Second Circuit Holds That a Sexual Harassment Claim Can Keep an Employee’s Entire Lawsuit Out of Arbitration

On September 30, 2026, the U.S. Court of Appeals for the Second Circuit issued a significant decision for employers that rely on pre-dispute arbitration agreements. In Diaz-Roa v. Hermes Law, P.C., the court held that when an employee invokes the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act (EFAA), the employer’s arbitration agreement becomes unenforceable as to the employee’s entire lawsuit, including claims unrelated to the alleged harassment.

The decision, which governs federal courts in New York, Connecticut, and Vermont, aligns the Second Circuit with the Sixth and Ninth Circuits and substantially narrows the practical reach of employment arbitration agreements whenever a sexual harassment allegation is part of a case.

Background: The EFAA

Congress enacted the EFAA in 2022 as an amendment to the Federal Arbitration Act. The statute provides that, at the election of a person alleging conduct constituting a sexual harassment dispute or sexual assault dispute, no pre-dispute arbitration agreement or joint-action waiver “shall be valid or enforceable with respect to a case which is filed under Federal, Tribal, or State law and relates to the sexual assault dispute or the sexual harassment dispute.” Whether the EFAA applies is decided by a court, not an arbitrator, even if the agreement purports to delegate that question.

The Facts

The plaintiff began working at a law firm in 2017 and, in February 2018, signed an arbitration agreement covering essentially all claims against the firm. She later took on senior roles at an affiliated legal technology company and was awarded stock options. After she repeatedly stated her intention to exercise those options, she was terminated in February 2024, purportedly for cause.

She sued in the Southern District of New York, asserting sexual harassment claims under the New York State and New York City Human Rights Laws, along with breach of contract, New York Labor Law § 193, tortious interference, and conversion claims. The employers moved to compel arbitration. In a single ruling, the district court denied the motion to compel arbitration in its entirety and dismissed all but the harassment claims and the conversion claim. On appeal, the employers argued that the conversion claim, which was unrelated to the harassment allegations, was covered by the plaintiff’s arbitration agreement.

The Court’s Holding

The Second Circuit affirmed the lower court. Relying on the statute’s plain text, the court reasoned that the EFAA invalidates arbitration agreements “with respect to a case,” and that the word “case” naturally refers to a lawsuit as a whole, as distinct from the individual “claims” within it. The court noted that Congress used the word “claim” elsewhere in the EFAA, which indicated that it intended “case” to carry a different, broader meaning. The court therefore held that a plaintiff who successfully invokes the EFAA may proceed in court with every claim in the lawsuit. In practical terms, Diaz-Roa means that, in the Second Circuit, an employee who pairs a viable sexual harassment or sexual assault claim with other employment claims can avoid arbitration of the entire case.

Conclusion

With at least three federal circuits now in agreement, the “whole case” reading of the EFAA is quickly becoming the prevailing rule. Employers should expect plaintiffs’ counsel to include sexual harassment allegations in complaints more frequently as a means of avoiding arbitration. Employers that use arbitration agreements should consult counsel to review their agreements, their dispute resolution strategy, and their harassment prevention practices in light of this decision.

Kauff McGuire & Margolis LLP attorneys are available to assist employers in assessing how this decision affects their arbitration programs and pending or anticipated litigation.

This client alert is provided for informational purposes only and does not constitute legal advice. Readers should consult counsel regarding their specific circumstances.