District of New Jersey Rules that New Jersey Ban on Employment Arbitration Agreements is Preempted by the Federal Arbitration Act

In a decision rendered March 25, 2021, United States District Court Judge Anne E. Thompson barred the State of New Jersey from enforcing a recently enacted statutory provision that precluded employers from requiring workers to arbitrate discrimination and harassment claims.  The Court held that the Federal Arbitration Act (the “FAA”) preempts N.J. ST § 10:5-12.7 (“Section 12.7”) and permanently enjoined the State from enforcing Section 12.7.  By way of background, in March 2019, the New Jersey Legislature enacted Section 12.7 as an amendment to the New Jersey Law Against Discrimination (“NJLAD”).  Section 12.7 barred arbitration of certain NJLAD claims, by providing that any “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.” N.J. ST § 10:5-12.7(a).  Section 12.7 was widely interpreted as preventing the enforcement of mandatory arbitration provisions with regard to discrimination and harassment claims.

In New Jersey Civil Justice Institute v. Grewal, No. 19-17518, 2021 WL 1138144 (March 25, 2021), Judge Thompson held that, “[b]ecause the FAA is a federal statute, any state law that conflicts with it or frustrates its purpose violates the Supremacy Clause.” Id. at *6 (internal citations omitted).  Section 2 of the FAA 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.”  Therefore, the Court held that any state law seeking to invalidate an arbitration clause is preempted by the FAA.

The District Court noted that Section 12.7’s failure to explicitly mention arbitration by name does not protect Section 12.7 from preemption.  As quoted by the District Court, “[a] state that ‘discriminat[es] on its face against arbitration’ as well as ‘any rule that covertly accomplishes the same objective by disfavoring contracts that… have the defining features of arbitration agreements’ will be preempted by the FAA.” NJ Civil Justice Institute at *6 (quoting Kindred Nursing Cts. Lt. P’ship v. Clark, 137 S. Ct. 1421, 1426 (2017)).  In its decision, the District Court determined that the prohibition of the waiver of a jury trial clearly singles out arbitration.  This decision follows similar rulings from federal courts in California and New York, as well as Janco v. Bay Ridge Auto Mgmt. Corp., MON-L-1967-20 (Law Div. Jan. 22, 2021).

NJ Civil Justice Institute, unless appealed, will allow the continued enforcement of arbitration provisions in employment contracts for discrimination and harassment claims. It is unclear whether New Jersey will appeal this decision.