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By Jean Schroll Knapp, Esq.

In the most recent New Jersey case addressing the interplay between the New Jersey Law Against Discrimination (“LAD”) and the Federal Arbitration Act (“FAA”), an Essex County Judge found that, following the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021, the FAA no longer preempts Section 12.7 of the LAD (which prohibits mandatory arbitration clauses in the employment context) with respect to claims of sexual harassment and sexual assault.  Specifically, Section 12.7 prohibits “[a] provision in any employment contract that waives any substantive or procedural right or remedy relating to a claim of discrimination, retaliation, or harassment shall be deemed against public policy and unenforceable.”

This represents a marked change from previous decisions addressing the question of federal preemption of Section 12.7. For example, on March 25, 2021, in New Jersey Civil Justice Institute v. Grewal, (Civ. No. 19-17518), the District Court of New Jersey found that Section 12.7 was preempted by the FAA.  In finding that Section 12.7 was preempted, the Court noted the federal policy in favor of arbitration, and that any state law which conflicts with or frustrates the FAA’s purpose violates the Supremacy Clause.  The Court found that Section 12.7 subjected arbitration agreements to “uncommon barriers” and failed to put them on an “equal plane” with other contracts, despite the fact that Section 12.7 does not explicitly mention arbitration by name.

However, on March 3, 2022, President Biden signed into law the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021.  This law amended the FAA with respect to arbitration of claims involving sexual harassment and sexual assault.  In particular, the law states that a pre-dispute arbitration agreement is unenforceable as to sexual harassment and sexual assault disputes, although an employee aggrieved under the law may voluntarily elect to proceed with arbitration. 

With this amendment, the Court in Sellino v. Galiher, (ESX-L-8519-21), held that, at least with respect to sexual harassment or assault claims, Section 12.7 is no longer preempted by the FAA, noting that “enforcing section 12.7 . . . will fill rather than frustrate the purpose of congress under the FAA.” The Court reasoned that Section 12.7 no longer conflicts with or frustrates the FAA because the FAA itself now prohibits enforcement of some of the same type of arbitration agreements which would be prohibited under the LAD.  Importantly, the amended FAA is limited to sexual harassment and sexual assault claims and does not appear to impact other employment claims which may be brought under the LAD, such as discrimination or retaliation. 

It is also important to recognize that this is a trial court level decision, and it is unclear how this issue will be decided at the appellate level.  In fact, following this amendment in March 2022, the Appellate Division in Aguirre v. Conduent Patient Access Sols., LLC, (A-3542-20) confirmed that, at least with respect to claims of gender and marital status discrimination, Section 12.7 was still preempted by the FAA.  Just before the amendment, in February 2022, the same result was reached by the Appellate Division in Antonucci v. Curvature Newco, Inc., et al. (A-1983-20) on LAD claims of failure to accommodate under the New Jersey Compassionate Use Medical Cannabis Act.

Notably, the Sellino decision does not address whether application of the amended FAA extends retroactively, as the underlying events in Sellino occurred from 1995 through 2020 – after Section 12.7’s enactment in March 2019.  The amended FAA itself applies to claims arising or accruing after its effective date of March 3, 2022.

Employers should carefully review their arbitration agreements to ensure compliance with controlling law.  Employers should also consider the potential implications of this decision on cases involving multiple claims in addition to harassment or assault. 

NFC will continue to monitor developments in this area.  Please contact an NFC team member if you have questions or would like to discuss.

Please contact an NFC team member if you have any questions or seek further assistance.


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