This week the New Jersey Senate Labor Committee voted to release legislation that would make New Jersey the only state in the country to ban arbitration agreements in all employment contracts.
Much of the discussion on S121 focused on helping the victims of sexual harassment. And indeed, one element of the bill would specifically address non-disclosure agreements for discrimination or sexual harassment settlements. But the prohibition on waivers of “procedural rights” would apply to all employment contracts and would prohibit all prospective agreements to resolve any type of employment dispute through arbitration.
When disputes arise in the employment context, there are two possible tracks: it can be resolved through litigation in state or federal court, or it can be resolved through arbitration. The substantive remedies are the same, regardless of which mechanism is selected. But while proceeding in court will typically take years to resolve, with massive legal fees, arbitration is cheaper, faster, and more efficient. And money not spent on the legal fees associated with exhaustive court proceedings and discovery is instead available for employee compensation and business development.
But by reducing legal fees and precluding class actions, arbitration also presents a challenge to the business model of the plaintiffs’ bar. And as a result, we have seen an intensive anti-arbitration public relations campaign, coupled with efforts to undermine arbitration in state courts and legislatures.
Hostility to arbitration from those who benefit from the litigation business model is nothing new. Which is why federal law since 1925 has defended arbitration as a favored means of dispute resolution and expressly preempted efforts to undermine the enforceability of arbitration agreements. The Federal Arbitration Act mandates the enforceability of arbitration agreements, providing that they are “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”
S121 would attempt to circumvent that preemption, essentially by defining state contracts to preclude arbitration agreements. But when a state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: the conflicting rule is displaced by the FAA. And the result is the same when state law prohibits essential attributes of arbitration.
In its landmark decision of AT&T Mobility v. Concepcion, the U.S. Supreme Court cited several “obvious illustrations” of unenforceable state restrictions: agreements that fail to provide for judicially monitored discovery; that fail to abide by the Federal Rules of Evidence; or that waive a right to a jury trial. The Court explained that all such state restrictions would be invalid, as they would interfere with “fundamental attributes of arbitration” and would create a scheme “inconsistent with the FAA.”
S121 would attempt to impose all of these “obvious illustrations” of invalid state restrictions on all New Jersey employment contracts.
These state restrictions are preempted even when not limited to arbitration agreements. As Justice Kagan recently wrote for a 7-1 majority in Kindred Nursing Centers v. Clark, the FAA not only preempts state efforts to directly bar arbitration, it “also displaces any rule that covertly accomplishes the same objective by disfavoring contracts that (oh so coincidentally) have the defining features of arbitration agreements.”
As a practical matter, a prohibition on arbitration agreements does not benefit the average employee. Arbitration is a faster, more cost-effective way of resolving disputes, and the lower transaction costs inure to the benefit of all employees. Litigation costs, by contrast, function as a transfer of wealth from lower and middle-class employees, to more highly-compensated attorneys.
The New Jersey legislature’s attempt to interfere with the contractual protections afforded by the Federal Arbitration Act will result in protracted litigation, culminating in the legislation eventually being invalidated in federal court. And in the interim, it would impose massive litigation costs on employers and employees alike.