Seyfarth Synopsis: In vetoing the California Legislature’s attempt to criminalize arbitration agreements (AB 3080), Governor Brown displayed common sense and the legal learning provided by recent U.S. Supreme Court authority.

Haven’t high courts already upheld mandatory arbitration agreements?

Yes, they have. The California and U.S. Supreme Courts have repeatedly ruled that employers may require employees to enter valid arbitration agreements (waiving the right to judge and jury trial). The most recent vindication of arbitration agreements was the U.S. Supreme Court’s May 2018 decision in Epic Systems, which upheld the enforceability of an arbitration agreement that waived participation in class waivers, against an argument that such a waiver violated employee rights to concerted activity under the National Labor Relations Act.

Hasn’t the California Legislature got the message?

Apparently not yet. The Legislature has tried again and again to outlaw arbitration agreements in ever more inventive ways, notwithstanding the clear authority to the contrary. Governor Brown, meanwhile, has learned that these efforts will not pass constitutional muster. In 2014, Governor Brown signed into law AB 2617, which outlawed mandatory arbitrations for goods and services; but a March 2018 appellate decision held that the law was preempted by the Federal Arbitration Act. Meanwhile, in 2015, Governor Brown vetoed AB 465, which would have outlawed mandatory arbitration as a condition of employment. In doing so, Governor Brown noted that bans on arbitration have been consistently struck down as violating the FAA, and that California courts have made arbitrations more employee-friendly by requiring certain protections (neutral arbitrator, adequate discovery, no limit on damages or remedies, written decision subject to some review, cost limits). He even questioned whether arbitration is really less fair than traditional litigation for employees.

While Governor Brown’s learning curve has progressed, the California Legislature’s has regressed, as evidenced by AB 3080

In August 2018—just three months after the Epic Systems decision—the Legislature passed AB 3080, which banned mandatory arbitration agreements, which outlawed “opt-out” provisions (allowing employees to refuse to enter into arbitration agreements), and which even criminalized employer conduct to implement such an agreement. The legislative committee analyses argued that there must be “consent and fairness” in entering into an agreement, that the Supreme Court “has never ruled that the FAA applies in the absence of a valid agreement,” that the FAA would not preempt AB 3080 because it “regulates behavior prior to an agreement being reach[ed],” and that AB 3080 does not “outright ban or invalidate arbitration agreements.”

The apoplectic reaction to the outrage that was AB 3080

The employer community reacted strongly to AB 3080. Leading law firms urged Governor Brown to veto AB 3080. They noted that the proponents were making old, tired arguments that the U.S. and California Supreme Courts have rejected. They protested the disingenuousness of saying that arbitration agreements could not be voluntary even where employees have the right to opt out. They reminded Governor Brown of his veto of AB 465 in 2015.

Most emphatically, they pointed out that criminalizing employer conduct that the FAA so clearly protects could coerce fearful employers into abandoning arbitration agreements until the courts clearly rule AB 3080 unconstitutional. In this respect the Legislature, ironically, was engaging in something that a private party could not do without engaging in an unfair business practice. After all, an unfair business practice occurs when a party inserts an obviously unlawful provision into a contract, aiming to intimidate the other party into abiding by the unlawful provision.

Governor Brown’s veto and what’s next

On September 30, 2018, Governor Brown vetoed AB 3080. His accompanying letter rejected the Legislature’s argument that AB 3080 only regulates behavior prior to an agreement being reached. The Governor pointed out that in a 2017 Supreme Court decision, even Justice Kagan (“an appointee of President Obama”) acknowledged that the FAA “cares not only about the ‘enforcement’ of arbitration agreements, but also about their initial ‘valid[ity].’ ” Governor Brown emphatically stated that AB 3080 “plainly violates federal law.”

So what does all this mean? The lesson is that our systems of checks and balances can still work, where a governor learns not to permit a legislature to flout federal law. Will this trend continue as our great state ushers in a new governor in 2019? Stay tuned.