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ANALYSIS: Forced Arbitration Law Raises New Questions (1)

March 3, 2022, 7:32 PMUpdated: March 4, 2022, 11:33 AM

President Biden signed into law Thursday a bill that allows persons alleging sexual assault or sexual harassment to pursue their claim through court proceedings and class actions—even if they had agreed to mandatory arbitration or a joint-action waiver.

The Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 adds a new chapter to Title 9 (Arbitration) of the United States Code and effectively invalidates pre-dispute arbitration agreements and pre-dispute joint-action waivers in cases involving sexual assault or sexual harassment claims.

While the bill is relatively straightforward in its approach, it does raise a host of questions that parties, counsel, and ultimately the courts will need to address in a number of different areas.

In this analysis, we will issue-spot some of the questions we are exploring in specific practice areas. In subsequent articles, to be published in the coming weeks, we will take up these questions in turn.

How the New Law Would Work

Pre-dispute arbitration agreements and pre-dispute joint-action waivers are most frequently found in employment and consumer contracts. They require an aggrieved party to seek relief through arbitration rather than in court, and they waive the party’s right to participate in a class or collective action concerning the dispute.

While arbitration proceedings may be preferred by parties for their relative speed and cost, two principal reasons why employers and retailers prefer mandatory arbitration are the confidentiality of the proceedings (and of the outcome) and the lack of precedential value for claims posing similar facts or legal theories.

The new law would invalidate mandatory arbitration agreements and forced joint-action waivers that are agreed to or applied prior to the occurrence of a dispute between the parties. This means that the non-aggrieved party cannot enforce a pre-dispute arbitration or joint-action waiver.

However, the law would not prevent the parties, after a sexual assault or sexual harassment incident occurs, from agreeing to arbitrate or settle the dispute through non-judicial means, nor does it limit a claimant from initiating an arbitration proceeding should they decide that this is a better venue in their individual case.

Key Practice-Area Questions

Here are some of the toughest issues confronting lawyers in practice areas as diverse as employment, M&A, securities, litigation, and commercial law in light of the enactment of the bill.

Employment and Human Resources

Right now, employers (as well as their lawyers) are probably thinking about the practical implications of this development as well as the logical outgrowths that this law may spur.

Does the law require the organization to update or change already-executed employee arbitration clauses, and what changes does it require to standard arbitration clauses moving forward? Will Congress further chip away at other issues that mandatory arbitration can cover both within and beyond the employment context, such as consumer disputes? Absent Congressional action, might states try to expand this ban to other issues? It’s uncertain if there’s an appetite in Congress to go further, and it’s equally unclear if any more expansive state or local laws on arbitration would stand up in court. But employers and politicians alike may face increasing pressure on these issues in the future.

Mergers & Acquisitions

In the realm of mergers and acquisitions, “#MeToo” representations and warranties have become a market-standard inclusion in deal documents since first appearing in M&A agreements in 2018.

Will the formulation of these representations and warranties now shift? For example, will contract drafters begin to make explicit reference to the new law or to compliance therewith? Will related due diligence requests need to cast a wider net to assess compliance with the new law? This legal development will certainly require deal parties to adjust how they assess #MeToo risks and liabilities.

Securities

Once the barrier to bringing claims to court has been removed and the specter of potentially large judgments, including punitive damages, becomes more tangible, more public companies will likely be convinced to describe sexual harassment risk as a material risk to their business in their SEC filings.

The increased risks companies will face are numerous. How might the business suffer if management gets distracted while defending against these claims? How might the company be harmed if it needs to curtail the activities of key executives or needs to reassign them while claims are being investigated and adjudicated? Worse still, how might the company manage losing one or more key executives through termination or (perhaps forced) resignation? Will the company need to defend against unlawful termination executive suits, as well? Key personnel may be difficult to replace and the risk of reputational damage from these matters can be significant.

Effective risk factors will tailor disclosures to a public company’s unique facts and circumstances and avoid boilerplate (generic) statements about risk. Which industries will be most affected by this legislation? Perhaps sectors with male-centered executive cultures such as entertainment and finance? The new law may force internal investigations to determine if there’s an “inventory” of nondisclosure agreements, commonly called NDAs, or a new, undocumented potential liability.

Pressure may also build on companies to take more actions to prevent sexual harassment, change corporate culture, and limit the risk to the company. Such steps might include a focus on diverse hiring, inclusion efforts, board of directors composition, and succession planning for key executives.

Litigation

It’s an interesting—and important—point that the statutory language says that arbitration clauses and joint–action waivers cannot be enforced for sexual assault “cases.” The use of the word “cases,” rather than “claims,” raises questions about what happens to lawsuits containing multiple claims.

Will the strong pro–arbitration policy under the Federal Arbitration Act mean that courts may interpret the new statute narrowly, and direct multi–claim cases to be conducted piecemeal, so that some claims are arbitrated and some are litigated? The results could be messy.

Commercial and In-House Practice

What will in–house practitioners do about mandatory arbitration in other contexts? Will there be impacts on the use of other NDA clauses in personnel–related matters? Commercial and in–house practitioners may be faced with questions regarding the risk of continued usage of mandatory arbitration and joint–action waivers in general contract actions—and not only invalidation risk, but reputational risk as well.

In addition, will the prospect of potentially higher damage awards require a reexamination of insurance coverages and closer communications between counsel and financial accounting on litigation reserves?

Keep an eye on Bloomberg Law’s Analysis Channel for analysis addressing these questions and more in the weeks ahead.

Bloomberg Law subscribers can also find related content on our Labor & Employment Practice Center, In-House M&A Toolkit, Securities Practice Center, Litigation Intelligence Center, and In-House Counsel Resources pages.

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(Updated to reflect that President Biden signed the measure into law.)