As employers and employees alike continue to monitor and watch the landscape of alternative dispute resolution as a viable option (or not) in New Jersey, an important federal court decision was recently handed down.  On March 25, 2021, the U.S. District Court for the District of New Jersey held that Section 12.7 of the New Jersey Law Against Discrimination (NJLAD), which prohibits any “employment contract” that waives any right or remedy relating to discrimination, retaliation or harassment claims, is preempted by the Federal Arbitration Act (FAA).¹ Specifically, in rendering her holding in N.J. Civil Justice Institute v. Grewal, Judge Anne Thompson granted the plaintiffs’ motion for summary judgment, and, in doing so, found that, Section 12.7 directly conflicted with Section 2 of the FAA by “singl[ing] out arbitration agreements for disfavored treatment.” In reaching this ruling and providing her analysis, Judge Thompson cited, in part, to the well-established U.S. Supreme Court precedent which has long recognized the mandates of the federal FAA and related public policy considerations—all of which strongly favor alternative dispute resolution through arbitration.

Background

As many employers based and operating in New Jersey are aware, employment arbitration programs and policies suffered a massive legislative set-back when Section 12.7 of the NJLAD was enacted on March 18, 2019.  Indeed, this aggressive “anti-arbitration” law states, in relevant part, that:

(a) 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.

(b) No right or remedy under the “Law Against Discrimination,” P.L. 1945, c.169 (C.10:5-1 et seq.) or any other statute or case law shall be prospectively waived.

The NJLAD also provides that “[a]ny person claiming to be aggrieved by an unlawful employment practice or an unlawful discrimination” has the “right to file a complaint in the Superior Court to be heard before a jury.”² One repercussion of New Jersey’s enactment of the above additions to the NJLAD was that voluntary employer-employee arbitration agreements (and related arbitration programs for processing workplace disputes) became invalid and unenforceable, as a matter of law, in certain situations.  This is because arbitration agreements effectively waive an employee’s right to go to court and receive a jury trial. Thus, in sum, New Jersey law, as of March 2019, has (at least in theory) essentially precluded employers from requiring workers to arbitrate discrimination, retaliation and harassment claims.

Yet, as many employers have also been aware, the above amendments to the NJLAD are clearly contrary to longstanding federal law—again, as noted above, under the FAA.  Similar to the legal gymnastics which have played out and transpired on the “other side of the River” (i.e., in New York, where a similar law exists), New Jersey employers have continued to litigate and press for decisions to bolster the federal FAA preemption issue.

In N.J. Civil Justice Institute, the New Jersey Civil Justice Institute (NJCJI), a non-profit, non-partisan group whose members include small businesses, business associations, and professional organizations, and the U.S. Chamber of Commerce, filed suit against New Jersey Attorney General Gurbir Grewal, arguing that Section 12.7 is preempted by the FAA. Ironically, however, in response to the plaintiffs’ argument, the defendant did not contest that Section 12.7 is preempted under the FAA. In fact, throughout the entire litigation, the defendant never raised any serious opposition to the preemption argument, the “apparent” crux of the dispute. Rather, the defendant focused its briefing on whether the plaintiffs had standing and if the issue was ripe for adjudication. Both of those arguments were rejected by the court in July 2020, holding the plaintiffs did, in fact, have standing, through the doctrine of associational standing, and their claim was ripe for adjudication. The parties then exchanged discovery, submitted supplemental briefing, and the court heard oral arguments. The plaintiffs subsequently moved for summary judgment.

The Court’s Decision – Is this the Silver Bullet to End to FAA Preemption Debate?

Despite the defense’s failure to contest the FAA preemption issue, Judge Thompson did not ignore that aspect of the case.  In her holding, she found that Section 12.7 is preempted by the FAA and noted that the “Supreme Court has held that the FAA ‘reflects an emphatic federal policy in favor of arbitral dispute resolution.’”³ Judge Thompson also cited to Section 2 of the FAA, which provides that a

written provision in . . . a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.⁴

This provision “‘foreclose[s] state legislative attempts to undercut the enforceability of arbitration agreements.’”⁵

The court then focused on the absence of the word “arbitration” in Section 12.7. This was similar to the issue in Kindred Nursing Centers v. Clark,⁶ where a state law did not refer to arbitration by name.  The Supreme Court nevertheless found FAA preemption in that case because  the state law “hing[ed] on the primary characteristic of an arbitration agreement . . . a waiver of the right to go to court and receive a jury trial.”⁷ Similar to Kindred Nursing, Judge Thompson noted that Section 12.7 does not mention arbitration by name. Instead, Section 12.7 prohibits the waiver of “any substantive or procedural right or remedy,” which includes the right to bring an action in Superior Court. Because the “‘primary characteristic,’ or ‘defining trait’ of arbitration agreements” is to go to court and receive a jury trial, Section 12.7 “singles out arbitration agreements for disfavored treatment.”⁸ Therefore, because Section 12.7 thwarts the goal of the FAA and conflicts with the overall goal of promoting a liberal policy favoring arbitration proceedings, the court held that state law must yield to the federal law.

This is Not the First New Jersey Decision to Find FAA Preemption

As Judge Thompson noted, N.J. Civil Justice Institute is just another and additional case holding that the FAA preempts state law banning employers from requiring employees to arbitrate discrimination and harassment claims. Most recently, in Janco v. Bay Ridge Automotive Management Corp., a New Jersey Superior Court held that the FAA preempts Section 12.7 with respect to its preclusion of employer-employee arbitration agreements.⁹ Other examples of the FAA preempting similar state laws to Section 12.7 can be found in New York and California. In Latif v. Morgan Stanley, for example, the Southern District of New York found that New York CPLR Section 7515(b)'s prohibition on arbitration in sexual harassment cases contradicted the purpose of the FAA; therefore, the FAA preempted the state law.¹⁰ In Chamber of Commerce v. Becerra, the court held that a California law prohibiting retaliation against employees for their “refusal to consent to the waiver of any right, forum, or procedure for a violation of the California Fair Employment and Housing Act” was preempted by the FAA.¹¹ This decision is currently on appeal to the Ninth Circuit.

Conclusion

Employers should be mindful that requiring employees to sign arbitration agreements to settle disputes of discrimination and harassment may result in pushback from employees and potential litigation.  Simply because additional cases continue to be decided in favor of FAA preemption and enforceability of arbitration programs and procedures does not mean that employers should not continue to be cognizant of the legal risks.  Despite this decision’s further strengthening of the FAA preemption defense, employers must continue to also ensure an adherence to contract formation standards – i.e., maintain recommended practices related to adequate consideration and avoidance of ambiguity in drafting employee arbitration programs. However, for employers vested in the effectiveness of their employment arbitration programs, including the benefits intrinsic to such alternative dispute resolution mechanisms, the decision in N.J. Civil Justice Institute is good news.  This is because, as noted, the preemption argument that forms the foundation of the decision in N.J. Civil Justice Institute and the other cases mentioned above remains very strong. This is especially so given the Supreme Court’s deep-rooted precedent, which has consistently recognized the liberal policy in favor of arbitration under federal law.  Under current conditions, we see no legitimately significant impediment to employers continuing to implement arbitration programs in New Jersey.  Nevertheless, we do recommend employers continue to have employees sign arbitration agreements that are governed by the FAA, rather than state law, in the event states such as New Jersey further attempt to limit the use of such agreements.