AB 51, which restricts workplace arbitration, was scheduled to take effect on January 1, 2020. On December 30, 2019, US District Judge Kimberly Mueller granted a temporary restraining order to prevent the legislation from taking effect. On January 31, 2020, she issued a preliminary injunction extending the ban, and promised to explain her reasoning in more detail later. On February 6, 2020, she provided that more detailed explanation.
AB 51 made it unlawful (even criminal) for anyone to require an applicant or employee to waive their right to have claims under the Fair Employment and Housing Act or Labor Code decided in court. While the prohibition did not specifically mention arbitration, it was clear from the language and comments by the bill’s sponsors that that was the intent.
There is, however, a body of federal law (the Federal Arbitration Act) that prohibits states from imposing burdens or restrictions on arbitration agreements that they do not impose on other contracts. Former Governor Jerry Brown vetoed earlier versions of AB 51 because they ran afoul of federal law. The drafters of AB 51 attempted to draft their way around the problems faced by the earlier bills. For one thing, AB 51 doesn’t even mention arbitration except to (1) exempt arbitrations with registered broker-dealers under the Securities Exchange Act of 1934; and (2) state that the statute does not invalidate existing agreements to arbitrate that are enforceable under the FAA. Still, their intent to do away with workplace arbitration was clear. While Federal law states that courts must place arbitration agreements on equal footing with other types of contracts, the proposed state law says that asking someone to sign such an agreement is a misdemeanor.
The Supremacy Clause of the US Constitution says that “the Laws of the United States.. shall be the supreme Law of the Land….” This gives the federal government the power to preempt state regulation of certain areas. The employer groups that challenged AB 51 argued that the statute conflicted with the federal government’s declaration that states cannot put burdens on arbitration agreements that aren’t placed on other types of contracts. The state of California argued (unsuccessfully) that the bill does not regulate arbitration agreements, it instead regulates employers efforts to have workers sign them. Judge Mueller was not swayed by this sophistry. Nor was she swayed by the FAA exclusion mentioned above. On this issue, the state argued that, even if the employer and managers faced civil and criminal penalties, the agreement remained enforceable. It doesn’t require much analysis to see that such a provision does not put arbitration agreements on an equal plane with other types of contracts.
If arbitration is outlawed, only outlaws will have arbitration.
So the state remains banned from seeking to enforce AB 51. The litigation will proceed in the US District Court and will undoubtedly be appealed, whatever the outcome. So this is not the last word. As things stand now, however, employers in California remain free to enter into arbitration agreements with their employees.