A federal district court has ruled that the Federal Arbitration Act (FAA) preempts a 2019 amendment to the New Jersey Law Against Discrimination (NJLAD). Section 12.7 of the NJLAD deemed unenforceable and against public policy any provision in an employment contract which waived a “substantive or procedural right or remedy relating to a claim of discrimination” or “prospectively waived” any right or remedy under the NJLAD. While ABA Litigation Section leaders agree that the ruling was consistent with federal jurisprudence under the FAA, it remains to be seen whether this decision is a bellwether for the viability of other state anti-discrimination laws that limit the use of arbitration clauses in employment agreements.
AG Challenges Standing of “Employer” Organizations
In New Jersey Civil Justice Institute, et al. v. Gurbir Grewal, in his official capacity as Attorney General of the State of New Jersey, the New Jersey Civil Justice Institute (NJCJI) sought a declaration from the U.S. District Court for the District of New Jersey that the FAA preempts section 12.7, and an injunction precluding the state from enforcing the amendment. NJCJI is a nonprofit organization that consists of “small businesses, business associations, and professional organizations.” The defendant, the New Jersey Attorney General (AG), initially challenged both plaintiffs’ standing to sue, claiming, inter alia, that no “injury-in-fact” had been suffered, as section 12.7 had not yet been enforced against them.
Rejecting the AG’s argument, the court reasoned that the plaintiffs did have standing to challenge section 12.7 on behalf of their various constituent employers, holding that they possessed “associational standing” to seek relief that their members could pursue “in their own right.” The court further found that NJCJI also had “direct organizational standing” to bring suit, having suffered financial harm from section 12.7 having been enacted. Accordingly, the court squarely reached the issue of whether the FAA preempted section 12.7.
FAA Preemption’s Wide Reach
The court began its preemption analysis by articulating the well-settled premise that any state law that “sing[les] out arbitration provisions for suspect status ‘directly conflicts’ with § 2 of the FAA.” While acknowledging that section 12.7 failed to mention arbitration by name, the court found that argument to be unavailing: “a state law that ‘avoid[s] referring to arbitration by name’ does not avoid FAA preemption.” Rather, the court reaffirmed that any state law that either “‘discriminat[es] on its face against arbitration,’ or ‘covertly accomplishes the same objective by disfavoring contracts that . . . have the defining features of arbitration agreements,’ will be preempted by the FAA.”
In finding section 12.7 was preempted, the court explained “[s]ection 12.7 prohibits the waiver of ‘any substantive or procedural right or remedy,’ N.J. Stat. Ann § 10:5-12.7, which, according to the NJLAD, encompasses ‘the right to file a complaint in the Superior Court to be heard before a jury,’ §§ 10:5-13(a)(1)–(2).” The court further explained that “[b]ecause the waiver of the right to go to court and receive a jury trial is the ‘primary characteristic,’ or ‘defining trait’ of arbitration agreements, Section 12.7, in effect, ‘singles out arbitration agreements for disfavored treatment.’”
Jurisprudence Against Disfavoring Arbitration Grows Stronger
The court noted in its decision that “[f]ederal Courts in New York and California have also found state laws similar to Section 12.7 to be preempted by the FAA.” Accordingly, Litigation Section leaders were not surprised by the court’s rejection of section 12.7. “By passing the FAA, Congress made clear their stance as it relates to arbitration, which is really a forum selection clause and not substantive in nature,” highlights Christopher S. Hennessy, Chicago, IL, cochair of the Section’s Employment & Labor Relations Law Committee. “The decision really just re-states established law. . . . Congress could have carved-out all employment contracts from the FAA (instead of the specific few noted in § 1) but did not,” explains Hennessy.
“States attempting to limit arbitration as a means of resolving employment disputes will run up against the U.S. Supreme Court’s pronouncement that the Federal Arbitration Act (FAA) reflects a ‘liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary,’” counsels Jerry M. Cutler, New York, NY, cochair of the Section’s Employment & Labor Relations Law Committee. “The court’s decision is also consistent with other federal court rulings which have held that the FAA preempts conflicting state laws and have therefore rejected state legislative efforts restricting the use of arbitration agreements,” advises Cutler.
Despite the breadth of the FAA and its preemptive status, states and employees are not without recourse. “It is noteworthy that the EEOC, nonetheless, retains jurisdiction to investigate charges of employment discrimination, and pursue legal action on an employee’s behalf even if the employee has disavowed any desire to seek such relief on their own,” describes Cutler. “States are not without any options,” adds Hennessey. For instance, “as it relates to employment contracts, the California Supreme Court outlined a number of limitations on arbitration agreements, including that they cannot limit an employee’s remedies such as punitive damages and attorney fees,” he explains, referencing Armendariz, et al. v. Foundation Health Psychcare Services, Inc. However, to date, the application of FAA preemption to anti-discrimination laws that attempt to undercut it remains fairly consistent.
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- U.S. Const. art. VI, cl. 2.
- Kindred Nursing Ctrs. Ltd. P’ship v. Clark, 137 S. Ct. 1421, 1426 (2017).
- Kenneth E. Sharperson, “New Jersey Confirms Arbitration Is Favored Mechanism for Resolving Disputes under Federal and State Law,” Alternative Dispute Resolution (June 8, 2021).
- Kelso L. Anderson, “Nonsignatories May Enforce Arbitration Agreement,” Litigation News (Sept. 21, 2020).
- Keith J. Frank, “State Legislation Precluding Compelled Arbitration in Sexual Harassment Claims and the FAA,” Bus. L. Today (Feb. 24, 2020).
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