The California Court of Appeal recently held that arbitration couldn’t be compelled in an employment-related lawsuit alleging sexual harassment, and that the arbitration agreement was unenforceable as to all claims asserted in the lawsuit because the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 (EFAA) applied to an entire case.
Background
The plaintiff began working in 2015 as a real estate agent for D.H. Horton, a national homebuilding company. In 2017, she signed a new employment contract, which included the arbitration clause in question. It stated that if the parties are unable to resolve a dispute through negotiation or mediation, they agree to binding arbitration. It further said that by entering into the agreement, the parties agreed they were forfeiting their right to litigate in court and that a party who refuses to submit to arbitration “MAY BE COMPELLED TO ARBITRATE UNDER THE AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE.”
A separate clause, entitled “Governing Law,” said that “the construction and interpretation of this Agreement shall at all times and in all respects be governed by the laws of the State of California.”
The plaintiff was one of the company's top performers. In late 2022, she was assigned to work with the defendant employee at a remote development site in Fairfield. Beginning almost immediately, the employee made a series of unwanted sexual remarks, and the plaintiff felt unsafe and became physically nauseous when she was around him. The plaintiff ultimately went on medical leave because of the strain, and she resigned in September 2023.
That same month, the plaintiff filed this lawsuit against her former employer and the employee. She alleged causes of action under the California Fair Employment and Housing Act for sexual harassment, discrimination based on gender or sex, retaliation, and failure to prevent discrimination and harassment.
The employer filed a motion to compel arbitration, which the plaintiff opposed, arguing that the EFAA applied and that she couldn’t be forced to arbitrate her case. The trial court granted the motion and agreed with the employer that the choice-of-law provision in the parties' agreement meant that neither the Federal Arbitration Act (FAA) nor the EFAA (which is a part of the FAA) applied. The plaintiff filed a petition for a writ of mandate, and this court issued an order to show cause.
The State and Federal Laws Governing Arbitration Agreements and the Standard of Review.
Presiding Judge Jim Humes explained that the FAA and California's corollary, the California Arbitration Act generally embody a liberal policy in favor of the enforcement of arbitration agreements. The statutes can work in tandem, he said, and thus, where the FAA applies to an arbitration agreement in California, the CAA may provide the procedures to enforce such an agreement if the parties selected California law and the state procedures don’t offend policies embodied in the FAA.
But the judge noted that the federal and state schemes differ in one key aspect that controls the resolution of this case: whereas both the FAA and CAA provide exceptions to the enforcement of arbitration agreements when grounds exist for the revocation of any contract, the FAA, unlike the CAA, also excepts agreements as otherwise provided in the EFAA—which means all cases relating to a sexual harassment dispute.
The EFAA says that a “person alleging conduct constituting a sexual harassment dispute” may elect that “no predispute arbitration agreement … shall be valid or enforceable with respect to a case which is filed under Federal, Tribal, or State law and relates to the … sexual harassment dispute.” A “sexual harassment dispute” is defined as “a dispute relating to conduct that is alleged to constitute sexual harassment under applicable Federal, Tribal, or State law.” The judge said there’s no California statutory counterpart to the EFAA.
Can the Plaintiff Invoke the EFAA To Avoid Arbitration?
Judge Humes and the Court of Appeal ruled that the EFAA applies to the parties' transaction because it sufficiently involved interstate commerce. Because the FAA's reach coincides with that of the commerce clause, the statute “applies not only to the actual physical interstate shipment of goods but also contracts relating to interstate commerce,” the judge wrote, quoting a 2002 decision.
Here, the undisputed evidence here amply demonstrated a nexus to interstate commerce for the EFAA to apply as the employer “conducts business in 33 states and employs multiple trades such as lumber and escrow companies that are based out of different states.” The evidence demonstrated a sufficient link with interstate commerce to establish the EFAA's reach to the parties' dispute.
The Court of Appeals then considered whether the employer's effort to compel arbitration was preempted by the federal law and concluded that it plainly was. The law governing federal preemption states that there are three situations in which state law is preempted:
- Express preemption, where Congress explicitly defines the extent to which its enactments preempt state law;
- Field preemption, where state law attempts to regulate conduct in a field that Congress intended the federal law exclusively to occupy; and
- Conflict preemption, where it is impossible to comply with both state and federal requirements, or where state law stands as an obstacle to the accomplishment and execution of the full purpose and objectives of Congress.
Judge Humes found that conflict preemption was present here because the EFAA states a blanket rule of unenforceability of arbitration agreements in cases related to a sexual harassment dispute, while the CAA provides for the general enforceability of arbitration agreements in all cases—including those related to a sexual harassment dispute.
Conflict preemption is present when it’s impossible for a private party to comply with both state and federal requirements or where state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress. “What is a sufficient obstacle is a matter of judgment, to be informed by examining the federal statute as a whole and identifying its purpose and intended effects,” the judge wrote, quoting a U.S. Supreme Court case.
The EFAA's purpose is plainly obstructed by an attempt to use state law to force a person who is alleging sexual harassment to arbitrate their dispute, the judge said. To reach this conclusion, he pointed to the EFAA's text, which explicitly states that “the person alleging conduct constituting a sexual harassment dispute” may elect that “no predispute arbitration agreement … shall be valid or enforceable with respect to a case which … relates to the … sexual harassment dispute.”
In addition, the parties' selection of California law meant that they chose the CAA's arbitration-enforcement procedures, along with the state's substantive law for most of their disputes. However, the employer's attempt to compel arbitration of the plaintiff's case—which directly related to a sexual harassment dispute—by relying on the choice-of-law provision would directly contravene Congress's purpose and objectives in enacting the EFAA. Thus it was preempted, and the plaintiff could elect to render the arbitration provisions invalid and unenforceable in this case. As such, the trial court erred in denying her the ability to do so.
The Court of Appeal directed the trial court to vacate the order compelling arbitration and to enter a new order denying the motion. Casey v. Superior Court (California Court of Appeal, 1st Appellate District 2/3/25).
Takeaway
The case shows the wide reach of the EFAA to invalidate arbitration agreements in sexual harassment claims brought under state law. As such, employers can’t compel an arbitration in an employment-related lawsuit alleging sexual harassment and other claims.
Employers should speak with Eanet, PC about the enforceability of their arbitration agreements in cases alleging sexual harassment.