On June 26, 2019, the U.S. District Court for the Southern District of New York in Mahmoud Latif v. Morgan Stanley, et. al., held that § 7515 of the New York Civil Practice Law & Rules, which prohibits mandatory arbitration clauses in sexual harassment cases is preempted by the Federal Arbitration Act (“FAA”).

FACTS

On June 5, 2017, Plaintiff, Mahmoud Latif, signed an employment offer with Morgan Stanley, which incorporated Morgan Stanley’s Arbitration Agreement. The Arbitration Agreement provided that statutory discrimination, harassment, retaliation and common law claims were to be resolved by arbitration governed by and interpreted in accordance with the FAA.

Latif claims that he became the target of inappropriate comments regarding his sexual orientation, inappropriate touching, offensive comments about his religion and sexual assault. He reported the incidents to Morgan Stanley’s Human Resources Department and was terminated months later, on August 1, 2018.

Latif filed a lawsuit against Morgan Stanley alleging discrimination, hostile work environment and retaliation in violation of Title VII of the Civil Rights Act of 1964, New York State Human Rights Law and New York City Human Rights Law; assault, battery and aggravated sexual abuse, in violation of the Gender Motivated Violence Protection Act; and intentional and negligent infliction of emotional distress. Morgan Stanley moved to compel arbitration of Latif’s claims in accordance with the previously executed Arbitration Agreement.

CRITICAL BACKGROUND

In April 2018, the State of New York enacted § 7515 of the New York Civil Practice Law & Rules, which prohibits mandatory arbitration clauses in sexual harassment cases.

On June 19, 2019, the New York Legislature passed a bill, which is expected to be signed by Governor Andrew Cuomo, prohibiting mandatory arbitration of all discrimination cases.

COURT’S DECISION

The FAA requires courts to enforce arbitration agreements absent inapplicability or invalidity on contractual grounds. Essentially, an arbitration agreement may be nullified by defenses used for the revocation of a contract, but not defenses applying solely to arbitration.

The District Court found that the New York law prohibiting arbitration in sexual harassment cases clearly contradicts the purpose and historical interpretations of the FAA. The Court further highlights that, in § 7515(b), the New York Legislature expressly states that the prohibitions apply “except where inconsistent with federal law.”

The District Court granted Morgan Stanley’s motion to compel arbitration based upon the well-established principle that conflicting state law is preempted by federal law. The Court’s decision rested on the idea that allowing New York’s prohibition of arbitration agreements in sexual harassment cases would be inconsistent with the FAA.

BOTTOM LINE

New York’s efforts to circumvent the federal law to ban arbitration agreements in various employment contexts have been stymied for the time being based on the FAA as management attorneys have predicted from the outset. Notably, S 121 passed which became law in New Jersey in March of 2019 while not as straightforward as § 7515(b) was viewed by many in part as an effort to ban arbitration agreements in the employment context. The Mahmoud Latif v. Morgan Stanley, et. al. decision while not binding in New Jersey provides a likely guide as to how the District of New Jersey will rule when S 121 is eventually challenged based on FAA preemption.