USA – NEW YORK Trends and Developments Contributed by: Joshua Stanton, David Russell and Torie Feldman, Perry Law
the employer to include substantial liquidated damages in the event of breach ‒ perhaps the entire consideration for the agreement. That runs counter to the second goal, however, as such a liquidated damages provision would appear to invalidate the release. Faced with these apparently irreconcilable goals, what is an employer to do? Before answering that question, it is worth consider- ing protective provisions that can still be kept in settlement agreements in such cases. Fore- most among these is a confidential arbitration provision, which requires all claims that exist ‒ or may exist in the future ‒ between the employer and the employee to be submitted to confiden- tial, binding arbitration. (Although New York law technically prohibits mandatory arbitration for the resolution of discrimination claims “[e]xcept where inconsistent with federal law” (see CPLR Section 7515), courts have routinely held the Federal Arbitration Act to allow such provisions.) It is important to note that a settlement agree- ment under New York law can require disputes to be submitted to confidential arbitration. Sec- tion 5-336 does not prohibit or render unen- forceable such a clause. So, even if a release were unenforceable owing to the inclusion of liquidated damages for breach of the confiden- tiality clause, the employee would still be unable to file their claim publicly ‒ at least not without violating the mandatory confidential arbitration clause as well. It is also worth noting that this would not run afoul of the federal Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act (EFASASHA), which prohibits mandatory arbitra- tion agreements with regard to sexual harass- ment or assault claims that have not yet arisen at the time the agreement is made. Given the
employee’s claim necessarily will have arisen prior to the time the agreement is made, the EFASASHA does not apply. With the inclusion of a confidential arbitration provision, the path forwards for the employer (and the path that maximises payouts to claim- ant-employees) becomes much clearer: the worth of the release of the claim itself dimin- ishes greatly in value. In the context of meritless claims alleging serious misconduct, the value to the employer is frequently the confidential- ity provision rather than the release. That is because the publicity of allegations of serious misconduct could do massive damage to the company regardless of their truth, whereas the likely damages assessed by a court (or arbitra- tor) for a frivolous claim would be zero. Of course, there would be litigation costs asso- ciated with defending against a frivolous claim, even in confidential arbitration. Nevertheless, how many claimants, having successfully nego- tiated a large payout to be subject to a confi- dentiality provision, would turn around and bring a frivolous claim in confidential arbitration? The answer is not many ‒ especially if the confidential arbitration provision includes shifting attorney’s fees, which could impose significant costs on a frivolous claimant whose arbitration claim fails. (Such fee-shifting provisions, however, must not be so prohibitive as to prevent employee-claim- ants from vindicating their rights in the arbitral forum (see Brady v Williams Cap Grp, LP, 14 NY3d 459, 466, 928 NE.2d 383, 387 (2010) (cit- ing Green Tree Fin Corp-Alabama v Randolph, 531 US 79, 90 (2000)).) Consequently, where the value of a confiden- tiality provision is extremely high for a com- pany faced with apparently frivolous claims, it is entirely rational for the company to opt to
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