity is only proper if the activity was economic - and Newton's allegations were not economic in nature and involved activity in New York City offices only.

Finally, the judge noted that the employer revised its employee handbook shortly after the new law took effect. The new policy was that all employees can file discrimination claims with federal or state agencies or in state court, followed by a similar statement that was New York employee-specific. The court held that this new policy "superseded and replaced" the arbitration clause in the plaintiff's employment agreement.

Takeaways

The judge in Newton specifically disagreed with at least three other court decisions interpreting the New York arbitration clause ban. This lack of legal consensus makes it likely that the parties will appeal the issues to higher courts. LVMH plans to appeal this case to the Appellate Division, according to The Fashion Law.

Because of these shifting sands, it is important for New York employers and employees alike to consult with a knowledgeable employment lawyer about arbitration clauses involving discrimination, harassment, and retaliation in order to understand the current state of the law.

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