SDNY Decisions Impact Enforceability of Arbitration Clauses Under the EFAA

On February 24, 2023, the District Court for the Southern District of New York issued decisions in Johnson v. Everyrealm, Inc. and Yost v. Everyrealm, Inc., with broad implications for the enforceability of arbitration agreements when plaintiffs allege that they have been subjected to sexual harassment. As we reported in a client alert last year, President Biden signed the Ending Forced Arbitration of Sexual Assault and Harassment Act (“EFAA”) on March 3, 2022. The EFAA amended the Federal Arbitration Act (“FAA”) to prohibit the forced arbitration of disputes involving sexual assault and harassment.

Both cases were brought by former employees of the digital real estate company Everyrealm, Inc. (“Everyrealm”) claiming they had been subjected to sexual harassment as well as a wide swath of other claims, including purported violations of the New York Labor Law, discrimination on a variety of bases, and common law tort. Both Johnson and Yost signed arbitration agreements in connection with their employment with Everyrealm and both claimed that the EFAA precluded enforcement of their respective arbitration agreements. Everyrealm sought to compel arbitration in both cases, yet, interestingly, the Court reached opposite results in each case.  

In examining the facts alleged in Yost’s pleadings, the Court stated that the allegedly discriminatory acts, however “inappropriate or infantile”, were disconnected from Yost’s sexual orientation. The Court noted that while Yost’s complaint portrayed the Everyrealm CEO as a “full-spectrum and unfiltered purveyor of gossip, with a special obsession with matters of sex and intimacy” the pleadings did not link the CEO’s statements to Yost to any protected characteristic of Yost. As such, Yost had failed to state a claim for sexual harassment under the NYCHRL, the most lenient of the sexual harassment statutes at issue. Johnson’s pleadings, on the other hand, alleged that Everyrealm’s CEO had made sexually explicit comments, encouraged him to take part in sexual activities described as office games, pressured Johnson to engage in sexual conduct with work colleagues and seemingly propositioned Johnson. The Court therefore held that Johnson’s pleadings had stated a claim for sexual harassment under the NYCHRL.

Both decisions then turned to the EFAA’s effect on the arbitration agreements with respect to the remaining causes of action (the non-sexual harassment claims) brought by the employees. Amici in both cases argued that even if a claim of sexual harassment is not plausibly pled, the EFAA precludes enforcement of an arbitration agreement. As Johnson’s complaint had stated a cause of action for sexual harassment, the Court did not have to consider whether an implausibly pled complaint rendered an arbitration agreement unenforceable. It did, however, have to determine whether the arbitration agreement was unenforceable solely with respect to Johnson’s sexual harassment claims, or whether arbitration of his remaining claims was similarly unenforceable. The Court held that, because Johnson had made a viable claim for sexual harassment, the EFAA rendered the arbitration agreement unenforceable with respect to all of his claims. In reaching this decision, the Court looked to the text of the EFAA. The EFAA makes pre-dispute arbitration agreements invalid and unenforceable “with respect to a case which is filed under Federal, Tribal, or State law and relates to the… sexual harassment dispute.” The Court reasoned that the statute’s use of the word “case” made clear that the invalidation of the arbitration agreement extends to the entirety of the case and not only the discrete claims alleging or relating to a sexual harassment dispute. As such, the arbitration agreement was unenforceable as to Johnson’s entire case, and not just his sexual harassment claims.

In Yost’s case, however, the Court was faced with the question of whether the EFAA renders an entire arbitration agreement unenforceable when a complaint alleges sexual harassment but fails to state a viable claim for sexual harassment. The Court noted that under the EFAA the conduct “must have been alleged to constitute sexual harassment under applicable Federal, Tribal, or State law.” The Court reasoned that the words “under applicable Federal, Tribal, or State law” created the “legal measuring stick” as for whether the EFAA would render an arbitration agreement unenforceable. This measuring stick, the Court held, is satisfying federal pleading standards. Because Yost had failed to state a claim for sexual harassment, the Court dismissed Yost’s sexual harassment claims and held that the EFAA did not have any bearing on the motion to compel arbitration.

While these decisions may lead to an increase in the number of sexual harassment claims brought by plaintiffs seeking to bring claims in court rather than through arbitration, the Yost decision should dispel some fears that baseless claims of sexual harassment will result in an arbitration agreement being rendered unenforceable for non-sexual harassment claims. Nevertheless, employers should be mindful that arbitration agreements may not be enforceable on any claims if an employee has stated a plausible sexual harassment claim. For that reason, employers should ensure that all employees, including management and owners, are fully aware of sexual harassment laws and are adequately trained on respectful and professional workplace behaviors to avoid such claims. If you have any questions about these decisions, or would like to discuss sexual harassment training options, please contact Kate Townley at ktownley@fglawllc.com or any other attorney at the Firm.

DISCLAIMER: This alert is provided to clients and friends of the firm for informational purposes only and the distribution of this alert is not intended to, and does not, establish an attorney-client relationship. This alert also does not provide or offer legal advice or opinions on any specific factual situations or matters. This communication may be considered Attorney Advertising. Prior results do not guarantee a similar outcome.