California Court Keeps AB 51 on Hold

Employment Law
 

The Chamber of Commerce and employer organizations convinced a federal court judge in California to halt enforcement of Assembly Bill 51, which was set to take effect January 1, 2020, and invalidate all agreements requiring the waiver of any right to forum or procedure as a condition of employment, continued employment or the receipt of any employment-related benefit. Governor Gavin Newsom had signed the bill into law on October 10, 2019.

Just two days before the effective date, U.S. District Judge Kimberly J. Mueller granted the motion for a temporary restraining order. Following a full hearing on the preliminary injunction, the court sided with the plaintiffs, finding that they were likely to succeed on the merits of their preemption claim.

AB 51 violates the Federal Arbitration Act (FAA) because it treats arbitration agreements differently from other contracts, the court said, and conflicts with the purposes and objectives of the statute.

“As AB 51’s legislative history acknowledges, the primary target of the bill is agreements to arbitrate,” Judge Mueller wrote. “As a result, AB 51 penalizes employers who include, as a take-it-or-leave-it proposition, a mandatory arbitration clause as a ‘right, forum or procedure’ waiver in their employment contracts.”

The court rejected the state’s argument that the law merely regulated employer behavior, not arbitration agreements, calling this characterization “a distinction without a difference.”

“In its expressed purpose, and its operation, AB 51 singles out the requirement of entering into arbitration agreements and thus subjects these kinds of agreements to unequal treatment,” the court said. “Other types of employment provisions may tangentially fall within AB 51’s ambit, but the law’s clear target is arbitration agreements, given the sponsors’ concern regarding an overabundance of arbitration agreements in the California employment market.”

For similar reasons, AB 51 interferes with the statute’s goals as interpreted by the U.S. Supreme Court, Judge Mueller said.

The court also ruled that the plaintiffs would be irreparably harmed absent a grant of injunctive relief, as employers would be faced with two equally unpalatable options.

“If AB 51 takes effect, plaintiffs have provided sufficient evidence to show California businesses that rely on arbitration agreements as a condition of employment will be forced to choose between risking criminal or civil penalties, or both, based on the uncertainties surrounding AB 51’s implementation, and forgoing the use of arbitration agreements altogether to avoid penalties,” the court said.

In addition, California businesses that rely on standard form arbitration agreements as a condition of employment will incur immediate costs of redrafting their employment agreements to omit the arbitration provisions and be unable to realize the cost and efficiency benefits they say arbitration provides, the court wrote.

“These costs likely cannot be recouped through traditional legal remedies, such as damages, because the State of California, the moving force behind AB 51’s enactment, is immune from suit under sovereign immunity, as are the defendant state actors acting within their lawful capacity,” Judge Mueller pointed out. “The costs California businesses will incur are not merely conjectural; they are highly probable and not recoverable if AB 51 is found preempted by the FAA at the conclusion of the case.”

Finally, the balance of equities and public interest factors favored the plaintiffs, the court found. While the state has significant interests in advancing policies seeking to protect its citizens’ rights through legislative action, those interests are not unbounded.

The likelihood of harm to the plaintiffs “outweighs defendants’ interest in advancing a policy seeking to enhance employee rights with respect to mandatory arbitration because defendants do so at the expense of arbitration rights governed by the FAA,” the court explained.

Judge Mueller granted the motion for preliminary injunction.

Specifically, the defendants are enjoined from enforcing Sections 432.6(a), (b) and (c) of the Labor Code, “where the alleged ‘waiver of any right, forum or procedure’ is the entry into an arbitration agreement covered by the [FAA]” as well as Section 12953 of the Government Code, where the alleged violation of “Section 432.6 of the Labor Code” is entering into an arbitration agreement covered by the FAA.

To read the order in Chamber of Commerce of the United States of America v. Becerra, click here.

Why it matters: California employers can breathe easier with the preliminary injunction in place that halts enforcement of AB 51 for arbitration agreements covered by the FAA. With that in mind, employers should add express language to their agreements to clarify that their enforceability is covered by the FAA to ensure they fall under the category of agreements delineated by the injunction.

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