Labor & Employment Law Daily Business groups win preliminary injunction against California mandatory arbitration ban
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Wednesday, February 12, 2020

Business groups win preliminary injunction against California mandatory arbitration ban

By Wayne D. Garris Jr., J.D.

The court granted the preliminary injunction, in full, on the same day that a previously imposed temporary restraining order was set to expire.

A federal district court in California granted the U.S. Chamber of Commerce’s request for a preliminary injunction blocking the state of California from enforcing A.B. 51, a recently enacted state law that prohibits mandatory arbitration agreements in employment. Finding that the plaintiffs had a high likelihood of success on the merits, the court concluded that the supporters of the bill wanted to curb the abundance of mandatory arbitration agreements within the state which placed arbitration on “unequal footing” with other contracts and interfered with employers’ rights under the FAA. Further, the plaintiffs showed that irreparable harm would result in the absence of an injunction because A.B. 51 placed employers in the position of having to risk the penalty of violating the law or absorbing the costs of rolling back existing arbitration agreements—and those costs could not be recovered in litigation. The court previously granted the Chamber’s motion for preliminary injunction in a January 31 order but it articulated its reasoning in this subsequent written order (Chamber of Commerce of the United States of America v. Becerra, February 6, 2020, Mueller, K.).

Bar on mandatory arbitration. A.B. 51, a new California law, basically outlaws mandatory arbitration in the employment context by prohibiting employers from requiring that employees or job applicants waive a right, forum, or procedure for a violation of the state’s Fair Employment and Housing Act or its Labor Code as a condition of employment or employment-related benefit. A.B. 51 also prohibits employers from threatening, retaliating, or discriminating against, or terminating employees or applicants because they refused to waive any such right, forum, or procedure. Violations are a criminal misdemeanor under state law.

Lawsuit. The U.S. Chamber of Commerce and other business groups filed suit asking the court to declare that A.B. 51 is preempted by the FAA and therefore invalid as applied to arbitration agreements covered under that statute. Alternatively, the plaintiffs asserted that the text of A.B. 51 itself precludes application of the statute to formation and enforcement of arbitration agreements covered under the FAA. On December 29, 2019, the court had entered a temporary restraining order, finding there were serious questions about whether the new law was preempted by the FAA and that the balance of hardship tipped in the favor of the U.S. Chamber of Commerce and other plaintiffs, particularly in light of the potential for the imposition of criminal penalties. In addition to granting a temporary restraining order, the court at that time had set an expedited hearing on the plaintiffs’ motion for a preliminary injunction for January 10, 2020.

Subject matter jurisdiction. As a preliminary matter, the court held that it had subject matter jurisdiction pursuant to 28 U.S.C. § 1331. In Shaw v. Delta Air Lines, Inc., the Supreme Court held that “a plaintiff who seeks injunctive relief from state regulation, on the ground that such regulation is pre-empted by a federal statute” raises a federal question, thus the federal courts have jurisdiction to resolve the claim.

Standing. As business organizations, the plaintiffs also had standing to bring the lawsuit. The complaint sufficiently alleged that members of each organization enter into arbitration agreements or require affirmative opt-outs as a condition of employment, and those members would be irreparably harmed if A.B. 51 went into effect.

Likelihood of success. Turning to the requirement for a preliminary injunction, the plaintiffs argued that A.B. 51 violated the FAA because it treated arbitration agreements differently from other contracts, and it conflicted with the purposes and objectives of the FAA. The court noted that a state law can be preempted by the FAA if it places arbitration on “unequal footing” or interferes with “fundamental attributes of arbitration.”

Unequal footing. The state argued that A.B. 51 did not put arbitration agreements on unequal footing with other contracts, but that it merely regulated employer behavior by prohibiting employer’s from requiring an arbitration agreement, or any employment agreement, as a condition of employment. The court dismissed this as a distinction without a difference. The legislative history of A.B. 51 revealed that arbitration agreements were viewed as especially troublesome by proponents of A.B. 51 and sponsors of the bill spoke of their concerns about the overabundance of arbitration agreements in the state. The court concluded that “even if the law itself is artfully crafted to support the argument that it only regulates the behavior of employers, it cannot avoid being construed as law that in effect discriminates against arbitration agreements.”

Interference. The court also concluded that A.B. 51 conflicted with the objectives of the FAA because it would deter employers from using arbitration agreements. Specifically, the existing code sections to which A.B. 51 was added include civil and criminal sanctions for a violation. These penalties interfere with the FAA’s purpose, thus A.B. 51 is preempted by the FAA.

Irreparable harm. The court next found that employers were likely to suffer irreparable harm under A.B. 51 because they would either have to choose not to comply with the law and risk criminal or civil sanctions or comply and “incur immediate administrative costs in order to redraft standard contracts, deprive them of the fiscal benefit of arbitration, subject them to costly litigation, and increase meritless claims” Further, the employers would not be able to recover the costs of compliance because the state would be immune from suit under sovereign immunity.

Balance. Lastly, the court found that the balance of equitable and public interest factors weighed in favor of preliminary injunctive relief. The likelihood of harm to the plaintiffs outweighed the state’s interest in ehancing employee rights with respect to mandatory arbitration because the state attempted to do so “at the expense of the arbitration rights governed by the FAA.” In addition, if it was later found that the FAA did not preempt A.B. 51, the state would have suffered the “minimal harm” of delayed enforcement versus the plaintiffs’ harms which the court had already determined could not be remedied.

Severability. The court was not persuaded by the state’s argument that preemption did not apply to the anti-retaliation provision of A.B. 51. Under the state’s argument, preemption should only apply to the section of A.B. 51 that prohibits mandatory arbitration agreements. The court noted that under the state’s interpretation, mandatory arbitration agreements would not be mandatory because employers would be prohibited from taking any action when an employee refuses to sign an arbitration agreement.

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