It is generally understood, or at least it has been in the past, that plaintiffs prefer to avoid the application of the Federal Arbitration Act (the “FAA”) and instead present their cases to juries. As such, plaintiffs have routinely exhausted every avenue attempting to fall outside of the mandates of the FAA. However, the passage of the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act (the “EFAA”) on March 3, 2022, has put plaintiffs in a quandary and left arbitrators scratching their heads when faced with overseeing a sexual harassment or sexual assault arbitration. Specifically, when does the EFAA apply and when are cases outside of its purview?

The Interplay Between the FAA and the EFAA

The EFAA invalidates arbitration agreements that preclude a party from filing a lawsuit in court that involves allegations of sexual assault or sexual harassment. What makes the EFAA a bit unusual is the fact that lawmakers “embedded” the EFAA into the FAA. Specifically, Chapter 4 of the FAA (which is included in the EFAA) provides that “no pre-dispute arbitration agreement… shall be valid or enforceable with respect to a case which is filed under Federal, Tribal, or State law and relates to the sexual assault dispute or the sexual harassment dispute.” “Sexual assault dispute” is defined as a dispute that “involves a nonconsensual sexual act or sexual contact. . .including when the victim lacks capacity to consent.”  A “sexual harassment dispute” is defined as “any conduct that is alleged to constitute sexual harassment”. It is worth noting that Chapter 4 also applies to cases that “relate to such disputes.” So, the inclusion of the EFAA in the FAA means that parties can only benefit from the protections of the EFAA if the FAA applies.

Questions for Arbitrators When Considering Jurisdiction of These Cases

There are three main questions for arbitrators to ask themselves when determining whether they have subject matter jurisdiction over a dispute submitted to them for arbitration involving allegations of sexual assault or sexual harassment.

1. Is the worker an independent contractor?

According to Section 1 of the FAA, the only workers that are not covered by the FAA are those with “contracts of employment of seamen, railroad employees or any other class of workers engaged in … interstate commerce.” Thus, historically, very few plaintiffs have been able to avoid the application of the FAA as the exemption provided by Section 1 is so narrowly tailored. In 2001, the Circuit City Stores, Inc. v. Adams opinion was handed down, but it did little to expand the exemption, merely adding “transportation workers” engaged in interstate commerce to the already very short list of workers who are exempt from the application of the FAA.

Then, in 2019, the United States Supreme Court (“SCOTUS”), in New Prime, Inc. v. Oliveira, expanded the scope of the exemption when it held that Section 1 of the FAA applied to independent contractors, hence excluding them from FAA coverage. In reaching this conclusion, SCOTUS closely examined the mean­ing of “contracts of employ­ment”. Specifically, the court held that “contracts of employment” referred to agreements to perform work and extended the FAA exemption or “residual clause” to independent contractors.  Interestingly, even when a worker argued she had been misclassified, the judge deferred to the employer’s classification and found her to be an independent contractor, hence seemingly signaling the court’s increasing leaning towards a broader interpretation of the FAA residual clause.

2. Is the arbitration provision part of a contract or is it embedded into an employee handbook?

Section 2 of the FAA requires that an arbitration clause be part of a “contract” for the FAA to apply.  While many arbitration provisions are set forth in employment contracts, others are sometimes set forth in employee handbooks. Most employee handbooks contain language expressly stating that the policies set forth in the handbook are not intended to create contractual obligations. As such, an arbitration provision set forth in an employee handbook is not part of a contract and accordingly, the FAA does not apply (and so neither does the EFAA). It is incumbent upon arbitrators to be aware of the source of the arbitration provision that governs and confirm that it is “contained in a contract.”

3. Is there a Contractual Nexus?

Section 2 of the FAA also provides that only allegations arising out of the arbitration contract are arbitrable; or in other words, that there be a “contractual nexus”. It is common for an arbitration provision to include language requiring that the arbitration provision applies to “any controversy or claim … arising out of or related to employee’s employment with the company …” So, the arbitrator must ask whether the dispute that has been submitted to them falls within this category. In evaluating the FAA’s contractual nexus requirement, some judges have refused to compel arbitration of an employee’s claims against an employer that stem from a co-worker’s sexual wrongdoing. These courts have reasoned that “rape does not ordinarily arise out of the employment context.” Concerned by this line of cases, and worried that some of these sexual assault and sexual discrimination claims may not be deemed to have arisen out of the employment context (and therefore not covered by the FAA), some drafters have started crafting language that mandates arbitration for “any controversy”.

For instance, in Haasbroek v. Princess Cruise Lines, Ltd., the employer mandated arbitration for “all disputes, claims and controversies whatsoever,” [emphasis added] also known as an “infinite arbitration clause.” Noticeably absent from infinite arbitration provisions is any limitation narrowing the scope of application to only those disputes, claims, or controversies relating to or in any way arising out of or connected with the employee’s employment agreement. In Haasbroek, an employee of the defendant employer was raped and impregnated by a co-worker. In arguing that the FAA did not apply, the employee explained that the conduct at issue was unrelated to the arbitration contract since it occurred after hours in a residential section of the ship.  The court disagreed and found that the conduct, and ensuing dispute, fell within the requirements of the arbitration provision and therefore it compelled arbitration.

Litigating in an Alternate Universe

Thanks to the forgoing, counsel for plaintiffs and defendants who litigate sexual harassment matters are left in a truly alternate universe. While plaintiffs have historically fought to be excluded from the application of the FAA to avoid compelled arbitration, they now often want to be subject to the FAA so that they can take advantage of the prohibition against forced arbitrations of sexual harassment cases offered by the EFAA. And employers, who have traditionally fought hard to have arbitration compelled, are no longer as adamant in this pursuit since sexual harassment and sexual discrimination claims would likely be excluded from forced arbitration anyway. These fissures in the EFAA and FAA have truly turned matters upside down.

*Originally published in the Daily Report and reprinted with permission.