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INSIGHT: California’s Rebuke of Forced Arbitration in Limbo, Full of Uncertainty

Feb. 11, 2020, 9:01 AM

Most people (even most attorneys) are likely not aware of the seismic shifts that have occurred in recent years regarding dispute resolution in America via mandatory arbitration agreements. In short, mandatory arbitration has been used to route numerous types of claims out of the courts, and into private arbitration.

In the case of consumers and employees, most are unaware that they have ever “agreed” to arbitration at all. California, however, has been fighting back against this trend both in the courts and in the legislature, much to the consternation of some conservatives and business interests.

Indeed, in one recent U.S. Supreme Court cert petition, the author stridently warned the high court that the California Supreme Court is a “serial offender” of the court’s decisions involving the Federal Arbitration Act (FAA), and that the high court’s pro-arbitration “message has not gotten through.” (Oto LLC v. Kho, cert petition filed Jan. 13, 2020)

On Jan. 1, 2020, California’s most recent effort to push back against forced arbitration, Assembly Bill 51, went into effect, outlawing (and in fact criminalizing) mandatory arbitration agreements in the employment context. With legal challenges already lodged, whether it will survive, and its impact, leave employers and employees in uncertain waters.

Given the newness of the statute, the inscrutability of one of its key provisions, and the ongoing federal court challenge, what employees and employers should do right now is uncertain.

Employees seeking to enforce their rights under AB 51 are still free to bring an action to enforce their rights, particularly for any arbitration agreement imposed as a condition of employment after Jan. 1, 2020.

Employers, on the other hand, may wish to tread cautiously by making any arbitration agreements truly voluntary (perhaps by making arbitration one of several post-dispute options). Other employers may instead wish to take their chances by continuing to impose arbitration on employees, and asserting a preemption defense to any claims brought under the statute.

Arbitration and the Supreme Court

When consumer and employment class actions increased just after the new millennium began, some pro-business groups saw an opportunity to use arbitration agreements to rein in such class litigation. In 2011, the high court validated this approach, holding in AT&T Mobility v. Concepcion that the FAA preempted a California rule holding most class action waivers (inserted into arbitration agreements) to be unenforceable.

It would be difficult to overstate the impact of the Concepcion decision. As of 2020, at least 60 million American workers are subject to mandatory arbitration agreements with class action waivers, and 800 million consumer arbitration agreements are in effect.

To slow the steady march toward mandatory arbitration in the employment context, in late 2019 California Gov. Gavin Newsom (D) signed into law AB 51. AB 51 added a new section (432.6) to the California Labor Code, a violation of which would be a misdemeanor as well as an unfair labor practice.

Specifics of AB 51

AB 51 became law on Jan. 1, 2020, and bars a “person” from conditioning an employee’s or applicant’s “employment, continued employment, or the receipt of any employment-related benefit” on the employee’s agreement to “waive any right, forum or procedure” to pursue violations of the Fair Employment and Housing Act or the Labor Code, including the right to sue in court. Per AB 51, an employer also cannot “retaliate or discriminate against or terminate” any employee or applicant for refusing to consent to a waiver prohibited by law.

Importantly, AB 51 defines arbitration agreements that bind an employee unless he or she opts out or takes some other affirmative action as being unlawful “conditions of employment.” AB 51 exempts post-dispute settlement agreements or severance agreements, and provides for reasonable attorneys’ fees to any prevailing plaintiff.

Finally, AB 51 includes an unusual provision, stating that “[n]othing in this section is intended to invalidate a written arbitration agreement that is otherwise enforceable under the Federal Arbitration Act.”

Unanswered Questions

The first big question is what AB 51 means, especially the cryptic “otherwise enforceable” provision. The most straightforward reading of this provision is that AB 51 exempts all arbitration agreements to which the FAA applies. However, given that the FAA applies as broadly as Congress’s Commerce Clause power, that would leave AB 51 with very little to cover, a result that seems incongruous with the law’s purpose.

This provision might also mean arbitration agreements entered into prior to Jan. 1, 2020, are “otherwise enforceable” and thus exempt, but that agreements entered into after Jan. 1 are not exempt. This reading is plausible, but certainly not the most obvious one. It is also noteworthy that the “otherwise enforceable” provision is cast merely as an “intention” rather than as defining the state’s reach. All that seems clear is that the “otherwise enforceable” provision will lead to litigation over its meaning.

The most obvious obstacle that AB 51 will face is whether it is preempted by the FAA. The breadth of FAA preemption was expanded dramatically in Concepcion.

However, AB 51’s supporters have explained that preemption only comes into play once an arbitration agreement has been entered into, and AB 51 applies only to pre-contractual conduct. Moreover, AB 51 is laser-trained on ensuring the voluntariness of the employee’s assent, and “consent rather than coercion” continues to be the touchstone of the U.S. Supreme Court’s FAA decisions. (E.g., Lamps Plus v. Varela)

Despite the logic of this reasoning, the high court’s FAA jurisprudence has far overgrown its original boundaries, and now also seems to reach state laws that touch any aspect of the contractual process, including the process of entering into them. (E.g., Kindred Nursing Centers Ltd. P’ship v. Clark)

Unlike the state law at issue in Kindred, AB 51 does not single out arbitration, but after Concepcion, that may not matter. Indeed, preemption based on Kindred is one of the plaintiffs’ primary arguments in the federal suit challenging AB 51 filed by the Chamber of Commerce and five other business groups. (Chamber of Commerce v. Becerra, 2:19-cv-02456-KJM-DB (E.D. Cal., filed December 9, 2019.)

The district court in that case has so far been receptive to the Chamber’s arguments, having granted a temporary restraining order on Dec. 30, 2019, against enforcement of AB 51, and a preliminary injunction on Jan. 31.

Although the district court’s preliminary injunction in the Chamber of Commerce’s suit binds only the parties in that suit, it likely supports the preemption defense of any other business sued under AB 51.

With AB 51 now law, litigation over its scope and validity is now quickly ramping up. Ultimately, the courts, and perhaps the U.S. Supreme Court, will decide its fate.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Glenn Danas is a partner in Robins Kaplan’s Los Angeles office. A member of the firm’s Appellate Advocacy and Guidance Group, he focuses his practice on appeals and major motions, and has substantial experience litigating consumer and employment class actions. Danas has argued and won several cases in the California Supreme Court, including the landmark decision in Iskanian v. CLS Transportation Los Angeles.