Labor & Employment Law Daily Court temporarily halts California law barring mandatory arbitration agreements
Wednesday, January 8, 2020

Court temporarily halts California law barring mandatory arbitration agreements

By Marjorie Johnson, J.D.

The law, scheduled to go into effect January 1, prohibits employers from requiring employees, as a condition of employment, to waive any right, forum or procedure for a violation of any provision of the California Fair Employment and Housing Act or Labor Code.

The California attorney general and other state officials have been temporarily restrained from enforcing a new state law that effectively outlaws mandatory arbitration in the employment context. A federal court in found there were serious questions regarding whether Assembly Bill 51 (A.B. 51) was preempted by the Federal Arbitration Act 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 set an expedited hearing on the plaintiffs’ motion for a preliminary injunction for January 10 (Chamber of Commerce of the United States v. Becerra, December 29, 2019, Mueller, K.).

Bar on mandatory arbitration. A.B. 51, a new California law, basically outlaws mandatory arbitration in employment 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.

A.B. 51 is the California legislature’s most recent attempt to restrict employment arbitration. Last year, state lawmakers passed A.B. 3080 with nearly identical provisions prohibiting arbitration as a condition of employment. But then-Governor Jerry Brown vetoed the measure, explaining that it “plainly violates federal law.”

Legal challenge. This lawsuit, brought by the U.S. Chamber of Commerce and other business groups, asks 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 assert that the text of A.B. 51 itself precludes application of the statute to formation and enforcement of arbitration agreements covered under the FAA.

The plaintiffs also asked the court to preliminarily and permanently enjoin the California attorney general and the other defendants from enforcing A.B. 51 as applied to arbitration agreements covered under the FAA. Their complaint alleges that the Supreme Court has repeatedly held that state laws singling out arbitration agreements for disfavored treatment are preempted by the FAA.

TRO granted. At issue here was the plaintiffs’ motion for a temporary restraining order seeking to prevent A.B. 51 from taking effect. In finding that emergency relief was warranted, the court noted that the plaintiffs “filed their motion with very little time to spare and could have sought the court’s intervention somewhat earlier.” Nevertheless, they raised serious questions going to the merits and showing that the balance of hardship tips decidedly in their favor. The business groups also showed a likelihood of irreparable injury and that a restraining order was in the public interest. Significantly, they raised serious questions regarding whether the challenged statute is indeed preempted by the FAA as construed by the U.S. Supreme Court.

The court also was persuaded by the plaintiffs’ argument that allowing the statute to take effect even briefly, if it was preempted, would cause disruption in the making of employment contracts, particularly given the criminal penalties to which violators of the law may be exposed. The business groups also had no other adequate legal remedy to preserve the status quo until the court could consider their motion for a preliminary injunction on a more well-developed record.

Therefore, the state’s attorney general and other officials were temporarily enjoined from enforcing A.B. 51, pending resolution of the motion for a preliminary injunction.

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