A coalition of business groups is challenging California Assembly Bill 51, California’s recent legislation criminalizing mandatory arbitration agreements as a condition of employment or receipt of employee-related benefits, arguing that the initial formation of an arbitration agreement is covered by the Federal Arbitration Act
Overview
In October 2019 California enacted Assembly Bill 51 (“AB 51”), which prohibits employers from requiring mandatory arbitration agreements as a condition of employment, continued employment, or receipt of employment-related benefits for claims arising under California’s Labor Code or California’s Fair Employment Housing Act (“FEHA”). AB 51’s prohibition on mandatory arbitration agreements includes agreements that permit an employee to opt out of a waiver of rights, or to require an employee to take any affirmative action to preserve his or her rights. It also prohibits employers from taking adverse action against an employee or prospective employee for refusing to consent to arbitration. A violation of these restrictions is a misdemeanor.
AB 51 is set to take effect on January 1, 2020 and will apply only to contracts for employment entered into, modified, or extended on or after that date. The Bill carves-out severance agreements from its purview.
On December 9, 2019, a coalition of business groups led by the Chamber of Commerce of the United States of America filed suit in the U.S. District Court for the Eastern District of California on behalf of their members, seeking a declaratory judgment that AB 51 is invalid with respect to arbitration agreements governed by the Federal Arbitration Act (the “FAA”), and an order permanently enjoining enforcement of AB 51 with respect to such agreements. The business coalition simultaneously filed a motion for a preliminary injunction to prevent the Bill from taking effect while the lawsuit is pending. The FAA applies to arbitration agreements in interstate commerce (other than to agreements involving certain transportation workers), so there may be agreements entered into by employers operating solely within California which would not be impacted by this case. The plaintiffs, however, argue that AB 51 will have sweeping effects on many California employment agreements.
Assembly Bill 51
On October 10, 2019, California Governor Gavin Newsom signed into law AB 51, which amends California’s Labor Code and the FEHA to place new restrictions on an employer’s ability to require arbitration agreements in contracts for employment. In 2018, the California Legislature attempted to enact similar legislation with Assembly Bill 3080, but then-Governor Jerry Brown vetoed the bill, stating that it “plainly violates federal law.”
AB 51 amends the California Labor Code, which provides certain rights for employees in California, by adding Section 432.6. The new provision provides that a “person shall not, as a condition of employment, continued employment, or the receipt of any employment-related benefit, require any applicant for employment or any employee to waive any right, forum, or procedure for a violation of any provisions of the [FEHA or California Labor Code] . . . including the right to file and pursue a civil action or a complaint . . . ” Cal. Labor Code § 432.6(a). AB 51 amends the FEHA, which protects employees from discrimination, to state, “[i]t is an unlawful employment practice for an employer to violate Section 432.6 of the Labor Code.” AB 51’s amendments prohibit mandatory pre-dispute arbitration agreements for claims under the FEHA or California Labor Code in contracts for employment, if such agreement is a condition of employment or employment-related benefits.
AB 51 also amends the California Labor Code to provide that “an agreement that requires an employee to opt out of a waiver or take any affirmative action in order to preserve their rights is deemed a condition of employment.” Cal. Labor Code § 432.6(c). Even agreements that permit an employee to opt out of arbitration are prohibited. Employers also may not “threaten, retaliate or discriminate against, or terminate any applicant for employment or any employee” if they refuse to consent to arbitration. § 432.6(b). Employees who are terminated, or applicants who are not hired, because they refuse to enter an arbitration agreement may sue for damages and attorneys’ fees.
A separate and preexisting provision of the California Labor Code provides that it is a misdemeanor to violate the provisions of the California Labor Code governing contracts and applications for employment. Cal. Labor Code § 433. Under this provision, employers who violate § 432.6 may now face misdemeanor charges, and employees and applicants may report employers for criminal sanctions.
There are certain express limitations to § 432.6. First, the provision applies only to contracts “entered into, modified, or extended on or after January 1, 2020.” § 432.6(h). Second, it “does not apply to a person registered with a self-regulatory organization” under the Securities Exchange Act of 1934, “or regulations adopted under that act pertaining to” arbitrating disputes. § 432.6(e). Third, it does not apply to “post[-]dispute settlement agreements or negotiated severance agreements.” § 432.6(g).
AB 51’s FAA Limitation
The FAA makes arbitration agreements “valid, irrevocable, and enforceable” unless unenforceable on equity grounds. The FAA governs interstate arbitration agreements (other than those entered into with transportation workers). The California Legislature, recognizing AB 51’s potential conflict with the FAA, added the following language to § 432.6: “Nothing in this section is intended to invalidate a written arbitration agreement that is otherwise enforceable under the FAA.” § 432.6(f). The language is intended to limit § 432.6 to regulating employer behavior before an employment agreement is formed, not once the agreement is reached, such that a court could deem pre-employment to be beyond the purview of the FAA.
Business Groups Challenge AB 51
On December 9, 2019, a coalition of business groups led by the Chamber of Commerce of the United States of America filed suit in the U.S. District Court for the Eastern District of California on behalf of their members, seeking a declaratory judgment that AB 51 is invalid with respect to arbitration agreements governed by the FAA, and an order permanently enjoining enforcement of AB 51 with respect to such agreements.
The plaintiffs allege that because AB 51 impedes the ability of employers to enter into arbitration agreements it is preempted by the FAA, and is therefore invalid under the Supremacy Clause of the United States Constitution. They argue that the FAA preempts any state legislation governing the conditions for entering into arbitration agreements, and is not limited only to the enforceability of such agreements once formed. The complaint highlights the criminal liability imposed on employers who violate AB 51’s amendments to the California Labor Code, and it underscores how the legislation is intended to prevent employers from freely exercising their right to enter into arbitration agreements with employees and prospective employees.
To support their claims, plaintiffs cite recent Supreme Court precedent holding that the FAA preempts “any state rule discriminating on its face against arbitration” or “any rule that covertly accomplishes the same objective by disfavoring contracts that . . . have the defining features of arbitration agreements.” Kindred Nursing Centers, Limited Partnership v. Clark, 137 S. Ct. 1421, 1426 (2017). The key issue before the district court is whether the FAA preempts any state law that discriminates against the initial formation of an arbitration agreement, in addition to the enforceability of such agreement once it is formed.
Plaintiffs filed a motion for preliminary injunction to maintain the status quo while the lawsuit is pending. Plaintiffs argue they are likely to succeed on the merits of their challenge to AB 51 because Supreme Court precedent makes clear that the FAA preempts laws like AB 51. Plaintiffs further assert that they will suffer irreparable harm if AB 51 is permitted to take effect because refusal to comply exposes the plaintiffs to criminal and civil penalties and lawsuits, and that AB 51 could impact many California employment agreements because compliance would require them to alter their relationships with their workers and incur significant costs, because the only practical approach for employers to ensure compliance with AB 51 is to cease entering into pre-dispute arbitration agreements. Plaintiffs highlight that these costs cannot be recovered with monetary damages because any such recovery would be barred by California’s sovereign immunity, which it will not waive. Finally, plaintiffs argue that arbitration serves a public benefit because it reduces the cost and complexity associated with litigation, and is more efficient that court litigation.
The hearing on plaintiffs’ motion for a preliminary injunction is set for January 10, 2020.