A new law signed into effect by the California Governor and originally set to take effect on January 1, 2020, provides that California employers will no longer be able to compel workers into arbitration for state discrimination claims or those brought under the Labor Code. The law could be blocked by a court before it ever takes effect and was recently stayed based on the argument that the Federal Arbitration Act, which favors arbitration in most circumstances, preempts state law.
Similar recent attempts at restricting arbitration have been struck down as conflicting with a strong federal law favoring it. On December 9, 2019, the U.S. Chamber of Commerce, joined by other entities filed suit challenging the law in the U.S. District Court for the Eastern District of California on these preemption grounds, Chamber of Commerce of the USA, et al. v. Becerra, et al., Case No. 2:19-cv-02456-KJM-DB. On December 30, 2019, the court issued a temporary restraining order enjoining the State of California from enforcing AB-51 pending the court’s resolution of a pending motion for preliminary injunction that, if granted, would extend that injunction through the life of the case.
On February 7, 2020, the court granted the Chamber of Commerce’s Motion for Preliminary Injunction. In its order granting the motion, the court evaluated whether AB-51 interfered with the fundamental attributes of arbitration and whether AB-51 put agreements to arbitrate on unequal footing with other contracts in California. On February 20, 2020, the Court’s Order was appealed. The matter is still pending.
Similar anti-arbitration legislation had been vetoed previously by Governor Newsom’s predecessor, Jerry Brown, because of a breadth of case law suggesting a law of this type was preempted by the United States federal Arbitration Act (the FAA). State laws attempting to interfere with or otherwise standing as an obstacle to arbitration have been repeatedly struck down by the United States Supreme Court based on preemption theories.
This article shall discuss the state law which remains possible and the attempt to strike it down in the federal courts.
California’s Attempt to Ban Mandatory Arbitration of Employment Claims
A major target of the “MeToo” movement has been the use of pre-dispute mandatory arbitration agreements in employment agreements. Plaintiffs felt that they would receive a fairer hearing before a judge and jury rather than an arbitrator. California Assembly Bill 51 prohibits such arbitration agreements. The proposed new law is actually much broader and covers much more than just sexual harassment.
The bill adds a new Section 432.6 to the California Labor Code prohibiting any person (including employers) from requiring an applicant or employee, as a condition of employment, continued employment, or the receipt of any employment-related benefit, to “waive any right, forum, or procedure” for alleged violations of the entire Fair Employment and Housing Act (FEHA) and the entire Labor Code. Effectively, AB 51 prohibits mandatory arbitration agreements for any discrimination claims covered under FEHA (not just sexual harassment) and for any claims under the Labor Code (including wage and hour and other protections).
Moreover, while AB 51 seemingly only applies to mandatory arbitration clauses, language in the bill also prohibits employers from using voluntary opt-out clauses to avoid the reach of the bill. New Labor Code Section 432.6(c) states 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.”
No state law can nullify Federal law on the same topic. Federal law “preempts” the State law which is voided.
The FAA was enacted in 1925 by Congress to ensure the validity and enforcement of arbitration agreements. State laws attempting to interfere with (or “standing as an obstacle to”) arbitration have been repeatedly and consistently struck down by the U.S. Supreme Court as preempted by the FAA.
Proponents of AB 51 argued that it is not preempted by the FAA because it only impacts “mandatory” arbitration agreements and does not affect “voluntary” agreements. However, this argument ignores a long line of federal cases that rely upon the FAA to uphold arbitration agreements that are imposed on a “take-it-or-leave-it” basis, so long as they meet certain substantive fairness criteria. Moreover, the bill’s language cited above that purports to prohibit “opt-out” or other affirmative actions by employees makes it clear that the new law will also impact “voluntary” agreements.
Years ago, a state appeals court blocked a similar bill on preemption grounds. Assembly Bill 2617, which purported to prohibit mandatory arbitration of certain civil rights claims in contracts for goods or services, was voided by a 2018 decision from the Second District Court of Appeal. In Saheli v. White Memorial Medical Center, the court ruled that AB 2617 was preempted by the FAA because its “restrictions discourage arbitration by invalidating otherwise valid arbitration agreements. It is precisely this sort of hostility to arbitration that the FAA prohibits.”
The United States Supreme Court recently relied on the FAA to reject an argument that class action waivers contained in arbitration agreements violate the National Labor Relations Act in the Epic Systems v. Lewis case. Also, a federal court held earlier this year that a New York law that aimed to prohibit the use of mandatory arbitration agreements in sexual harassment cases was inconsistent with the FAA.
Last year, Governor Jerry Brown vetoed two similar legislative efforts, including a bill crafted by AB 51’s author (AB 3080). In his veto message, he stated: “This bill plainly violates federal law.” Given the case law, AB-51 faces an uphill battle to be confirmed law in California.
AB 51 Creates a New Private Right of Action Under FEHA
Section 12953 of Government Code states that any violation of the various provisions in AB 51 will be an “unlawful employment practice.” This means that violations will be subject to the private right of action under FEHA set forth in Government Code Section 12960. Although this will presumably require an employee to exhaust the administrative remedy under FEHA before filing a civil suit, this provision will nevertheless expose California employers to another layer of litigation related to arbitration agreements.
Under AB 51, an employee who successfully challenges an alleged violation of the new law may be entitled to their attorneys’ fees.
In practical terms, the court’s order enjoining the State of California from enforcing AB-51 means that employers can, for the time being, validly enter into agreements to arbitrate with their employees. Given precedent from the United States Supreme Court, employers can make these agreements a term of employment. Employers should be cognizant of the ruling on appeal from the Ninth Circuit and any further developments in the underlying litigation, as an adverse ruling could change this picture entirely.
To some, the average employee is helped, not hindered, by the relatively inexpensive relief available in arbitration. There is clearly a feeling by plaintiff’s counsel that the danger of an emotional jury verdict will compel employers to either settle in a more generous manner or face potentially very large verdicts.
We see a desire by the federal courts to avoid clogging their system up with numerous claims versus a desire by advocates of employee rights to have free access to the federal and state courts to enforce their client’s claimed rights.
Further, arbitrators are not held to rigorous appellate review and are given tremendous latitude in determining a fair and equitable result. Minus dishonesty, most courts will not overrule a decision by an arbitrator. Lower courts are held to a much higher standard of review by the appellate courts.
Most likely it will take a change in the federal law by Congress before state law can seek to invalidate arbitration clauses, but nothing is certain, and the wise employer will keep abreast of the law. For now, such clauses are valid and may be a way to save significant sums in legal fees and costs.