It sounds like a good idea: Legislation banning nondisclosure agreements is on Gov. Phil Murphy’s desk. Nondisclosure agreements are a hot topic. Some decry NDAs that block transparency and allow repeat sexual harassment offenders to escape public accountability, though others point out that they facilitate settlements and protect the privacy interests of victims.
But the #MeToo movement is being used as cover to advance a far more selfish objective that will benefit attorneys at the expense of employees themselves. Hidden within the legislation is oblique language that would ban all arbitration agreements in employment contracts.
Arbitration is a fast and cost-effective way of resolving disputes. Your substantive rights are the same as in court, but a more streamlined procedure means you receive faster resolution with lower transaction costs. But, such efficiency comes at the expense of the attorneys who make their living off of those “transaction costs.” Hence their ongoing effort to ban arbitration.
Arbitration cannot be banned outright, though. The Federal Arbitration Act pre-empts such state interference and mandates that arbitration agreements are “valid, irrevocable and enforceable.”
So, instead, this legislation bans “waivers of procedural rights” — which would include waivers of jury trials, limitations on discovery and agreements to opt out of the Federal Rules of Evidence.
Such limits on process are the essence of arbitration. And the U.S. Supreme Court has been clear that states are not only prohibited from banning arbitration outright, they are also prohibited from banning “essential aspects of arbitration.” Citing as “obvious illustrations of this point” the very types of waivers that would be prohibited by this bill.
In fact, the legislation is so plainly unconstitutional, it’s a bit of a puzzle why this language is even included. In the landmark Supreme Court case of Concepcion, even the plaintiffs agreed states could not prohibit essential aspects of arbitration and require procedures “that would wholly eviscerate arbitration agreements.” Justice Elena Kagan reaffirmed the point in 2017, noting that the FAA “also displaces any rule that covertly accomplishes the same objective by disfavoring contracts that (oh, so coincidentally) have the defining features of arbitration agreements.”
Nevertheless, moving this language has been in the works for years. In 2016, a prohibition on waivers of rights was included in an otherwise unremarkable bill codifying an applicable statute of limitations. But the offending waiver language was stripped out when the sponsor realized that it was unconstitutional. Coincidentally, the bill then went no further, and a new vehicle had to be found.
It took several years and just the right confluence of political factors to finally get the language to the governor’s desk. Though it’s curious that there has never been an effort to move this waiver ban as a stand-alone bill. It came, instead, via a bill that legislators had to support.
Indeed, legislators have been effusive in their praise for the nondisclosure restrictions within the bill — on a bipartisan basis, leaping to demonstrate their #MeToo bona fides. Though, notably, no one cared to opine on the constitutionality of banning waivers of procedural rights.
In fairness, as a general matter, legislators have a binary choice — yes or no. When the question is #MeToo legislation to help women, there is an easy “right” answer.
But the governor has more nuanced options at his disposal. New Jersey’s governorship is constitutionally powerful, and with that power comes great responsibility. Murphy has both the power and the responsibility to correct the constitutional flaws in this legislation.
If signed into law as is, this legislation will not help employees. Federal law holds that employees who value higher base pay over more elaborate litigation rights have the freedom to make that choice. By attempting to hold otherwise, this legislation would throw countless employment relationships into uncertainty and generate significant litigation — to the benefit of attorneys and the detriment of everyone else.
It falls to Murphy to use his conditional veto power to strip the unconstitutional language hiding within this Trojan Horse.
Alida Kass is president & chief counsel of the New Jersey Civil Justice Institute.
