Can a Sexual Harassment Claim Keep the Whole Lawsuit Out of Arbitration? Yes.

Your employee signed an agreement to arbitrate all employment disputes. But a single sexual harassment claim can bring an entire lawsuit, and every other claim with it, into court anyway.

TL;DR: The Second Circuit joined the Sixth and Ninth Circuits in holding that properly invoking the federal law allowing sexual harassment disputes to proceed in court keeps the entire lawsuit out of compelled arbitration, including non-harassment claims. Employers need to assess the whole complaint before counting on arbitration.

📄 Read the court’s decision.

An employee signed a broad arbitration agreement and received stock options allegedly worth more than $1 million. When a dispute over those options landed in a lawsuit alongside sexual harassment claims, the employers sought arbitration. They lost that fight, and a federal appeals court affirmed.

A firing, disputed stock options, and allegations of sexual harassment

According to the complaint, she started at a law firm and helped develop an affiliated legal technology company. She received options representing approximately 10% of that company’s shares, which fully vested in August 2023.

She alleged that she announced her intention to exercise the options and was fired weeks after reiterating that request in writing. The employers maintained that they terminated her for cause, which would extinguish the options.

She also alleged sexual harassment, including pressure to flirt with prospective clients and pursue relationships for the employers’ benefit. The court accepted her allegations as true for this appeal.

The trial court dismissed several claims, leaving sexual harassment claims and a conversion claim alleging wrongful control of the stock options. The employers argued that the conversion claim belonged in arbitration even if the harassment claims stayed in court.

One word kept the remaining claims together

The Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act (EFAA) allows a person alleging covered sexual harassment or sexual assault to choose court despite an arbitration agreement signed before the dispute arose.

The employers conceded on appeal that she properly invoked the EFAA. The question was how much of her lawsuit it covered.

The employers argued that the stock-option claim did not relate to sexual harassment. But Congress used “case,” meaning the lawsuit as a whole. The statute requires the lawsuit to relate to the harassment dispute; it does not require that connection for each individual claim. The stock-option claim stayed in court.

The Second Circuit joined the Sixth Circuit and Ninth Circuit, which had reached the same conclusion. This is an emerging appellate consensus, although each decision binds federal courts within its own circuit.

Rules governing which claims and parties may appear together still apply. The court left open how much factual detail a harassment claim must contain to trigger the law, along with its application to class, collective, and certain multiple-plaintiff cases. The appeals court decided where the surviving claims would proceed, without deciding whether the employee would ultimately win.

Employers and counsel should evaluate the entire complaint before seeking arbitration. Three points should guide that review.

Three implications for the arbitration decision

1. The financial exposure extends beyond harassment damages

Here, the forum fight reached a stock-option claim. Include non-harassment claims when assessing discovery and settlement strategy; their subject matter alone may not preserve arbitration.

2. Whether the harassment claim triggers the law deserves early attention

Assess whether the EFAA actually applies before investing in a motion to compel arbitration. These employers conceded that point on appeal, leaving only the question of how much of the lawsuit the law covered.

3. Three appeals courts now agree

When estimating litigation costs or evaluating settlement, include the possibility that every surviving claim will proceed in court. In the Second, Sixth, and Ninth Circuits, the non-harassment claims’ subject matter alone will not preserve compelled arbitration.

A sexual harassment claim can change where every other claim gets heard. That arbitration agreement may cover the whole employment relationship and still fail to keep the lawsuit out of court.