Second Circuit Ruling Expands EFAA Reach: Entire Lawsuits Avoid Arbitration if Sexual Harassment Claims are Present

NEW YORK — In a landmark decision that significantly alters the landscape of employment litigation, the United States Court of Appeals for the Second Circuit has ruled that the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act (EFAA) invalidates pre-dispute arbitration agreements for an entire lawsuit, rather than solely for the specific sexual harassment or assault claims.

The September 30, 2026, ruling in Diaz-Roa v. Hermes Law, P.C. carries profound consequences for employers across New York, Connecticut, and Vermont. Under this interpretation, if an employee properly invokes the EFAA by including a viable sexual harassment or assault claim in their complaint, any accompanying claims—even those entirely unrelated to workplace misconduct, such as contract disputes, wage-and-hour violations, or stock option disputes—must also be adjudicated in a public court of law rather than behind closed arbitration doors.

This comprehensive overview examines the facts, chronology, legal foundations, judicial reasoning, and strategic implications of a decision that is reshaping how corporate legal teams approach mandatory arbitration agreements.

1. Main Facts and Case Overview

The legal battle central to the Second Circuit’s ruling stems from a high-stakes employment dispute involving a former executive.

The Parties and the Dispute

The plaintiff, Diaz-Roa, served as an executive at ClaimDeck, a legal technology company affiliated with the defense firm Hermes Law, P.C. Following her abrupt termination, Diaz-Roa filed a lawsuit in the United States District Court for the Southern District of New York.

Her complaint alleged a dual track of grievances:

• The Financial Claims: Diaz-Roa asserted that her employers terminated her specifically to prevent her from exercising lucrative stock options valued at upwards of $1 million, alongside related claims of conversion and contractual breaches.
• The Misconduct Claims: She also alleged that she had been subjected to sexual harassment during the course of her employment.

The Defense Strategy

Upon facing the lawsuit, the defendants moved to compel arbitration. They pointed directly to an employment-related arbitration agreement that Diaz-Roa had signed during her tenure. Under this pre-dispute contract, she had agreed to resolve all employment-related disputes through private arbitration rather than the court system.

The core legal question before the courts was statutory interpretation: When an employee combines a sexual harassment claim with completely unrelated financial or corporate claims, does the EFAA pierce the arbitration agreement for the entire lawsuit, or does it isolate only the harassment claim, forcing the remaining counts into arbitration?

2. Chronology of Events

To fully understand how Diaz-Roa v. Hermes Law, P.C. reached this pivotal appellate juncture, it is helpful to trace the timeline of the statute and the litigation itself.

• March 2022: President Joe Biden signs the bipartisan EFAA into law, amending the Federal Arbitration Act (FAA) to protect victims of sexual assault and harassment from being forced into mandatory private arbitration.
• The Employment Era: Diaz-Roa works as an executive for ClaimDeck/Hermes Law, executing a pre-dispute arbitration agreement as a condition of or during her employment.
• Termination and Filing (2024): Following her termination and the alleged forfeiture of her $1 million in stock options, Diaz-Roa files suit in the U.S. District Court for the Southern District of New York, blending New York state/city sexual harassment claims with non-harassment corporate claims.
• District Court Ruling (2024): The Southern District denies the defendants’ motion to compel arbitration, holding that the EFAA renders the agreement unenforceable as to the entire lawsuit. The defendants immediately file an appeal to the Second Circuit.
• August 19, 2026: In a parallel development across the country, the Ninth Circuit issues a similar ruling in Ding v. Structure Therapeutics, Inc., reinforcing the "entire case" interpretation of the EFAA.
• September 16, 2026: The Sixth Circuit weighs in with a matching precedent in Bruce v. Adams & Reese, LLP, solidifying a growing national consensus.
• September 30, 2026: The Second Circuit officially issues its decision in Diaz-Roa v. Hermes Law, P.C., affirming the lower court’s ruling and aligning the Second Circuit with its sister circuits.

3. Supporting Data and Statutory Framework

The legal mechanism at the heart of this controversy is the EFAA, codified under Section 402(a) of the Federal Arbitration Act (FAA).

Understanding the EFAA

Enacted in the wake of the #MeToo movement and widespread public outcry over the silencing of harassment victims through confidential arbitration clauses, the EFAA was designed to give individuals a choice. It states that no pre-dispute arbitration agreement shall be valid or enforceable with respect to a "case" that relates to a sexual assault or sexual harassment dispute.

Prior to the EFAA, employers routinely relied on broad mandatory arbitration clauses to force all workplace disputes out of public courts, where juries could award substantial damages and where proceedings were a matter of public record. Arbitration, by contrast, is private, typically binding, and often restricts discovery.

The Statutory Debate: "Case" vs. "Claim"

The primary battleground in Diaz-Roa—and in similar cases across the nation—revolved around Congress’s precise choice of terminology.

• The Defense Argument: Employers argued that the statute should be read narrowly. They contended that "case" should be functionally interpreted as "claim" or "cause of action." Under this reading, only the specific count alleging sexual harassment would stay in court, while unrelated claims (like stock option disputes) would still be siphoned off to private arbitration.
• The Plaintiff Argument: Employees argued that "case" means the entire civil action filed in court. If a lawsuit touches upon a sexual harassment dispute, the protective umbrella of the EFAA covers the whole proceeding.

4. Official Judicial Reasoning and Responses

Writing for the Second Circuit, the appellate panel dismantled the defendants’ narrow interpretation of the statute, relying heavily on textualism and statutory intent.

The Textual Distinction

The Second Circuit emphasized that when Congress drafts legislation, every word matters. In Section 402(a) of the EFAA, lawmakers deliberately utilized the word "case" rather than "claim."

The Court noted that in legal parlance, a "case" refers to the overarching judicial proceeding or lawsuit, whereas a "claim" refers to an individual legal theory or cause of action within that proceeding. By choosing "case," Congress signaled its intent to permit plaintiffs who properly invoke the EFAA to shield their entire lawsuit from compulsory arbitration, even if certain causes of action within that lawsuit bear no factual relationship to sexual harassment or assault.

Rejection of the FAA’s Pro-Arbitration Policy

The defendants heavily relied on the FAA’s long-standing, overarching national policy favoring the enforcement of arbitration agreements. However, the Second Circuit firmly rejected this defense, pointing out that the EFAA was explicitly enacted by Congress as a statutory exception to the FAA. When a plaintiff invokes the EFAA, the general policy favoring arbitration yields directly to the specific protections mandated by Congress for harassment and assault victims.

Alignment with Other Circuits

In reaching its conclusion, the Second Circuit explicitly joined a growing federal consensus. It cited two major 2026 rulings from sister circuits:

1. The Sixth Circuit: Bruce v. Adams & Reese, LLP, 168 F.4th 367 (6th Cir. 2026)
2. The Ninth Circuit: Ding v. Structure Therapeutics, Inc., No. 25-1532 (9th Cir. Aug. 19, 2026)

Both circuits likewise concluded that the EFAA applies to an entire lawsuit, reinforcing a unified judicial interpretation across multiple jurisdictions.

Unresolved Questions

While the Second Circuit’s ruling provides clarity on the scope of the EFAA, the Court was careful to leave certain procedural questions open for future litigation:

• The Pleading Standard: The decision did not fully define the exact threshold or standard of plausibility a plaintiff must meet regarding their sexual harassment allegations to successfully trigger the EFAA.
• Multi-Party Actions: The Court left open how the rule will apply in complex class actions, collective actions, or multi-plaintiff lawsuits where only one plaintiff alleges sexual harassment.
• Joinder Rules: The Court noted that ordinary procedural rules governing the joinder of claims and parties (such as Federal Rule of Civil Procedure 20) continue to act as a guardrail, preventing plaintiffs from arbitrarily attaching sham harassment claims to entirely unrelated lawsuits just to bypass arbitration.

5. Strategic Implications for Employers

For employers, human resources professionals, and corporate defense counsel operating within the Second Circuit (New York, Connecticut, and Vermont) and across the country, Diaz-Roa v. Hermes Law, P.C. introduces significant risk management challenges.

1. The "All-or-Nothing" Dilemma

Employers can no longer safely assume that maintaining a mandatory arbitration agreement will protect them from public litigation regarding routine employment matters—such as unpaid wages, breach of contract, or executive compensation disputes—if the employee also chooses to allege sexual harassment. A single, well-pleaded harassment count can now effectively drag an entire corporate dispute out of private arbitration and into the public court system.

2. Litigation Strategy and Settlement Leverage

This ruling drastically shifts leverage during early-stage litigation and settlement negotiations. Employees armed with both financial grievances and sexual harassment claims now possess the power to litigate all matters before a jury in open court. This increases the public relations and reputational risks for employers, who historically relied on confidential arbitration to resolve high-level executive disputes quietly.

3. Review and Revision of Arbitration Agreements

While the decision does not invalidate employment arbitration agreements altogether, it forces a strategic rethink. Employers should consult with labor and employment legal counsel—such as the Labor & Employment team at firms like Squire Patton Boggs (US) LLP—to review their existing dispute resolution clauses.

Legal experts suggest that companies should:

• Evaluate how claims are structured and bundled internally.
• Assess the potential exposure of mixing different categories of workplace disputes.
• Stay vigilant regarding how lower courts interpret the pleading standards required to successfully invoke the EFAA in light of this new precedent.

Conclusion

The Second Circuit’s ruling in Diaz-Roa v. Hermes Law, P.C. marks a decisive victory for employee rights under the EFAA, while presenting a stark compliance and litigation warning for employers. As federal circuits increasingly close ranks around the "entire case" interpretation, corporate entities must adapt their risk management strategies to a legal environment where workplace misconduct allegations can sweep away mandatory arbitration protections entirely.