Seyfarth Synopsis: Among other things, AB 51 makes it unlawful for employers to impose arbitration agreements on employees as a condition of employment, even if employees are permitted to opt out. AB 51 was quickly challenged on the ground that it is preempted by the Federal Arbitration Act (“FAA”). The lawsuit, which was brought by the United States and California Chambers of Commerce, as well as several trade associations, sought declaratory relief and a preliminary injunction to stop the relevant California government agencies from enforcing the law with respect to arbitration agreements subject to the FAA. On February 7, 2020, the Eastern District of California issued a detailed ruling explaining its decision to grant the motion for a preliminary injunction.

As previously reported, on December 30, 2019, the trial court temporarily halted the California agencies tasked with enforcing AB 51 from doing so, pending resolution of the motion for preliminary injunction because of “serious questions” about whether the FAA preempts AB 51 and whether enforcement of AB 51 would lead to “disruption” in employment contract formation. The order was limited in scope to temporarily enjoin the State of California from enforcing AB 51, and did not necessarily address private enforcement.

On January 31, 2020, the court issued a minute order granting the motion for a preliminary injunction. As promised, on February 7, 2020, the court issued a more detailed order explaining its reasoning for granting the motion. The court found that plaintiffs met their burden of showing that the FAA likely preempts AB 51, and the plaintiffs would therefore be likely to succeed on their claims at the merits hearing, on grounds that AB 51 (1) “is preempted by the FAA because it discriminates against arbitration” and (2) “interferes with the FAA’s objectives.” Notably, the court emphasized the FAA’s applicability not only to the enforceability of arbitration agreements, but also to their “creation.”

The court first discussed that, particularly based on AB 51’s legislative history, the statute targets arbitration agreements, and “thus subjects these kind of agreements to unequal treatment.” AB 51 operates to “penalize employers who include, as a take-it-or-leave-it proposition, a mandatory arbitration clause” that requires employees to waive their right to litigate employment matters. AB 51’s ban on a party’s waiver of the right to litigate in court, the very essence of arbitration agreements, shows that AB 51 “singles out the requirement of entering into arbitration agreements,” which should be treated just like any other contracts.

The court next found that the high risk of civil and criminal liability that AB 51 imposes on employers “will likely have a deterrent effect on employers’ use of arbitration agreements.” That employers would be forced to forego arbitration agreements altogether indicates a clear interference with the FAA’s underlying goal to promote arbitration. In the face of AB 51, an employer would be at risk for sanctions every time it offered even a voluntary arbitration agreement during the hiring process due to the uncertainty surrounding what actually constitutes voluntariness.

As a result of these findings, the court issued an order enjoining California Attorney General and the officials of the relevant California agencies, including the Labor Commissioner, from enforcing Labor Code sections 432.6(a), (b), and (c) where the alleged “waiver of any right, forum, or procedure” regards the formation of an arbitration agreement covered by the FAA. The State is also enjoined from enforcing California Government Code section 12953 where the alleged violation of Labor Code section 432.6 regards entering into arbitration agreements protected by the FAA. Like the temporary restraining order, the preliminary injunction does not address the rights of private parties, but it is anticipated that the reasoning and holding of the court’s recent decision will provide guidance to courts asked to address similar issues in the context of private law suits.