Seyfarth Synopsis. On Thursday, September 5, 2019, the Legislature passed AB 51. This bill would ban mandatory arbitration agreements with respect to claims under the Labor Code and the Fair Employment and Housing Act while simultaneously disclaiming any intent to invalidate any agreement protected by the Federal Arbitration Act. Is this bill California’s latest clever—but predictably unsuccessful—effort to discriminate against arbitration agreements, in violation of federal law?
The Peaceful Prelude
Under current law, California employers can insist that employees agree to resolve disputes through a neutral arbitrator instead of a judge and jury, and also waive participation in class actions. Because public policy favors arbitration, courts have rejected wrongful termination claims by employees fired for refusing to sign arbitration agreements. The FAA, meanwhile, declares that states must enforce arbitration agreements to the same extent that they enforce contracts generally. Federal law, which thus protects arbitration agreements from discrimination, preempts any state law that is hostile to arbitration.
Yet California continues to resist. Its public officials are recidivists when it comes to making unconstitutional attacks on arbitration agreements. On no fewer than five occasions the United States Supreme Court, invoking the U.S. Constitution’s Supremacy Clause, has struck down California statutes or judicial decisions that have discriminated against arbitration agreements.
Last legislative session saw the passage of Assembly Bill 3080, which we characterized here as a quixotic attempt to invalidate arbitration agreements that the FAA protects. AB 3080 sought to forbid businesses to impose arbitration agreements on employees or independent contractors, even where those individuals could opt out of the agreement. And AB 3080 had a strong bite: it would have authorized FEHA lawsuits against businesses that require arbitration agreements, and would have added a Labor Code provision that subjects violators to criminal prosecution.
Governor Brown, in his veto message, spoke of AB 3080 as if it were a dead man walking, doomed for FAA preemption: “This bill is based on a theory that the [FAA] only governs the enforcement and not the initial formation of arbitration agreements and therefore California is free to prevent mandatory arbitration agreements from being formed at the outset. The Supreme Court has made it explicit this approach is impermissible.”
Haven’t We Seen This Movie Before?
Yet, like zombies who refuse to stay dead, efforts to ban arbitration agreements continue to rise, in different forms. The latest incarnation is AB 51, passed September 5, 2019, and now awaiting Governor Newsom’s approval or veto. AB 51 would create a new Labor Code provision (section 432.6), the violation of which would be a crime and also actionable as an unlawful employment practice under the FEHA. AB 51 obviously aims to gut arbitration agreements: it forbids employers to require employees or job applicants to “waive any right, forum, or procedure for a violation” of the FEHA or the Labor Code—and that, of course, is just what arbitration agreements do.
But how could this attack on arbitration agreements be compatible with the FAA? AB 51 cleverly proclaims: “Nothing in this section is intended to invalidate a written arbitration agreement that is otherwise enforceable under the Federal Arbitration Act … .” Yet this assurance rings hollow. The promise not to invalidate any agreement would still permit opponents of an arbitration agreement to challenge its formation, on such grounds as a lack of true consent.
If you think this distinction is too clever by half, then read the Senate Judiciary Committee report on AB 51. The report admits that AB 51, “if enacted, … would be challenged in court and there is some chance … that it would be found preempted,” yet AB 51’s proponents still argue that it “does not conflict with the FAA and thereby avoids preemption.” How is that? The proponents say two main things: (1) “AB 51 simply gives the worker the option of whether or not to form the contract in the first place.” (2) “[N]othing in AB 51 selectively calls out arbitration contracts as such; the bill applies to contracts requiring waiver of any forum.”
Do these defenses of AB 51 stand up? Consider this. First, the notion that AB 51 simply gives employees a choice runs counter to the reality that courts enforce contracts presented on a take-it-or-leave-it basis, so long as they are not unreasonably one-sided, and arbitration agreements can meet that test. Accordingly, courts invoke the FAA to protect arbitration agreements imposed as a condition of employment, regardless of whether the agreements are called “mandatory” or “voluntary.”
Second, the FAA preempts any state law that “stands as an obstacle” to enforcing arbitration agreements. (This rationale inspired the Supreme Court to foil California’s attempt to ban class-action waivers in arbitration agreements.) AB 51 would create an enormous obstacle. It would threaten to turn employers into criminals—and to subject them to oppressive discrimination lawsuits—merely for making arbitration a condition of employment. How could creating that in terrorem effect for employers not create an obstacle? Why should employers be required to risk criminal sanctions or a lawsuit, or both, if they want to insist that employees agree to a form of dispute resolution that can be fair while also being cheaper and quicker than formal litigation?
What Happens Next?
Last year, Governor Brown heard the concerns of the employer community and rebuffed the pleas of plaintiffs’ lawyers. His veto killed AB 3080. AB 51 is its reanimated corpse. Will Governor Newsom now assign AB 51 to its condign fate, or allow it to roam among the living? He has until October 13 to decide whether an undead law will be haunting employers this Halloween.
Post-publication update. After we went to press, Governor Newsom signed AB 51 into law. We will now see if Governor Brown was right in predicting that such a law will not withstand constitutional scrutiny.
Note one treat buried among AB 51’s tricks: even if signed by the Governor, it would not go live till January 1, 2020, so any arbitration program an employer might have in mind now can safely be in place by then. Meanwhile, look out for employer groups to mount legal challenges that will seek to have the new law declared unconstitutional before it wreaks too much havoc.
Also note that AB 51 is not confined to arbitration agreements. Among its other horrors are vague provisions that draw into question the use of traditional severance agreements. These are subjects for another blog.
Edited by Christopher J. Truxler