On December 30, 2019, a federal judge in the Eastern District of California entered an order temporarily halting the enforcement of AB 51, California’s new anti-mandatory arbitration law. AB 51, which was set to go into effect on January 1, 2020, makes it illegal for an employer to require an employee or applicant to waive the right to pursue a civil action as a condition of employment. While AB 51 does not directly reference arbitration, the clear purpose of the law is to halt the use of mandatory workplace arbitration agreements in California.
The Eastern District temporarily hit the brakes on the new law going into effect just two days before the New Year, finding that there are “serious questions” as to whether the new law is preempted by federal law, which favors the use of arbitration. The ruling, however, is not final and only represents a temporary pause in the implementation of the law until the District Court can fully address the issue. All eyes will be on the District Court on January 10, 2020, when it will hold a full hearing to determine if entering a more permanent preliminary injunction is appropriate.
A Brief History of Arbitration in California
Historically, both California law and federal law favored arbitration as an efficient alternative to civil actions. The federal preference for arbitration was codified in the Federal Arbitration Act (FAA), which was passed in 1925. The FAA reflects a “liberal federal policy favoring arbitration” and generally mandates that arbitration agreements “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011).
In recent years, however, there have been a number of high-profile clashes between the FAA and state legislatures or courts attempting to curtail the use of arbitration agreements. In general, states have attempted to limit or eliminate the use of mandatory arbitration agreements in the employment or consumer realm, based on the claim that such mandatory agreements are unfair to employees and consumers. In a series of decisions over the past decade, the United States Supreme Court has repeatedly found that such state attempts to block arbitration agreements run afoul of the clear language and intent of the FAA and are preempted. In these decisions, the High Court has made clear that states are prohibited from passing laws that are uniquely hostile to arbitration.
Not surprisingly, California has been at the forefront of many of the recent attacks on arbitration. In 2018, Governor Jerry Brown vetoed a law prohibiting mandatory employment arbitration agreements. In a refreshingly pragmatic, non-political move, Governor Brown explained he was vetoing the bill, AB 3080, because it “plainly violates federal law.”
This year, with a new governor at the helm, the California Legislature took another shot at pushing through a ban on mandatory employment arbitration agreements. This time, they were successful, and AB 51 was signed by Governor Newsom in September 2019. Many legal experts opined that the new law was subject to constitutional and preemption challenges and would likely be blocked by the courts (as Governor Brown recognized). That now appears to be taking place.
The Challenge to AB 51 and the Order Temporarily Halting its Implementation
On December 6, 2019, the U.S. Chamber of Commerce and other business organizations filed a Complaint for Declaratory and Injunctive Relief against the State of California challenging AB 51, arguing that AB 51 is preempted by the FAA.
On December 23, 2019, the court heard plaintiffs’ motion for a temporary restraining order (TRO) seeking to stop AB 51 from taking effect until the court rules on plaintiffs’ pending motion for a preliminary injunction. On December 30, 2019, the court granted plaintiffs’ motion, halting AB 51 from taking effect on January 1, 2020, and set an expedited hearing on the request for a preliminary injunction for January 10, 2020.
In its brief, two-page order, the court found that plaintiffs raised “serious questions” regarding whether the statute is preempted by the FAA and that the “balance of hardship tips decidedly in [plaintiffs’] favor.” The court emphasized that “irreparable harm” would result if the law were to take effect, even briefly, beginning on January 1, acknowledging the “disruption in the making of employment contracts” and noting the criminal penalties to which violators of the new law would be exposed. To be clear, the battle is far from over. This temporary restraining order will be in effect only until the court issues a ruling on plaintiffs’ motion for a preliminary injunction, following the hearing on January 10. Thus, while this ruling does not permanently block AB 51, it is a good first step because the court would not have issued a TRO if it did not believe the plaintiffs had a substantial likelihood of prevailing on the merits of the lawsuit. The TRO ruling may signal how the court will ultimately rule on a preliminary injunction. The good news for employers is that the court clearly recognizes the significant disruption AB 51 would have on the making of employment contracts and sees the importance of resolving the preemption question before allowing AB 51 to go into effect.
What Does This Mean for California Employers?
The challenge to AB 51, and the court’s recent order, give hope to employers who enter into binding arbitration agreements with their California employees, but again, the arbitration battle is far from over. Stay tuned for updates on further developments. For now, employers are strongly encouraged to use the time provided by this temporary halt of AB 51 to review their current arbitration agreements with competent legal counsel, and develop a plan for the future…whatever that future may hold. Of course, FordHarrison attorneys stand at the ready to assist and advise employers regarding these important issues.
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