In a veto action that was somewhat unexpected, California Governor Edmund G. ("Jerry") Brown declined to sign AB 465, the proposed legislation that would have made it unlawful for "any person" to require another to sign away legal rights as a condition of employment. We reported on AB 465 in an earlier Duane Morris Alert. The proposed statute specifically included situations in which an employer required prospective employees to enter into binding mutual arbitration agreements as a condition of hire (or continued employment).

In his October 11, 2015, veto memo, Governor Brown wrote: "[A] blanket ban on mandatory arbitration agreements is a far-reaching approach that has been consistently struck down in other states as violating the Federal Arbitration Act ("FAA")." He further noted that there are currently two cases pending before the United States Supreme Court that arise from California cases involving mandatory arbitration agreements. Governor Brown wrote: "Before enacting a law as broad as this, and one that will surely result in years of costly litigation and years of legal uncertainty, I would prefer to see the outcome of those cases."

On October 6, 2015, arguments were heard in DIRECTV, Inc. v. Imburgia, Case 14-462. The issue was whether the California Court of Appeal erred by holding, in direct conflict with the Ninth Circuit, that a reference to state law in an arbitration agreement governed by the FAA requires the application of state law preempted by the FAA. Additionally, on October 1, 2015, the United States Supreme Court granted certiorari and agreed to hear argument in MHN Government Services, Inc. v. Zaborowski, Case No. 14-1458. The FAA provides that an arbitration agreement shall be enforced "save upon such grounds as exist at law or in equity for the revocation of any contract," 9 U.S.C. § 2. California law applies one rule of contract severability to contracts in general, and a different rule of contract severability to agreements to arbitrate. The arbitration-only rule disfavors arbitration and applies even when the agreement contains an express severability clause. The question presented in the Zaborowskicase is whether California's arbitration-only severability rule is preempted by the FAA.

What This Means for Employers

For now, California employers may continue to require new hires to enter into binding mutual agreements to arbitrate all disputes. Employers should ensure that their mandatory mutual arbitration agreements meet all of the requirements deemed necessary for such agreements to be enforceable—the key elements are described in the case Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 83 (2000). Among the Armendariz requirements are that the agreement must provide for a neutral factfinder and adequate discovery, and require the employer to bear all the expense of the arbitration process (except for the amount of the initial filing fee that the claimant would have to bear if action were filed in court). Enforceable mandatory arbitration agreements must also place no limits on damages or remedies and require the arbitrator to prepare a written statement of decision with reference to the evidence underlying the decision.  

Had AB 465 been enacted, it still would have left open the opportunity for employers and employees to enter into "voluntary" arbitration agreements. Forward-thinking employers may wish to consider including additional features within their arbitration agreements that may support a conclusion that such agreements are, indeed, voluntary. One example might be inclusion of a revocation window, during which a new hire who has signed the agreement may revoke without adverse consequence. However, for the moment, it appears that employers of California workers can still require agreements to binding arbitration as a condition of hire.