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California’s Novel Arbitration Law Gets Ninth Circuit Test

Dec. 7, 2020, 11:15 AM

California will try to convince a federal appeals court to revive the state’s novel law barring companies from forcing workers to sign arbitration agreements or other waivers of their legal rights, which a trial court judge blocked before the measure ever took effect.

The U.S. Court of Appeals for the Ninth Circuit will hear oral argument Monday in California’s bid to overturn a preliminary injunction against the law. A federal judge last December put the measure on ice at the behest of business groups, saying it’s trumped by a federal law requiring the enforcement of arbitration agreements.

The case will have major implications for employment litigation in the country’s most populous state, testing whether the state’s unique attempt to curb the widespread use of mandatory arbitration contracts in the workplace will ever be enforced.

Contracts that require workers to bring job-related claims in private arbitration rather than court are particularly widespread in California, where about two-thirds of private employers use them, compared with 54% nationwide, according to a 2018 study from the left-leaning Economic Policy Institute.

That higher rate in California is a consequence of companies reacting to the state’s worker protective employment laws, the study said. Arbitration agreements are often paired with clauses that waive a worker’s right to join class or collective actions.

Business advocates often tout private arbitration as a faster, cheaper alternative to court that benefits both worker and employer. But critics say requiring vulnerable, low-wage workers to agree to binding, pre-dispute arbitration pacts prevents them from seeking justice for labor law violations.

“It’s inherently coercive and unacceptable to force workers to sign away their basic labor rights as a condition of being hired or keeping their job,” Lorena Gonzalez, the Democratic California assemblywoman who authored the state’s disputed arbitration law, said in a statement. “As long as corporations are allowed to continue abusing the arbitration process, victims of sexual harassment and discrimination will continue to be silenced and unprotected in the workplace, while serial offenders of wage theft and retaliation will go on unchecked.”

The California attorney general’s office, and the attorney for the U.S. Chamber of Commerce and other business groups, Andrew Pincus of Mayer Brown, didn’t respond to requests for comment.

Law Blocked Despite Design

California lawmakers crafted the legislation at issue, known as Assembly Bill 51, in the shadow of U.S. Supreme Court precedent making it very difficult to regulate companies’ use of arbitration agreements. The state has frequently seen its statutes and precedents that limit arbitration fall at the nation’s top court, most notably in 2011’s AT&T v. Concepcion decision that struck down its bar against class-action waivers in consumer arbitration pacts.

In light of that record, California enacted a law in 2019 that regulates employer conduct related to arbitration agreements rather than the agreements themselves. Specifically, the law prohibits employers from forcing prospective and current employees to “waive any right, forum, or procedure” for a violation of the California Labor Code or its workplace anti-discrimination law.

Although U.S. District Judge Kimberly Mueller recognized that A.B. 51 was designed to avoid federal preemption by focusing on the need for both parties to consent to arbitration agreements, she granted the business coalition’s bid for a preliminary injunction because she said it’s blocked by the Federal Arbitration Act.

The law runs afoul of Supreme Court precedent on the FAA conflicting with laws that single out arbitration or interfere with the basic features of arbitration, said Mueller, an Obama administration appointee.

Guaranteeing Two-Party Consent

But California argued in a brief that preemption shouldn’t even be considered because its law doesn’t fall under the umbrella of the FAA. The law doesn’t affect the enforcement of arbitration contracts, the state said.

The measure also doesn’t put arbitration agreements on unequal footing with other contracts, California said. The Supreme Court struck down laws that explicitly singled out arbitration pacts in Doctor’s Associates v. Casarotto or were designed to only cover those types of agreements in Kindred Nursing v. Clark. But A.B. 51 applies equally to requirements that workers sign non-arbitration agreements like non-disparagement and nondisclosure clauses, the state said.

Moreover, the law doesn’t interfere with arbitration, explicitly stating that it does nothing to prevent the enforcement of arbitration agreements, according to California’s brief.

“By regulating employment practices, AB 51 seeks to ensure that any waiver of rights and remedies in the employment context is consensual,” the state said. “This is fully consistent with the spirit and foundational principles of the FAA.”

Arbitration Discrimination

The business coalition countered in its brief that the law doesn’t impose a neutral rule generally applicable to all contracts, but rather singles out arbitration agreements.

The measure stands in the way of forming arbitration pacts—targeting the waiver of the right to go to court, which is their defining feature—by imposing a consent requirement that doesn’t exist for other types of employment agreements, the groups said.

The Supreme Court’s decision in Kindred made clear that the FAA blocks California’s law even though it regulates the formation of the arbitration agreement rather than its enforcement, the business coalition said.

“There is no daylight for preemption purposes between criminalizing or imposing civil penalties on the act of forming an arbitration agreement and refusing to enforce that agreement once (or if) made,” the coalition said.

Supreme Court Backstop

The Ninth Circuit panel hearing the case will be composed of U.S. Circuit Judges Carlos Lucero and William Fletcher, who were appointed by the Clinton administration, and Sandra Ikuta, who was tapped by the George W. Bush administration.

But even if the Ninth Circuit lifts the preliminary injunction blocking the law, the business groups could appeal to the Supreme Court—which has handed down an extensive series of pro-arbitration rulings going back to the 1980s.

The California law is consistent with the original intent of the Federal Arbitration Act, but not with the high court’s interpretation of the law over the past four decades, said Imre Szalai, a Loyola University New Orleans law professor who has written extensively about arbitration.

The Supreme Court’s conception of the law, however, could change, Szalai said. Justice Clarence Thomas has expressed skepticism about FAA preemption and the breadth of the court’s doctrine, which some of the newer members of the court who hold literalist views of the law may agree with, he said.

The case is Chamber of Commerce v. Becerra, 9th Cir., No. 20-15291, oral argument 12/7/20.

To contact the reporter on this story: Robert Iafolla in Washington at riafolla@bloomberglaw.com

To contact the editors responsible for this story: Karl Hardy at khardy@bloomberglaw.com; Jay-Anne B. Casuga at jcasuga@bloomberglaw.com

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