Arbitration in sexual harassment cases

Contributors

In recent years, the landscape of employment law has undergone significant changes regarding the enforceability of arbitration agreements in employment cases. The enactment of the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act (“EFAA”) has introduced crucial exceptions to the enforcement of mandatory arbitration clauses. The EFAA allows employees who allege sexual harassment, gender-based discrimination, or sexual orientation harassment to evade arbitration agreements and take their claims directly to court. Indeed, pursuant to recent California court decisions, employees who allege these types of claims may bypass arbitration agreements and litigate their entire case, including completely unrelated claims, in court. This shift has significant implications for California employers who may be hauled to court despite valid arbitration agreements, especially given the state’s strong focus on employee rights and protections.

A brief background of the FAA and EFAA

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To fully understand the ramifications of the EFAA, it’s essential to first explore the role of the Federal Arbitration Act (“FAA”) in employment disputes. The FAA is a federal law pertaining to the resolution of disputes in arbitration, where a neutral third party adjudicates their case instead of litigating it in a traditional courtroom setting. The FAA applies to arbitration agreements involving interstate commerce—this is a broad category that typically includes most business transactions, since interstate commerce is widely interpreted. The FAA enforces agreements to arbitrate and sets standards for how arbitration proceedings should be conducted when the parties have agreed to arbitrate their disputes. In the context of employment, many employers require employees to sign arbitration agreements as a condition of employment. Many of these agreements expressly call for the application of the FAA or otherwise implicate the FAA when the employment relationship involves interstate commerce.

The FAA was designed to provide a streamlined and cost-effective alternative to litigation. However, while efficient, arbitration is often seen as biased in favor of employers, given the private and confidential nature of the proceedings. This has raised concerns about employees being forced into arbitration even in cases involving serious allegations, such as sexual harassment.

Recognizing these concerns, Congress enacted the EFAA in 2021, effectively amending the FAA to provide exceptions for claims of sexual harassment and sexual assault. The EFAA allows employees to opt out of arbitration in cases involving sexual harassment, even if they signed an arbitration agreement to the contrary, making it easier for them to bring such claims before a court. The EFAA’s primary goal is to provide a more transparent and fairer forum for victims of sexual harassment to seek recourse.

Liu v. Miniso Depot CA, Inc.: A landmark California case

The implications of the EFAA were brought to the forefront of California employment law in Liu v. Miniso Depot CA, Inc., et al. (Cal. Ct. App. Oct. 7, 2024) No. B338090, 2024 WL 4446693. In this case, the plaintiff, Liu, filed a lawsuit against her employer, Miniso Depot, alleging not only sexual harassment but also claims of retaliation, constructive termination, intentional infliction of emotional distress, and violations of wage and hour laws.

Liu had signed an arbitration agreement as part of her employment contract, which would typically have compelled her to resolve any disputes with her employer through arbitration. However, Liu argued that her sexual harassment claim was exempt from arbitration under the provisions of the EFAA. She contended that the inclusion of a sexual harassment claim in her lawsuit should render the arbitration agreement inapplicable to all her claims, not just the claim for harassment.

At trial, Liu prevailed, and the case was brought to the California Court of Appeal for review. Miniso Depot acknowledged that the sexual harassment and sexual orientation claims were exempt from arbitration under the EFAA. However, the company argued that the other claims—such as retaliation, emotional distress, and wage and hour violations—were unrelated to sexual harassment and should, therefore, be subject to arbitration.

The California Court of Appeal’s decision

The California Court of Appeal (Second Appellate District) ruled in favor of Liu, affirming the trial court’s decision to deny arbitration as to the entire case. The Court’s ruling rested on its interpretation of the plain language of the EFAA. Under the statute, the Court noted that the EFAA does not merely exempt sexual harassment claims from arbitration; it applies to the entire “case.” The language of the EFAA specifies that no pre-dispute arbitration agreement shall be enforceable with respect to a “case” that involves a sexual harassment dispute. The Court pointed out that the statute uses the term “case” rather than “claim”, a crucial distinction. According to the Court, the word “case” refers to the entire lawsuit, not just individual claims within that lawsuit. Therefore, if a plaintiff’s case involves at least one claim related to sexual harassment, the EFAA exempts the entire case from arbitration.

This interpretation is significant because it avoids the inefficiency and complexity of bifurcating a lawsuit, where some claims are litigated in court while others are subject to arbitration. It also eliminates the possibility of a situation where a court hears one part of a claim while the arbitration forum hears another, leading to potential confusion and conflicting outcomes. However, it also means that employees can merely allege sexual harassment claims as a means to avoid arbitrating all their disputes.

The broader implications of the Liu decision

The Liu case is significant for California employers and employment law practitioners. By interpreting the EFAA to exempt entire lawsuits from arbitration, the Court of Appeal has exempted arbitration in cases involving sexual harassment even if the parties agree to arbitration. While this interpretation aligns with the broader policy goals of the EFAA, which seeks to ensure that victims of harassment are not forced into arbitration, it may also provide a loophole for aggrieved employees to evade arbitration clauses and haul their employers to the courtroom and before juries by alleging sexual harassment-based, gender-based, or sexual orientation-based claims.

Employers in California, and potentially in other states that follow similar legal reasoning, must now be aware that a single sexual harassment claim can invalidate the entire arbitration agreement in a lawsuit. This has significant consequences for employers who have relied on arbitration clauses to resolve disputes. No longer can they assume that a narrowly defined arbitration agreement will shield them from litigation if a sexual harassment claim is included in a broader lawsuit.

The decision in Liu further highlights the importance of keeping abreast of developments in federal and state laws related to arbitration. Employers who have implemented mandatory arbitration clauses may need to revisit and revise these agreements in light of the EFAA’s broader exemptions.

Other courts weigh in

Other California courts have taken a similar stance. In Casey v. Superior Ct. (2025) 108 Cal. App. 5th 575, 329 Cal. Rptr. 3d 518 (2025), the plaintiff filed a lawsuit against his former employer alleging sexual harassment, among other claims. The Court found that the FAA preempted the choice-of-law provision in the arbitration agreement signed by the parties, which called for the application of state law rather than the EFAA. The Court then applied the EFAA to the dispute, exempting the plaintiff’s entire “case” against her employer, including claims unrelated to sexual harassment, from arbitration pursuant to EFAA.

This decision reinforces the precedent set in Liu and underscores that employers involved in interstate commerce cannot circumvent the EFAA and the arbitration of cases involving sexual harassment, among other things, through choice-of-law clauses in arbitration agreements.

In yet another California case, Doe v. Second Street Corp. (Sept. 30, 2024, B330281) ___ Cal.App.5th ___ [2024 WL 4350420], the Court of Appeal took a similar approach as in Liu, holding that the EFAA foreclosed the arbitrability of the entire case, not just the sexual assault or sexual harassment claims. A federal court arrived at the same conclusion in Turner v. Tesla, Inc. (N.D. Cal. 2023) 686 F.Supp.3d 917, 925.

Two recent cases from the Southern District of New York, Johnson v. Everyrealm, Inc. and Yost v. Everyrealm, Inc., have taken a similar approach as the California courts. In Johnson v. Everyrealm, Inc., Case No. 22 Civ. 6669 (PAE), 2023 WL 2216173 (S.D.N.Y. Feb. 24, 2023), and Yost v. Everyrealm, Inc., Case No. 22 Civ. 6549 (PAE), 2023 WL 2224450 (S.D.N.Y. Feb. 24, 2023), the Southern District of New York was presented with cases where plaintiffs alleged sexual harassment and other workplace violations. In both cases, the court ruled that none of the claims could be compelled to arbitration. The court’s rationale was that the EFAA applied to any claims related to sexual harassment and that the entire lawsuit should proceed in court, regardless of the nature of the other claims. This is in line with the interpretation adopted by the California Court of Appeal in Liu, where the presence of a sexual harassment claim rendered the arbitration agreement unenforceable as to that entire case.

However, a subsequent decision from the same district, Mera v. SA Hospitality Grp., LLC, Case No. 1:23-cv-03492(PGG)(SDA), 2023 WL 3791712 (S.D.N.Y. Jun. 3, 2023), presented a more nuanced approach. In Mera, a restaurant busser alleged sexual harassment due to his sexual orientation, specifically that he endured homophobic slurs and groping by coworkers and a manager. He also brought wage claims on a class and collective basis, arguing that all his claims should be exempt from arbitration under the EFAA. The court in Mera distinguished the case from Johnson and Yost, finding that the wage claims were not brought solely on behalf of the plaintiff, but rather were class-based claims and noted that the wage claims were not directly related to the harassment claims, and as such, those claims were subject to the arbitration agreement.

This distinction from Mera adds a layer of complexity to the application of the EFAA, suggesting that courts, particularly those outside of California, are split on the issue and may take a more individualized approach depending on the specifics of each case. It also roadmaps arguments California employers can use if they are faced with unrelated class or collective claims, comingled with a harassment claim.

Strategies for California employers going forward

For employers, the Liu ruling and the EFAA offer both challenges and opportunities. Employers who wish to retain arbitration as a tool for dispute resolution must carefully navigate the landscape shaped by these developments. Here are some strategies that employers may consider:

Review and revise arbitration agreements: Employers should review their current arbitration agreements to ensure that they are in compliance with the EFAA. In some cases, employers may choose to carve out specific exceptions for sexual harassment claims, providing clarity about the scope of arbitration agreements.
Choice of law provisions: Employers may consider incorporating specific choice-of-law provisions to forego the application of the FAA and thus the EFAA. Under this approach, employers should be aware that courts may nonetheless apply the FAA and EFAA if they find that the employment relationship and/or the employee’s duties implicate interstate commerce.
Emphasize training and prevention: While arbitration agreements can be useful in managing disputes, they should not be relied upon as a substitute for proactive measures in preventing harassment. Employers should focus on comprehensive training programs to reduce the incidence of harassment and other discrimination in the workplace and address any complaints of harassment to avoid liability.
Consider alternative dispute resolution (ADR) methods: In light of the limitations imposed by the EFAA, employers may explore other ADR methods, such as mediation, which could provide a less adversarial forum for resolving disputes. Mediation, unlike arbitration, does not carry the same legal weight and might be more flexible in accommodating both parties’ needs.
Prepare for a shift in litigation: Employers should anticipate that, given the broader scope of the EFAA, more employees may choose to litigate sexual harassment claims in court rather than arbitrate them. This could result in greater exposure to public scrutiny. Employers should prepare for this possibility by enhancing their legal teams and reviewing their overall litigation strategies.

Scali Rasmussen