Federal Arbitration Law Poses Barrier to #MeToo State Laws (1)

The #MeToo movement inspired a slew of states to propose limits on arbitration—the widespread practice that keeps workplace disputes in a private setting and out of public courts.

The practice became a target in recent years of lawmakers and advocates who said it shielded harassers from being held accountable.

But those efforts may prove futile. A recent ruling by a New York judge telegraphs that attempts by states to limit arbitration run afoul of a powerful federal law that governs such contracts.

Mahmoud Latif, a former Morgan Stanley associate, asked a federal appeals court to test this tension between state anti-harassment proposals and the Federal Arbitration Act, which has been bolstered by the U.S. Supreme Court in recent years.

“The New York case is a fantastic illustration of the situation the legal system is in right now,” said David Horton, a law professor at the University of California, Davis. “There is growing consensus that certain types of arbitration are unfair. But as a matter of doctrine, it’s clear under precedent that laws cannot be passed that exempt claims from arbitration. There’s a clash of values.”

In the last two years, there have been 19 state laws proposed related to arbitration—often specifically related to blocking the practice in cases of sexual harassment—across 15 states, according to Bloomberg Law analyst Dori Goldstein. Of those proposals, four measures meant to limit arbitration have been enacted, including in New York, New Jersey, Vermont and Maryland. New Jersey and New York legislatures have proposed laws that would expand the original proposals, as well.

In California, then-Gov. Jerry Brown of California vetoed such a measure passed by the progressive state legislature, saying it would hold no power over federal law. Kentucky, meanwhile, passed a bill that would strengthen arbitration.

Pushing Back Against ‘Bro-Like’ Culture

During his time at the financial giant, Latif, who is Muslim and openly gay, said he felt powerless when he complained about what he called discrimination and harassment he faced in the “bro-like” culture. He claimed in a lawsuit against the firm that his supervisor harassed him, escalating from inappropriate touching to a sexual assault, and his co-workers leveled racist and homophobic comments at him.

His frustration magnified when he felt these arguments wouldn’t be pressed in court. An agreement he signed at the onset of his employment would require workplace disputes, including discrimination and harassment charges, to be hashed out behind closed doors in a private arbitration system.

He sought to keep his case in federal district court using a new New York law meant to limit arbitration, but the court ruled against him. That decision is already being cited in at least one other case in New York where Andowah Newton, former executive at LVMH Moet Hennessy Louis Vuitton is trying to keep her harassment case in court using the state’s anti-sexual harassment law.

The dispute puts a spotlight on a growing tension over arbitration, increasingly common in corporate America and Wall Street, in particular. While the U.S. Supreme Court has all but cemented the preemptive power of the federal law that governs such agreements, a public backlash emerged in the #MeToo era that saw large companies folding their forced arbitration programs, in addition to the state laws attempting to limit the use of arbitration for harassment claims.

States should have the right to tackle measures to prevent sexual harassment, Latif’s attorney Abraham Melamed of the Derek Smith Law Group said, though he acknowledged his client faces an uphill battle.

“To my knowledge this is one of the first challenges” to the FAA’s “power over a states’ rights issue. So many states passed this type of law, it’s clearly an important issue to the states,” Melamed said. “When you sweep these issues under the rug, the world doesn’t get to see them. People won’t bring claims and nothing changes on the systemic level.”

A Morgan Stanley spokesperson said that the company “does not tolerate workplace discrimination of any kind. The firm thoroughly investigated Mr. Latif’s claims and believes them to be entirely without merit. We intend to defend ourselves vigorously.” The company, which is represented by Morgan, Lewis & Bockius, also said that it doesn’t believe that the judge’s ruling can be appealed.

Federal Law Bolstered

The Supreme Court in recent years has bolstered the Federal Arbitration Act in several decisions. Last year, the court decided in Epic Systems Corp. v. Lewis that the FAA takes precedence, even over other federal laws. The ruling upheld class action waivers in arbitration agreements, despite federal labor law rules that say workers have a right to complain about workplace conditions collectively.

Meanwhile, public scrutiny has increased against the more private arbitration process that reckons with employee-employer disputes outside the courtroom. Some large technology companies, including Microsoft Corp. and Google Inc. have bowed to employee pressure and ended their forced arbitration programs.

Overall, the number of workers subject to mandatory arbitration has increased in recent decades, according to an April 2018 Economic Policy Institute study. The report shows that more than half of nonunion, private sector employers have mandatory arbitration procedures. Among companies with more than 1,000 employees, 65.1% use these contracts.

Justice Ruth Bader Ginsburg noted this tension as part of her dissent in a recent decision regarding arbitration. She said “developments outside the judicial arena,” including the New York’s law, could “ameliorate some of the harm this Court’s decisions have occasioned.”

Absent a federal law change, arbitration is likely to prevail in court, despite states jumping in to help, according to academics and employment lawyers.

“States are addressing forced arbitration as an issue of public well-being and concern,” said Shirley Lin, professor at the New York University School of Law. “The most straightforward response would be for Congress to pass legislation amending the FAA to clearly exempt all labor, employment, civil rights, and consumer actions. States should meanwhile continue to explore model laws that preserve their traditional right to regulate contracts as a whole.”

Congress Pushed to Act

There have been federal attempts to alter the FAA, including a bipartisan effort that would carve out sexual harassment. None have yet succeeded. A coalition of state attorneys general has also urged Congress to act.

The proposed state laws vary, but any limit to arbitration would be difficult to override the federal law. Many states would carve out exemptions for sexual harassment cases, others proposed exempting all discrimination and harassment cases from mandatory arbitration. Missouri’s proposed law would prohibit confidentiality in arbitration.

Kentucky, meanwhile, enacted a law that took a different tact than others that specifically permits arbitration. The Bluegrass State also proposed a limit to arbitration in 2018 that was left pending in committee.

“These laws do raise the question, ‘why are they even trying? It could be a message to Congress that they need to do something. They could be trying to influence employers.” said Elizabeth Tippett, associate professor at the University of Oregon School of Law. “It’s unlikely the employers will back down unless they are facing a strong backlash from their employees.”

Confidentiality can be regulated in other ways, Tippet said. Other state laws proposed or recently enacted aimed at limiting arbitration turn on nondisclosure and nondisparagement agreements, for example. Many of those laws would limit the use of those in harassment cases.

Seyfarth Shaw’s Robert Whitman said arbitration was targeted as something that contributed to the problem that led to the #MeToo movement. He said the text of the New York law itself says the state apply would apply “except where inconsistent with federal law.” Given the existence of the FAA, that line likely weakens the state effort significantly.

“This runs headlong into the preemption problem, but in some ways the market is speaking and there have been a number of companies that say we will no longer enforce or rewrite them not to apply in cases of sexual harassment,” Whitman said.

New York Law Tested

Andowah Newton is testing the boundaries of New York’s law in her case against Louis Vuitton.

Newton claims she faced persistent sexual harassment during her time at the company and also asked a court to consider New York’s anti-harassment law to keep her case in court, despite an arbitration agreement she signed with the company. The FAA only applies to interstate commerce, and her attorneys argue the harassment happened only in New York and between employees there. Louis Vuitton attorneys, represented by Winston & Strawn, say the federal law is the preferred law of the land.

As for Latif, he will now attempt to have his case heard before the U.S. Court of Appeals for the Second Circuit, and the pathway to success is narrow.

The Egyptian native who moved to the U.S. when he was 18 years old to attend college originally attempted to file as a John Doe, but decided to proceed despite a court ruling that he should be unmasked. A public lawsuit means he would be outed to his family in Egypt and Saudi Arabia, who don’t know his sexual orientation. He also fears repercussions from his new financial job in New York.

Latif chose to proceed in court despite these fears because he doesn’t want to be silenced by arbitration. But he said it was worth it to fight to prevent the type of behavior he says he experienced at Morgan Stanley.

“It goes beyond essentially getting justice for myself,” Latif said.